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Pros And Cons Of Offshore Investing
Offshore investing is often demonized in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. While its true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.
Tutorial: Personal Income Tax Guide
What Is Offshore Investing?
Offshore investing refers to a wide range of investment strategies that capitalize on advantages offered outside of an investors home country. We will briefly touch on the advantages and disadvantages of offshore investing. The particulars are far beyond the scope of this introductory article.
There is no shortage of money-market, bond and equity assets offered by reputable offshore companies that are fiscally sound, time-tested and, most importantly, legal.
Advantages
There are several reasons why people invest offshore:
Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual. (For additional information, read What is an Emerging Market Economy?)
In recent years, however, the U.S. government has become increasingly aware of the tax revenue lost to offshore investing, and has created more defined and restrictive laws that close tax loopholes. Investment revenue earned through offshore investment is now a focus of regulators and the tax man alike. According to the U.S. Internal Revenue Service (IRS), U.S. citizens and residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade U.S. federal income tax on capital gains can be prosecuted for tax evasion. Therefore, although the lower corporate expenses of offshore companies can translate into better gains for investors, the IRS maintains that U.S. taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. (To learn more, see How International Tax Rates Impact Your Investments.)
Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax. However, the trustor of an offshore asset-protection fund will still be taxed on the trusts income (the revenue made from investments under the trust entity), even if that income has not been distributed.
Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesnt mean that offshore investors are criminals with something to hide. Its also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investors identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors dont like the public at large knowing what stocks theyre investing in. Multi-millionaire investors dont want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.
Because nations are not required to accept the laws of a foreign government, offshore jurisdictions are, in most cases, immune to the laws that may apply where the investor resides. U.S. courts can assert jurisdiction over any assets that are located within U.S. borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect not be held physically in the United States.
Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatize sectors that were formerly under government control. Chinas willingness to privatize some industries has investors drooling over the worlds largest consumer market. (To read more, see Investing Beyond Your Borders.)
Disadvantages
Tax Laws are Tightening - Tax agencies like the IRS arent ignorant of offshore strategies. Theyve clamped down on some traditional ways of tax avoidance. There are still loopholes, but most are shrinking more and more every year. In 2004, the IRS amended the Internal Revenue Code (IRC) and began to collect taxes from both American corporations that operate out of another country and American citizens and residents who earn money through offshore investments. (For more information on tax laws that affect offshore investors, see the IRS International Taxpayer - Expatriation Tax.)
Cost - Offshore Accounts are not cheap to set up. Depending on the individuals investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.
How Safe Is Offshore Investing?
Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to offer fairly secure investment opportunities. More than half of the worlds assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable investment advisor, accountant, and lawyer who specializes in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (For more information, see Investment Scams: Prime Banks.)
Conclusion
We are not lawyers, tax accountants or offshore investment experts in any country. Every individuals situation is different. Offshore investment is beyond the means of most investors, and above the risk tolerance of others.
Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, do your research before parting with your money - unless youre prepared to lose it.
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Prices Movements are not Totally Random
Most technicians agree that prices trend. However, most technicians also acknowledge that there are periods when prices do not trend. In his book, Schwager on Futures: Technical Analysis, Jack Schwager states:
There is a wide range in the quality of issuers whose securities are traded Over the Counter (OTC) - from major international conglomerates to very small, highly speculative companies. Therefore, investors should conduct thorough research prior to making an investment decision.
10 Books Every Investor Should Read
When it comes to learning about investment, the internet is one of the fastest, most up-to-date ways to make your way through the jungle of information out there. But if youre looking for a historical perspective on investing or a more detailed analysis of a certain topic, there are several classic books on investing that make for great reading. Here we give you a brief overview of our favorite investing books of all time and set you on the path to investing enlightenment. (To find more recommended books, see Investing Books It Pays To Read.)
The Intelligent Investor (1949) by Benjamin Graham
Benjamin Graham is undisputedly the father of value investing. His ideas about security analysis laid the foundation for a generation of investors, including his most famous student, Warren Buffett. Published in 1949, The Intelligent Investor is much more readable than Grahams 1934 work entitled Security Analysis, which is probably the most quoted, but least read, investing book. The Intelligent Investor wont tell you how to pick stocks, but it does teach sound, time-tested principles that every investor can use. Plus, its worth a read based solely on Warren Buffetts testimonial: By far the best book on investing ever written.
Common Stocks And Uncommon Profits (1958) by Philip Fisher
Another pioneer in the world of financial analysis , Philip Fisher has had a major influence on modern investment theory. The basic idea of analyzing a stock based on growth potential is largely attributed to Fisher. Common Stocks And Uncommon Profits teaches investors to analyze the quality of a business and its ability to produce profits. First published in the 1950s, Fishers lessons are just as applicable half a century later.
Stocks For The Long Run (1994) by Jeremy Siegel
A professor at the Wharton School of Business, Jeremy Siegel makes the case for - you guessed it - investing in stocks over the long run. He draws on extensive research over the past two centuries to argue not only that equities surpass all other financial assets when it comes to returns, but also that stock returns are safer and more predictable in the face of the effects of inflation.
Learn To Earn (1995), One Up On Wall Street (1989) or Beating The Street (1994) by Peter Lynch
Peter Lynch came into prominence in the 1980s as the manager of the spectacularly performing Fidelity Magellan Fund. Learn To Earn is aimed at a younger audience and explains many business basics, One Up On Wall Street makes the case for the benefits of self-directed investing, and Beating The Street focuses on how Peter Lynch went about choosing winning stocks (or how he missed them) while running the famed Magellan Fund. All three of Lynchs books follow his common sense approach, which insists that individual investors, if they take the time to do their homework, can perform just as well or even better than the experts.
A Random Walk Down Wall Street (1973) by Burton G. Malkiel
This book popularized the ideas that the stock market is efficient and that its prices follow a random walk. Essentially, this means that you cant beat the market. Thats right - according to Malkiel, no amount of research, whether fundamental or technical, will help you in the least. Like any good academic, Malkiel backs up his argument with piles of research and statistics. It would be an understatement to say that these ideas are controversial, and many consider them just short of blasphemy. But whether you agree with Malkiels ideas or not, it is not a bad idea to take a look at how he arrives at his theories. (For further reading, see What Is Market Efficiency?)
The Essays Of Warren Buffett: Lessons For Corporate America (2001) by Warren Buffett and Lawrence Cunningham
Although Buffett seldom comments on his current holdings, he loves to discuss the principles behind his investments . This book is actually a collection of letters that Buffett wrote to shareholders over the past few decades. Its the definitive work summarizing the techniques of the worlds greatest investor. Another great Buffett book is The Warren Buffett Way by Robert Hagstrom. (For further reading, see Warren Buffett: How He Does It and What Is Warren Buffetts Investing Style?)
How To Make Money In Stocks (2003, 3rd ed.) by William J. ONeil
Bill ONeil is the founder of Investors Business Daily, a national business of financial daily newspapers, and the creator of the CANSLIM system. If you are interested in stock picking, this is a great place to start. Many other books are big on generalities with little substance, but How To Make Money In Stocks doesnt make the same mistake. Reading this book will provide you with a tangible system that you can implement right away in your research.
Rich Dad Poor Dad (1997) by Robert T. Kiyosaki
This book is all about the lessons the rich teach their kids about money, which, according to the author, poor and middle-class parents neglect. Robert Kiyosakis message is simple, but it holds an important financial lesson that may motivate you to start investing : the poor make money by working for it, while the rich make money by having their assets work for them. We cant think of a better financial book to buy for your kids.
