Stock Market Investing With a Trader

Professional trading is more a science than an art.

There are two kinds of traders: professional traders and amateurs who like to style themselves as traders. The professionals know what they are doing and are usually found making big money on a Wall Street trading desk. The trader-wannabes are usually found at a PC in their extra bedroom, doing things most professional traders would laugh at. Beware who you put your money with, or you may find your return on investment to be negative.

Questions to Ask

It is important to find out if the trader has professional experience and how his track record looks. Ask where he has worked on Wall Street, how long and why he is no longer trading for a Wall Street firm. Day traders are like fishermen; they may be standing in front of you holding a minnow but just yesterday they caught a whale. Asking for a trading record may do you no good, but asking for references -- several references -- is a must. Then check FINRA to see if the trader has been disciplined for compliance violations.

Professional Trading Methods

Professional traders are not very exciting people. They are detail-oriented and not interested in stories about a company's prospects. They are expert technical analysts of stock and bond price charts, quick with numbers and trade for very small amounts of profit. Unfortunately, unless you are trading for a firm account, you have to pay commissions on those trades, which cuts into the profit. Professional traders watch the big picture -- the economy, market trends and major announcements. They do not pay attention to rumors or hype. Even professional traders lose money.

Terms

The trader should be able to outline in detail how he trades. If his methods rely on having a feel for the market, no matter how impressive he seems, a good hunch is not enough. Discuss the fees that will be charged and how those fees are figured. It is important to discover whether you will be paying commissions on each trade and how much those commissions will add to your expense, and how many trades will take place each day. Many money managers work for a percentage of profits. If your trader loses your money, you don't want to be surprised by a large bill for his time.

Active vs. Passive Investment Management

Passive investing involves putting your money into an index fund that clones the makeup of a major stock index such as the Dow Jones Industrials or the Standard & Poor's 500. Having your money managed by a trader would fall under the category of active investment management. While there are always arguments for and against each methodology, for the extra risk incurred in active management -- particularly day trading -- there are few statistics that prove higher returns than would be achieved in an index fund.

References

• Securities and Exchange Commission: Investment Advisers -- What You Need to Know Before Choosing One
• CNN Money: Improve Your Understanding of Passive and Active Investing