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The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices.
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Portfolio Management Pays Off In A Tough Market
When you think about investing, you have a very long decision tree - the question of passive or active, long or short, stocks or funds, China or Brazil and on and on. These topics seem to occupy the majority of the media as well as individuals minds. However, these decisions are far down the investing process relative to portfolio management. Portfolio management is basically looking at the big picture. This is the classic forest and trees analogy; many investors spend too much time looking at each tree (stock, fund, bond, etc) and not enough - if any - time looking at the forest (portfolio management).
Prudent portfolio management begins after the client and his or her advisor have reviewed the total picture and completed an investment policy statement (IPS). Embedded in the IPS is the asset allocation strategy of which there are four: integrated, strategic, tactical and insured. Most people recognize how critical asset allocation is, but most investors are unfamiliar with asset allocation rebalancing strategies, of which there are also four: buy-hold, constant-mix, constant proportion and option based. A lack of familiarity with rebalancing strategies helps explain why many confuse the constant-mix rebalancing strategy with buy-hold. Here is a side-by-side comparison of these two most common asset allocation rebalancing strategies.
Buy-Hold Rebalancing
The objective of buy-hold is to buy the initial allocation mix and then hold it indefinitely, without rebalancing regardless of performance. The asset allocation is allowed to vary significantly from the starting allocation as risky assets, such as stocks, increase or decrease. Buy-hold essentially is a do not rebalance strategy and a truly passive strategy. The portfolio becomes more aggressive as stocks rise and you let the profits ride, no matter how high the stock value gets. The portfolio becomes more defensive as stocks fall and you let the bond position become a greater percentage of the account. At some point, the value of the stocks could reach zero, leaving only bonds in the account.
Constant-Mix Investing
The objective of constant-mix is to maintain a ratio of, for example, 60% stocks and 40% bonds , within a specified range by rebalancing. You are forced to buy securities when their prices are falling and sell securities when they are rising relative to each other. Constant-mix strategy takes a contrarian view to maintaining a desired mix of assets, regardless of the amount of wealth you have. You essentially are buying low and selling high as you sell the best performers to buy the worst performers. Constant-mix becomes more aggressive as stocks fall and more defensive as stocks rise.
Returns in Trending Markets
The buy-hold rebalancing strategy outperforms the constant-mix strategy during periods when the stock market is in a long, trending market such as the 1990s. Buy-hold maintains more upside because the equity ratio increases as thestock markets increase. Alternately, constant-mix has less upside because it continues to sell risky assets in an increasing market and less downside protection because it buys stocks as they fall.
Figure 1 shows the return profiles between the two strategies during a long bull and a long bear market. Each portfolio began at a market value of 1,000 and an initial allocation of 60% equities and 40% bonds. From this figure, you can see that buy-hold provided superior upside opportunity as well as downside protection.
Figure 1: Buy-hold vs. constant-mix rebalancing
Copyright ? 2009 Investopedia.com
Returns in Oscillating Markets
However, there are very few periods that can be described as long-trending. More often than not, the markets are described as oscillating. The constant-mix rebalancing strategy outperforms buy-hold during these up and down moves. Constant-mix rebalances during market volatility, buying on the dips as well as selling on the rallies.
Figure 2 shows the return characteristics of a constant-mix and buy-hold rebalancing strategy, each starting with 60% equity and 40% bonds at Point 1. When the stock market drops, we see both portfolios move to Point 2, at which point our constant-mix portfolio sells bonds and buys stocks to maintain the correct ratio. Our buy-hold portfolio does nothing. Now, if the stock market rallies back to initial value, we see that our buy-hold portfolio goes to Point 3, its initial value, but our constant-mix portfolio now moves higher to Point 4, outperforming buy-hold and surpassing its initial value. Alternatively, if the stock market falls again, we see that buy-hold moves to Point 5 and outperforms constant-mix at Point 6.
Figure 2
Copyright ? 2009 Investopedia.com
Conclusion
Most professionals working with retirement clients follow the constant-mix rebalancing strategy. Most of the general investing public has no rebalancing strategy or follows buy-hold out of default rather than a conscious portfolio management strategy. Regardless of the strategy you use, in difficult economic times, you will often hear the mantra stick to the plan, which is preceded by be sure you have good plan. A clearly defined rebalancing strategy is a critical component of portfolio management.
Broker-dealers usually will first determine if they can or choose to execute the trade internally. Internal executions occur if they can ‘match’ (same prices for a buy and sell order) Limit Orders or if they choose to trade for their own account. If they are trading for their own account, they must give investors their limit order price or the NBBO (National Best Bid or Offer) as defined by an Inter-dealer Quotation Systems (OTC Link/FINRA BB) at that point in time.
In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.
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Will Corporate Debt Drag Your Stock Down?
When you invest in a company, you need to look at many different financial records to see if it is a worthwhile investment. But what does it mean to you if, after doing all your research, you invest in a company and then it decides to borrow money? Here we take a look at how you can evaluate whether the debt will affect your investment.
How Do Companies Borrow Money?
Before we can begin, we need to discuss the different types of debt that a company can take on. There are two main methods by which a company can borrow money :
1. by issuing fixed-income (debt) securities - like bonds, notes, bills and corporate papers
2. by taking out a loan at a bank or lending institution.
