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Benchmark Your Returns With Indexes
Investors look to broad indexes as benchmarks to help them gauge not only how well the markets are performing, but also how well they, as investors, are performing. For those who own stocks, they look to indexes like the S
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Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited.
Companies that follow the International Reporting Standard or the Alternative Reporting Standard by making filings publicly available through the OTC Disclosure
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Interpreting Your Brokers Reports
Each month, most brokers or banks send a printout of information about your investments, often accompanied by a cover letter and some other documentation. While these statements provide ongoing updates about your investments and how they have performed, the quality and presentation of the information varies. The documents and printouts are frequently unclear and investors often have trouble deciphering what is important and how to interpret the material, even after discussions with a broker. In this article, well give you some guidelines for interpreting the important information contained in these brokerage reports. (Make sure your broker is working for you with Is Your Broker Acting In Your Best Interest? and Evaluating Your Broker.)
Asset Allocation and Risk
Typically, your portfolio structure is presented as a breakdown of the various asset classes in which it is invested. Your asset allocation includes stocks, bonds, cash equivalents, alternative investments, real estate and natural resources. You may also see a breakdown within a specific asset class, such as segregating equities by market capitalization or bonds according to the type of issuer.
One problem is that the report will often not specify the level of risk you are taking in your portfolio or, even worse, will categorize it incorrectly. A moderate level of risk might entail a roughly even allocation between stocks and bonds, or at most, a 60/40 split. However, brokerage firms often categorize portfolios containing 80% equities as medium risk. Other reports simply do not address the level of risk, or insert the term medium risk somewhere discreetly at the top, bottom or side of the page, where the unwary investor barely notices it. You should be kept clearly informed of the level of risk of your overall portfolio, and if your asset allocation seems too aggressive or conservative for you, then talk to your financial advisor about the issue. (To read more on these topics, see Determining Risk And The Risk Pyramid, Risk And Diversification and How Risky Is Your Portfolio?)
Performance of Your Portfolio
Next, look at your portfolios performance for the most recent period reported, and how it compares with past performance. If returns are not satisfactory to you, talk to the advisor and determine whether any changes may be needed. A simple listing of cost, current value and other figures, with no meaningful analysis or discussion, is not very helpful.
In addition to seeing how your portfolio has performed, you need to know how well, or poorly, it has performed, compared with other investments. Comparing investment performance to benchmarks, such as market indexes or industry statistics, will provide a yardstick for evaluating your own portfolio. (Keep reading about this in Benchmark Your Returns With Indexes.)
For example, the Standard
Putting it All Together
After all is said and done, an investor will be left with a handful of companies that stand out from the pack. Over the course of the analysis process, an understanding will develop of which companies stand out as potential leaders and innovators. In addition, other companies would be considered laggards and unpredictable. The final step of the fundamental analysis process is to synthesize all data, analysis and understanding into actual picks.
The opposite is true for illiquid securities. Liquidity depends on a number of forces including supply and demand, price transparency, trading history, market venue, market participants and freely tradable shares (public float).
Forces That Move Stock Prices
Have you ever wondered about what factors affect a stocks price? Stock prices are determined in the marketplace, where seller supply meets buyer demand. But unfortunately, there is no clean equation that tells us exactly how a stock price will behave. That said, we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors and market sentiment.
Fundamental Factors
In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (earings per share (EPS), for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owners return on his or her investment. When you buy a stock , you are purchasing a proportional share of an entire future stream of earnings. Thats the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.
Part of these earnings may be distributed as dividends, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.
As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream.
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About the Earnings Base
Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power . Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.
The way earnings power is measured may also depend on the type of company being analyzed. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
About the Valuation Multiple
The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.
What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).
In summary, the key fundamental factors are:
• The level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share)
• The expected growth in the earnings base
• The discount rate, which is itself a function of inflation
• The perceived risk of the stock.
Technical Factors
Things would be easier if only fundamental factors set stock prices! Technical factors are the mix of external conditions that alter the supply of and demand for a companys stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth.) Technical factors include the following:
• Inflation - We mentioned inflation as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples and high inflation drives low multiples). Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies.
• Economic Strength of Market and Peers - Company stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements - as opposed to a companys individual performance - determines a majority of a stocks movement. (There has been research cited that suggests the economic/market factors account for 90%!) For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as guilt by association drags down demand for the whole sector.
• Substitutes - Companies compete for investment dollars with other asset classes on a global stage. These include corporate bonds, government bonds, commodities, real estate and foreign equities. The relation between demand for U.S. equities and their substitutes is hard to figure, but it plays an important role.
• Incidental Transactions - Incidental transactions are purchases or sales of a stock that are motivated by something other than belief in the intrinsic value of the stock. These transactions include executive insider transactions, which are often prescheduled or driven by portfolio objectives. Another example is an institution buying or shorting a stock to hedge some other investment. Although these transactions may not represent official votes cast for or against the stock, they do impact supply and demand and therefore can move the price.
• Demographics - Some important research has been done about the demographics of investors. Much of it concerns these two dynamics: 1) middle-aged investors, who are peak earners that tend to invest in the stock market , and 2) older investors who tend to pull out of the market in order to meet the demands of retirement. The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples.
• Trends - Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as success breeds success and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean. Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are trendy does not help us predict the future. (Note: trends could also be classified under market sentiment.)
• Liquidity - Liquidity is an important and sometimes under-appreciated factor. It refers to how much investor interest and attention a specific stock has. Wal-Marts stock is highly liquid and therefore highly responsive to material news; the average small-cap company is less so. Trading volume is not only a proxy for liquidity, but it is also a function of corporate communications (that is, the degree to which the company is getting attention from the investor community). Large-cap stocks have high liquidity: they are well followed and heavily transacted. Many small-cap stocks suffer from an almost permanent liquidity discount because they simply are not on investors radar screens.
Market Sentiment
Market sentiment refers to the psychology of market participants, individually and collectively. This is perhaps the most vexing category because we know it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased and obstinate. For example, you can make a solid judgment about a stocks future growth prospects, and the future may even confirm your projections, but in the meantime the market may myopically dwell on a single piece of news that keeps the stock artificially high or low. And you can sometimes wait a long time in the hope that other investors will notice the fundamentals.
