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In addition, bar charts that include the open will tend to get cluttered quicker. If you are interested in the opening price, candlestick charts probably offer a better alternative.
Index Mutual Funds Vs. Index ETFs
Investment may be either active or passive. With the former approach, the investor purchases, holds and sells marketable securities in pursuit of a particular objective. His or her decision is a function of fundamental research on the company in the context of its industry, in particular, and of the national and global economy, in general. The latter approach, by contrast, entails replicating a benchmark or index of marketable securities that share common traits.
Active investors believe that they can best the market and earn alpha. Passive investors, on the other hand, maintain that market inefficiencies over the long term get ironed out (arbitraged away, in the parlance of market professionals), so attempting to beat the market is fruitless. These sorts of investors simply desire to achievebeta, or the market return.
For the typical individual investor , passive investment is best accomplished through professional management. Two choices exist: the open-end investment company, otherwise known as the mutual fund, and the exchange-traded fund or ETF. Because both types of funds track an underlying index, differences in performance typically lie in the tracking error or degree to which the fund fails to replicate the index.
Additionally, the cost of an ETF can be lower than its open-ended counterpart, a difference that can affect performance, as well. Another important consideration that bears on performance is investor behavior. What follows is a basic discussion of the main attributes of each and under what circumstances one would use them.
The Truly Passive Investor
This individual wants to achieve an asset allocation best suited to his or her objectives at a low cost and with minimal activity. For him or her, the index mutual fund would be preferable. A typical adjustment in exposure would be achieved through rebalancing on a regularly scheduled basis to maintain consistency with his or her goal. Should circumstances change the adjustment of ones allocation or one-off, then tactical changes are easily accomplished.
The (At Times) Not So Passive Investor
This individual shares many of the goals of the truly passive investor, but may exhibit greater sophistication and want to effect changes in his or her portfolio with greater speed and precision. For this type of investor, the ETF would be more appropriate. While taking the passive approach, like its older mutual fund cousin, the ETF allows the holder to take and implement a directional view on the market or markets in ways that the open-ended fund cannot. For example, as with shares of common stock, ETFs trade in the secondary market. Investors may purchase and sell them during market hours, rather than be dependent upon forward pricing, where the traditional mutual funds price is calculated at net asset value (NAV) after the market close.
Additionally, investors may short sell an ETF. The passive investor who may be opportunistically inclined will relish the greater flexibility that this vehicle affords - tactical changes and market plays may be executed rapidly. The one potential disadvantage is the accumulation of trading costs as a function of ones trading activity. Using ETFs in the aforementioned way is an active application of a passive investment.
The investor should understand market dynamics as they affect asset class behavior and be able to understand and justify their decision-making process, not forgetting that trading costs can reduce investment returns. Investors should understand that attempting to practice the hedge fund strategy of global macro (taking directional bets on asset classes to achieve outsized returns) is akin to a marksman attempting to achieve the range and precision of a high-powered rifle with a .22 caliber gun.
Additional Considerations
Notwithstanding the foregoing discussion, there are several other features of which individual investors should make note when deciding whether to use an index mutual fund or index ETF. Mutual funds have different share classes, sale charge arrangements and holding period requirements to discourage rapid trading. The investors time frame and (dis)inclination to trade will dictate what product to use. ETFs are built for speed, all else being equal, as they carry no such arrangements.
Mutual funds also often have purchase minimums that can be high, depending on the account in which one invests . Not so with exchange-traded funds. There are tax consequences, however, to investing in either a mutual fund or an ETF. The mutual fund can cause the holder to incur capital gains taxes in two ways:
When he or she sells for an amount greater than that at which he or she purchased, the investor realizes a capital gain. On the other hand, an investor may hold a mutual fund and still incur capital gains taxes if other investors in the same fund sell en masse and force the fund to sell individual holdings to raise cash for redemptions. Those sales may cause the remaining fund holders to incur a capital gain.
Finally, mutual funds offer investors dividend reinvestment programs that enable automatic reinvestment of the funds cash dividends. In a taxable brokerage account , the dividends would be taxed, even though theyre reinvested. ETFs have no such feature. Cash from dividends is placed into the brokerage account of the investor who may well incur a commission to purchase additional shares of the ETF with the dividend that it paid out. Some brokers waive any sales charge. Because of commission costs, ETFs typically do not work in a salary deferral arrangement. However, in an IRA, no tax ramifications from trading would affect the investor.
SEE: What You Need To Know About Capital Gains And Taxes
The Bottom Line
When considering an index mutual fund versus the index ETF, the individual investor would do well to consult an experienced professional who works with individual investors of differing needs. No two individuals circumstances are identical and the choice of one index product over another results from a confluence of circumstances. As with any investment decision, investors need to do their homework and due diligence.
OTCQX is the intelligent marketplace for the best OTC companies with the highest financial standards and superior information availability.
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3 Steps To A Profitable ETF Portfolio
Perhaps no vehicle is helping to change the investment landscape more than the exchange-traded fund (ETF). ETFs are baskets of individual securities much like mutual funds with two key differences. First, they can be freely traded like stocks, while mutual fund transactions dont occur until the market closes. Secondly, expense ratios tend to be lower than those of mutual funds because many are passively managed vehicles tied to an underlying index or market sector.
The primary benefit of ETFs is that they can be used to construct entire portfolios that can be traded easily. Also, they are usually well diversified because they are designed to replicate a specific index or sector. (To learn how ETFs are formed, see Introduction To Exchange-Traded Funds and An Inside Look At ETF Construction.)
Building an ETF Portfolio
If you are considering building a portfolio with ETFs, here are some simple guidelines:
1. Determine the Right Allocation. Look at your objective for this portfolio, your return and risk expectations, your time horizon, your distribution needs, your tax and legal situations, your personal situation and how this portfolio fits in with your overall investment strategy to determine your asset allocation. (See Three Simple Steps to Building Long-Term Wealth for a more detailed explanation that incorporates a process recommended by the CFA Institute.)
2. Implement your Strategy. Analyze the available funds and determine which ones will best meet your allocation targets. Phase in your purchases over a period of three to six months.
3. Monitor and assess. Once each year, evaluate your portfolios performance and your allocations in light of your circumstances. (To keep reading about allocation, see Asset Allocation Strategies and Choose Your Own Asset Allocation Adventure.)
We will break down each of these steps in the following sections.
Determine the Right Allocation
If you are knowledgeable in investments, you may be able to handle this yourself. If not, seek competent financial counsel. In determining the right allocation, consider the following:
1. What is your objective (purpose) for the portfolio (e.g., retirement versus saving for a childs college tuition)?
2. What are your risk/return objectives?
3. What is your time horizon? The longer it is, the more risk you can take.
4. What are your distribution needs for the portfolio? If you have income needs, you will have to add fixed-income ETFs and/or equity ETFs that pay higher dividends.