Common Sense On Mutual Funds (1999) by John Bogle
John Bogle, founder of the Vanguard Group, is a driving force behind the case for index funds and against actively-managed mutual funds. In this book, he begins with a primer on investment strategy before blasting the mutual fund industry for the exorbitant fees it charges investors. If you own mutual funds, you should read this book. (To learn more, see The Truth Behind Mutual Fund Returns.)
Irrational Exuberance (2000) by Robert J. Shiller
Named after Alan Greenspans infamous 1996 comment on the absurdity of stock market valuations, Shillers book, released in Mar 2000, gives a chilling warning of the dotcom bubbles impending burst. The Yale economist dispels the myth that the market is rational and instead explains it in terms of emotion, herd behavior and speculation. In an ironic twist, Irrational Exuberance was released almost exactly at the peak of the market. (To learn more on this topic, see Understanding Investor Behavior.)
The more you know, the more youll be able to incorporate the advice of some of these experts into your own investment strategy . This reading list will get you started, but it is only a fraction of all the great resources available. Do you have a favorite investing book that weve missed? If so, let us know.
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This question must be answered by your broker-dealer. Broker-dealers hold customer orders in their proprietary order books and only they can tell you why your order has not been filled. Possible explanations include: the order may not yet be marketable (at or within the bid/ask spread) or if it is/was marketable, other customer orders at the same price may have been in the order book longer and received execution priority.
These are the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going?
Contemplating Collectible Investments
If you have much space for storage, your attic and garage might be stuffed with old furniture, books and other items youve held onto over the years. If this is the case, you may be sitting on a few valuable collectibles just waiting to make you money. That said, you are just as likely to be looking at little more than a pile of junk. In this article well take a look at collectibles as an investment and help you decide whether this emotional market is a good place to park your money.
All Things Old Made New Again
140,000,000 B.C: A young Allosaurus missteps and finds itself mired in a sink hidden beneath the underbrush. Millions of geological ages later, an amateur paleontologist helps him out - or at least what was left of his head. In 2005, the Allosaurus restored skull sells for the high price of $600.
1908: Honus Wagner of the Pittsburgh Pirates hits his tenth home run and ends the year with a .354 batting average, marking one of the best years of his career. The next year, the American Tobacco Company commemorates Wagner by putting a trading card inside its cigarette packages. Less than 60 make it into stores before it is discovered that Honus is vehemently against smoking. In 2000, Wagners cigarette trading card is sold on EBay for $1.1 million.
1962: Stan Lee creates a superhero who has to worry about rent, his ailing aunt and passing his next test - all in addition to saving the world. Peter Parkers misadventure with a radioactive spider hit the stands with a $0.12 cover price. And, in 2006, the first edition of The Amazing Spider-Man is among the most valuable comics with a price around $6,000 or more, according to Wizard: The Guide To Comics pricing guide.
These are all examples of the strange and wonderful world of collectibles. While there is no denying the thrill of owning a juvenile Allosaurus skull, is collecting really a form of investment?
All That Glitters ...
The reason we began by discussing a fossil, a comic and a baseball card is that people have no qualms about calling them collectibles. However, when you speak about diamonds, gold and other precious materials, people tend to call theminvestments . In theory, these materials - and even stocks - could be termed collectibles because their price is based more on what people are willing to pay for them (or market value) than on their actual intrinsic value. But in the practical world, precious metals and stocks have an intrinsic value. For metals, this value is based on rarity and the fact that if you melt it, burn it or bend it, you still have the same atomic substance in the end. For stocks, the value is produced by the underlying brick and mortar company that the share represents - a company that is generating earnings to justify the prices you pay for its stock.
What makes collectibles different is that even a little damage can erase all of a collectibles value. This is because a collectibles value is based on emotional factors like nostalgia. These emotional factors can be as erratic as they are powerful. If you were asked whether people would be willing to pay more for a dinosaur skull or a baseball card, even if you chose one over the other you would give them both a higher value than, say, a torn up baseball card or a box of bone fragments. Those items you would probably call worthless (unless you are an archaeologist or a fan of papier-mâché).
The 20-Year Itch
It is said that nostalgia runs in 20-year cycles. In other words, the things that are popular now will become collectibles in 20 years when people want to reconnect with their past. This doesnt mean that you can buy the top 10 items from consumer polls, incubate them for 20 years and then sell them for a fortune. It means that some items this year will become collectibles if they meet two conditions: rarity and appeal.
Rarity is becoming a harder thing to find as mass production methods allow companies to (over)fill demand without incurring that much extra cost. Beanie Babies have devalued as more and more product lines are introduced. It is profitable for a company to sell as many products as it takes to satiate demand, and that mentality destroys a future collectors profits. (For more on this concept, check out Economics Basics.)
Appeal is also a difficult thing to nail down. To make money at collecting, you have to predict what will become popular in retrospect - perhaps something that is not in high demand now will become popular in the future, either because they are rare or they were not fully appreciated at the time. For example, in the 1950s and 1960s, wing-tipped plastic sun glasses with glass lenses were sold for a few dollars in drugstores, but they can now fetch hundreds of dollars in collectors markets.
Reasons Not To Buy Collectibles
Mark-ups
When you buy a collectible from a dealer, that dealer is usually marking up the price to make a profit. Unlike collectors, dealers do not have the luxury of holding an item for years and years while the value may or may not increase - they have sales to make and a business to run.
Maintenance
Many collectibles require special care to keep them in top condition. These can range in cost from the $1 plastic cover used to keep hockey cards safe to a special room with moisture, heat and light monitors to lengthen a paintings life. On top of the storage costs, there are the added costs of buying insurance for the more valuable types of collectibles as well as paying to have professionals, appraisers, restorers and dealers look at the collectible before you sell it. A collectible doesnt produce income while you hold it, and it may actually eat income while you wait for it to increase in value.
Wear
Most categories of collectibles - from Pokemon cards to antique plumbing fixtures - have a manual classifying how much an item is worth in pristine condition and what sorts of damage degrades it by what percentage of value. For example, a well-read copy of the aforementioned Amazing Spiderman #1 may only be worth 30-60% of the $6,000 list price, depending on what type and what degree of wear it shows.
Counterfeiting
Most museums display dinosaur fossils models - not the real thing. Can you tell the difference between an Allosauras skull made of plaster and cement and one made of fossilized bone? No matter how experienced the appraiser, forgeries do make it to the dealers and then through to the collectors, which could leave you holding a very expensive piece of criminal art.
Low Returns
Collectibles tend to have lower returns than a stock market index fund, a money market account and most bond funds. If you took an average of the returns on all collectibles – which is practically impossible to do given some have little or no market to measure – it would be dismal compared to the S
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Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well.
When you open a brokerage account, you must sign a new account agreement. You should carefully review all the information in this agreement because it determines your legal rights regarding your account.
Understanding Stocks, Mutual Funds And ETFs
There are a lot of investment products available and a lot are difficult to understand, for the consumer with little investment knowledge. Three common products, mutual funds, exchange traded funds and equities are similar, but function very differently in a portfolio.
Mutual Funds
Other than stocks, taking a close second in any investment popularity contest is the mutual fund. Anybody with a company or government sponsored retirement portfolio has most of their money invested in these funds. Mutual funds may be popular, but theyre not well understood.
Think of a mutual fund as a collection; the collection could be stocks, bonds or nearly any product. Any fund that is actively managed has a team of managers and advisors, who attempt to beat the overall performance of the market. For the person who has little or no investment experience, mutual funds offer a professionally managed product that should make money for you, without having to monitor a complicated portfolio.