• Fixed-Income Securities
Debt securities issued by the company are purchased by investors. When you buy any type of fixed-income security, you are in essence lending money to a business or government. When issuing these securities, the company must pay underwriting fees. However, debt securities allow the company to raise more money and to borrow for longer durations than loans typically allow.
• Loans
Borrowing from a private entity means going to a bank for a loan or a line of credit. Companies will commonly have open lines of credit from which they may draw in order to meet their cash requirements of day-to-day activities. The loan a company borrows from an institution may be used to pay for the company payrolls, buy inventories and new equipment, or to keep as a safety net. For the most part, loans require repayment in a shorter time period than most fixed income securities .
What to Look for
There are a few obvious things that an investor should look for when whether deciding to continue his or her investment in a company that is taking on new debt. Here are some questions you can ask yourself:
How much debt does the company currently have?
If a company has absolutely no debt, then taking on some debt may be beneficial because it can give the company more opportunity to reinvest resources into its operations. However, if the company in question already has a substantial amount of debt, you might want to think twice. Generally, too much debt is a bad thing for companies and shareholders because it inhibits a companys ability to create a surplus in cash. Furthermore, high debt levels may negatively affect common stockholders, who are last in line for claiming payback from a company that becomes insolvent.
What kind of debt is the company trying to take on?
Loans and fixed-income securities that a company issues differ dramatically in their maturity dates. Some loans must be repaid within a few days of issue while others dont need to be paid for a several years. Typically, debt securities issued to the public (investors ) will have longer maturities than the loans offered by private institutions (banks). Large short-term loans may be harder for companies to repay, but long-term fixed-income securities with high interest rates may not be easier on the company. Try to determine if the length and interest rate of the debt is suitable for financing the project that the company wishes to undertake.
What is the debt for?
Is the debt a company is taking on meant to repay or refinance old debts, or is it for new projects that have the potential to increase revenues? Typically, you should think twice before purchasing stock in companies that have repeatedly refinanced their existing debt, which indicates an inability to meet financial obligations. A company that must consistently refinance may be doing so because it is spending more than it is making (expenses are exceeding revenues), which obviously is bad for investors. One thing to note, however, is that it is a good idea for companies to refinance their debt to lower their interest rates. However, this type of refinancing, which aims to reduce the debt burden, shouldnt affect the debt load and isnt considered new debt.
Can the company afford the debt?
Most companies will be sure of their ideas before committing money to them; however, not all companies succeed in making the ideas work. It is important you determine whether the company can still make its payments if it gets into trouble or its projects fail. You should look to see if thecompanys cash flows are sufficient enough to meet its debt obligations. And do make sure the company has diversified its prospects. (For more on how to analyze corporate debt and refinancing, read Debt Reckoning.)
Are there any special provisions that may force immediate pay back?
When looking at a companys debt, look to see if there are any loan provisions that may be detrimental to the company if the provision is enacted. For example, some banks require minimum financial ratio levels, so if any of the stated ratios of the company drop below a predetermined level, the bank has the right to call (or demand repayment) of the loan. Being forced to repay the loan unexpectedly can magnify any problem within the company and sometimes even force it into a liquidation state.
How does the companys new debt compare to its industry?
There are many different fundamental analysis ratios that may help you along the way. The following ratios are a good way to compare companies within the same industry.
• Quick Ratio (Acid Test) - This ratio tells investors approximately how capable the company is of paying off all of its short-term debt without having to sell any inventory.
• Current Ratio - This ratio indicates the amount of short-term assets versus short-term liabilities. The greater the short-term assets compared to liabilities, the better off the company is in paying off its short-term debts.
• Debt-to-Equity Ratio - This measures a companys financial leverage calculated by dividing long-term debt by shareholders equity. It indicates what proportions of equity and debt the company is using to finance its assets.
Conclusion
A company increasing its debt load should have a plan for repaying it. When you have to evaluate a companys debt, try to ensure that the company knows how the debt affects investors, how the debt will be repaid and how long it will take to do so.
Liquidity follows transparency. Companies that provide current disclosure either through a regulator or directly to OTC Markets Group experience significantly greater levels of liquidity, improved price discovery, and more efficient trading.
Trading Range
Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns.
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Warren Buffetts Bear Market Maneuvers
In times of economic decline, many investors ask themselves, What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target? The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy. (For more on Warren Buffett and his current holdings, sign up for our Coattail Investor newsletter.)
The Buffett Investment Philosophy
Buffett has a set of definitive assumptions about what constitutes a good investment. These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, see Warren Buffett: The Road To Riches and What Is Warren Buffetts Investing Style?)
Buffett looks for businesses with a durable competitive advantage. What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companies and Economic Moats Keep Competitors At Bay.)
Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.
In addition, he assumes the following points to be true:
• The global economy is complex and unpredictable.
• The economy and the stock market do not move in sync.
• The market discount mechanism moves instantly to incorporate news into the share price.
• The returns of long-term equities cannot be matched anywhere else.
Buffett Investment Activity
Berkshire Hathaway investment industries over the years have included:
• Insurance
• Soft drinks
• Private jet aircraft
• Chocolates
• Shoes
• Jewelry
• Publishing
• Furniture
• Steel
• Energy
• Home building
The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?