Market sentiment is being explored by the relatively new field of behavioral finance. It starts with the assumption that markets are apparently not efficient much of the time, and this inefficiency can be explained by psychology and other social sciences. The idea of applying social science to finance was fully legitimized when Daniel Kahneman, a psychologist, won the 2002 Nobel Memorial Prize in Economics. (He was the first psychologist to do so.) Many of the ideas in behavioral finance confirm observable suspicions: that investors tend to overemphasize data that come easily to mind; that many investors react with greater pain to losses than with pleasure to equivalent gains; and that investors tend to persist in a mistake.
Some investors claim to be able to capitalize on the theory of behavioral finance. For the majority, however, the field is new enough to serve as the catch-all category, where everything we cannot explain is deposited.
Summary
Different types of investors depend on different factors. Short-term investors and traders tend to incorporate and may even prioritize technical factors. Long-term investors prioritize fundamentals and recognize that technical factors play an important role. Investors who believe strongly in fundamentals can reconcile themselves to technical forces with the following popular argument: technical factors and market sentiment often overwhelm the short run, but fundamentals will set the stock price in the long-run. In the meantime, we can expect more exciting developments in the area of behavioral finance since traditional financial theories cannot seem to explain everything that happens in the market.
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Such an analysis might involve three steps:
Broad market analysis through the major indices such as the S
Short sellers are subject to price manipulation schemes – or short squeezes. In a short squeeze, traders believing that there are a lot of short sellers begin buying shares to force the price and the short sellers losses higher. These traders hope that the short sellers will be forced to buy pushing the price even higher at which point they can sell their shares at a profit. Short squeezes are easier to execute in illiquid securities.
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Interest Rates And Your Bond Investments
Most investors care about future interest rates , but none more than bondholders. If you are considering a bond or bond fund investment, you must ask yourself whether you think interest rates will rise in the future. If the answer is yes then you probably want to avoid long-term maturity bonds or at least shorten the average duration of your bond holdings; or plan to weather the ensuing price decline by holding your bonds and collecting the par value at maturity. (For a review of the relationships between prevailing interest rates and yield, duration, and other bond aspects, please see the tutorial Advanced Bonds Concepts.)
The Treasury Yield Curve
In the United States, the Treasury yield curve (or term structure) is the first mover of all domestic interest rates and an influential factor in setting global rates. Interest rates on all other domestic bond categories rise and fall with Treasuries, which are the debt securities issued by the U.S. government. To attract investors, any bond or debt security that contains greater risk than that of a similar Treasury bond must offer a higher yield. For example, the 30-year mortgage rate historically runs 1% to 2% above the yield on 30-year Treasury bonds.
Below is a graph of the actual Treasury yield curve as of December 5, 2003. It is considered normal because it slopes upward with a concave shape:
Consider three elements of this curve. First, it shows nominal interest rates. Inflation will erode the value of future coupon dollars and principal repayments; the real interest rate is the return after deducting inflation. The curve therefore combines anticipated inflation and real interest rates. Second, the Federal Reserve directly manipulates only the short-term interest rate at the very start of the curve. The Fed has three policy tools, but its biggest hammer is the federal funds rate, which is only a one-day, overnight rate. Third, the rest of the curve is determined bysupply and demand in an auction process.
Sophisticated institutional buyers have their yield requirements which, along with their appetite for government bonds, determine how these institutional buyers bid for government bonds. Because these buyers have informed opinions on inflation and interest rates, many consider the yield curve to be a crystal ball that already offers the best available prediction of future interest rates. If you believe that, you also assume that only unanticipated events (for example, an unanticipated increase in inflation) will shift the yield curve up or down.
Long Rates Tend to Follow Short Rates
Technically, the Treasury yield curve can change in various ways: it can move up or down (a parallel shift), become flatter or steeper (a shift in slope), or become more or less humped in the middle (a change in curvature).
The following chart compares the 10-year Treasury yield (red line) to the one-year Treasury yield (green line) from June 1976 to December 2003. The spread between the two rates (blue line) is a simple measure of steepness:
Consider two observations. First, the two rates move up and down somewhat together (the correlation for the period above is about 88%). Therefore, parallel shifts are common. Second, although long rates directionally follow short rates, they tend to lag in magnitude. Specifically, when short rates rise, the spread between 10-year and one-year yields tends to narrow (curve of the spread flattens) and when short rates fall, the spread widens (curve becomes steeper). In particular, the increase in rates from 1977 to 1981 was accompanied by a flattening and inversion of the curve (negative spread); the drop in rates from 1990 to 1993 created a steeper curve in the spread, and the marked drop in rates from March 2000 to the end of 2003 produced a very steep curve by historical standards.
Supply-Demand Phenomenon
So what moves the yield curve up or down? Well, lets admit we cant do justice to the complex dynamics of capital flows that interact to produce market interest rates. But we can keep in mind that the Treasury yield curve reflects the cost of U.S. government debt and is therefore ultimately a supply-demand phenomenon. (For a refresher on how increases and decreases in the supply and demand of credit affect interest rates, see the article Forces Behind Interest Rates.)
Supply-Related Factors
Monetary Policy
If the Fed wants to increase the fed funds rate, it supplies more short-term securities in open market operations. The increase in the supply of short-term securities restricts the money in circulation since borrowers give money to the Fed. In turn, this decrease in the money supply increases the short-term interest rate because there is less money in circulation (credit) available for borrowers. By increasing the supply of short-term securities, the Fed is yanking up the very left end of the curve, and the nearby short-term yields will snap quickly in lockstep.
Can we predict future short-term rates? Well, the expectations theory says that long-term rates embed a prediction of future short-term rates. But consider the actual December yield curve illustrated above, which is normal but very steep. The one-year yield is 1.38% and the two-year yield is 2.06%. If you were going to invest with a two-year time horizon and if interest rates were going to hold steady, you would, of course, do much better to go straight into buying the two-year bond (which has a much higher yield) instead of buying the one-year bond and rolling it over into another one-year bond. Expectations theory, however, says the market is predicting an increase in the short rate. Therefore, at the end of the year you will be able to roll over into a more favorable one-year rate and be kept whole relative to the two-year bond, more or less. In other words, expectations theory says that a steep yield curve predicts higher future short-term rates.