The problem with mutual funds is that after fees, a majority of stock funds underperform the stock market and this isnt new. Back to the 1960s, stock mutual fund performance has lagged the market by an average of 2%. Although many stock funds underperform the market, passively managed index funds have lower costs and closely track the performance of the market. (For additional reading, check out: Is Your Mutual Fund Safe?)
Exchange Traded Funds (ETFs)
Similar to mutual funds, exchange traded funds are often a basket of stocks, bonds or other investment products, but unlike mutual funds, ETFs are traded on the stock exchanges. More importantly, ETFs dont try to beat the market like stock mutual funds, but instead reflect the performance of an index, sector or other product. The SPDR S
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This could be information held by insiders, competitors, contractors, suppliers or regulators, among others.
When To Sell A Mutual Fund
If your mutual fund is yielding a lower return than you anticipated, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful; there are both pros and cons to the redemption of your mutual fund shares. Lets examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.
Mutual Funds Are Not Stocks
The first thing you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the buy low, sell high rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.
Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the funds strategy. An advantage of this portfolio of assets is diversification. There are many types of mutual funds, and their degrees of diversification vary. Sector funds, for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.
Because mutual funds are diverse portfolios rather than single entities, relying only on market timing to sell your fund may be a useless strategy since a funds portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.
When Selling Your Fund
When you are cashing-in your mutual fund units, there are a couple of factors to consider that may affect your return:
• Back-end loads - If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected. Front-end loads, on the other hand, are sales fees charged when you first invest your money into the fund. So, if you had a front-end sales charge of 2%, your initial investment would have been reduced by 2%. If your fund has a back-end load, charges will be deducted from your total redemption value. For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.
• Tax consequences - If your mutual fund has realized significant capital gains in the past, you may be subject to capital gains taxes if the fund is held within a taxable account. When you redeem units of a fund that has a value greater than the total cost, you will have a taxable gain. The IRS has more detailed information on capital gains and their calculations in Publication 564: Mutual Fund Distributions.
When Your Fund Changes
Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. To paraphrase Kenny Rogers, the key to successful mutual fund investing is knowing when to hold em and knowing when to fold em.
The following four situations are not necessarily indications that you should fold, but they are situations that should raise a red flag:
Change in a Funds Manager
When you put your money into a fund, you are putting a certain amount of trust into the fund managers expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. If your quarterly or annual report indicates that your fund has a new manager, pay attention. If the fund mimics a certain index or benchmark, it may be less of a worry as these funds tend to be less actively managed. For other funds, the prospectus should indicate the reason for the change in manager. If the prospectus states that the funds goal will remain the same, it may be a good idea to watch the funds returns over the next year. For further peace of mind, you could also research the new managers previous experience and performance.
Change in Strategy
If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual funds original goals, you may want to re-evaluate the fund you are holding. For example, if your small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Note that funds are typically required to notify shareholders of any changes to the original prospectus.
Additionally, some funds may change their names to attract more customers, and when a mutual fund changes its name, sometimes its strategies also change. Remember, you should be comfortable with the direction of the fund, so if changes bother you, get rid of it.
Consistent Underperformance
This can be tricky since the definition of underperformance differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the funds performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
The Fund Becomes Too Big
In many cases a funds quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity.
When Your Personal Investment Portfolio Changes
Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. Here are two reasons which might prompt you to liquidate your mutual fund units:
• The need to rebalance your portfolio - If you have a set asset allocation model to which you would like to adhere, you may need to rebalance your holdings at the end of the year in order to return your portfolio back to its original state. In these cases, you may need to sell or even purchase more of a fund within your portfolio to bring your portfolio back to its original equilibrium. You may also have to think about rebalancing if your investment goals change. For instance, if you decide to change your growth strategy to one that provides steady income, your current holdings in growth funds may no longer be appropriate.
• Need a tax break - If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.
The Bottom Line
Selling a mutual fund isnt something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. However, if you have carefully considered all the pros and cons of your funds performance and you still think you should sell it, do it and dont look back.
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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A technician believes that it is possible to identify a trend, invest or trade based on the trend and make money as the trend unfolds.
Financial Statement Manipulation An Ever-Present Problem For Investors
Financial statement manipulation is an ongoing problem in corporate America. Although the Securities and Exchange Commission (SEC) has taken many steps to mitigate this type of corporate malfeasance, the structure of management incentives, the enormous latitude afforded by theGenerally Accepted Accounting Principles (GAAP) and the ever-present conflict of interest between the independent auditor and the corporate client continues to provide the perfect environment for such activity. Due to these factors, investors who purchase individual stocks or bonds must be aware of the issues, warning signs and the tools that are at their disposal in order to mitigate the adverse implications of these problems.
Factors That Contribute to Financial Statement Manipulation
There are three primary reasons why management manipulates financial statements. First, in many cases the compensation of corporate executives is directly tied to the financial performance of the company. As a result, management has a direct incentive to paint a rosy picture of the companys financial condition in order to meet established performance expectations and bolster their personal compensation.
Second, it is relatively easy to manipulate corporate financial statements because the Financial Accounting Standards Board (FASB), which sets the GAAP standards, provides a significant amount of latitude in the accounting provisions that are available to be used by corporate management. For better or worse, these GAAP standards afford a significant amount of flexibility, making it very easy for corporate management to paint a favorable picture of the financial condition of the company.
Third, it is unlikely that financial manipulation will be detected by investors due to the relationship between the independent auditor and the corporate client. In the U.S., the Big Four accounting firms and a host of smaller regional accounting firms dominate the corporate auditing environment. While these entities are touted as independent auditors, the firms have a direct conflict of interest because they are compensated by the very companies that they audit. As a result, the auditors could be tempted to bend the accounting rules to portray the financial condition of the company in a manner that will keep their client happy. Moreover, auditors typically receive a significant amount of money from the companies that they audit. Therefore, there is implicit pressure to certify the financial statements of the company in order to retain their business.
How Financial Statements Are Manipulated
There are two general approaches to manipulating financial statements. The first approach is to inflate current period earnings on the income statement by artificially inflating revenue and gains, or by deflating current period expenses. This approach makes the financial condition of the company look better than it actually is in order to meet established expectations.
The second approach to financial statement manipulation requires the exact opposite tactic, which is to deflate current period earnings on the income statement by deflating revenue or by inflating current period expenses. The reason behind this approach may not be as obvious as in the previous example because it may seem counterintuitive to make the financial condition of a company look worse than it actually is. However, there are many reasons to engage in such activity, such as making a company look bad in order to dissuade potential acquirers, pulling all of the bad financial information surrounding the company into one period so that the company will look stronger going forward, pulling all of the bad financial information into the current period when the poor performance can be attributed to the current macroeconomic environment or to postpone good financial information to a future period when it is more likely to be recognized.
According to Dr. Howard Schilit, in his famous book Financial Shenanigans (2002), there are seven primary ways in which corporate management manipulates the financial statements of a company. Lets look at these seven general categories of financial statement manipulation and the typical accounting processes that facilitate the manipulation.