Buffett Investment Criteria
Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions . While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:
1. The candidate company has to be in a good and growing economy or industry.
2. It must enjoy a consumer monopoly or have a loyalty-commanding brand.
3. It cannot be vulnerable to competition from anyone with abundant resources.
4. Its earnings have to be on an upward trend with good and consistent profit margins.
5. The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
6. It must have high and consistent returns on invested capital.
7. The company must have a history of retaining earnings for growth.
8. It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
9. The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
10. The company must be free to adjust prices for inflation.
The Buffett Investment Strategy
Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesnt understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadnt been around long enough to provide sufficient performance history for his purposes.
And even in a bear market , although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.
Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks , read Why Warren Buffett Envies You.)
Buffetts selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.
Conclusion
Buffetts strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash war chest that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.
Investigation of Fraud or Other Criminal Activities — There is an investigation of fraudulent or other criminal activity involving the company, its securities or insiders. When OTC Markets becomes aware of such investigation, the companies’ securities may be subject to Caveat Emptor.
Analyst Bias
The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said, "there are lies, damn lies, and statistics." When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals.
The Hidden Differences Between Index Funds
June 30 2012| Filed Under » Index Fund, Investing Basics, Investment, Mutual Funds
Think of your trips to the candy store as a child. Youd pick out your favorite candy ... lets say it was jelly beans. Orange tasted like oranges and yellow tasted like lemons; but sometime later, the yellow jelly beans you purchased might taste like pineapples, or popcorn! What was up with that? The lesson here, that appearances cant be trusted, can be applied to index funds too. Although a S
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Psychological or logical may be open for debate, but there is no questioning the current price of a security. After all, it is available for all to see and nobody doubts its legitimacy.
The fee may be in the form of a commission, regulatory fee or tax, or some other incidental expense. These secondary "advance fee" schemes work very similarly to boiler room operations, the difference being that an advance fee scheme generally targets investors who already purchased underperforming securities, perhaps through an affiliated boiler room, offering to arrange a lucrative sale of those securities, but first requiring the payment of an “advance fee.”
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Do Your Investments Have Short-Term Health?
For companies, being able to meet short-term financial obligations is an integral part of maintaining operations and growing in the future. After all, if its not able to meet todays debts, a company might not live to see another day! Thats why its essential for investors to know how to evaluate a companys short-term financial health. Here we take you through a few of the ratios that are the foremost tools for doing so.
The Basics of Liquidity
A large factor determining a companys short-term financial health is liquidity, the definition of which depends on context. In stock trading , liquidity is the degree to which the market is willing to buy a particular stock. As a characteristic of an asset, liquidity refers to the ease with which an asset can be converted into cash. This is the definition of liquidity we are interested in.
Lets compare two different kinds of assets: a building and a money market account. Even if these two assets are valued at $100,000 on a companys financial statement, their liquidities have different implications for the companys short-term health. The money market account, an asset referred to as a cash equivalent, can be converted into cash within a day or two, if not immediately. The building, however, is very illiquid. For the company to get its cash, it must sell the building, which could take months, if not years.
Essentially, a companys short-term liquidity determines how well it can make its necessary payments (cash outflows) - which include employee wages, interest and supplier costs - given the revenue it generates (cash inflows). If a company has no cash equivalents, its inflows need to match or exceed cash outflows. So, if a company has a bad month and it has no supply of liquid assets like a money market account , it will be unable to make its necessary payments.
The Current Ratio
The first ratio we will look at is the current ratio, which compares all of a companys current assets to all of its current liabilities. In general, the term current means less than one year. So, current assets include cash, accounts receivable, inventory, prepaid expenses and other assets that can be converted to cash within one year. Current liabilities include short-term debt, interest, accounts payable and any other outstanding liabilities that are due within a years time.
When calculating this ratio, you are essentially trying to determine whether a company can meet its short-term obligations. It will likely be able to do so if the ratio is above 1; if the ratio is less than 1, the company is likely to fall short. We say likely because although a ratio of 1 or greater indicates that the company has more current assets than current liabilities, it may be inappropriate to judge certain industries by a rigid standard.
For industries that generally have a large portion of current assets tied up in inventory, a ratio of 1.5 or even 2 might be a better standard. When analyzing the current ratio, as when looking at any ratio, an investor should make comparisons between companies that operate in the same industry. Different industries have different business needs, so investors must modify their analyses accordingly.
Finally, bigger is not necessarily better in the case of the current ratio. A really high ratio, 10 for example, should probably sound some alarm bells, because it indicates that the company has a large amount of current assets that could - and probably should - be invested back into the company. Although a company with a very high current ratio may be stable in the short term, it probably has no means of sustaining its long-term growth and performance.
The Acid Test or Quick Ratio
The acid test is a more rigorous version of the current ratio. It indicates whether a firm, without selling inventory, has enough short-term assets to cover its immediate liabilities. Companies with ratios of less than 1 cannot pay their current liabilities without selling inventories and should be viewed with extreme care. An acid test that is much lower than the current ratio signals that current assets are highly dependent on inventory - retail is a type of business in which this would occur. In general, a ratio of 1 is considered satisfactory, although, as with the current ratio, the acid test should be compared only within a similar industry.
Interest Coverage
Interest coverage indicates what portion of debt interest is covered by a companys cash flow. A ratio of less than 1 means the company is having problems generating enough cash flow to pay its interest expenses. Ideally, you want the ratio to be over 1.5. A company with no long-term debt doesnt have any interest expense; this situation causes the current ratio to give enviable results. Companies with a poor interest coverage ratio can improve it by improving cash flow and/or lowering interest expenses by paying off debt.