Unfortunately, the pure form of the theory has not performed well: interest rates often remain flat during a normal (upward sloping) yield curve. Probably the best explanation for this is that, because a longer bond requires you to endure greater interest rate uncertainty, there is extra yield contained in the two-year bond. If we look at the yield curve from this point of view, the two-year yield contains two elements: a prediction of the future short-term rate plus extra yield (i.e., a risk premium) for the uncertainty. So we could say that, while a steeply sloping yield curve portends an increase in the short-term rate, a gently upward sloping curve, on the other hand, portends no change in the short-term rate - the upward slope is due only to the extra yield awarded for the uncertainty associated with longer term bonds.
Because Fed watching is a professional sport, it is not enough to wait for an actual change in the fed funds rate, as only surprises count. It is important for you, as a bond investor , to try to stay one step ahead of the rate, anticipating rather than observing its changes. Market participants around the globe carefully scrutinize the wording of each Fed announcement (and the Fed governors speeches) in a vigorous attempt to discern future intentions.
Fiscal Policy
When the U.S. government runs a deficit, it borrows money by issuing longer term Treasury bonds to institutional lenders. The more the government borrows, the more supply of debt it issues. At some point, as the borrowing increases, the U.S. government must increase the interest rate to induce further lending. However, foreign lenders will always be happy to hold bonds in the U.S. government: Treasuries are highly liquid and the U.S. has never defaulted (it actually came close to a default in late 1995, but Robert Rubin, the Treasury secretary at the time, staved off the threat and has called a Treasury default unthinkable - something akin to nuclear war). Still, foreign lenders can easily look to alternatives like eurobonds and, therefore, they are able to demand a higher interest rate if the U.S. tries to supply too much of its debt.
Demand-Related Factors
Inflation
If we assume that borrowers of U.S. debt expect a given real return, then an increase in expected inflation will increase the nominal interest rate (the nominal yield = real yield inflation). Inflation also explains why short-term rates move more rapidly than long-term rates: when the Fed raises short-term rates, long-term rates increase to reflect the expectation of higher future short-term rates; however, this increase is mitigated by lower inflation expectations as higher short-term rates also suggest lower inflation (as the Fed sells/supplies more short-term Treasuries, it collects money and tightens the money supply):
An increase in feds funds (short-term) tends to flatten the curve because the yield curve reflects nominal interest rates: higher nominal = higher real interest rate lower inflation.
Fundamental Economics
The factors that create demand for Treasuries include economic growth, competitive currencies and hedging opportunities. Just remember: anything that increases the demand for long-term Treasury bonds puts downward pressure on interest rates (higher demand = higher price = lower yield or interest rates) and less demand for bonds tends to put upward pressure on interest rates. A stronger U.S. economy tends to make corporate (private) debt more attractive than government debt, decreasing demand for U.S. debt and raising rates. A weaker economy, on the other hand, promotes a flight to quality, increasing the demand for Treasuries, which creates lower yields. It is sometimes assumed that a strong economy will automatically prompt the Fed to raise short-term rates, but not necessarily. Only when growth translates or overheats into higher prices is the Fed likely to raise rates.
In the global economy, Treasury bonds compete with other nationss debt. On the global stage, Treasuries represent an investment in both the U.S. real interest rates and the dollar. The euro is a particularly important alternative: for most of 2003, the European Central Bank pegged its short-term rate at 2%, a more attractive rate than the fed funds rate of 1%.
Finally, Treasuries play a huge role in the hedging activities of market participants. In environments of falling interest rates, many holders of mortgage-backed securities, for instance, have been hedging their prepayment risk by purchasing long-term Treasuries. These hedging purchases can play a big role in demand, helping to keep rates low, but the concern is that they may contribute to instability.
Conclusion
We have covered some of the key traditional factors associated with interest rate movements. On the supply side, monetary policy determines how much government debt and money are supplied into the economy. On the demand side, inflation expectations are the key factor. However, we have also discussed other important influences on interest rates, including: fiscal policy (that is, how much does the government need to borrow?) and other demand-related factors such as economic growth and competitive currencies.
Here is a summary chart of the different factors influencing interest rates:
Semi-log scales are useful when the price has moved significantly, be it over a short or extended time frame.
This is preferable for broker-dealers because they receive commissions on both the buy and sell-side of the trade. In executing client orders, broker-dealers may also buy or sell for their own (principal) account, at their own risk. If, however, there is no match for a trade or a broker-dealer does not wish to trade for their own account then a broker-dealer must find another broker-dealer willing to trade that particular security.
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Financial Wisdom From Three Wise Men
December 25 2011| Filed Under » Futures, Investing Basics, Options, Technical Analysis, Warren Buffett
Some of us are more disciplined than others. Shortly after we are born, we start to learn the rules of life. Some of these rules we had to learn the hard way, through trial and error. Others we learned from our parents. Learning from others in this way is often easier, however, we seem to do a better job of remembering the lessons we learn the hard way. As investors, we have a choice. We can learn the hard way and hope that well survive our lessons and not run out of money, or we can learn from the following three wise men.
Tutorial: Top Stock-Picking Strategies
Three wise men - Warren Buffett, Dennis Gartmen and Puggy Pearson - found very different methods to achieve financial success, but they all share a common trait - their success came by following a strict set of rules. In this article well show you nine rules that three wise investors live by.
The Worlds Greatest Investor
Warren Buffett, the Oracle of Omaha, is considered by many to be the greatest investor ever. He is also known for giving much of his $40 billion fortune to the Bill
OTC Markets Group Inc. (“OTC Markets”) identifies securities with a Caveat Emptor symbol to inform investors that, in OTC Markets’ opinion, there is reason to exercise additional care and perform thorough due diligence in making investment decisions for a particular security.
When prices move out of the trading range, it signals that either supply or demand has started to get the upper hand.
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Information Overload: How It Hurts Investors
Our information-based society is often plagued with excess. There are many areas of everyday life in which information overload prevails, but the investment sector may well be where the consequences are the most serious. And the less financial knowledge and understanding people have, the worse they cope.