1. Recording Revenue Prematurely or of Questionable Quality
o Recording revenue prior to completing all services
o Recording revenue prior to product shipment
o Recording revenue for products that are not required to be purchased
2. Recording Fictitious Revenue
o Recording revenue for sales that did not take place
o Recording investment income as revenue
o Recording proceeds received through a loan as revenue
3. Increasing Income with One-Time Gains
o Increasing profits by selling assets and recording the proceeds as revenue
o Increasing profits by classifying investment income or gains as revenue
4. Shifting Current Expenses to an Earlier or Later Period
o Amortizing costs too slowly
o Changing accounting standards to foster manipulation
o Capitalizing normal operating costs in order to reduce expenses by moving them from the income statement to the balance sheet
o Failing to write down or write off impaired assets
5. Failing to Record or Improperly Reducing Liabilities
o Failing to record expenses and liabilities when future services remain
o Changing accounting assumptions to foster manipulation
6. Shifting Current Revenue to a Later Period
o Creating a rainy day reserve as a revenue source to bolster future performance
o Holding back revenue
7. Shifting Future Expenses to the Current Period as a Special Charge
o Accelerating expenses into the current period
o Changing accounting standards to foster manipulation, particularly through provisions for depreciation, amortization and depletion
Investors should understand that there are a host of techniques that are at managements disposal. However, what investors also need to understand is that while most of these techniques pertain to the manipulation of the income statement, there are also many techniques available to manipulate the balance sheet, as well as the statement of cash flows . Moreover, even the semantics of the management discussion and analysis section of the financials can be manipulated by softening the action language used by corporate executives from will to might, probably to possibly, and therefore to maybe. Taken collectively, investors should understand these issues and nuances and remain on guard when assessing a companys financial condition.
Financial Manipulation via Corporate Merger or Acquisition
Another form of financial manipulation can be found during the merger or acquisition process. A classic approach to this type of manipulation occurs when management tries to persuade all parties involved in the decision-making process to support a merger or acquisition based primarily on the improvement in the estimated earnings per share of the combined companies. Lets look at the table below in order to understand how this type of manipulation takes place.
Proposed Corporate Acquisition Acquiring Company Target Company Combined Financials
Common Stock Price
$100.00
$40.00
-
Shares Outstanding
100,000
50,000
120,000
Book Value of Equity
$10,000,000
$2,000,000
$12,000,000
Company Earnings
$500,000
$200,000
$700,000
Earnings Per Share $5.00 $4.00 $5.83
Based on the data in the table above, the proposed acquisition of the target company appears to make good financial sense because the earnings per share of the acquiring company will be materially increased from $5 per share to $5.83 per share. However, the earnings per share of the acquiring company will increase by a material amount for only two reasons, and neither reason has any long-term implications.
Following the acquisition, the acquiring company will experience an increase of $200,000 in company earnings due to the addition of the income from the target company. Moreover, given the high market value of the acquiring companys common stock, and the low book value of the target company, the acquiring company will only have to issue an additional 20,000 shares in order to make the $2 million acquisition. Taken collectively, the significant increase in company earnings and the modest increase of 20,000 common shares outstanding will lead to a more attractiveearning per share amount. Unfortunately, a financial decision based primarily on this type of analysis is inappropriate and misleading, because the future financial impact of such an acquisition may be positive, immaterial or even negative.
How to Guard Against Financial Statement Manipulation
There are a host of factors that may affect the quality and accuracy of the data at an investors disposal. As a result, investors must have a working knowledge of financial statement analysis, including a strong command of the use of internal liquidity solvency analysis ratios, externalliquidity marketability analysis ratios, growth and corporate profitability ratios, financial risk ratios and business risk ratios. Investors should also have a strong understanding of how to use market multiple analysis, including the use of price/earnings ratios, price/book value ratios, price/sales ratios and price/cash flow ratios in order to gauge the reasonableness of the financial data .
Finally, investors should keep in mind that the independent auditors responsible for providing the audited financial data may very well have a material conflict of interest that is distorting the true financial picture of the company and that the information provided to them by corporate management may be disingenuous, and therefore should be taken with a grain of salt.
The Bottom Line
The known prevalence and magnitude of the material issues associated with the compilation of corporate financial statements should remind investors to use extreme caution in their use and interpretation. There are many cases of financial manipulation that date back over the centuries, and recent examples such as Enron, Worldcom, Tyco International, Adelphia, Global Crossing, Cendant, Freddie Mac and AIG should remind investors of the potential land mines that they may encounter. Investors should also remember the corporate malfeasance recently conducted by the now defunct auditing firm Arthur Anderson, as well as the disingenuous information provided to the general public by the corporate executives of 360 Networks, Lehman Brothers and General Motors leading up to their bankruptcies. Extreme caution should be used while conducting financial statement analysis.
Finally, given the prevalence and magnitude of the material issues surrounding financial statement manipulation in corporate America, a strong case can be made that most investors should stick to investing in low-cost, diversified, actively-managed mutual funds in order to mitigate the likelihood of investing in companies that suffer from such corporate financial malfeasance. Simply put, financial statement analysis should be left to investment management teams that have the knowledge, background and experience to thoroughly analyze a companys financial picture before making an investment decision. Unfortunately, very few investors have the necessary time, skills and resources to engage in such activity, and therefore the purchase of individual securities by most investors is probably not a wise decision.
Many OTC equities are Penny Stocks. Penny Stocks Can be Very Risky. Due to the high level of risk involved in investing in Penny Stocks, brokers cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received agreement to the transaction in writing from the customer.
For thou convenience $HRAL BarChart Technical Analysis NITE-LYNX
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A comparative analysis of the competition within a sector will help identify those companies with an edge, and those most likely to keep it.
Callable CDs: Check The Fine Print
If youre looking for bigger yields with limited risk, callable certificates of deposit (CD ) might be right for you. They promise higher returns than regular CDs and are FDIC insured. However, there are a few things in the fine print that you should be aware of before you turn your money over to the bank or brokerage firm, otherwise, you could end up very disappointed.
Just like a regular CD, a callable CD is a certificate of deposit that pays a fixed interest rate over its lifetime. The feature that differentiates a callable CD from a traditional CD is that the issuer owns a call option on the CD and can redeem, or call, your CD from you for the full amount before it matures. In this article, we will provide you with some important terms to watch for in the fine print of your callable CDs , should you decide to invest.
Important Terms
Callable CDs are similar in many ways to callable bonds.
Callable Date
This is the date that the issuer can call your certificate of deposit . Lets say, for example, that the call date is six months. This means that six months after you buy the CD, the bank can decide whether it wants to take back your CD and return your money with interest. Every six months after the call date, the bank will have that same option again. Well get to why the bank would want to call back the certificate shortly.
Maturity Date
The maturity date is how long the issuer can keep your money. The farther in the future the maturity date, the higher the interest rate you should expect to receive. Make sure you dont confuse maturity date with the call date. For instance, a two-year callable CD does not necessarily mature in two years. The two years refers to the period of time you have before the bank can call the CD away from you. The actual amount of time you must commit your money could be much longer. Its common to find callable CDs with maturities in the range of 15 to 20 years.
To Call, or Not to Call
A change in prevailing interest rates is the main reason the bank or brokerage firm will recall your CD on the callable date. Basically, the bank will ask itself if its getting the best deal possible based on the current interest rate environment. (To learn how interest rate changes affect other investments , see How Interest Rates Affect The Stock Market and Its In Your Interest.)
Interest Rates Decline
If interest rates fall, the issuer might be able to borrow money for less than its paying you. This means the bank will likely call back the CD and force you to find a new vehicle to invest your money in.
Example - Callable CD When Rates Decline
Suppose you have a $10,000 one-year callable CD that pays 5% with a five-year maturity. As the one-year call date approaches, prevailing interest rates drop to 4%. The bank has therefore dropped its rates too, and is only paying 4% on its newly issued one-year callable CDs.
Why should I pay you 5%, when I can borrow the same $10,000 for 4%?, your banker is going ask. Heres your principal back plus any interest we owe you. Thank you very much for your business.
The good news is that you got a higher CD rate for one year. But what do you do with the $10,000 now? Youve run into the problem of reinvestment risk.