5. Do you have any legal or tax issues that will have an impact on allocation?
6. How does this portfolio fit in with your overall plans and unique situation? It is important to know how this portfolio ties in with your other investments and how much of your net worth will be invested in this portfolio.
Finally, consider some data on market returns. Research by Eugene Fama and Kenneth French resulted in the formation of the three-factor model in evaluating market returns. The three-factor model says the following:
1. Market risk explains part of a stocks return. (This indicates that because equities have more market risk than bonds, equities should generally outperform bonds over time).
2. Value stocks outperform growth stocks over time because they are inherently more risky.
3. Small cap stocks outperform large cap stocks over time because they have more undiversifiable risk than their large cap counterparts.
Therefore, investors with a higher risk tolerance can and should allocate a significant portion of their portfolios to smaller cap, value-oriented equities.
Remember that more than 90% of a portfolios return is determined by allocation rather than security selection and timing. Do not try to time the market. Research continually has shown that timing the market is not a winning strategy. (To read more about this subject, see our Financial Concepts tutorial.)
Once you have determined the right allocation for you, you are ready to implement your strategy.
Implement Your Strategy
The beauty of ETFs is that you can select an ETF for each sector or index in which you want exposure.
Once you know the basics, you are ready to select your ETFs. In making your selections, look for products that:
1. Most closely meet your allocation needs for each sector or index
2. Have the most favorable expense ratios
There are a number of product offerings. Following are links to the American Stock Exchange, which has more than 200 listed ETFs, as well as some of the largest ETF managers:
American Stock Exchange:
Managers:
1. Claymore: Offers ETFs designed to provide the investment performance delivered by specialized investment indexes.
2. First Trust: Offers ETFs benchmarked against a number of styles, sectors and special situations.
3. iShares: Owned by Barclays. Offerings across every major domestic index and sector, including fixed income, as well as international ETFs.
4. Powershares: Style, industry, commodity currency specialty access and broad-market ETFs, including the QQQQ (formerly the QQQ).
5. Pro Shares: Uses derivatives, short (selling the asset) and long (buying the asset) index ETFs, including leveraged index ETFs.
6. Rydex: ETFs that seek to capture the performance of equal weighted and segmented indexes and sectors.
7. State Street Global Advisors: Standard and Poors Depositary Receipts (SPDRs), specific sector and index ETFs (including fixed income) and the Streettracks ETFs, as well as tools to help build a portfolio.
8. Van Eck Global: Market Vector brand of ETFs based on special market sectors and countries.
9. Vanguard: Domestic and international index ETFs that cover a range of market segments, investment styles, sectors and industries including bond the bond market.
10. Wisdom Tree: Index ETFs with a fundamental approach toward dividends and core earnings.
The next step is execution. ETFs trade during market hours, so any broker can execute your trades. More often than not, it is prudent to phase in new purchases. Data from The Stock Traders Almanac show that, generally, the equity markets are strongest from November to April and weakest from May to October, which means you may choose to speed up your phase-in time during strong periods and slow it down during weaker months.
Monitor and Assess Your Portfolio
• At least once a year, check the performance of your portfolio. For most investors, depending on their tax circumstances, the ideal time to do this is at the beginning or end of the calendar year. Compare each ETFs performance to that of its benchmark index. Any difference, called tracking error, should be low. If it is not, you may need to replace that fund with one that will invest truer to its stated style.
• Balance your ETF weightings for any imbalances that may have occurred due to market fluctuations. Do not overtrade. A once-annual rebalancing is recommended for most portfolios.
• Do not be deterred by market fluctuations. Stay true to your original allocations. Certain styles will stay out of favor for a while, while others will log abnormally high returns for extended periods.
• Assess your portfolio in light of changes in your circumstances. Keep a long-term perspective. Your allocation will change over time as your circumstances change.
Conclusion
Remember, there are three steps to successfully building a portfolio with ETFs. One, determine the right allocation for you. Two, implement your strategy. And three, monitor and assess your portfolio in the context of your situation. If you follow these steps, you should be able to build a portfolio of ETFs that meets its intended objective.
Although they may not be required to make financial information available to the public, many OTC-traded companies do so voluntarily. You can search our Financial Reports to obtain the reports of any issuer that has voluntarily provided their financials and other disclosure to investors via the OTC Disclosure and News Service.
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Bar Chart
Perhaps the most popular charting method is the bar chart. The high, low and close are required to form the price plot for each period of a bar chart.
4 Traits Of A Great Index Fund
The average consumer has likely never heard the name, John Bogle. Bogle, founder of the Vanguard Group and creator of the first index fund, doesnt get as much love as he deserves from the investing world. The company he founded now has $1.7 trillion under management, but he was forced to retire at the mandatory age of 70 and for many industry professionals, the hope was that his retirement would silence a man who was fiercely critical of the world of mutual funds. That didnt happen.
Bogle has long said that the mutual fund world suffers from high fees and lack of accountability to shareholders, as well as too much turnover within the fund, producing extra taxes and commissions.
However, Bogle isnt just hard on the professionals. He and many others believe that trying to be a better stock picker by selecting individual stocks and trying to buy them at just the right time, is a mathematical impossibility. If everybody is trying to beat the market but everybody is the market, theyre almost trying to outsmart themselves.
SEE: Stop Paying High Mutual Fund Fees
Bogle created the index fund as a means of removing the many variables that are nearly impossible to overcome. He said of the index fund, index funds eliminate the risks of individual stocks, market sectors and manager selection. Only stock market risk remains.
However, even index funds have variables and picking the wrong funds can have the same negative effect on your portfolio as other funds. If youre planning to fill your portfolio with index funds, heres what you should look for in a high-quality fund.
1. Low Expenses
Index funds, by their nature, are low-fee instruments, but even Vanguard has funds like the 500 Index Admiral Shares, with an expense ratio of .05%, and the Global ex-U.S. Real Estate Index, which has a 0.50% ratio. Other companies have funds that are even higher.
Picking funds solely based on fees isnt an advisable strategy, but minimizing expenses as much as possible always translates to a higher portfolio balance .
2. Correlation to the Underlying Index
What good is an index fund if it isnt correlated to the market? If the S
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The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are universally applicable, each of the analysis steps above can be performed using the same theoretical background.
Play The Market Like Tiger Plays Golf
Very few people on this planet have earned the title of greatest ever. In investing , many would argue that this distinction goes to Warren Buffett; in golf, its Tiger Woods. But in this world you do not need to be the best to achieve success. However, we are fortunate that those who are considered the best have laid out lessons for us that can help us become more successful. (Read about Buffett in our articles on The Greatest Investors.)
Both Warren Buffett and Tiger Woods do a few simple things spectacularly well to achieve their goals. While odds are quite high that you will never become Woods or Buffett, you dont have to in order to succeed. There are a lot of subtle yet critical similarities between golf and investing. If you pay attention to how they go about perfecting their craft, you can gain a lot of wisdom that will set you ahead of the pack.