Information Overload Leads to Bad Decisions and Passivity
An important investigation on this very issue by Julie Agnew and Lisa Szykman (both professors at the Mason School of Business, Williamsburg, VA), published in the Journal of Behavioral Finance (2004), reveals that people with a low level of financial knowledge suffer particularly from overload, which leads them to take the path of least resistance, the default option in defined contribution retirement plans. Many are simply overwhelmed and cannot cope at all. (For a related reading, see Taking A Chance On Behavioral Finance.)
TUTORIAL: Behavioral Finance Use Investment Information Effectively
For a lot of people, financial security and peace of mind depend on making the right financial decisions now and in the future. Yet, there is growing evidence that far too many individuals make very poor decisions, and many cannot be described as making decisions at all.
While some investors inevitably have too little information, others have too much, which leads to panic and either bad decisions or trusting the wrong people. When people are exposed to too much information, they tend to withdraw from the decision-making process and reduce their efforts. (A lack of information, which one could call underload can have the same result, by the way, and is certainly just as dangerous).
In other words, simply providing people with information about investment options, may not be enough to produce rational and sound decisions. Investment information needs not only to be sufficient without being overwhelming, it also needs to be easy to use, and actually be used. This is a very real problem with potentially dreadful consequences. (To learn more, see Financial Media 4-1-1 For Investors.)
The Specific Causes of Overload
Agnew and Szykman tell us that there are three main causes of information overload. One is pure quantity. The second is having too many options (although too few is also bad), and the third factor is option similarity. If everything seems the same, differentiating one alternative from another is confusing and difficult. Well use their findings to extend to general investors rather than simply DC plan contributors.
Also important in the use of information is the investors level of financial knowledge. That is, knowledge which is directly relevant to the investment process. Theoretical economic or general business knowledge may be no help at all, being too removed from the nuts and bolts of money management. We are talking here about an awareness of how investment should be done in practice, what works and what does not.
The research indicates that many investors dont even have a basic understanding of financial concepts. This applies more to those who earn less. Not surprisingly, people who have never had much money, have had little practice in investing it. For this reason, someone who suddenly wins the lottery or inherits is often at a loss, initially metaphorically and then, not uncommonly, literally. (For a related reading, see Do Financial Decisions Get Better With Age?)
Consequences of Overload: Asset Misallocation
Floundering in a maze of information opens people up to misselling. Namely, getting really lousy, unsuitable investments foisted on them. These may be too risky, too conservative or insufficiently undiversified, to name just three of the classic horrors. In short, investors land up with investments that are lucrative only for the seller, or which are simply easy to sell and no trouble to manage.
In their experiment, Agnew and Szykman found that people who were not coping with the investment information just went for the default option, which was easiest to do. They did not bother to find out what is really best for them. In the real world of investment, this is truly dangerous. An investment that is totally devoid of risk, just cash, for instance, really does not pay off in the long run. This option may lead to an inadequate retirement fund, and almost everyone should have some equities.
By contrast, having too many stocks or weird, exotic funds, assets and certificates, is extremely volatile and can win or lose you a fortune. Most investors do not want such risks, and are often unaware that they are taking them – until disaster strikes. This kind of portfolio can lead to wealth, if you are lucky, and poverty if you are not. For most people, it is not worth the gamble, neither psychologically nor financially. (To learn more, see Achieving Optimal Asset Allocation.)
Coping with Information Overload
This can be done from both sides of the market. Brokers, banks and so on, need to ensure that they only provide investors with what they really need to know, and it must be simple to understand. The point is that the average investor needs to be informed sufficiently (but no more) on what will help them make the right decisions. There is a clear optimum, beyond which dysfunctional overload occurs, and of course, too little is just as bad. It is also absolutely essential for the sell side to ensure that the information is understood and converted into the appropriate investment decisions.
If investors themselves find they are being swamped with information, and truly do not have the skills or time to figure it out and use it, they need to go back to the seller and ask for concise information that they can use. If this fails to be provided, it is probably best to take ones money and business elsewhere.
Investors themselves do need to make an effort to find out what is appropriate for them. As indicated above, this can be daunting, but for this reason, sellers and regulators need to get the message across that the more they learn and the more they know, the safer the investment process.
There are inevitably some people who just cannot or will not understand the information and use it. This may be due to a lack of education or a phobia about money, and some people are just not prepared to bother with their money. Such individuals do then need some sort of independent advisor whom they can trust. (For more, see Advice For Finding The Best Advisor.)
Conclusion
An important research project from the Mason School of Business in Virginia informs us of the very serious problem of information overload (or the converse of underload) in the financial services industry. Ensuring that investors have an optimal amount of information that they can (and do) understand, and really use as a basis for decision making, is easier said than done. But it must be done; both the industry and investors themselves need to be proactive in solving the problem. The variety of potential investments, and the evolving nature of the relevant markets means that an ongoing, reciprocal and productive process of information provision and utilization is absolutely fundamental to peoples financial future and peace of mind.
Although exchange-listed stocks can be traded OTC on the third market, it is rarely the case. Usually OTC stocks are not listed nor traded on exchanges, and vice versa. Although stocks quoted on the OTCBB must comply with U.S. Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks have alternative disclosure guidelines (for example, OTCQX stocks through OTC Market Group Inc), and others have no reporting requirements, for example Pink Sheets securities.
Too Late
Technical analysis has been criticized for being too late. By the time the trend is identified, a substantial portion of the move has already taken place. After such a large move, the reward to risk ratio is not great. Lateness is a particular criticism of Dow Theory.
Always Another Level
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How To Manage Your Company Stock
If you work for a larger corporation theres a good chance that you have access to company stock as part of your compensation package. Your company may issue stock options or you may have access to company stock in your 401(k) retirement plan or an employee stock purchase plan. Heres what you need to know about managing company stock.
Its Not Different
When you think about your company stock, do you see it as a different kind of investment than you would make in the stock market? Does it feel more stable and secure to you since you know so much about the company? Holding company stock as part of your overall investment portfolio is no different than buying the stock of another company through your brokerage account.