Perhaps you were counting on the $500 per year interest ($10,000 x 5% = $500) to help pay for your annual vacation. Now youre stuck with just $400 ($10,000 x 4% = $400) if you buy another one-year callable CD. Your other choice is to try to find a place to put your money that pays 5% such as by purchasing a corporate bond - but that might involve more risk than you wanted for this $10,000 . (For more on the risks of these bonds, see Corporate Bonds: An Introduction To Credit Risk.)
Interest Rates Rise
If prevailing interest rates increase, your bank probably wont call your CD. Why would it? It would cost more to borrow elsewhere.
Example - Callable CD When Rates Rise
Lets look at your $10,000 one-year callable CD again. Its paying you 5%. This time, assume that prevailing rates have jumped to 6% by the time the callable date hits. Youll continue to get your $500 per year, even though newly issued callable CDs earn more. But what if youd like to get your money out and reinvest at the new, higher rates?
Sorry, your banker says, only we can decide if youll get your money early.
Unlike the bank, you cant call the CD and get your principal back - at least not without penalties called early surrender charges. As a result, youre stuck with the lower rate. If rates continue to climb while you own the callable CD, the bank will probably keep your money until the CD matures.
What to Watch For
Whos Selling
Anyone can be a deposit broker to sell CDs. There are no licensing or certification requirements. This means you should always check with your states securities regulator to see whether your broker or your brokers company has any history of complaints or fraud.
Early Withdrawal
If you want to get your money before the maturity date, there is a possibility youll run into surrender charges. These fees cover the maintenance costs of the CD and are put in place to discourage you from trying to withdraw your money early. You wont always have to pay these fees; if you have held the certificate for a long enough period of time these fees will often be waived.
Check the Issuer
Each bank or thrift institution depositor is limited to $100,000 in FDIC insurance. There is a potential problem if your broker invests your CD money with an institution where you have other FDIC insured accounts. If the total is more than $100,000, you run the risk of exceeding your FDIC coverage. (To learn more, read Are Your Bank Deposits Insured?)
Wrap Up: Callable or Non-Callable?
With all of the extra hassle they involve, why would you bother to purchase a callable CD rather than a non-callable one? Ultimately, callable CDs shift the interest-rate risk to you, the investor. Because youre taking on this risk, youll tend to receive a higher return than youd find with a traditional CD with a similar maturity date.
Before you invest, you should compare the rates of the two products. Then, think about which direction you think interest rates are headed in the future. If you have concerns about reinvestment risk and prefer simplicity, callable CDs probably arent for you.
Use this checklist when you are shopping for callable CDs to help you keep track of the important information.
Callable CD Checklist
Traditional CD Callable CD #1 Callable CD #2
Callable Date N/A
Maturity Date
Seller Background
Surrender Fee
Issuer
Interest Rate
To initiate quotations in any OTC Equity security or resume quotations after a four day absence or SEC suspension on either the OTC Link or OTCBB inter-dealer quotation system, a market maker must first obtain and review certain specified information regarding the issuer. The information requirements are specified in the SEC's Rule 15c2-11. The information is supplied to FINRA on Form 211. When approved by FINRA, the member may submit its quotation to OTC Link or the OTCBB, as sufficient reliable current information is available in the marketplace to support the member’s quotation.
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It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials.
Portfolio Mismanagement: 7 Common Stock Errors
Ignorance may be bliss, but not knowing why your stocks are failing and money is disappearing from your pockets is a long way from paradise. In this article, well uncover some of the more common investing faux pas, as well as provide you with suggestions on how to avoid them.
1. Ignoring Catalysts
The financial pundits, trade journals and business schools teach that proper valuation is the key to stock selection. This is only half of the picture because calculating P/E ratios and running cash flow spreadsheets can only show where a company is at a given point in time - it cannot tell us where it is heading.
Therefore, in addition to a quantitative evaluation of a company, you must also do a qualitative study so that you can determine which catalysts will drive earnings going forward.
Some good questions to ask yourself include:
• Is the company about to acquire a very profitable enterprise?
• Is a potential blockbuster product about to be launched?
• Are economies of scale being realized at the companys new plant and are margins about to rise dramatically?
• What will drive earnings and the stock price going forward?
2. Catching the Falling Knife
Investors love to buy companies on the cheap, but far too often, investors buy in before all of the bad news is out in the public domain, and/or before the stock stops its free fall. Remember, new lows in a companys share price often beget further new lows as investors see the shares dropping, become disheartened and then sell their shares. Waiting until the selling pressure has subsided is almost always your best bet to avoid getting cut on a falling knife stock. (To learn more, read How Investors Often Cause The Markets Problems.)
3. Failing to Consider Macroeconomic Variables
You have found a company you want to invest in. Its valuation is superior to that of its peers. It has several new products that are about to be launched, and sales could skyrocket. Even the insiders are buying the stock, which bolsters your confidence all the more.
But if you havent considered the current macroeconomic conditions, such as unemployment and inflation, and how they might impact the sector you are invested in, youve made a fatal mistake!
Keep in mind that a retailer or electronics manufacturer is subject to a number of factors beyond its control that could adversely impact the share price. Things to consider are oil prices, labor costs, scarcity of raw materials, strikes, interest rate fluctuations and consumer spending. (For more on these factors, see Macroeconomic Analysis and Where Top Down Meets Bottom Up.)
4. Forgetting About Dilution
Be on the lookout for companies that are continuously issuing millions of shares and causing dilution, or those that have issued convertible debt. Convertible debt may be converted by the holder into common shares at a set price. Conversion will result in a lower value of holdings for existing shareholders.
A better idea is to seek companies that are repurchasing stock and therefore reducing the number of shares outstanding. This process increases earnings per share (EPS) and it tells investors that the company feels that there is no better investment than their own company at the moment. (You can read more about buybacks in A Breakdown Of Stock Buybacks.)
5. Not Recognizing Seasonal Fluctuations
You cant fight the Fed. By that same token, you cant expect that your shares will appreciate even if the companys shares are widely traded in high volumes. The fact is that many companies (such as retailers) go through boom and bust cycles year in and year out. Luckily, these cycles are fairly predictable, so do yourself a favor and look at a five-year chart before buying shares in a company. Does the stock typically wane during a particular part of the year and then pick up during others? If so, consider timing your purchase or sale accordingly. (To learn more, see Capitalizing On Seasonal Effects.)
6. Missing Sector Trends
Some stocks do buck the larger trend; however, this behavior usually occurs because there is some huge catalyst that propels the stock either higher or lower. For the most part, companies trade in relative parity to their peers. This keeps their stock price movements within a trading band or range. Keep this in mind as you consider your entry/exit points in a stock.
Also, if you own stock in a semiconductor company (for example), understand that if other semiconductor companies are experiencing certain problems, your company will too. The same is true if the situation was reversed, and positive news hit the industry.
7. Avoiding Technical Trends
Many people shy away from technical analysis, but you dont have to be a chartist to be able to identify certain technical trends. A simple graph depicting 50-day and 200-day moving averages as well as daily closing prices can give investors a good picture of where a stock is headed. (To learn about this method, read the Basics Of Technical Analysis.)
Be wary of companies that trade and/or close below those averages. It usually means the shares will go lower. The same can be said to the upside. Also remember that as volume trails off, the stock price typically follows suit.
Lastly, look for general trends. Has the stock been under accumulation or distribution over the past year? In other words, is the price gradually moving up, or down? This is simple information that can be gleaned from a chart. It is truly surprising that most investors dont take advantage of these simple and accessible tools.
The Bottom line
There are a myriad of mistakes that investors can and do make. These are simply some of the more common ones. In any case, it pays to think about factors beyond what will propel the stock you own higher. A stocks past and expected performance in comparison to its peers, as well as its performance when subjected to economic conditions that may impact the company, are some other factors to consider.