This ratio is popular not only among investors, but also with creditors, who want to see that a companys short-term health is strong and that the company has sufficient cash flow to make principal and interest payments.
Another notable fact about the ratio is that sometimes different numerators will be used. For example, some analysts or creditors will use EBITDA in place of EBIT.
Activity Ratios
There are a few different activity ratios, but essentially, their main function is to help determine the companys cash flow cycle, giving a picture of how efficiently assets are being used. Almost any current account can be analyzed in terms of this cycle, but the three most common activity ratios each measure one of the following:
1. How long a company takes to collect receivables
2. How long a company takes to sell inventory
3. How long it takes to pay suppliers
The calculation of activity ratios is a little complex, but to give you an idea of how these ratios work, well look at the activity ratio dedicated to accounts receivable. Suppose that a company has total credit sales of $22 million. At the beginning of the year, accounts receivable is at $4.5 million, and at the end its $1.5 million. By using the accounts receivable turnover ratio we can determine that the companys receivables turn over at a rate of approximately 7.3 times per year. This means receivables remain outstanding for an average of 50 days. Here the calculations are represented mathematically:
Although we only demonstrate one activity ratio calculation here, the others are calculated in a similar fashion. All it takes is some research into the company and some number crunching.
Lets look at an example to put this all into context. Suppose that the above company has to pay suppliers within 90 days of purchase and suppose that, by calculating another activity ratio, we find the company holds inventory for 80 days. As the companys accounts receivable remain outstanding for 50 days, we find it has a cash cycle of 130 days (80 50). In other words, from the time it purchases its product from the supplier, the company takes approximately 130 days to collect payment from the customer.
The supplier, however, requires a payment within 90 days of the purchase. This 40-day discrepancy may create short-term liquidity problems for the company. This means investors should conduct more research to determine whether there is justification for this difference, and whether it is likely to cause hardship for the company. Examining activity ratios and determining a companys cash flow cycle are important elements of determining a companys short-term health and should be analyzed in conjunction with the other short-term liquidity ratios.
Conclusion
By honing in on crucial aspects of a companys financial health, ratios shed light on how well a company will do in the short term. More importantly, they help investors determine whether a company has the stability to get through unexpected problems today. If a company cannot maintain operations in the short term, it will not have the ability to provide investors with any benefits in the long term.
Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more an art form than a science.
The Pitfalls Of Diversification
Diversification is a prominent investment tenet known by average and sophisticated investors alike. Diversification means putting your proverbial eggs into more than one basket. Proponents of this method recommend diversification within a portfolio or across various types of investments. The assumption is that diversification helps mitigate the risk of multiple investments decreasing all at once, or that relatively better performing assets will at least offset the losses. There is some truth to this approach, but there is another side to this coin. Investors should also be asking how diversification affects their portfolios performance. In other words, is diversification all that its cracked up to be? This article will examine some of the pitfalls of over-diversifying your portfolio and possibly debunk some misconceptions along the way.
SEE: Top 4 Signs Of Over-Diversification
Expenses
Having and maintaining a truly diversified portfolio can be more expensive than a more concentrated one. Regardless of whether an investor is diversified across various assets, such as real estate, stocks , bonds or alternative investments (such as art), expenses will likely rise simply based on the actual number of investments. Every asset class will probably require some expense that will be incurred on a transactional basis. Real estate brokers, art dealers and stockbrokers all will take a portion of your diversified portfolio. An average investor may have a mix of 20 or so stock and bond funds. It is likely that your financial advisor is recommending certain fund families across investable sectors.
In many cases, these funds are expensive and may carry a sales and/or redemption charge. These expenses cut into your returns and you will not get a refund based on relative underperformance. If diversification is a must-have strategy for your investable assets, then consider minimizing maintenance and transaction costs. Doing this is critical to preserving your return performance. For example, pick mutual funds or exchange traded funds (ETFs) with expense ratios less than 1% and pay a load for investing your hard-earned dollars. Also, negotiate commissions on large purchases, such as real estate.
Balancing
Many investors may incorrectly assume that having a diversified portfolio means they can be less active with their investments. The idea here is that having a basket of funds or assets enables a more laissez-faire approach, since risk is being managed through diversification. This can be true, but isnt always the case. Having a diversified portfolio may mean that you have to be more involved in and/or knowledgeable about, your investment choices. Most portfolios across or within an asset class will likely require rebalancing. In laymans terms, you have to decide how to reallocate your already invested dollars. Rebalancing may be required due to many reasons, including, but not limited to, changing economic conditions (recession), relative outperformance of one investment versus another or because of your financial advisors recommendation.
Many investors with over 20 funds or multiple asset classes now will likely face a choice of picking a sector or asset class and funds that they are simply unfamiliar with. Investors may be advised to delve into commodities or real estate without real knowledge of either. Investors now face decisions on how to rebalance and what investments are most appropriate. This can quickly become quite a daunting task unless you are armed with the right information to make an intelligent decision. One of the assumed benefits of being diversified may actually become one of its biggest hassles.
Underperformance
Perhaps the greatest risk of having a truly diversified portfolio is the underperformance that may occur. Great investment returns require choosing the right investments at the correct time and having the courage to put a large portion of your investable funds toward them. If you think about it, how many people do you know have talked about their annual return on their 20 stock and bond mutual funds ? However, many people can recall what they bought and sold Cisco Systems for in the late 1990s. Some people can also remember how they invested heavily in bonds during the real estate collapse and ensuing Great Recession in the mid to late 2000s.