The truth is that you likely have very little knowledge of news and events that would directly affect the price of the stock. Its illegal for company management to give you advance knowledge of coming events and if youre one of the decision makers that has access to the knowledge, youre aware of the tight restrictions you have when trading your stock.
Dont adopt a false sense of security because you work there. History is filled with past employees of now bankrupt companies that were left holding worthless company stock, (Enron, Lehman Brothers, etc.)
Dont Own More Than 10%.
If your main investment dollars are in a 401(k), no more than 10% of your 401(k) should be in company stock and some experts advise much less. If you have investments outside of your 401(k), your company stock should make up no more than 10% of your entire portfolio. How would you feel if you lost 10% of your portfolio? If that scares you, trim your company stock down to 5% or even less.
How About Company Stock Options?
Many employees make the mistake of letting their stock options gain too much value, because they dont understand how they work. They also dont understand that the value of stock options degrade over time. If youre awarded stock options, typically you receive a certain amount of options that have to go through a vesting period - this means that you cant exercise these options right away. Once youre able to exercise the options, you want the options to be above the strike price before you exercise.
Employee stock options not only have a minimum amount of time that goes by before you exercise the option, theres also a maximum. Count these options as part of your overall portfolio and although you shouldnt let this part of your portfolio become too large, when to exercise the options is complicated and best done with the help of a trusted financial adviser. Make sure they discuss the tax implications with you.
Should You Sell?
According to Reuters, purchasing company stock is on the decline and for good reason. For investors without the time or experience to manage individual stocks, mutual funds, some exchange traded funds and index funds are better, more diversified alternatives to owning single company stocks, even if the company happens to be your employer. If you dont have a high level of stock market knowledge, owning company stock outside of stock options is a bad idea.
The Bottom Line
The company stock you own in one of the many forms should not violate the rules of good diversification. No more than 10% of your portfolio should be in any one stock even if the company supplies your paycheck. Also remember that like any investment, company stock comes with the same risk as any other single stock. Dont hold a false sense of security since the company happens to employ you.
Compliance with the Information Requirement of SEA Rule 15c2-11 – To initiate quotations on an inter-dealer quotation system for an OTC security not currently being quoted or to resume quotations after a four day absence or SEC suspension, a market maker must submit a Form 211 to FINRA. Once FINRA approves the 211, the market maker may submit a quotation to the applicable inter-dealer quotation system(s) they selected on the Form 211.
This is only 1 point higher and a trader would have had to take action immediately to avoid a sharp fall. However, the lows match up rather nicely on the neckline, and it is something to consider when drawing support lines.
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3 Questions To Find Your Trading Plan
You have put in the work creating a trading plan or possibly spent money on supposedly great strategies, but you still cannot seem to turn a trading profit. Or maybe you are starting out in trading and investing and want to be cautious before you start putting real money on the line. No matter what level you are at, before you trade - or if are already trading and struggling - you should have a trading plan. That plan needs to be tailored to you and your needs; a plan that is not will likely result in a drain on your trading account.
The following three questions can save you a lot of grief. Run through these questions during your planning stages to make sure your plan will serve you well. If it cannot pass this three question test, it should not be used.
SEE: Day Trading Strategies For Beginners
Why Ask These Questions?
Executing a plan is not just about the design itself, it is about the person executing that plan. Someone can search their whole life for a great trading system, not realizing it is themselves that need work, not the system. Therefore, these questions take the plan and the trader into account, making sure the two fit together. No matter how good a trading plan, it is useless if the trader cannot personally stick to it or implement it properly.
These three questions will help to clarify the traders objectives for the trading plan, take inventory of the consequences which may arise by executing the plan, and determine if they will be able to even stick with their plan, given their personality.
1. Does the Plan Allow Me to Achieve the Outcome I Want?
Sounds simple enough, but not so fast.
An outcome needs to be specific and measurable. Stipulating I want to be rich is not concise enough. What is the ultimate goal that you want your trading plan to bring you? Is the outcome feasible and reasonable? Can the plan you currently have actually produce that, or given the realities of the plan is it likely to fall short of the outcome you desire?
The plan and outcome must also balance short-term and long-term goals. While the long-term goal may be to be financially independent, continually trying to make as much money as possible in the short-term with high risk trades could jeopardize the long-term goal. Short-term goals must work in harmony with the long-term goals, not against them. Brainstorm what you want your trading plan to produce and make sure that the plan works to satisfy both the short and long-term desired outcomes.
2. What Are the Consequences and Risks of My Plan, and Can I Deal with Them?
In this step we strip away the fantasy and focus on reality. The fact is most traders lose money - even very smart ones - so how is your plan different? All plans have risk; what is the downside of the strategies you have employed? Go through the plan and write down all of the risks and pitfalls you see.
Now, also consider consequences outside of trading. Will realizing your plan mean you spend less time with family or friends? Will it mean cutting back on certain expenses? Will it create more stress (less stress) or cut into other work time?
Once all the potential risk and pitfalls of your strategy have been fully and honestly addressed, can you realistically handle all the potential consequences of trading this plan? If so, proceed. If not, rework the plan making sure the consequences of your plan are within your personal tolerance.
3. Does the Plan Account for Me Being Me?
This is the most important question, as ultimately you must be able to implement the plan. A plan means nothing if you cannot execute it.
If you cannot sit in front of a screen for more than 30 minutes, no matter how good your plan is you will likely not be a good day trader. Or, if you cannot sleep at night with an open position, your swing trading plan will likely do you no good. You will continually struggle to adhere to it.
We each have different traits and tendencies. If you have a gambling streak, account for this in your plan - maybe have a demo account off to the side (or have a play money poker game open) so you can satisfy your gambling craving without losing real money. Plan and account for everything.
Be brutally honest, and make sure your trading plan accounts for the market and yourself. Accept yourself for your tendencies, and make sure that the plan can actually be employed by you based on who you are. Do not sugar coat anything, as doing so could result in problems down the road.
If the plan is easy to implement for you and fits with who you are, use the plan. If you do not think you will be able to stick to it, come up with a plan you can follow.