Practice Makes Perfect
How Tiger Woods practices may be one of the most intriguing activities in all of sports. People are often advised that practice makes perfect. In other words, continue to practice, practice, practice, and you will get better. While theres no doubt that practice very often leads to improvement, its not practice that sets Woods apart; its perfect practice.
When Woods is on the driving range hitting balls, he is not just hitting balls for the sake of it. Instead, he hits every single ball with a specific target in mind. Woods will hit 500 balls a day with a specific target for each one.
The parallel for investors is constant discipline. Many investors incorrectly invest just for the sake of investing - without any discipline or specific target in mind. As a result, new investors have no idea how to navigate the course or manage risk. Investors often buy most of their stocks with the same expectations - that the stock price will go up - without giving any consideration to the existing competition, the quality of management and the level of difficulty of the current market layout.
What It Takes to Win
When the course is easy - in a bull market - every shot you take looks like a good one. It doesnt seem to matter what price you pay, the favorable landscape makes you look like an expert. However, the real danger lies in the fact that the longer this persist the greater the likelihood that you begin confusing your investment acumen with what is really going on: favorable conditions. This happened during the internet boom in the 1990s and the majority of people never had a chance to cash in on their spectacular gains. In fact, many actually lost lots of money when things came crashing down.
When the investing layout is hard, as it is during bear markets and recessions, its crucial to understand shooting par could likely be the long-term winner. As stock prices begin to rapidly rise, they often become riskier propositions, but most investors naively do not see it that way and continue to buy. Then when the course gets hard, the wrong lessons they learned on the easy course cost them dearly.
Invest with Purpose
Like Woods, investors should always invest with a specific target in mind. When stock prices rise dramatically without any regard for valuation, ignore the fact that some people may make superior returns over the next several months or year. Very often, the majority of those folks wont have the faintest idea when the goods times will end and all those profits will vanish.
Always invest with a specific target in mind. Be cautious when everyone is excited about buying stocks because that usually means paying a very rich price. Consider bonds, or high quality dividend paying stocks that usually dont attract as much excitement as the Amazons or Googles of the world. Sometimes shooting even par often produces the winning score.
Manage Your Expectations
Theres a saying that goes in order to finish first, you must first finish. There is tremendous wisdom in those words for investors. Success in investing is very often highly correlated to longevity. If you can navigate the market storms and not suffer catastrophic losses, then you are able to capitalize on the opportunities available when stocks prices are discounted. As is so often the case, many investments funds go out of businesses when the markets collapse, which is the absolute worst time to exit the game.
Tiger Woods does a brilliant job of managing his expectations. He doesnt go out on Thursday focusing on the leader board and trying to come out on top that day. Instead he plays his game against the course, fully aware that it is the person who remains consistent during the tournament who usually comes into Sundays round with the best chance to take home the trophy. Of course, during the course of play, Woods, like many investors, will often weigh the risk rewards of a difficult or low probability shot and make his decision based on the benefit gained.
Learn from the Best
Long-term success is not a result of luck. However, discipline and hard work often leads to opportunities that might not otherwise appear, and to outsiders this is often viewed as simple luck. Examine the approach of guys like Tiger Woods and Warren Buffett, learn from their successes and failures and youve already got a head start.
The most difficult decision is the investment decision which should be based on thorough research on the company and security. OTCMarkets.com provides investors with comprehensive, in-depth data, including trade data, company news, and company financials to help facilitate an investor’s investment decisions.
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Support and Resistance Zones
Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case.
Great Investors Not Named Buffett
Sometimes it feels as though the name Warren Buffett is morphing into something like the legend of Bloody Mary - say his name three times in a column about investing and readers suddenly appear. It is very much worth mentioning, though, that Warren Buffett is simply one example of a successful investor and businessman. Granted, Mr. Buffett is an excellent example of a successful investor, but readers might be interested in considering the approaches and track records of other investors that have enjoyed considerable professional success, but do not necessarily get the same publicity as Warren Buffett. (This esteemed investor rarely changes his long-term investing strategy, no matter what the market does. See Warren Buffetts Bear Market Maneuvers.)
George Soros
Perhaps it would have seemed impossible to imagine as he was living through World War II, but George Soros became one of the most successful investors in history. With a current net worth north of $14 billion, Soros is largely retired as an active investor. However, he established a remarkable record while running the Quantum Group of hedge funds.
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britains Black Wednesday currency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. Whats more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the worlds elite investors, and even he didnt always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald Perelman
Some will question whether Perelman is properly called an investor. Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlmans activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffetts success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John Paulson
With about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson
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Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more an art form than a science.
What Is A Pyramid Scheme?
A pyramid scheme is a fraudulent investing plan that has unfortunately cost many people worldwide their hard-earned savings. The concept behind the pyramid scheme is simple and should be easy to identify; however, it is often presented to potential investors in a disguised or slightly altered form. For this reason, it is important to not only understand how pyramid schemes work, but also to be familiar with the many different shapes and sizes they can take. (Many investors do not understand how to determine the level of risk their individual portfolios should bear. Find out for yourself in Determining Risk And The Risk Pyramid.)
The Scheme
As its name indicates, the pyramid scheme is structured like a pyramid. It starts with one person - the initial recruiter - who is on top, at the apex of the pyramid. This person recruits a second person, who is required to invest $100 which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person will make $900 with just a $100 investment.
The 10 new people become recruiters and each one is in turn required to enlist an additional 10 people, resulting in a total of 100 more people. Each of those 100 new recruits is also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of all of the money received minus the initial $100 paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure (meaning there are no more recruits). (From pyramid schemes to envelope stuffing, there are a lot of scams masquerading as legitimate part-time work.
The Fraud
The problem is that the scheme cannot go on forever because there is a finite number of people who can join the scheme (even if all the people in the world join). People are deceived into believing that by giving money they will make more money (with an investment of just $100, you will receive $900 in return). But no wealth has been created; no product has been sold; no investment has been made; and no service has been provided.
The fraud lies in the fact that it is impossible for the cycle to sustain itself, so people will lose their money somewhere down the line. Those who are most vulnerable are those towards the bottom of the pyramid, where it becomes impossible to recruit the number of people required to pay off the previous layer of recruiters. This kind of fraud is illegal in the Unites States and most countries throughout the world. It is estimated that 90% of people who get involved in a pyramid scheme will lose their money. (Lower levels of liquidity in exchange-traded funds make it harder to trade them profitably.
Fraud Disguised
Because people are attracted to the idea of making a quick buck with very little effort, many different forms of disguised pyramid schemes have succeeded in fooling people. Despite the illusion of legality presented by these revamped schemes, they are still illegal. It is thus important to recognize the characteristics of such so-called investment plans .