There have been several investing themes over the last few decades that have returned tremendous profits: real estate, bonds, technology stocks, oil and gold are just some examples. Investors with a diverse mix of these assets did reap some of the rewards, but those returns were limited by diversification. The point is that a concentrated portfolio can generate outsized investing returns. Some of these returns can be life changing. Of course, you have to be willing to work diligently to find the best assets and the best investments within those assets. Investors can leverage Investopedia.com and other financial sites to help in their research to find the best of the best.
SEE: 4 Steps To Building A Profitable Portfolio
The Bottom Line
At the end of the day, having a diversified portfolio, perhaps one managed by a professional, may make sense for many people. However, investor beware, this approach is not without specific risks, such as higher overall costs, more accounting for and tracking of investments, and most importantly, potential risk of significant underperformance. Having a concentrated portfolio may mean more risk, but it also means having the greatest return potential. This may mean owning all stocks when pundits and professionals say owning bonds is preferred (or vice versa). It could mean you stay 100% in cash when everyone else is buying the market hand over fist. Of course, common sense cannot be ignored: no one should blindly go all-in on any investment without understanding its potential risks. Hopefully, one can recognize that having a diversified portfolio is not without risks of its own.
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Price Discounts Everything
This theorem is similar to the strong and semi-strong forms of market efficiency.
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Managing A Portfolio Of Mutual Funds
After youve built your portfolio of mutual funds, you need to know how to maintain it. This week, we talk about how to manage a mutual-fund portfolio by walking through four common strategies:
The Wing-It Strategy
This is the most common mutual-fund strategy. Basically, if your portfolio does not have a plan or a structure, then it is likely that you are employing a wing-it strategy. If you are adding money to your portfolio today, how do you decide what to invest in? Are you one that searches for a new investment because you do not like the ones you already have? A little of this and a little of that? If you already have a plan or structure, then adding money to the portfolio should be really easy. Most experts would agree that this strategy will have the least success because there is little to no consistency.
Market-Timing Strategy
The market timing strategy implies the ability to get into and out of sectors or assets or markets at the right time. The ability to market time means that you will forever buy low and sell high. Unfortunately few investors buy low and sell high because investor behavior is usually driven by emotions instead of logic. The reality is most investors tend to do exactly the opposite – buy high and sell low. This leads many to believe that market timing does not work in practice. No one can accurately predict the future with any consistency.
Buy-and-Hold Strategy
This is by far the most commonly preached investment strategy . The reason for this is that statistical probabilities are on your side. Markets generally go up 75% of the time and down 25% of the time. If you employ a buy-and-hold strategy and weather through the ups and downs of the market, you will make money 75% of the time. If you are to be more successful with other strategies to manage your portfolio, you must be right more than 75% of the time to be ahead. The other issue that makes this strategy most popular is it is easy to employ. This does not make it better or worse. It is just easy to buy and hold.
Performance-Weigthing Strategy
This is somewhat of a middle ground between market timing and buy and hold. With this strategy, you will revisit your portfolio mix from time to time and make some adjustments. Lets walk through an oversimplified example using real performance figures.
Lets say that at the end of 1996, you started with an equity portfolio of four mutual funds and split the portfolio into equal weightings of 25% each.
After the first year of investing, the portfolio is no longer an equal 25% weighting because some funds performed better than others.
The reality is that after the first year, most investors are inclined to dump the loser (Fund D) for more of the winner (Fund A). However, the right strategy is to do the opposite to practice sell high, buy low. Performance weighting simply means that you sell some of the funds that did the best to buy some of the funds that did the worst. Your heart will go against this logic but it is the right thing to do because the one constant in investing is that everything goes in cycles.
In year four, Fund A has become the loser and Fund D has become the winner.
Performance weighting this portfolio year after year means that you would have taken the profit when Fund A was doing well to buy Fund D when it was down. In fact, if you had re-balanced this portfolio at the end of every year for five years, you would be further ahead as a result of performance weighting.
Its all about discipline.
The key to portfolio management is to have a discipline that you adhere to. The most successful money managers in the world are successful because they have a discipline to manage money and they have a plan. Warren Buffet said it best: To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such. Products traded on the exchange must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in trading.
Such an analysis might involve three steps:
Broad market analysis through the major indices such as the S
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Dollar-Cost Averaging Pays
Dollar-cost averaging (DCA) is a wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. This type of systematic investment program is familiar to many investors, as they practice it with their 401(k) and 403(b) retirement plans. When it comes to implementing investment strategies based on dollar-cost averaging, there may be no better investment vehicle than the no-load mutual fund - the structure of these mutual funds almost seems to have been designed with dollar-cost averaging in mind. Here we look at why, helping you use dollar-cost averaging when investing in mutual funds .
Review of Dollar-Cost Averaging
Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. Its a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you dont have to invest the time and effort to monitor market movements and strategically time your investments.
Why Dollar-Cost Averaging Works Well With Mutual Funds
The expense ratio that mutual fund investors pay to invest in a fund is a fixed percentage of your contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. Compared tostock trades , for example, where a flat commission is charged on each transaction, the value of the fixed-percentage expense ratio is startlingly clear. Consider the following:
Example A
• By making a $25 installment in a mutual fund that charges a 20 basis-point expense ratio, you pay $0.05, which amounts to a 0.2% fee.
