Q&A

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Since You Asked

Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions.

Don Bright of Bright Trading

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BLOGGING ABOUT DIVIDENDS

Basic question about dividends. How do they work? I have $2,000 to invest and I was wondering how the dividend yield relates to how much I am going to get. Do I get the dividend each month or quarter? Thanks--Anonymous

If a stock has a declared dividend, it will have an "ex-dividend" date, which means that if you own the stock the night before this declared date, you will be paid the dividend amount multiplied by the number of shares you own. The payment will come in a couple weeks after the ex-date.

BLOGGING FOLLOWUP

So do I get the dividend yield times number of shares once a quarter or is this once a year but the dividend yield is divided each quarter?

Many companies pay a quarterly cash dividend, but the amounts vary widely. Dividend yield is adding all 4 up to make an annual dividend amount, which you divide into the current price to determine the current yield.

Dividend yield is often the reason we see longer-term support and resistance. If a stock pays a $1.00 per year dividend, when the stock is $15 that's 6.6% yield (minus cost of carrying the stock). When the stock hits $20, the yield is 5%, so not as good a yield, thus a support at $15 and some resistance at $20.

There has been a lot of discussion about whether it's better for the company to pay out their profits in dividends to the shareholders, or keep the money and increase the valuation of the stock (book value and hopefully price to book). It depends on the company and the investor's needs.

Most companies pay a quarterly dividend amount. Dividend yield is adding all 4 up to make an annual dividend amount, which you divide into the current price to determine the current yield.

It is important to remember that on ex-dividend day, the stock price is reduced by the amount of the dividend. So if Xyz had a 50-cent dividend and closed at $32, and opened unchanged, the opening price would be $31.50.

BUY/SELL NUMBER

I noted the daily buy/sell number on your site differs from the number displayed at program trading; it is generally a lower amount, so I wondered why. Second, I am finding inconsistencies in the opening price displayed in eSignal and Yahoo! Finance. Today, BAC opened at 50.23, yet eSignal shows 50.10. JPM opened at 46.04, eSignal displayed 46.25. MER opens at 72.90, eSignal displays 73.25.

I filtered my time & sales to display NYSE prints only and often need to scroll down to locate the opening print for EOD analysis -- on 50 names, a drag! For what it's worth, I am working on a spreadsheet to calculate the FV and import into my basket order entry; errors in data can vaporize my equity.--anvil993

The FV numbers vary based on whether you're "long cash," meaning you are trying to beat the current interest rate with your trading vs. Treasury bills or something, or if you're "short money," meaning you're borrowing money at a higher rate, you need to overcome with your trading. There are a few percentage points' difference, and since interest rates are primary to the FV equation, they can be different. But www.programtrading .com is a good place to get a good number.

That said, I tend to use an average between the two rates and check other sources for FV as well, come up with a number that works for the openings and all day long on my futures chart. When the Prem/Disc to FV (futures) goes from red to green during the day, it basically substantiates that the FV number is right for that day.

Regarding the opening print, you are probably seeing a consolidated quote at 9:30 am vs. the actual NYSE opening. And yes, filtering only for NYSE should help. We have something new with RediPlus (the Goldman Sachs trading platform) where, due to the newly implemented Nms (National Market System, which assures the traders they won't be filled at a price worse than the NBBO, National Best Bid/Offer) rules. They are using a consolidated quote for our intraday P&L, but then reverting back to NYSE (or other primary exchange) for our actual overnight sheets.

WASH SALES

You stated "We often park on Arca, take on NYSE, keep the net." The topic was order execution. Would you please explain? And isn't that a wash sale? You're adding liquidity on a stock and once it's hit, you take liquidity on the same stock. Thanks for the clarification! --jcinmf

First, wash sales do not apply to proprietary traders, primarily to retail customer/investors. Now for order execution and order destination. We now pay eight cents per 100 shares to the exchange when "taking" liquidity on the NYSE and pay 30 cents per 100 shares when "taking" liquidity on the Arca ECN. In the case of a daytrade, or adding to a pair, we may place a bid on Arca and then hit; we sell the other stock short via NYSE (pairs trading). This will actually pay me 25 cents for buying on the bid, and yet I only pay 8 to hit the bid on the sale. Net profit to me.

For basic daily trading, I may buy GE on the NYSE when the market starts moving up, at say $40.20, and then offer a sale on Arca at 40.30, thus getting paid 25 cents for providing liquidity on the sale, and only paying 8 cents for "taking" on NYSE vs. 30 cents if I were to "take" on Arca.

What may seem like a small differential actually amounts to thousands of dollars monthly for some of my traders. Hope this helps.

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E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the December 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.

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