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.
BarChart Technical Analysis NITE-LYNX $VKMD
http://www.barchart.com/technicals/stocks/VKMD
If the chart can display 100 data points, a weekly chart will hold 100 weeks (almost 2 years).
5 Common Mistakes Young Investors Make
When learning any skill, it is best to start young. Investing is no different. Missteps are common when learning something new, but when dealing with money, they can have serious consequences. Investors who start young generally have the flexibility and time frame to take on risk and recover from their money-losing errors, but sidestepping the following common mistakes can help improve the odds of success. (In addition to this article, read Eight Financial Tips For Young Adults.)
1. Procrastinating
Procrastination is never good, but it can be especially detrimental while investing because the markets move so quickly. Good investment ideas are not always easy to find. If, after doing research, a good investment idea arises, it is important to act on it before the rest of the market takes note and beats you to it. Young investors can be prone to not acting on a good idea out of fear or inexperience. Missing out on a good idea can lead a young investor to two very bad scenarios:
1. The investor will revise his opinion upward and still purchase an asset when it is not warranted. Perhaps the investor rightly develops an opinion that an asset priced at $25 should be worth $50. If it moves up to $50 before he or she buys it, the investor may artificially revise the price target to $60 in order to rationalize the purchase.
2. The young investor will look for a replacement. In the previous example, the investor who failed to buy the asset that rose from $25 to $50 may quickly try to identify the next asset that will double. As a result, the investor might purchase another asset quickly, without doing the proper work and research, in order to try to make up for the previous missed opportunity. (Young investors often find themselves with too many options and not enough money. Read more in Competing Priorities: Too Many Choices, Too Few Dollars.)
2. Speculating Instead of Investing
A young investor is at an advantage in his or her investing life. Holding the level of wealth constant, an investors age affects how much risk an he or she can take on. So, a young investor can seek out bigger returns by taking bigger risks. This is because if a young investor loses money, he or she has time to recover the losses through income generation. This may seem like an argument for a young investor to speculate, but it is not.
Any young or novice investor will have an inclination to speculate if they do not fully understand the investment process. Speculation is often the equivalent of gambling, as the speculator does not necessarily have a reason for a purchase except that there is a chance that it may go up in value. This can be dangerous, as there are many experienced professionals waiting to take advantage of their less-experienced counterparts.
Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long term. So, while a diversified portfolio of small-cap growth stocks would not be appropriate for an investor nearing retirement, a young investor is better equipped to take on that risk and can take advantage accordingly.
A final risk of speculation is that a large loss can scar a young investor and affect his or her future investment choices. This can lead to a tendency to shun investing altogether or to move to lower or risk-free assets at an age when it may not be appropriate. (For more insight, seePersonalizing Risk Tolerance.)
3. Using Too Much Leverage
Leverage has its benefits and its pitfalls. If there is ever a time when investors have the ability to add leverage to their portfolios, it is when they are young. As mentioned earlier, young investors have a greater ability to recover from losses through future income generation. However, similar to speculation, leverage can shatter even a good portfolio.
If a young investor is able to stomach a 20-25% drop in his or her portfolio without getting discouraged, the 40-50% drop that would result at two times leverage may be too much to handle. The consequences of such a drop are similar to those resulting from a loss due to speculation: the young investor may become discouraged and overly risk averse for the rest of his investing life. (Want to learn more about leverage? See Leverages Double-Edged Sword Need Not Cut Deep for more.)
4. Not Asking Enough Questions
If a stock drops a lot, a young investor might expect it to bounce right back, but more often than not, it is down for good reason. One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investors perceived value, there is a reason and it is the investors responsibility to find it. Young investors who have not experienced the pitfalls of investing can be particularly susceptible to making decisions without locating all the pertinent information.
5. Not Investing
As mentioned earlier, an investor has the best ability to seek a higher return and take on higher risk when they have a long-term time horizon. Investors have their longest time horizons, and therefore a high tolerance for risk, when they are young. Young people also tend to be less experienced with having money. As a result, they are often tempted to focus on how money can benefit them in the present, without focusing on any long-term goals (such as retirement). Spending money now instead of saving and investing can create bad habits and contribute to a lack of savings and retirement funds. (For more on this, read Young Investors: What Are You Waiting For?)
The Bottom Line
Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life. There are also many risks that a young/less-experienced investor will face when making decisions. Hopefully, avoiding some of the common mistakes above will help young people learn investing early and embark on a fruitful investing career.
$GORXQ BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/GORXQ
The best way to illustrate the OTC market trading process is to step through a specific example. This example is tailored for individual investors, although many of the same principles apply to institutional investors.
Pros And Cons Of Offshore Investing
Offshore investing is often demonized in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. While its true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.
What Is Offshore Investing?
Offshore investing refers to a wide range of investment strategies that capitalize on advantages offered outside of an investors home country. We will briefly touch on the advantages and disadvantages of offshore investing. The particulars are far beyond the scope of this introductory article.
There is no shortage of money-market, bond and equity assets offered by reputable offshore companies that are fiscally sound, time-tested and, most importantly, legal.
Advantages
There are several reasons why people invest offshore:
Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual. (For additional information, read What is an Emerging Market Economy?)
In recent years, however, the U.S. government has become increasingly aware of the tax revenue lost to offshore investing, and has created more defined and restrictive laws that close tax loopholes. Investment revenue earned through offshore investment is now a focus of regulators and the tax man alike. According to the U.S. Internal Revenue Service (IRS), U.S. citizens and residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade U.S. federal income tax on capital gains can be prosecuted for tax evasion. Therefore, although the lower corporate expenses of offshore companies can translate into better gains for investors, the IRS maintains that U.S. taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. (To learn more, see How International Tax Rates Impact Your Investments.)
Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free ofincome tax. However, the trustor of an offshore asset-protection fund will still be taxed on the trusts income (the revenue made from investments under the trust entity), even if that income has not been distributed.
Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesnt mean that offshore investors are criminals with something to hide. Its also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investors identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors dont like the public at large knowing what stocks theyre investing in. Multi-millionaire investors dont want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.
Because nations are not required to accept the laws of a foreign government, offshore jurisdictions are, in most cases, immune to the laws that may apply where the investor resides. U.S. courts can assert jurisdiction over any assets that are located within U.S. borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect not be held physically in the United States.
Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatize sectors that were formerly under government control. Chinas willingness to privatize some industries has investors drooling over the worlds largest consumer market. (To read more, see Investing Beyond Your Borders.)
Disadvantages
Tax Laws are Tightening - Tax agencies like the IRS arent ignorant of offshore strategies. Theyve clamped down on some traditional ways of tax avoidance. There are still loopholes, but most are shrinking more and more every year. In 2004, the IRS amended the Internal Revenue Code (IRC) and began to collect taxes from both American corporations that operate out of another country and American citizens and residents who earn money through offshore investments. (For more information on tax laws that affect offshore investors, see the IRS International Taxpayer - Expatriation Tax.)
Cost - Offshore Accounts are not cheap to set up. Depending on the individuals investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.
How Safe Is Offshore Investing?
Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to offer fairly secure investment opportunities. More than half of the worlds assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable investment advisor, accountant, and lawyer who specializes in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (For more information, see Investment Scams: Prime Banks.)
Conclusion
We are not lawyers, tax accountants or offshore investment experts in any country. Every individuals situation is different. Offshore investment is beyond the means of most investors, and above the risk tolerance of others.
Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, do your research before parting with your money - unless youre prepared to lose it.
At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy
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Market Orders direct the broker-dealer to immediately execute either a buy or sell order at the current ‘market price’ – the best bid or offer.