Many schemes will adopt the guise of gift-giving or loans that take place in investment clubs because none of these activities are technically illegal. However, the practice of donating a gift (tax free up to $10,000 in the U.S.) to someone (the recruiter), then having to recruit people into the club in order to receive a return on your investment (or your gift, rather) is essentially a pyramid scheme in disguise. (Joining an investment club isnt a get-rich-quick scheme, but it can help you learn the ropes or sharpen your investing skills. Learn more in Benefit From A Winning Investment Club.)
Multi-Level Marketing (MLM)
Legal multi-level marketing (MLM) involves being recruited in order to sell a product or service that actually has some inherent value. As a recruit, you can make a profit from the sales of the product or service, so you dont necessarily have to recruit more salespeople below you. And while you may be encouraged to recruit other salespeople whose sales would give you more profit, you can stick to just selling the product directly to the consumer if you choose.
A pyramid scheme MLM, however, will most likely sell a product with no independent value. The product could take the form of reports of some kind, for example, or mailing lists. In this kind of pyramid scheme, you would be required to recruit new members into the MLM in order to make a profit and keep the MLM alive. Joining the MLM is the only reason anyone would buy the products sold by this pyramid scheme.
Ponzi Schemes
Named after Charles Ponzi, who ran such a plot from 1919-1920, the Ponzi scheme is a fraudulent investment plan. It is not necessarily a pyramid, which is hierarchical. In a Ponzi scheme, there is one person who takes peoples money as an investment and does not necessarily tell them how their returns will be generated. As such, the peoples return on investment could be generated by anything; it could come from money taken from new investors - which means new investors essentially pay off the old investors - or even from money made by gambling in Las Vegas.
Chain Letters
Chain letters can be received electronically or through snail mail and are not illegal on their own. However, they take on the form of a pyramid scheme when the letter asks you to donate a certain amount of money (even just 5 cents) to the people on a list, then delete the name of the first person on the list, add your name, and forward the letter to a certain number of other people. The next people receiving the letter are then asked to do the same thing, so that you can receive your money as well. By forwarding the letter, you are asking people to give money with the promise of making money.
Conclusion
It is easy to see how a pyramid scheme can work, but participating in it (regardless of the form in which it is presented) involves deception and fraud because not everyone will receive the money that is promised in return.
As with any other investment plan you consider entering, it is important to ask the right questions. How will this money be invested? What is the rate of return? Who will be investing it? Talk to professionals and do your research before placing your money anywhere. And always remember that if a plan promises youll get rich quick with no risk or doesnt tell you how your money will be invested, you should raise a red flag and exercise caution before getting on board.
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OTC Markets Group, Inc. (OTCQX: OTCM), headquartered in New York City, operates a financial marketplaces platform providing price and liquidity information for almost 10,000[3] over-the-counter (OTC) securities. OTC-traded securities are organized into three marketplaces to inform investors of opportunities and risks: OTCQX, OTCQB and OTC Pink.
The annotated example above shows a stock that opened with a gap up. Before the open, the number of buy orders exceeded the number of sell orders and the price was raised to attract more sellers. Demand was brisk from the start.
Understanding Credit Card Interest
Did you know that according to an IndexCreditCards.com, as of 2010 the average credit card debt among households with balances was $7,394? Even worse, the average rate of interest on this debt was an astronomical 17-20%. Yikes! Its tough for anybody to get ahead financially with that sort of baggage. This article will shed some light on credit card debt and the benefits of getting out of it.
SEE: Check out our credit card comparison tool and find out which credit card is right for you.
What Is Interest?
Interest, typically expressed as an annual percentage rate, is the fee paid for the privilege of borrowing money. This fee is the price a person pays for the ability to spend money today that would otherwise take time to accumulate. Conversely, if you were lending the money, that fee/interest compensates you for giving up the ability to spend that money today. (If you want a deeper look at the significant factor of time, check out Understanding the Time Value of Money for a quick recap.)
Credit Card Debt
Most of us are familiar with credit cards. As mentioned earlier, U.S. statistics show the average family has long-term credit card debt in excess of $5,000. In fact, credit card debt accounts for a very sizeable chunk of total consumer debt, which hit $2.43 trillion in May 2011. Clearly credit cards are an important part of our day-to-day lives, which is why its important for consumers to understand the effect of that interest on them.
An Example: Discovering the Benefit of Increasing Your Payments
Lets say John and Jane both have $2,000 debt on their credit cards, which require a minimum payment of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payments. John pays only the minimum.
Each month John and Jane are charged a 20% annual interest on their cards outstanding balances. So, when John and Jane make payments, part of those payments go to paying interest and part go to the principal.
Here is the breakdown of the numbers for the first month of Johns credit card debt:
• Principal: $2,000
• Interest: $33.33 ($2,000 x (1 20%/12))
• Payment: $60 (3% of remaining balance)
• Principal Repayment: $26.67
• Remaining Balance: $1,973.33 ($2,000 - $26.67)
These calculations are done every month until the credit card debt is paid off.
In the end, John pays $4,240 in total over 15 years to absolve the $2,000 in credit card debt. The interest that John pays over the 15 years totals $2,240, higher than the original credit card debt.
Because Jane paid an extra $10 a month, she pays a total $3,276 over seven years to absolve the $2,000 in credit card debt. Jane pays a total $1,276 in interest.
The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by more than seven years!
The lesson here is that every little bit counts. Paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which leads to lower interest charges.
However, as we will see below, its wise not to pay only your minimum or even just a little more than your minimum. Its best simply not to carry a balance at all.
20% Return Guaranteed?
As an investor, you would be thrilled to get a yearly return of 17-20% on a stock portfolio, right? In fact, if you were able to sustain that kind of return over the long term, you would be rivaling investing legends such as Peter Lynch, Warren Buffett, George Soros and value-investing guru Jim Gipson.
But if someone came up to you on the street or you opened your email inbox and read a headline that screamed, 20% Return Guaranteed! youd likely be very, very skeptical. Anyone who guarantees anything is questionable. (For more on how to avoid investment scams check out our Investing Scams Tutorial.)
However, you do get one guarantee by paying off the balance on your credit card: if it charges 20% per year, you are guaranteed to save yourself from losing 20%, which, in a way, is just as good as making a 20% return.
Ensure Your Investments Arent a Guaranteed Drain
Often, however, investors are reluctant to pay down their credit cards and choose to put the money in investing or savings accounts. Now, there are many factors that drive individuals to do this, which behavioral finance tries to explain. One of these factors is peoples tendency to have mental accounts, which causes them to place different meaning on different accounts and on the money held in them. Mental accounting sometimes prevents investors from looking at their finances as a whole. Do remember, $1 is $1, regardless of whether it is invested or lost. Not thinking this way can be very costly. (For further reading, see Understanding Investor Behavior.)
Holding a credit card balance actually negates any investment gains - unless of course youre a world-class investor. Investing instead of paying off your credit card is a guaranteed loss of money.