The Bottom Line
A trading plan is only as good as the trader who implements it. The plan and trader must mesh, or the trader will be unable to implement the plan and it will be useless. To make sure the trading plan fits, the trader must pass the plan through three questions: Does the plan achieve the outcome I want? Can I handle the consequences of the plan? Does the plan account for me being me? If the plan can pass through all of these questions, the trader has a much better chance of being able to actually follow through with their investment strategy and is more likely to experience success in the markets
While this can be frustrating, it should be pointed out that technical analysis is more like an art than a science, somewhat like economics. Is the cup half-empty or half-full? It is in the eye of the beholder.
Advance fee fraud gets its name from the fact that an investor is asked to pay a fee up front or in advance of receiving any proceeds, money, stock or warrants in order for the deal to go through.
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3 Steps To A Profitable ETF Portfolio
Perhaps no vehicle is helping to change the investment landscape more than the exchange-traded fund (ETF). ETFs are baskets of individual securities much like mutual funds with two key differences. First, they can be freely traded like stocks, while mutual fund transactions dont occur until the market closes. Secondly, expense ratios tend to be lower than those of mutual funds because many are passively managed vehicles tied to an underlying index or market sector.
The primary benefit of ETFs is that they can be used to construct entire portfolios that can be traded easily. Also, they are usually well diversified because they are designed to replicate a specific index or sector. (To learn how ETFs are formed, see Introduction To Exchange-Traded Funds and An Inside Look At ETF Construction.)
Building an ETF Portfolio
If you are considering building a portfolio with ETFs, here are some simple guidelines:
1. Determine the Right Allocation. Look at your objective for this portfolio, your return and risk expectations, your time horizon, your distribution needs, your tax and legal situations, your personal situation and how this portfolio fits in with your overall investment strategy to determine your asset allocation. (See Three Simple Steps to Building Long-Term Wealth for a more detailed explanation that incorporates a process recommended by the CFA Institute.)
2. Implement your Strategy. Analyze the available funds and determine which ones will best meet your allocation targets. Phase in your purchases over a period of three to six months.
3. Monitor and assess. Once each year, evaluate your portfolios performance and your allocations in light of your circumstances. (To keep reading about allocation, see Asset Allocation Strategies and Choose Your Own Asset Allocation Adventure.)
We will break down each of these steps in the following sections.
Determine the Right Allocation
If you are knowledgeable in investments, you may be able to handle this yourself. If not, seek competent financial counsel. In determining the right allocation, consider the following:
1. What is your objective (purpose) for the portfolio (e.g., retirement versus saving for a childs college tuition)?
2. What are your risk/return objectives?
3. What is your time horizon? The longer it is, the more risk you can take.
4. What are your distribution needs for the portfolio? If you have income needs, you will have to add fixed-income ETFs and/or equity ETFs that pay higher dividends.
5. Do you have any legal or tax issues that will have an impact on allocation?
6. How does this portfolio fit in with your overall plans and unique situation? It is important to know how this portfolio ties in with your other investments and how much of your net worth will be invested in this portfolio.
Finally, consider some data on market returns. Research by Eugene Fama and Kenneth French resulted in the formation of the three-factor model in evaluating market returns. The three-factor model says the following:
1. Market risk explains part of a stocks return. (This indicates that because equities have more market risk than bonds, equities should generally outperform bonds over time).
2. Value stocks outperform growth stocks over time because they are inherently more risky.
3. Small cap stocks outperform large cap stocks over time because they have more undiversifiable risk than their large cap counterparts.
Therefore, investors with a higher risk tolerance can and should allocate a significant portion of their portfolios to smaller cap, value-oriented equities.
Remember that more than 90% of a portfolios return is determined by allocation rather than security selection and timing. Do not try to time the market. Research continually has shown that timing the market is not a winning strategy. (To read more about this subject, see our Financial Concepts tutorial.)
Once you have determined the right allocation for you, you are ready to implement your strategy.
Implement Your Strategy
The beauty of ETFs is that you can select an ETF for each sector or index in which you want exposure.
Once you know the basics, you are ready to select your ETFs. In making your selections, look for products that:
1. Most closely meet your allocation needs for each sector or index
2. Have the most favorable expense ratios
There are a number of product offerings. Following are links to the American Stock Exchange, which has more than 200 listed ETFs, as well as some of the largest ETF managers:
American Stock Exchange:
Managers:
1. Claymore: Offers ETFs designed to provide the investment performance delivered by specialized investment indexes.
2. First Trust: Offers ETFs benchmarked against a number of styles, sectors and special situations.
3. iShares: Owned by Barclays. Offerings across every major domestic index and sector, including fixed income, as well as international ETFs.
4. Powershares: Style, industry, commodity currency specialty access and broad-market ETFs, including the QQQQ (formerly the QQQ).
5. Pro Shares: Uses derivatives, short (selling the asset) and long (buying the asset) index ETFs, including leveraged index ETFs.
6. Rydex: ETFs that seek to capture the performance of equal weighted and segmented indexes and sectors.
7. State Street Global Advisors: Standard and Poors Depositary Receipts (SPDRs), specific sector and index ETFs (including fixed income) and the Streettracks ETFs, as well as tools to help build a portfolio.
8. Van Eck Global: Market Vector brand of ETFs based on special market sectors and countries.
9. Vanguard: Domestic and international index ETFs that cover a range of market segments, investment styles, sectors and industries including bond the bond market.
10. Wisdom Tree: Index ETFs with a fundamental approach toward dividends and core earnings.
The next step is execution. ETFs trade during market hours, so any broker can execute your trades. More often than not, it is prudent to phase in new purchases. Data from The Stock Traders Almanac show that, generally, the equity markets are strongest from November to April and weakest from May to October, which means you may choose to speed up your phase-in time during strong periods and slow it down during weaker months.
Monitor and Assess Your Portfolio
• At least once a year, check the performance of your portfolio. For most investors, depending on their tax circumstances, the ideal time to do this is at the beginning or end of the calendar year. Compare each ETFs performance to that of its benchmark index. Any difference, called tracking error, should be low. If it is not, you may need to replace that fund with one that will invest truer to its stated style.
• Balance your ETF weightings for any imbalances that may have occurred due to market fluctuations. Do not overtrade. A once-annual rebalancing is recommended for most portfolios.
• Do not be deterred by market fluctuations. Stay true to your original allocations. Certain styles will stay out of favor for a while, while others will log abnormally high returns for extended periods.