• By making a $250 lump-sum investment in the same fund, you pay $0.50, or a 0.2% fee.
Example B
• By making a $25 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10, which amounts to a 40% fee.
• By making a $250 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10.00, which amounts to a 4% fee.
The examples above show that you have to buy more stock in order for the percentage of the commissions to go down. In comparison, the structure of the mutual fund expense ratio makes the investment more accessible: the no-commission trading of the mutual fund coupled with low minimum investment requirements allows almost everyone to afford mutual funds.
Furthermore, many mutual funds waive their required minimums for investors who set up automatic contribution plans (plans that put dollar-cost averaging into action). All this enables low-wage earners and folks with tight budgets to invest $10 or $25 or another nominal amount on a regular basis without worrying about the impact of trading costs. While small contributions may not seem impressive at first glance, they enable investors to get into the habit of saving, and can really add up over the course of a lifetime thanks to the power of compounding.
Of course, dollar-cost averaging with mutual funds isnt a strategy that is limited to use by the less than affluent. If you have a large sum of money and invest it all at once, you face the risk that declining financial markets will take a huge chunk out of your portfolio. Dollar-cost averaging offers the perfect solution to your dilemma. To facilitate a long-term strategy for investing large sums of money, many mutual funds offer investors the ability to make a lump-sum investment in a money market fund, from which predetermined amounts are automatically invested into a designated higher-risk mutual fund at pre-arranged intervals. Its a convenient, cost-efficient solution that mitigates concerns about investing a large sum of money at the wrong time.
A Long-Term Strategy
Regardless of the amount of money that you have to invest, dollar-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not years. Because of these trends, dollar-cost averaging is generally not a particularly valuable short-term strategy.
Consider, for example, an investor making 10 purchases of a mutual funds shares over the course of a month. While it is unlikely that the purchase price of the shares will be identical for each transaction, it is also unlikely that they will differ significantly over such a short time frame.
On the other hand, over the course of a market cycle lasting five or 10 years and including a bull market and a bear market, the price of a given security is likely to change significantly. Dollar-cost averaging will help to ensure that your average cost per share represents both the premiumsof a bull market and the discounts of a bear market, as opposed to just the premiums usually paid by investors in a bull market.
Conclusion: Keep Costs in Mind
While low, percentage-based expense ratios make mutual funds the perfect vehicle for dollar-cost averaging, it pays to exercise caution when it comes to your investments . Some mutual funds charge low-balance fees, sales loads, purchase fees and/or exchanges fees. Be sure to read the disclosure materials prior to investing and make sure you are aware of all expenses associated with your investments.
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."
For a candlestick chart, the open, high, low and close are all required.
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Banking On Blue Chip Stocks
Blue chip stocks, named after the highest-valued chips in poker, are prized investment holdings representing ownership in some the most successful firms in the economy. If you want to invest in companies that have proven their ability to ride out economic downturns and maintain profitability even when times get tough, you should take a look at these stocks.
Basic Characteristics of Blue Chip Stocks
A blue chip stock is a share of ownership in a large, well-established and stable company that has a long history of consistent earnings growth and dividend payments. Blue chip companies have a large market capitalization, strong balance sheets and good cash flow. Blue chip stocks have low volatility overall, but strong changes in the overall market can also have strong effects on these stocks. The performance of an individual blue chip company will tend to correlate closely with the performance of the S
Complaints regarding companies should be directed to the SEC, while complaints regarding broker-dealers or other investment professionals should be directed to FINRA. More information about specific OTC regulations is covered in Part 3 – Regulation.
The shorter the time frame and the less compressed the data is, the more detail that is available.
The Highest Priced Stocks In America
Why do so few stocks get over $400, or even over $200, and should you care? Most companies care about the price of their stock, and actually take measures to keep it down. Splitting shares or issuing new stock can keep the price low. But price is not the same as value. Shares which are trading for over $1,000 each can make it sometimes tough to even afford a handful of shares.
Berkshire Hathaway (NYSE:BRK.A) $114,700
Berkshire Hathaway has the highest shares on the New York Stock Exchange, so it needs special attention. It is over $110,000 because it doesnt split its shares. Normally a company will complete several 2;1 splits over the years, which doubles the shares outstanding but also cuts the price in half. Famous investor Warren Buffett keeps the price high to deter short-term traders from creating excessive volatility. At one point this year it cost over $140,000 per share. At that price it trades about 450 shares every day. There is a lower priced option with Berkshire Hathaway B shares (NYSE:BRK.B), which trade around $75 which were $3,000 per share until a 50;1 split in 2010.
Buffett created this holding company, which is so big that it doesnt just acquire buildings or factories; instead it often gobbles up whole companies. A true conglomerate, Berkshire owns retail, insurance, railways, furniture stores and more.
Seaboard Corporation (NYSE:SEB) $2,460
Seaboard Corporation went public in 1959 through a merger with Hathaway Industries, Inc. It deals in several areas including ocean transportation, pork production, commodity merchandising as well as an energy producer in the Dominican Republic. As you will see in most of these companies it has never split its shares and operations span several industries.
NVR, Inc. (NYSE:NVR) $700
NVR is a homebuilder and mortgage banking company in the United States. It has also never split any of its stock. Its shares took off in the early 2000s just as the tech bubble was popping. Shares went from $70 to about $700 in about 10 years.