On the other hand, paying off your credit card debt guarantees you a return, a return of whatever your card charges you. So, if you have money in your investing or savings account, or you have $1,000 burning a hole in your jeans, take that money and pay off your credit card! Then, once you eliminate your high-interest debt, youll not only have more money (because youre not making interests payments) but your investments will truly grow.
Conclusion
The moral of the story: carrying a balance on your card can be very costly. Our first recommendation is to pay off your balance entirely. Paying the astronomical interest rates that credit card companies charge simply does not make sense if you have savings elsewhere. If you cant completely pay off your balance, increasing your monthly payment, even a little bit, will be very helpful in the long run.
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All corporate actions, including: symbol changes, venue changes (new to the OTC), OTC Tier changes, Caveat Emptor status changes, Splits, Dividends, and Deletes are available within the Corporate Actions section.
On the other hand, if the analyst is a disgruntled eternal bear, then the analysis will probably have a bearish tilt.
Open to Interpretation
The NYSE And Nasdaq: How They Work
Whenever someone talks about the stock market as a place where equities are exchanged between buyers and sellers, the first thing that comes to mind is either the New York Stock Exchange (NYSE) or Nasdaq, and theres no debate over why. These two exchanges account for the trading of a major portion of equities in North America and worldwide. At the same time, however, the NYSE and Nasdaq are very different in the way they operate and in the types of equities traded therein. Knowing these differences will help you better understand the function of a stock exchange and the mechanics behind the buying and selling of stocks.
Location, Location, Location
The location of an exchange refers not so much to its street address but the place where its transactions take place. On the NYSE, all trades occur in a physical place, on the trading floor in New York City. So, when you see those guys waving their hands on TV or ringing a bell before opening the exchange, you are seeing the people through whom stocks are transacted on the NYSE.
The Nasdaq, on the other hand, is located not on a physical trading floor but on a telecommunications network. People are not on a floor of the exchange matching buy and sell orders on behalf of investors. Instead, trading takes place directly between investors and their buyers or sellers, who are the market makers (whose role we discuss below in the next section), through an elaborate system of companies electronically connected to one another.
Dealer vs. Auction Market
The fundamental difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers. The Nasdaq is a dealers market, wherein market participants are not buying from and selling to one another directly but through a dealer, which, in the case of the Nasdaq, is a market maker . The NYSE is an auction market, wherein individuals are typically buying and selling between one another and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price. (For more on different types of markets, see Markets Demystified.)
Traffic Control
Each stock market has its own traffic control police officer. Yup, thats right, just as a broken traffic light needs a person to control the flow of cars, each exchange requires people who are at the intersection where buyers and sellers meet, or place their orders. The traffic controllers of both exchanges deal with specific traffic problems and, in turn, make it possible for their markets to work. On the Nasdaq, the traffic controller is known as the market maker, who, we already mentioned, transacts with buyers and sellers to keep the flow of trading going. On the NYSE, the exchange traffic controller is known as the specialist, who is in charge of matching up buyers and sellers.
The definitions of the role of the market maker and that of the specialist are technically different; a market maker creates a market for a security, whereas a specialist merely facilitates it. However, the duty of both the market maker and specialist is to ensure smooth and orderly markets for clients. If too many orders get backed up, the traffic controllers of the exchanges will work to match the bidders with the askers to ensure the completion of as many orders as possible. If there is nobody willing to buy or sell, the market makers of the Nasdaq and the specialists of the NYSE will try to see if they can find buyers and sellers and even buy and sell from their own inventories.
Perception and Cost
One thing that we cant quantify but must acknowledge is the way in which the companies on each of these exchanges are generally perceived by investors. The Nasdaq is typically known as a high-tech market, attracting many of the firms dealing with the internet or electronics. Accordingly, the stocks on this exchange are considered to be more volatile and growth oriented. On the other hand, the companies on NYSE are perceived to be more well established. Its listings include many of the blue chip firms and industrials that were around before our parents, and its stocks are considered to be more stable and established.
Whether a stock trades on the Nasdaq or the NYSE is not necessarily a critical factor for investors when they are deciding on stocks to invest in. However, because both exchanges are perceived differently, the decision to list on a particular exchange is an important one for many companies. A companys decision to list on a particular exchange is affected also by the listing costs and requirements set by each individual exchange. The entry fee a company can expect to pay on the NYSE is up to $250,000 while on the Nasdaq, it is only $50,000-$75,000. Yearly listing fees are also a big factor: on the NYSE, they based on the number of shares of a listed security, and are capped at $500,000, while the Nasdaq fees come in at around $27,500. So we can understand why the growth-type stocks (companies with less initial capital) would be found on the Nasdaq exchange. (For further reading, see What are the listing requirements for the Nasdaq?)
Public vs. Private
Prior to March 8, 2006, the final major difference between these two exchanges was their type of ownership: the Nasdaq exchange was listed as a publicly-traded corporation, while the NYSE was private. This all changed in March 2006 when the NYSE went public after being a not-for-proft exchange for nearly 214 years. Most of the time, we think of the Nasdaq and NYSE as markets or exchanges, but these entities are both actual businesses providing a service to earn a profit for shareholders. The shares of these exchanges, like those of any public company, can be bought and sold by investors on an exchange. (Incidentally, both the Nasdaq and the NYSE trade on themselves.) As publicly traded companies, the Nasdaq and the NYSE must follow the standard filing requirements set out by the Securities and Exchange Commission. Now that the NYSE has become a publicly traded corporation, the differences between these two exchanges are starting to decrease, but the remaining differences should not affect how they function as marketplaces for equity traders and investors.
Conclusion
Both the NYSE and the Nasdaq markets accommodate the major portion of all equities trading in North America, but these exchanges are by no means the same. Although their differences may not affect your stock picks, your understanding of how these exchanges work will give you some insight into how trades are executed and how a market works.
With over 275 companies and a combined market capitalization of $1 Trillion, investors are drawn to the transparency, disclosure and quality-control which OTCQX provides.
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Taking A Look Behind Hedge Funds
Once dismissed as secretive, risky and only for the well-heeled, hedge funds represent a growth industry. They can promise higher-than-average market returns in a downtrodden market, but despite the allure of these alternative investment vehicles, investors should think twice before taking the hedge fund plunge.
What Are Hedge Funds?
Hedge funds are privately offered investments that use a variety of non-traditional strategies to try to offset risk, an approach called - you guessed it - hedging.
One such technique is short selling. Hedge fund managers identify a stock in which price is likely to decline, borrow shares from someone else who owns them, sell the shares and then make money by later replacing the borrowed shares with others bought at a much lower price; buying at this lower price is possible only if the share price actually falls.
