1. Chapter 8 Why People Trade

3. Utilitarian traders Investors and borrowers Asset exchangers Hedgers
Gamblers
Fledglings
Cross-subsidizers
Tax avoiders

4. Investors and borrowers
Solve inter-temporal cash flow timing problems
People
Corporations
Governments
Financial assets and real assets
Fisher’s separation theorem
Expect fair rate of return (risk free rate + risk premium) (vs. Speculators)

6. Asset Exchangers
Use markets to exchange assets that they own for other assets that are of greater immediate use to them
Spot commodity markets and foreign exchange markets
In most asset exchanges, a buyer pays money or financial assets to a seller who deliver a commodity or a currency
Investing and borrowing are special cases of asset exchanges

7. Hedgers and hedging Financial risks (four examples) Wheat farmers
Wholesale bakers
Traders who speculate in individual stocks
Banks that lend money at fixed long-term rates and borrow money at variable short-term rates

8. Hedging
Hedgers use markets to reduce their exposure to financial risks
They hedge risks by selling or buying instruments whose values are correlated with the risks that they face
They use forward contracts, futures contracts, option contracts, and swaps

9. Forward contracts
Farmers and bakers can manage their price risks by using forward contracts
Forward contract is an agreement to trade something in the future at a price that is set now.
A farmer would sell a forward wheat contract to a baker

10. Futures contracts
A futures contract is a standardized forward contract for which a clearinghouse guarantees the performance of the buyer and seller by interposing itself between the buyer and seller of every trade

11. Hedging with stock options
Buying a stock and put option simultaneously
In a futures hedge, the hedger gives up upside potential
In an options hedge, the hedger keeps the upside potential, but at a price (i.e., option premium)

12. Gamblers Gamblers are not speculators Gamblers are uninformed traders
They trade for entertainment
They are foolish if they believe that they will be successful speculators
Many stock traders who think that they are speculators are actually gamblers (unless they can clearly articulate their reason for trading)
Gamblers are not necessarily bad for financial markets

13. Fledglings Fledglings trade to learn whether they can trade profitably
Fledglings become profit-motivated traders if they learn to trade profitably
Fledglings who cannot trade well, and who continue to trade, are futile traders
Luck vs. Skills
Learning trading is similar to learning disciplines like medicine, engineering, sports, and management

14. Futile traders
Futile traders expect to profit from trading, but they do not profit, on average
Futile trades include inefficient traders and victimized traders
Inefficient traders lack the skills, resources, and access to information necessary to trade profitably. The most common type is the pseudo-informed traders who believe that they are well-informed, but actually are not.
Victimized traders rely on brokers, advisors, or employees who fail to meet their fiduciary responsibilities