The Day Trader by Stephen Frey Read Free Book Online

get the trade executed right away, before the market can move against you. That’s the most important thing.”
    “How will I know if you really had to go to two sources or you just double-charged me?”
    “You won’t,” Seaver replies evenly. “You’ll just have to trust me.”
    There’s an uncomfortable pause.
    “Do you offer a training program?” I ask.
    “No. I assume you know what you’re doing when you get here.”
    “What about the new pattern day trading rules the big exchanges have suggested?”
    “What about them?”
    “Do you enforce them?”
    Seaver studies his cuticles for a moment. “We do our best to comply with all the exchange rules.”
    “How about margin lending?” I remember Seaver bragging at the beginning of the conversation about how he personally makes certain each person who rents a desk from him can handle the stress of the situation. “Does Bedford offer that?”
    Day trading firms often lend money to people renting space from them, using shares of stock as collateral. Exactly like banks lend against the value of someone’s house with a mortgage.
    “I’ll lend you fifty cents on the dollar,” Seaver informs me. “Marked to market at the end of every day,” he adds.
    Marked to market at the end of every day means that if the shares I own fall in value between the opening and closing bells, and I’m borrowing on margin, I’ll owe Seaver fifty percent of the stock price’s decline before I can go home for the night. If I can’t pay him, he’ll take my shares and sell them to cover the shortfall.
    Margin lending took me some time to understand, but now I get it. If I want to buy a share of stock that costs ten dollars, fifty percent margin means I have to put up five dollars of my own money and Seaver will lend me the other five—fifty percent of the stock’s market value. Borrowing the five dollars gives me the opportunity to purchase and control more shares—and gives Seaver the opportunity to make more money. Not only do I pay him rent for the cubicle and interest on the margin loan, but I also pay him that fee for each trade because he acts as my broker. He becomes my lifeline to the market instead of some on-line trading firm like the one I purchased the Unicom shares from. Seaver wants me to spin my account fast because the more volume I do, the more cash he makes. For him, it doesn’t matter whether I’m buying or selling. The margin loan doubles my opportunity to spin the account and therefore his opportunity to earn brokerage commissions.
    That’s all fine if the price of that stock I bought for ten dollars keeps rising. I’m paying a smidgen of interest on the five dollars I borrowed and guzzling champagne as the price goes up. But if the price drops, it’s a different story. Say the share price decreases from ten to eight by the end of the first day’s trading. Then I would owe Seaver fifty percent of the two-dollar loss—one dollar—because after the adjustment he’d still be lending me fifty percent of the market value of the stock: a four-dollar loan against an eight-dollar stock. Doesn’t sound too bad when it’s one dollar I owe him. But if I’d bought ten thousand dollars’ worth of stock, then I’d owe Seaver a thousand dollars. And if I’d used every last dollar I had for my original five-thousand-dollar half of the purchase, I’d have to sell some shares to repay him. And I’d have to sell them exactly when I didn’t want to—when the price was down. That’s when day trading turns nasty. Bottom line, margin lending exaggerates your profits—and your losses.
    “Fifty percent?”
    “Fifty percent,” Seaver confirms. “You may have heard that some day trading firms will lend more, but I won’t because that would be irresponsible. The last thing I want to have to do is grab your stock certificates and sell them.” He glances at Roger, who is still stroking his beard with a measured cadence. “How much money are you guys starting