Hedge fund managers also invest in derivatives, options, futures and other exotic or sophisticated securities. Generally, hedge funds operate as limited partnerships or limited liability companies and they rarely have more than 500 investors each. (For more read Getting To Know Hedge-Like Mutual Funds.)
Arguments for Hedge Funds
Some hedge fund managers say these funds are the key to consistent returns, even in downtrodden markets. Traditional mutual funds generally rely on the stock market to go up; managers buy a stock because they believe its price will increase. For hedge funds, at least in principle, it makes no difference whether the market goes up or down.
While mutual fund managers typically try to outperform a particular benchmark, such as the S
Granted, there are many studies and disputes raging on the performance of equity mutual funds, but it is safe to assume that about 75% of equity mutual funds underperform the S
Short selling is a trading strategy where an investor, believing that a security is over-valued, borrows (from a broker-dealer or institutional investor) and sells a security and then repurchases and returns (to the broker-dealer or institutional investor) the security at a lower price. The difference between the sale price and the purchase price is the investor’s profit.
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Whisper Numbers: Should You Listen?
During earnings season - the time when companies publicly report their results from the last quarter - many whisper numbers can be heard floating around Wall Street and on the Internet. It can be a period of extreme stock market volatility; the companies that dont meet earnings estimates are usually hammered hard, and experience a decline in share price. However, even companies that meet earnings estimates can suffer if they dont match the seemingly mysterious whisper number. What are whisper numbers? Where do they come from? Well attempt to demystify the whisper number, and evaluate its importance to you as an individual investor. (To learn more, see 5 Tricks Companies Use During Earnings Season.)
Earnings Estimates
When a company releases its earnings, any increase or decrease in its profitability is secondary to how well the company fared compared to investor expectations. This is because a stocks price almost always takes into account all future information. In other words, how well (or poorly) a company is expected to do is already built into a stocks price. For example, the market will punish a company that is expected to grow earnings by 20% if actual earnings only increase by 15%. Conversely, a company thats expected to grow 10% but expands 12% will be rewarded. This phenomenon occurs because future earnings are the driving force behind share price valuations. An unexpected earnings surprise for a companys current quarter will very likely have far-reaching effects on earnings forecasts for many years to come, and can significantly change how investors calculate the present value of the companys shares. (For further reading, see Getting The Real Earnings and How To Evaluate The Quality Of EPS.)
It is not surprising, then, that most analysts spend the majority of their time trying to make an exact prediction of a companys future earnings, called forward earnings. Surprising or disappointing Wall Street estimates by even a few cents can have a dramatic effect on a stock. If a large brokerage firm can make a prediction that is even one cent more accurate than that of its competitors, it stands to earn a lot of extra money.
Taking things one step farther, there are companies out there that do nothing but sell earnings estimates to institutional investors. Their job is to contact as many brokerage firms as possible and get quarterly earnings predictions from each firms analysts. The estimates that you see in the newspaper, online or on TV are usually compiled by these firms, and are often reported as an average, or what is called a consensus estimate. Often, when you read the consensus estimate you will see that the highest and lowest estimate values are also reported - this can give you a sense of the variance of analysts estimations. Large proportional differences between the high and low estimates generally indicate greater uncertainty about a given earnings report. (To read more about earnings estimates, see Earnings Guidance: The Good, The Bad And Good Riddance?)
The Whisper Number
Even after plenty of research, however, consensus earnings estimates often still arent that accurate. An explanation might be that there just arent that many analysts covering the entire market. Large caps often have dozens of analysts, but there are plenty of mid-caps and small-caps who dont have any analyst coverage! On top of that, as news of the earnings estimate spreads, the game then turns to trying to predict what the discrepancy will be between the actual earnings and the estimates. (To learn more, see What Mutual Fund Market Cap Suits Your Style?)
This is where the whisper number comes into play. While the consensus estimate tends to be widely available, whispers are the unofficial and unpublished earnings per share (EPS) forecasts. In the past, these came from professionals on Wall Street and were meant for the wealthy clients of top brokerages. However, post Sarbanes-Oxley, the definition of whisper numbers has changed. You see, with all the regulations on Wall Street, you wont find analysts providing favorite clients with insider earnings data - the risk of getting in trouble with the SEC is just too great. (To learn more about the SEC, read Policing The Securities Market: An Overview Of The SEC.)
While over the past few years it has become more difficult (if not impossible) to get whispers from insiders on the street, a new type of whisper has emerged in which the expectations of investors as a whole (based on shared information, fundamental research and past earnings performance) create a sense of what to expect from a company, which spreads much like insider information.
In other words, the whisper now is the expectation from individual investors. The whisper is still unofficial, if you consider the consensus estimate to be the official number, but the difference is that it comes from individuals, not from professionals. The source has also changed from your broker, to websites that put the whisper together.
The most obvious concerns here are manipulation of this consensus by investors who have a vested interest in promoting (or trashing) a stock.
Should You Follow the Whisper?
While the quality of the source of a whisper number is certainly important, whether or not you should take heed of a whisper mostly depends on what type of investor you are. For a long-term (buy-and-hold) investor, the price action around earnings season will, over time, be merely a small blip, making the whisper number a relatively trivial statistic.
However if you are a more active investor who is looking to profit from share price changes during earnings season, a whisper can be a much more valuable tool. Differences between actual earnings results and consensus estimates can have a significant effect on a stocks price. Whisper numbers can be useful when they differ (and of course, are more accurate) than the consensus forecast. For example, a lower whisper can provide a signal to get out of a stock you own before earnings come out. Also, whisper numbers certainly have a use when it comes to the large number of stocks that arent covered by any analysts. If you are analyzing a stock with little coverage, a whisper number at least provides some insight into the upcoming financials.
There certainly is an ethical issue with what we referred to as the older type of whisper number. Lets assume that there are analysts breaking federal laws and providing you (or a website) with non-public information. Do you really want to take the chance with illegal data? While all investors are continually looking for a leg-up on the competition, insider trading laws are serious business - just ask Martha Stewart. (To learn more, see Should Insider Trading Be Legal?)
Conclusion
Whisper numbers used to be the unpublished EPS forecasts circulating around Wall Street, now they are more likely to represent the collective expectations of individual investors. For more active investors, an accurate whisper number can be extremely valuable over the short term. The extent to which this is important to you depends on your investing style. While whisper numbers arent a guaranteed way to make money (nothing is), they are another tool that serious investors should consider.
Switching back and forth may cause confusion and undermine the focus of your analysis.
The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) regulate trading in the OTC market. FINRA's responsibilities include establishing rules governing the business conduct of its broker-dealer members.
Why You Should Be Wary Of Target-Date Funds
Its the in thing now; everybodys doing it, so why wouldnt you? Heres how the story repeatedly plays out, especially for those who recently opened a new 401(k) or 403(b) account. The benefits manager of your company sent you a big stack of documents and told you to complete the application. You thumbed through everything, skimming the microscopic print in these pamphlets called prospectuses, and found yourself completely overwhelmed.