Google Inc. (Nasdaq:GOOG) $600
Google waited until after the dotcom bust to go public when it issued shares in 2004. This was a highly anticipated IPO which closed the day around $100. Since then there have no splits and nearly a 500% return to those who have bought and held.
Priceline.com, Inc. (Nasdaq:PCLN) $525
Priceline held its initial public offering in 1999 at $16 per share. This was in the last stages of the dotcom bubble. About a month later the stock jumped to $120 per share. The bubble burst and the price dropped to around $1.30 by 2001. In 2003 it did a reverse split (1:6) which means every six shares you owned was now one, but that one was worth six times the price. If this split had not happened the current price would be around $87.50 each.
The Washington Post Company (NYSE:WPO) $415
The Washington Post company has not split its shares since it went public in 1971. At that time the class B shares were available to the public at around $26.
White Mountains Insurance Group, Ltd. (NYSE:WTM) $415
White Mountains insurance Group deals in insurance and reinsurance. Buffetts invested in insurance companies back in 1967 which was the beginning of Berkshire Hathaways rise.
Alexanders Inc (NYSE:ALX) $415
Rounding out the over $400 list is Alexanders inc. which is actually a Real Estate Investment Trust (REIT). It allows you to buy shares in a company which invests in properties and distributes the profits in the form of dividends. This means a $3 dividend for every share you hold every three months. This can obviously change.
Low Prices
I once heard a friend say to stay away from stocks with prices is over $200, because a $200 stock would need a $40 increase in price to gain 20%. It would be much easier for a $20 stock to move $4. For the record this is not true, sort of. A lower priced stock can be more volatile but the value of a stock is due to many factors.
Penny stocks, for example, will usually have low volume and can be very small companies. There is often less information available and less coverage by analysts. A single event or a few speculators can easily create huge jumps or drops in share price.
Low prices dont always mean you are dealing with a small company. Take Synovus Financial Corp. (NYSE:SNV) they trade around $2 per share. Because they have 785 million shares outstanding they have a market capitalization of $1.6 billion. Ultimately, the price is based on what that share represents: partial ownership in the company.
Actual Value
To find the true value of these shares you need to look at a variety of metrics, most of which are calculated per share, to make it easier to compare to their price. For example a very popular metric is the price to earnings ratio. Investors basically see how much it costs to buy a part of the profits of the company. The lower the P/E the better the value, but be careful to only compare similar companies. For example if you bought one share of Seaboard Corp. for $2,300 you are paying about $9 for every $1 of earnings over the last year. But take a look at Hormel Foods Corp. (NYSE:HRL) it costs $29 per share but you need to pay $17 for every dollar of earnings. In this case the $2,300 share is a better value. (For more on the P/E ratio check out Profit With The Power Of Price-To-Earnings.)
Future Prospects
The true value of a stock goes beyond the price you pay, or even what you get right now for that price. The true value of a stock is a moving target based on future prospects. Any company can have a great year, but value can be highly dependent on projections. Analysts scrutinize figures such as the potential growth rate of the economy, the strength of the industry and the prospects of specific companies. In the end, high price doesnt always mean overpriced.
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Equity Securities, including OTCQX, OTCQB and Pink Sheets securities, which improves pricing for investors and results in greater volumes and better overall liquidity. In 2008 FINRA expanded the rule to cover real-time trade reporting and dissemination of trade reports to include OTC ADRs and Foreign Ordinary shares.
Some buying interest began to become evident around 44 in mid- to late-February. Notice the array of candlesticks with long lower shadows, or hammers, as they are known.
Invest Without Stress
Many investors get a lot of anxiety chasing mutual fund returns, hoping that history repeats itself while they are in the fund. In fact, a fund which has already yielded large returns has less of a chance to do so again when compared with its peer group. A better idea, rather than stressing out over the vagaries of the financial markets, is to look for wisdom in time-tested, academic methods. Once your high-quality investment plan is set up, relax. Let your investment compound, understanding that the plan is rooted in knowledge, not hype.
Good Soil
As with growing a garden, you want to invest in good soil (strategy). Accordingly, you can expect there to be some rainy days (bear market) with the sunny (bull market). Both are needed for overall growth. Once a garden (money) starts to grow, dont uproot it and replant, lest it wither and die. Set up your investment wisely and then let it grow.
Academic research creates good soil. The body of knowledge about the market goes through a rigorous review process where primary goal is truth or knowledge rather than profit. Thus, the information is disinterested - something you should always look for in life to make wise decisions.
Greatly distilling this body of knowledge, here are a few key points to remember when it comes to investing in the stock market .
Risk and Return
This concept is similar to the saying there is no free lunch. In money terms, if you want more return, you are going to have to invest in funds that have a greater probability of going south (high risk). Thus, the law of large numbers really comes into play here, since investing in small, unproven companies may yield better potential returns, while larger companies which have already undergone substantial growth may not give you comparable results.
Market Efficiency
This concept says that everything you need to know about conventional investments is already priced into them. Market efficiency supports the concept of risk and return; thus, dont waste your time at the library with a Value Line investment unless it provides entertainment value. Essentially, when you look at whether or not to invest in a large corporation, it is unlikely that you are going to find any information different from what others have already found. Interestingly, this also gives insight into how you make abnormal returns by investing in unknown companies like Bobs Tomato Shack, if you really have the time and business acumen to do the front-line research.