Technicians believe it is best to concentrate on what and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why?
Top-Down Analysis: Finding The Right Stocks And Sectors
The top-down investment strategy is based on determining the health of the economy (and whether you want to even be investing at that time), the strength of different sectors and then picking the strongest stocks within those sectors to maximize returns. In this article you will learn how to pinpoint the hottest sectors leading the market higher (or lower in a bear market) and how to find stocks within those sectors that will potentially maximize returns.
If your market analysis has determined that the market is in an uptrend and likely to continue for some time, you want to buy stocks that are showing the best potential to be big winners in the uptrend. Just because the market is moving higher does not mean that all stocks will perform well, and some will greatly outperform others. If we are in a bear market and the investor is not opposed to short selling, we can look for stocks that will likely perform the worst, therefore making a nice profit on the short positions as prices fall. For the remainder of this article we will only focus on uptrends, but the same principles apply to downtrends.
Pick the Right Sectors
If the market is moving higher, we can begin to look at different sectors to find which ones will provide us the greatest potential for profits. Certain sectors perform better than others, so if the market is heading higher, we want to buy stocks within sectors that are performing the best. In other words, we want to invest in sectors that are outperforming the overall market.
To find the hottest sectors, we will want to look at several time frames. Looking at two or three time frames will allow us to pick sectors that are not just performing well right now, but that have been showing strength over a longer time frame. The time frames looked at will vary from person to person depending on their overall time frame.
We only want to pick the sector that appears most often at or near the top of the list for top performing sectors. The top two or three sectors can be picked if some diversity is desired. It is within these sectors that we will be placing our investment dollars.
We can also view the charts of sector ETFs. The trend should be defined by a trend line, with the ETF showing strength as it rises off the trendline. But more importantly we want to narrow our focus to specific stocks.
Pick the Right Stocks
We could simply buy a basket of stocks reflecting the entire sector, and this could do reasonably well, but we can do better by just picking the best stocks within that sector. Just because a sector is moving higher does not mean that all stocks in that sector will be great performers, but a few will outperform; those are the ones we want in our portfolio.
One process for finding individual stocks is the same as the process for sector analysis. Within each sector, we want to find the stocks that are showing the greatest price appreciation. Once again, we can look at multiple timeframes to make sure the stock is moving well over time. The stocks that have performed the best over two or three timeframes are the stocks we will buy for our portfolio. Examine the charts of top performers by placing trending lines on the chart. The price trend should be defined and profit objectives based on chart patterns should indicate high gains relative to risk on the upside. (For a complete overview of other major strategies to compare to the technical top down approach, refer to our Stock-Picking Strategies Tutorial.)
It is important to note that there are some other factors to consider when buying a stock. Additional criteria to look at before you buy includes:
• Liquidity: Buying stocks with little volume makes it hard to sell at a fair price if quick liquidation is required. Unless you are a seasoned investor/trader, invest in stocks that trade over a couple hundred thousand shares a day.
• Price: Many investors shy away from high-priced stocks and gravitate towards low-priced stocks. Trade in stocks that are above $5, or preferably higher. This is not to say there are not good cheap stocks, or not bad expensive ones, but do not shy away from a stock just because it is a high price, or buy a stock just because it is cheap in dollar terms.
One additional note is that ETF trading has come a long way in recent years. If you do not want to hold multiple individual stocks, you may be able to find an ETF that will give you reasonably close results. There is no problem buying specific ETFs, if that is preferred, which can reasonably mirror what individual stocks would have been selected.
Exiting and Rotating
While going through this process cannot guarantee that you will make extraordinary returns, it does offer you a good chance to make better-than-market returns. Some monitoring of positions will be required to make sure your sectors and stocks are still in favor with the market. The investor must also be aware of overtrading, which can result in excessive commissions; this why we use multiple timeframes.
If your stocks or sectors begin to fall out of favor across the timeframes in which you were analyzing them, it is time to rotate into the sectors that are performing well. Your overall market analysis will also give you a guide of when you should exit positions. When major trend lines within the stocks being held, or sectors being watched, are broken, it is time to exit and look for new trade candidates. (Learn more about rotating sectors in our article Sector Rotation: The Essentials.)
Summary
This strategy does require some turnover of trades, as sectors and the leading stocks within those sectors will change over time. The object is to be in stocks that are leading the market higher in bull markets, and if you are not opposed to short selling, being short in the weakest stocks that are leading the market lower during bear markets. We do this by finding the hottest sectors (for a bull market) over a period of time and then finding the best performing stocks within that sector. By continually transferring assets into the best performing stocks we stand a good chance to make above average returns.
BarChart Technical Analysis NITE-LYNX $FTCH
http://www.barchart.com/technicals/stocks/FTCH
OTCQX International – OTCQX offers international companies a visible presence in the U.S. on the premier tier of the OTC market, without the duplicative regulatory burdens of a traditional U.S. exchange listing.
After we have explored this area, we will then take a closer look at the random walk theory, fundamental analysis and technical analysis.
Evaluating A Companys Capital Structure
For stock investors that favor companies with good fundamentals, a strong balance sheet is an important consideration for investing in a companys stock. The strength of a companys balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capital structure. In this article, well look at evaluating balance sheet strength based on the composition of a companys capital structure.
A companys capitalization (not to be confused with market capitalization) describes the composition of a companys permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a companys capital structure is an indication of financial fitness.
Clarifying Capital Structure Related Terminology
The equity part of the debt-equity relationship is the easiest to define. In a companys capital structure, equity consists of a companys common and preferred stock plus retained earnings, which are summed up in the shareholders equity account on a balance sheet. This invested capital and debt, generally of the long-term variety, comprises a companys capitalization, i.e. a permanent type of funding to support a companys growth and related assets.
A discussion of debt is less straightforward. Investment literature often equates a companys debt with its liabilities. Investors should understand that there is a difference between operational and debt liabilities - it is the latter that forms the debt component of a companys capitalization - but thats not the end of the debt story.
Among financial analysts and investment research services, there is no universal agreement as to what constitutes a debt liability. For many analysts, the debt component in a companys capitalization is simply a balance sheets long-term debt. This definition is too simplistic. Investors should stick to a stricter interpretation of debt where the debt component of a companys capitalization should consist of the following: short-term borrowings (notes payable), the current portion of long-term debt, long-term debt, two-thirds (rule of thumb) of the principal amount of operating leases and redeemable preferred stock. Using a comprehensive total debt figure is a prudent analytical tool for stock investors.
Its worth noting here that both international and U.S. financial accounting standards boards are proposing rule changes that would treat operating leases and pension projected-benefits as balance sheet liabilities. The new proposed rules certainly alert investors to the true nature of these off-balance sheet obligations that have all the earmarks of debt.
Is There an Optimal Debt-Equity Relationship?
In financial terms, debt is a good example of the proverbial two-edged sword. Astute use of leverage (debt) increases the amount of financial resources available to a company for growth and expansion. The assumption is that management can earn more on borrowed funds than it pays in interest expense and fees on these funds. However, as successful as this formula may seem, it does require that a company maintain a solid record of complying with its various borrowing commitments.
A company considered too highly leveraged (too much debt versus equity) may find its freedom of action restricted by its creditors and/or may have its profitability hurt as a result of paying high interest costs. Of course, the worst-case scenario would be having trouble meeting operating and debt liabilities during periods of adverse economic conditions. Lastly, a company in a highly competitive business, if hobbled by high debt, may find its competitors taking advantage of its problems to grab more market share .