Luckily, as you were completing the application, you noticed that you could either pick your own investment options or choose the ready-made option that placed all of your retirement funds into a target-date fund. You didnt know what it was, but you didnt know how to pick your investment options anyway, so into this target-date fund is where your money has gone.
What Is a Target-Date Fund?
The concept is very simple. A target-date fund adjusts the assets in the fund to line up with your retirement timeline. If youre planning to retire in 15 years, you might pick a target-date fund of 2025 or 2030. The fund manager will adjust the holdings and when you near retirement age, that fund will hold a lot of bonds, instead of the more risky stocks.
You dont have to worry about adjusting your investment portfolio because the fund does it for you. If you dont have the time or desire to learn how to manage your retirement portfolio, these target-date funds might be a great idea.
As your grandparents might have said, if its too good to be true, it probably isnt and that might be the case with target-date funds.
The Whole You
First, you are more than a date. Knowing that you plan to retire in 2025 or 2030 isnt enough information to assemble your retirement portfolio; imagine a doctor asking nothing more than your age. Your investment portfolio should be crafted around your tolerance for risk, the other assets you own, your family situation, social security and more. A target-date fund doesnt take any of that into account, because its designed for a large amount instead of you, personally.
They Might Cost a Lot
According to Consumer Reports, the median expense ratio of target-date funds is 0.68%, compared to 0.71% for stock funds. That isnt bad if your plan offers a target-date fund around the median, but the median expense ratio of index funds, a fund that tracks the performance of a certain investment index, is only 0.5% and you can find index funds for as low as 0.1%.
In general, actively managed funds, funds that have a team of people picking stocks and bonds in an attempt to beat the overall market, will cost more, but over the long term they dont perform any better than an index fund that is cheaper.
Theyre Hard to Understand
Target-date funds are like a brand new car . They look good on the outside but theyre hard to figure out when you open the hood. A recent SEC study found that many people believed that a target-date fund guarantees an income stream at retirement much like an annuity or a pension.
Others believed that once the fund reached the target-date, no more allocation changes in the fund were made. Both of these facts are untrue but this, along with the fact that a 2025 fund may vary greatly between companies, makes these funds dangerous for investors to take at face value.
The Bottom Line
Regardless of what you read today or in the future, there is no one investment product that will address all of your investing needs. A combination of products that may include a target-date fund is the best way to insure your retirement needs are met. Diversification will likely always be the best way to protect and grow your portfolio.
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Business Acumen
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company.
All OTC securities are assigned a market tier based on their reporting method (SEC Reporting, Alternative Reporting Standard) and disclosure category – Current, Limited or No Information. Securities on OTCQX, the highest tier of the OTC market, are required to have Current disclosure and meet minimum financial qualifications. Securities in OTCQB tier must be SEC, Bank or Insurance reporting and must be Current in their disclosure.
Conglomerates: Cash Cows Or Corporate Chaos?
Conglomerates are companies that either partially or fully own a number of other companies. Not long ago, sprawling conglomerates were a prominent feature of the corporate landscape. Vast empires, such as General Electric (NYSE:GE) and Berkshire Hathaway (NYSE:BRK.A), were built up over many years with interests ranging from jet engine technology to jewelry. Corporate hodgepodges like these pride themselves on their ability to avoid bumpy markets. In some cases, they have produced impressive long-term shareholder returns - but this doesnt mean that corporate conglomerates are always a good thing for investors. If youre interested in investing in these behemoths, there are a few things you should know. Here we explain what conglomerates are and give you an overview of the pros and cons of investing in them.
The Case for Conglomerates
The case for conglomerates can be summed up in one word: diversification. According to financial theory, because the business cycle affects industries in different ways, diversification results in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another venture. In other words, if Berkshire Hathaways brick-making division has a bad year, the loss might be offset by a good year in its insurance business.
At the same time, a successful conglomerate can show consistent earnings growth by acquiring companies whose shares are more lowly rated than its own. In fact, GE and Berkshire Hathaway have both promised - and delivered - double-digit earnings growth by applying this investment growth strategy.
The Case Against Conglomerates
However, the prominent success of conglomerates such as GE and Berkshire Hathaway is hardly proof that conglomeration is always a good idea. There are plenty of reasons to think twice about investing in these stocks , particularly in 2009, when both GE and Berkshire suffered as a result of the economic downturn, proving that size does not make a company infallible.
Investment guru Peter Lynch uses the phrase diworsification to describe companies that diversify into areas beyond their core competencies. A conglomerate can often be an inefficient, jumbled affair. No matter how good the management team, its energies and resources will be split over numerous businesses, which may or may not be synergistic.
For investors, conglomerates can be awfully hard to understand, and it can be a challenge to pigeonhole these companies into one category or investment theme. This means that even managers often have a hard time explaining their investment philosophy to shareholders. Furthermore, a conglomerates accounting can leave a lot to be desired and can obscure the performance of the conglomerates separate divisions. Investors inability to understand a conglomerates philosophy, direction, goals and performance can eventually lead to share underperformance.
While the counter-cyclical argument holds, there is also the risk that management will keep hold of businesses with poor performance, hoping to ride the cycle. Ultimately, lower-valued businesses prevent the value of higher-valued businesses from being fully realized in the share price . (For further reading, see The Ups And Downs Of Investing In Cyclical Stocks.)
Whats more, conglomerates do not always offer investors an advantage in terms of diversification. If investors want to diversity risk, they can do so by themselves, by investing in a few focused companies rather than putting all of their money into a single conglomerate. Investors can do this far more cheaply and efficiently than even the most acquisitive conglomerate can.
The Conglomerate Discount
The case against conglomerates is a strong one. Consequently, the market usually applies a haircut to the piecewise, or sum-of-parts, value - that is, it frequently values conglomerates at a discount to more focused companies. This is known as the conglomerate discount. According to a 2001 article in CFO Magazine, academic studies have suggested in the past that this discount could be as much as 10-12%, but more recent academic inquiries have concluded that the discount is closer to 5%. Of course, there are some conglomerates that command a premium but, in general, the market ascribes a discount.
The conglomerate discount gives investors a good idea of how the market values the conglomerate as compared to the sum value of its various parts. A deep discount signals that shareholders would benefit if the company were dismantled and its divisions left to run as separate stocks.
Lets take a shot at calculating the conglomerate discount using a simple example. Well use a fictional conglomerate called DiversiCo, which consists of two unrelated businesses: a beverage division and a biotechnology division.