• Assess your portfolio in light of changes in your circumstances. Keep a long-term perspective. Your allocation will change over time as your circumstances change.
Conclusion
Remember, there are three steps to successfully building a portfolio with ETFs. One, determine the right allocation for you. Two, implement your strategy. And three, monitor and assess your portfolio in the context of your situation. If you follow these steps, you should be able to build a portfolio of ETFs that meets its intended objective.
There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price). Just as stock prices fluctuate, so too do growth and multiplier assumptions. Are we to believe Wall Street and the stock price or the analyst and market assumptions?
Short selling carries with it unlimited risk because the purchase price of a security can rise to any price point. Conversely, long investors (buyers) may only lose the amount invested – if, for example, the security price drops to zero.
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Earnings Power Drives Stocks
Equity investors are primarily interested in the earnings power of the companies in which they invest . Other things being equal, the greater the earning potential of the issuer, the greater the upside potential of the stock.
A good way to analyze earnings power is to assess return on assets (ROA) and return on equity (ROE) - two financial ratios that compare a companys earnings to certain balance sheet components. An even better way is to break out these simple ratios into their component parts to see whats really driving earnings power over time. In this article, well show you how to calculate this number and make it work for you.
Return On Assets
ROA is simply earnings available for the common shareholder divided by average total assets over a time period (usually one fiscal year). ROA measures the earnings power of a companys assets - how well the company generates earnings from its asset base. As demonstrated by a simple example, ROA is a very easy ratio to calculate.
Looking at the 2006 financial statements for General Electric, we note that earnings were $20.8 billion, the beginning total asset line was $673.3 billion and the ending total asset line was $697.2 billion.
So, ROA is $20.8/(($673.3 $697.2)/2) or 3.03%.
You can use this tool to compare the current ROA to GEs historic numbers as well as to comparable companies. This is to assess whether GEs earnings power is increasing or decreasing over time. Remember that numbers dont just move on their own - if this number is increasing or decreasing, there must be a reason.
Return On Equity
ROE is the companys earnings the are available for common shareholders divided by average equity. ROE is similar to ROA except that it measures the earnings power of a companys net assets (assets minus debt or other items that arent common equity). It is a more direct measure of how well the company generates earnings from a shareholders investments (or the book value of the shareholders investment). It is therefore the more applicable and more widely used measure for equity analysis compared to ROA. Continuing with GEs financials, we note that in the beginning period, equity was $109.4 billion and the ending period equity was $112.3 billion. ROE is GEs $20.8 billion in earnings divided by average equity, or 18.8%. Just like for ROA, you would then take the ROE and check for any changes in trends and what reasons there could be for those changes. (For more on this, see Keep Your Eyes On The ROE.)
Analyzing Du Ponts ROE Theory
Years ago, the smart people at E.I. Du Pont de Nemours and Company realized they could better analyze the returns of their business by breaking out ROE into a few component parts. Called Du Pont identity or Du Pont ROE decomposition, it is a widely used technique for analyzing ROE. There are a few ways to do this, but well look at a simple version of it here.
Where:
EAT = earnings after tax or net earnings for the common shareholders
EBIT = operating income (which doesnt consider interest expenses and taxes)
Notice how the numerator and denominators of the four terms cancel each other out:
The first term (EAT/EBIT) could be described as interest and tax burden. It measures the proportion of operating income that is left over for the common shareholders after paying interest on debt and taxes. Other things being equal, profit-loving common shareholders want this number to be as high as possible. In the GE example, EAT for 2006 was $20.8 billion and EBIT was $43.9 billion, so the interest and tax burden was 0.474. In other words, about 47.4% of operating income flowed through to the shareholders after the company paid interest and taxes.
The second term (EBIT/Sales) is described as operating margin. Operating margin is an important accounting measure of revenues less operating expenses (like the cost of goods sold and corporate overhead). Again, business owners love big operating margins, so they prefer this number to be as high as possible. Continuing with GEs financials, operating margin for 2006 was $43.9 billion divided by revenue of $163.4 billion, or 26.9%.
Sales/Average Assets is called asset turnover. Asset turnover is a measure of how efficiently the company uses its assets to produce revenues. Investors want this number to be as high as possible, all other things being equal. Continuing with GE, asset turnover is $163.4 billion/$685.25 billion, or 0.239.
Lastly, Average Assets/Average Equity is called financial leverage. The number is higher if the company has a lot of debt and smaller if the company is more conservatively financed. Other things being equal, the higher this number, the higher the ROE. However, using a lot of debt is risky and common shareholders do not always want their companies to use a lot of debt to finance operations.
Debt can cause a lot of burden on cash flows, not just from interest expense (which hits the income statement directly) but also from principal repayments (which hits the cash flow statement). Also note the relationship between financial leverage and the tax and interest burden. A high debt load increases financial leverage but decreases the income flow after taxes and interest, causing a combination effect on ROE. In our example, financial leverage is $685.25 billion/$110.9 billion or 6.2-times.
Weekly data is made up of daily data that has been compressed to show each week as a single data point.
The OTC market and broker-dealers’ activities in the market are regulated by The Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) and various state securities regulators. As well, companies with SEC-registered securities are regulated by the SEC. OTC Markets Group is neither a stock exchange nor a self-regulatory organization (SRO) and is not regulated by either FINRA or the SEC.
The Basics Of Outstanding Shares And The Float
Financial lingo is very important for anybody interested or invested in products like stocks, bonds or mutual funds. Many of the financial ratios used in fundamental analysis include things like outstanding shares and the float. Lets go through these terms so that next time you come across them, you can know their significance.
Restricted and Float
When you look a little closer at the quotes for a company , you may see some obscure terms that youve never encountered before. For instance, restricted shares refer to a companys issued stock that cannot be bought or sold without special permission by the SEC. Often, this type of stock is given to insiders as part of their salaries or as additional benefits. Another term that you may encounter is float. This refers to a companys shares that are freely bought and sold without restrictions in the public. Denoting the greatest proportion of stocks trading on the exchanges, the float consists of regular shares that many of us will hear or read about in the news.