Unfortunately, there is no magic proportion of debt that a company can take on. The debt-equity relationship varies according to industries involved, a companys line of business and its stage of development. However, because investors are better off putting their money into companies with strong balance sheets, common sense tells us that these companies should have, generally speaking, lower debt and higher equity levels.
Capital Ratios and Indicators
In general, analysts use three different ratios to assess the financial strength of a companys capitalization structure. The first two, the so-called debt and debt/equity ratios, are popular measurements; however, its the capitalization ratio that delivers the key insights to evaluating a companys capital position.
The debt ratio compares total liabilities to total assets . Obviously, more of the former means less equity and, therefore, indicates a more leveraged position. The problem with this measurement is that it is too broad in scope, which, as a consequence, gives equal weight to operational and debt liabilities. The same criticism can be applied to the debt/equity ratio, which compares total liabilities to total shareholders equity. Current and non-current operational liabilities, particularly the latter, represent obligations that will be with the company forever. Also, unlike debt, there are no fixed payments of principal or interest attached to operational liabilities.
The capitalization ratio (total debt/total capitalization) compares the debt component of a companys capital structure (the sum of obligations categorized as debt total shareholders equity) to the equity component. Expressed as a percentage, a low number is indicative of a healthy equity cushion, which is always more desirable than a high percentage of debt.
Additional Evaluative Debt-Equity Considerations
Companies in an aggressive acquisition mode can rack up a large amount of purchased goodwill in their balance sheets. Investors need to be alert to the impact of intangibles on the equity component of a companys capitalization. A material amount of intangible assets need to be considered carefully for its potential negative effect as a deduction (or impairment) of equity, which, as a consequence, will adversely affect the capitalization ratio.
Funded debt is the technical term applied to the portion of a companys long-term debt that is made up of bonds and other similar long-term, fixed-maturity types of borrowings. No matter how problematic a companys financial condition may be, the holders of these obligations cannot demand payment as long the company pays the interest on its funded debt. In contrast, bank debt is usually subject to acceleration clauses and/or covenants that allow the lender to call its loan. From the investors perspective, the greater the percentage of funded debt to total debt disclosed in the debt note in the notes to financial statements, the better. Funded debt gives a company more wiggle room.
Lastly, credit ratings are formal risk evaluations by credit-rating agencies - Moodys, Standard
Feast thine eyes upon $EVGI BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/EVGI
Stocks and many other securities are judged in relative terms through the use of ratios such as PE, Price/Revenues and Price/Book. With this in mind, it also makes sense to analyze price movements in percentage terms.
OTCQB companies must be registered with and reporting to the SEC or a U.S. regulatory agency. There are no financial or qualitative standards to be in this tier.
An Introduction To Shareholder Activism
Share and Share Alike
The power of followership cannot be overrated. A hackneyed phrase, strength in numbers can and has been used to desired effect by shareholders for their benefit. The shareholders themselves can also be large institutions, such as public employee retirement systems. The recent results for say-on-pay at various annual general meetings are but one example. Management misdeeds and corporate fraud in the early and late 2000s led to the passage of Sarbanes-Oxley (2002) and Dodd-Frank (2010) legislation that has empowered shareholders to some degree. Here is an overview of the mechanics of shareholder voting and its true motivation.
SEE: Proxy Voting Gives Fund Shareholders A Say
Activists Toolkit
Shareholder activism is expressed through the proxy statement. More than mere ballots describing a particular issue to a shareowner requesting him or her to take action, proxy statements are assets as the decisions that they ask stockholders to make impact the value of their company. Voting on these matters is akin to taking a decision on a referendum at the ballot box on the merits (or lack thereof) of a political candidate. Investors need to do their homework, rather than merely rubberstamping managements recommendations. Once they have done so, they have the choice of completing the card accompanying the proxy statement and mailing it in or attending the annual general meeting to vote the shares in person. The latter option may be preferable if issues to be discussed are particularly important.
In this way, the shareholder is able to ask questions, the answers to which may inform his ultimate decision. While management often files the proxy statement, outside parties may do so as well. The latters interest may differ from management. Investors should note that whereas public companies are required to file an annual proxy statement, investment companies, by contrast, only do so when a specific issue needs to be put before the shareholders.
SEE: Knowing Your Rights As A Shareholder
Requisite disclosures are part of every proxy statement, varying by the issue at hand:
• Types of voting shares must be disclosed and the control accorded to each share class, along with disclosure of ownership by management and individuals with greater than 5% of outstanding shares.
• The independent public accountant must be disclosed, fees paid for audit services, and records kept of any disputes and whether firm representatives will attend the AGM. The investor should look for any sign that independence and objectivity on the part of the auditor is somehow compromised.
A summary of typical proxy proposals and their required disclosures:
Issue Required Disclosure
Election of Company Directors Names, ages, tenure, role(s) in the company, business relationships with the company, meetings that the board held in the past twelve months.
Remuneration A clear description of who gets paid what for their respective roles (e.g.(non) employee directors)
Executive Compensation Plan features, eligible persons, funding links to service (e.g defined benefit plan), prices, expiry dates, strike prices of warrants, rights or options, which do (not) require shareholder approval, tax consequences to the company/recipient.
Capital Structure Title, amount of securities to be issued or modified, fee for the transaction and anticipated use of funds; financial statements with managements discussion of financial condition.
Corporate Actions (mergers, acquisitions, spinoffs, etc.) Transaction details, financials of acquirer and acquired companies, discussion of effects of the corporate action, financials.
Property Acquisition or Disposition Type and location, fee paid or received, including basis therefore, name and address of seller or buyer.
Restatement of Financial Accounts The type of restatement and when effective, rationale for restatement and date anticipated resultant effect on company accounts.
Investment Advisory and Fee Changes A table with current and anticipated fees (e.g advisory, transfer, custody)
Distribution Fee Changes The 12b-1 fee rate, to whom the fee may be paid and the payment amounts to those affiliated with the fund or advisor.
Investments Permitted/Strategy A clear description of the change in permissible investments or strategy.
Investors should look for potential conflicts of interest. Are the interests of management sufficiently aligned with those of shareholders?
Shareholder activism is an outgrowth of corporate governance. Company directors are supposed to mind the store. If they do not, it is the responsibility of shareholders to step forward, weigh the merits of proposals and vote accordingly.
SEE: Putting Management Under The Microscope
In Whose Interest?
Traditionally a tool for exacting changes in the public company to benefit shareholders, shareholder activism is not without its critics who contend that certain interest groups stand behind the aegis of corporate democracy to advance (an) agenda(s) that might not necessarily benefit the shareholder, such as the pursuit of public policy initiatives and legislative or regulatory agendas. Socially responsible investment funds (SRI) may have a reform-minded, rather than profit-maximizing goal (e.g. environmental issues, human rights, practices that accord with religious beliefs, such as Christian values and Islamic finance).
The number of shareholder proposals is a function of a companys industry. Energy and mineral companies with the ability to harm the environment would, ceteris paribus, come in for greater criticism than technology groups. At issue in the maelstrom of shareholder activism is whether certain proposals advanced properly fall within the remit of a shareholder vote. Might they not be better resolved at the ballot box? A practice referred to as interest-group capture uses the share vote where the legislation might be a preferable alternative. Some examples of this are proposals on corporate political spending and the Taft-Hartley plans share votes to obtain concessions from management.
The Bottom Line
When evaluating any proposal, the investor needs to ask the right questions. What does the proposal ask him or her to evaluate, who is putting forth the proposal and, ultimately, whom does it serve? The answers to these questions will determine who truly benefits from such proposals.
NITE-LYNX $THMG BarChart Technical Analysis
http://www.barchart.com/technicals/stocks/THMG
Like weather forecasting, technical analysis does not result in absolute predictions about the future.
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