DiversiCo has a stock market valuation of $2 billion and total debt of $0.75 billion. Its beverage division has balance sheet assets of $1 billion, while its biotechnology division has $0.75 billion worth of assets. Focused companies in the beverage industry have median market-to-book values of 2.5, while pure play biotech firms have market-to-book values of 2. DiversiCos divisions are fairly typical companies in their industries. From this information, we can calculate the conglomerate discount:
Example - Calculating the Conglomerate Discount
Total Market Value DiversiCo:
= Equity Debt
= $2 billion $0.75 billion
= $2.75 billion
Estimated Value Sum of the Parts:
= Value of Biotech Division Value of Beverage Division
= ($0.75 billion X 2) ($1 billion X 2.5)
= $1.5 billion $2.5 billion
= $4.0 billion
So, the conglomerate discount amounts to:
= ($4.0 billion - $2.75 billion)/$4.0 billion
= 31.25%
Copyright ??2009 Investopedia.com
DiversiCos conglomerate discount of 31.25% seems unusually deep. Its share price does not reflect the true value of its separate divisions. It becomes clear that this multibusiness company could be worth significantly more if it were broken up into individual businesses. Consequently, investors may push for divesting or spinning off its beverage and biotech divisions to create more value. If that were to happen, Diversico might be worth closer examination as a buying opportunity.
What to Look For
The big question is whether investing in conglomerates makes sense. The conglomerate discount suggests it does not. But there may be a silver lining. If you invest in conglomerates that break up into individual pieces through divestitures and spinoffs, you could capture an increase in value as the conglomerate discount disappears. As a general rule, you stand to get greater returns when conglomerates break up than when they are built.
That said, some conglomerates do command a valuation premium - or at least a slim conglomerate discount. These are extremely well-run companies. They are managed aggressively, with clear targets set for divisions. Underperforming companies are quickly sold, or divested. More importantly, successful conglomerates have financial rather than strategic or operating objectives, adopting strict approaches to portfolio management .
If you choose to invest in conglomerates, look for ones with financial discipline, rigorous analysis and valuation, a refusal to overpay for acquisitions and a willingness to sell off existing businesses. As with any investment decision , think before you buy and dont assume that big companies always come with big returns.
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The security is being promoted to the public, but adequate current information about the issuer has not been made available to the public. OTC Markets believes adequate current information must be publicly available during any period when a security is the subject of ongoing promotional activities having the effect of encouraging trading of the issuer's securities.
Should You Buy Stock Or An ETF?
After completing a thorough research of an attractive sector, you may like a couple of stocks and an exchange-traded fund (ETF) that fit your criteria. Now you need to decide, do I buy the stocks or the ETF? Investors encounter this question every day. Many are under the impression that if you buy an ETF, you are stuck with receiving the average return in the sector. This is not necessarily true, depending on the characteristics of the sector.
SEE: Building An All-ETF Portfolio
Making this choice is no different from any other investment decision. As always, you want to look for ways to reduce your risk. Of course, you want to generate a return that beats the market (create alpha.) Reducing the volatility of an investment is the general method of mitigating risk. Most rational investors give up some upside potential to prevent a potentially catastrophic loss. An investment that offers diversification across an industry group should reduce the portfolio volatility an investor is exposed to. This is one way that diversification through ETFs works in your favor.
Alpha is the ability of an investment to outperform its benchmark. Any time you can fashion a more stable alpha, you will be able to experience a higher return on your investment. There is a general belief that you must own stocks, rather than an ETF, to beat the market. This notion is not always correct. Being in the right sector can lead to achieving alpha, as well.
When Stock Picking Might Work
Industries or situations where there is a wide dispersion of returns, or instances in which ratios and other forms of fundamental analysis could be used to spot mispricing, offer stock-pickers an opportunity to exceed.
Maybe you have a good legal insight on how well a company is performing, based on your research and experience. This insight gives you an advantage that you can use to lower your risk and achieve a better return. Good research can create value added investment opportunities, rewarding the stock investor .
The retail industry is one group in which stock picking might offer better opportunities than buying an ETF that covers the sector. Companies in the sector tend to have a wide dispersion of returns based on the particular products that they carry, creating an opportunity for the astute stock picker to do well.
SEE: Analyzing Retail Stocks
For example, recently you have noticed that your daughter and her friends prefer a particular retailer. Upon further investigation, you find that the company has upgraded its stores and hired new product management people. This led to the very recent roll out of new products that have caught the eye of your daughters age group. So far, the market has not noticed. This type of perspective (and your research) might give you an edge in picking the stock over buying a retail ETF.
Company insight through a legal or sociological perspective may provide investment opportunities that are not immediately captured in market prices. When such an environment is determined for a particular sector, where there is much return dispersion, single stock investments can provide a higher return than a diversified approach.
When an ETF Might Be the Best Choice
Sectors that do have a narrow dispersion of returns from the mean do not offer stock pickers an advantage when trying to generate market-beating returns. The performance of all companies in these sectors tends to be similar. For these sectors, the overall performance is fairly similar to the performance of any one stock. The utilities and consumer staples industries fall into this category. In this case, investors need to decide how much of their portfolio to allocate to the sector overall, rather than pick specific stocks. Since the dispersion of returns from utilities and consumer staples tends to be narrow; picking a stock does not offer sufficiently higher return for the risk that is inherent in owning individual securities. Since ETFs pass through the dividends that are paid by the stocks in the sector, investors receive that benefit as well.
Often, the stocks in a particular sector are subject to disperse returns, yet investors are unable to select those securities which are likely to continue over-performing. Therefore, they cannot find a way to lower risk and enhance their potential returns by picking one or more stocks in the sector.
SEE: How To Pick The Best ETF
If the drivers of the performance of the company are more difficult to understand, you might consider the ETF. These companies may possess more difficult to evaluate technology or processes that cause them to underperform or do well. Perhaps their performance depends on the successful development and sale of a new unproven technology. The dispersion of returns is wide, and the odds of finding a winner can be quite low. The biotechnology industry is a good example, as many of these companies depend on the successful development and sale of a new drug. If the development of the new drug does not meet expectations in the series of trials, or the FDA does not approve the drug application, the company faces a bleak future. On the other hand, if the FDA approves the drug, investors in the company can be highly rewarded.
The semiconductors, certain commodities and specialty technology groups fit the category where ETFs may be the preferred alternative. For example, if you believe that now is a good time to invest in the mining sector, you may want to gain specific industry exposure. However, you are concerned that some stocks might encounter political problems harming their production. In this case, it is prudent to buy into the sector rather than a specific stock, since it reduces your risk. You can still benefit from growth in the overall sector, especially if it outperforms the overall market.
When deciding whether to pick stocks or select an ETF, look at the risk and the potential return that can be achieved. Stock-picking offers an advantage over ETFs, when there is a wide dispersion of returns from the mean. And you can gain an advantage using your knowledge of the industry or the stock.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, and regardless of return dispersions, an ETF is your best choice
SEE: 5 ETFs Flaws You Shouldnt Overlook
The Bottom Line
Whether picking stocks or an ETF, you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals. You do not want to see all of your good work go down the drain as time passes.
This link will help thou $AWNE BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/AWNE
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