Authorized Shares
Authorized shares refer to the largest number of shares that a single corporation can issue. The number of authorized shares per company is assessed at the companys creation and can only be increased and decreased through a vote by the shareholders. If at the time of incorporation the documents state that 100 shares are authorized, then only 100 shares can be issued.
Now just because a company can issue a certain number of shares doesnt mean that it is going to issue all of these shares to the public. Typically, companies will, for many reasons, keep a portion of the shares in their own treasury. For example, CTC may decide to maintain a controlling interest within the treasury just to ward off any hostile takeover bids. On the other hand, the company may have shares handy just in case it wants to sell them for excess cash (rather than borrowing). This tendency of a company to reserve some of its authorized shares leads us to the next important and related term: outstanding shares.
Outstanding Shares
Not to be confused with authorized shares, outstanding shares refer to the number of stocks that a company actually has issued. This number represents all the shares that can be bought and sold by the public as well as all the restricted shares that require special permission before being transacted. As we already explained, shares that can be freely bought and sold by public investors are called the float, and this value changes depending on if the company wishes to repurchase shares from the market or sell out more of its authorized shares within its treasury.
Lets look back at our company CTC. From the previous example, we know that this company has 1000 authorized shares. If they offered 300 shares in an IPO, gave 150 to the executives and retained 550 in the treasury, then the number of shares outstanding would be 450 shares (300 float shares 150 restricted shares). If after a couple years CTC was doing extremely well and wanted to buy back 100 shares from the market, the number of outstanding shares would fall to 350, the number of treasury shares would increase to 650 and the float would fall to 200 shares since the buyback was done through the market (300 – 100).
Hold on a minute though - this is not the only way that the number of outstanding shares can fluctuate. In addition to the stocks it issues to investors and executives, many companies offer stock options and warrants. These stock options and warrants are instruments that give the holder a right to purchase more stock from the companys treasury. Every time one of these instruments is activated, the float and shares outstanding increase while the number of treasury stocks decrease. For example, suppose CTC issues 100 warrants. If all these warrants are activated, then Corys Tequila Corporation will have to sell 100 shares from its treasury to the holders of the warrants. Thus, by following the most recent example, where the number of outstanding shares is 350 and treasury shares is 650, the exercise of all the warrants would change the numbers to 450 and 550 respectively, and the float would increase to 300. This effect is known as dilution.
Why Is It Important?
Because the difference between the number of authorized and outstanding shares can be so large, its important that you realize what they are and which figures the company is using. Different ratios may use the basic number of outstanding shares while others may use the diluted version. This can affect the numbers significantly and possibly change your attitude towards a particular investment ; furthermore, by identifying the number of restricted shares versus the number of shares in the float, investors can gauge the level of ownership and autonomy that insiders have within the company. All these scenarios are important for investors to understand before they make a decision to buy or sell.
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All corporate actions, including: symbol changes, venue changes (new to the OTC), OTC Tier changes, Caveat Emptor status changes, Splits, Dividends, and Deletes are available within the Corporate Actions section.
This left a supply overhang (commonly known as resistance) around 18. When the stock rebounded to 18, many of the green-oval-bulls probably took the opportunity to sell and "escape" with little to no loss. When this supply was exhausted, the demand was able to overpower supply and advance above resistance at 18.
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3 Dangers Of Checking Your Stock Portfolio Everyday
The digital age has had a profound impact on global financial markets. Most of the impacts have been advantageous for investors and include the fact that investment information has become readily available and literally right at investor fingertips. This has leveled the investment playing field, with individual investors benefiting as the industry is no longer controlled by a small handful of large banking, brokerage and advisory institutions. Digital information has even revolutionized trading itself as exchange floors are run increasingly by computers, as opposed to physical traders through an open outcry system. (Buying stocks is a careful balance of risk and reward. Learn to identify your risk tolerance and financial goals with these fundamental points. See 4 Key Factors To Building A Profitable Portfolio.)
There are many benefits to vast volumes of data that are readily available to investors, including the ability to check your portfolio in real time via the internet and through the latest smartphone technology. However, the digital age of investing has led to excessive trading, which can be very dangerous to your portfolio. Below is an overview of three of the most serious disadvantages it can place on investors.
Higher Taxes
Checking your stock portfolio everyday and trading too often can increase your tax bill. Taxes on stocks occur only through realized gains, and short-term realized gains are taxed at the same rate as an investors regular income, or namely his or her highest marginal tax rate. Long-term taxable gains are more reasonable at 15%, but this is still much higher than 0, which is what investors pay by holding a stock and locking up appreciation in the form of unrealized gains.
Using options is another shorter term trading strategy that is relatively tax inefficient. Options werent invented as part of the digital age, but the ability to obsess over short-term price fluctuations has made options a more integral part of the trading habits of many investors. As the vast majority of options, including the most common put and call options, are held less than a year, they qualify as short term and are taxed at ordinary income rates. (The option to bolster after-tax stock returns through tax-loss harvesting can reverse investor gloom. check out Tax-Loss Harvesting: Reduce Investment Losses.)
Excessive Trading Costs
Trading stocks often is nearly certain to increase trading costs. Many discount brokers offer equity trades for less than $10 these days, but these trading commissions can still add up for investors that trade excessively. The costs can really add up for day traders as they can rack up hefty trading commissions and must also pay short-term tax rates for realized gains.
Bid and ask spreads are not explicit trading costs, but can greatly affect overall gains in stock portfolios. For liquid securities including blue-chip stocks, the spread is usually not significant. However, for smaller and other illiquid stocks, spreads can be substantial. As the investor must buy at the asking price, or price a seller is willing to offer the security, and sell at the bid price, or price a buyer is willing to pay for the security, a wider spread eats into eventual gains and increases losses should the stock fall in price after purchase. (Discover how investment strategies and expense ratios impact your mutual funds returns. See Stop Paying High Mutual Fund Fees.)
Portfolio Underperformance
Many investment professionals have pointed out that it is extremely difficult to beat the market. The market is usually defined as the Standard
If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value.
Investors should always carefully review the financial information of issuers before making investments. Many OTC equities are issued by small companies with limited histories or in economic distress.
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Strategists are hired to predict the direction of the market and various sectors.
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