Modern Portfolio Theory
Modern portfolio theory (MPT) basically says that you want to diversify your investments as much as possible in order to get rid of company- or stock-specific risk, thus incurring only the lowest common denominator - market risk. Essentially, you are using the law of large numbers in order to maximize returns while minimizing risk for a given market exposure.
Now here is where things get really interesting! We just found the way to optimize your risk-return tradeoff for a given market level of risk by being well diversified in your investments. However, you can further adjust the investment risk downwards by lending money (investing some of it in risk-free assets) or upwards by borrowing it (margin investing).
Best Market Portfolio
Academics have created models of the market portfolio , consisting of a weighted sum of every asset in the market, with weights in the proportions that the assets exist in the market. Many think of this as being like the S
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Investors should clearly understand that trading practices for OTC securities are different from those of securities traded on exchanges. Your broker-dealer or the broker-dealer they route your order to, may not provide you with limit order display or instantaneous executions in OTC securities.
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
Switching back and forth may cause confusion and undermine the focus of your analysis.
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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.
4 Ways Bonds Can Fit Into Your Portfolio
February 02, 2012 | Filed Under » Bonds, Fixed Income, Interest Rates, Investing Basics, Portfolio Management
Since the early 1980s, interest rates have been on a secular decline. Since the credit crisis, governments across the world have worked to flood global financial markets with liquidity, which includes low interest rates, to try and stoke economic growth. This has served to push most interest rates to all-time lows, be it those paid on government securities, mortgage rates or the rates that banks borrow from and lend to each other. (For related reading, see Forces Behind Interest Rates.)
See: Bond Basics
With interest rates across the board so low, there is a pretty wide consensus that they will trend up in 2012 and beyond. Because bond prices move in the opposite direction of interest rates, investors holding bonds have a good chance of losing money on their holdings over the next few years. However, as with any asset class, there are pockets of the market where investors should be able to protect their principal and earn reasonable rates of returns in their bond portfolios. Below are four ways that bonds can fit into your investment profile during 2012.
Municipal Bonds
About a year ago, market strategist Meredith Whitney boldly predicted that municipal bonds in the United States would eventually see hundreds of billions of dollars in defaults, as local municipalities struggle with lower tax revenue due to the credit crisis and also find it difficult to operate after years of generous retirement benefit promises and relatedoperating costs. Other strategists echoed her negative sentiment, which served to send many investors fleeing from municipal bond funds and individual bond positions.
Lower demand has served to push bond prices down and rates up. The rate on an AAA-rated five-year municipal bond is currently at roughly 0.79%, which is currently below the current Treasury bond yield of about 0.86% for the same maturity. Additionally, municipal bonds are generally exempt from federal taxes as well as most state and local tax rates. As a result, the tax equivalent yield is even higher, and moving into lower-rated bonds that are still investment grade could garner higher rates. A five-year A-rated municipal bond yields approximately 1.35%. (To learn more, read Avoid Tricky Tax Issues On Municipal Bonds.)
Corporate Bonds
AAA corporate bonds with a five-year maturity currently yields around 1.8%, which compared to the yield of municipal bonds with the same rating is more than double. A 20-year AAA corporate bond rate is somewhat decent at around 4.45%, though it requires locking up your money in a security that doesnt reach maturity until two decades later. As with the municipal bonds, sacrificing quality but still sticking in the investment grade category can allow for some pick up in yield. For instance, those brave enough to invest in bonds issued by banks and other financial institutions, can find yield to maturities of as much as 9%.
High-Yield Bonds
Sticking on the braver side of the bond market, high-yield bonds - which is a euphemism for junk bonds - offer plenty of opportunity to gamble for yields that can match the returns of stocks. A current perusal of some high-yield bonds, which are of a much lower credit rating than the investment grade bonds mentioned above, offer yield to maturities into the double digits. Clearly, the bonds with yields in the teens on up carry significant default risk, meaning investors can lose all of their money if the firm falls into further financial distress or ends up declaringbankruptcy. (Also, check out Junk Bonds: Everything You Need To Know.)
Convertible Bonds
Convertible bonds are an interesting subset of the bond market in that they combine features of traditional bonds with stocks. Like a bond, convertibles usually have a maturity date and pay a regular coupon, which should appeal to income-minded investors. They also tend to trade like a bond in a weak market environment or when company fundamentals are weak. But they also have the upside of a stock as they are convertible into the underlying companys stock. As such, they can trade much like a stock as it reflects the performance of the stock they are convertible into. Coupon rates vary and are generally quite low, but, again, offer more upside if the underlying stock performs well.
The Bottom Line
The bond market generally does not favor investors these days. The fact that companies, governments and municipalities are jumping at the chance to issue debt at low interest rates speaks to the fact that rates are at historic lows. Recently, a 10-year Treasury bond was issued with a coupon rate below 2%, which is the first time rates were ever this low. Despite the challenging overall outlook for the asset class, there are plenty of opportunities to find ways for bonds to fit into your portfolio.
A decline below support indicates a new willingness to sell and/or a lack of incentive to buy.
The FINRA OTCBB system, on the other hand, is a quotation only system, as it lacks the electronic messaging capabilities of OTC Link. Furthermore, only companies that are SEC-reporting (or bank/insurance reporting) are eligible for quotation on the FINRA OTCBB. Since these securities may also be quoted on OTC Link, many BB eligible securities are ‘Dually-Quoted’ on both inter-dealer quotation systems. Currently, 99% of OTCBB eligible securities are quoted on OTC Link.
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