Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
The choice of which charting method to use will depend on personal preferences and trading or investing styles.
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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.
Get A Hold On Mishandled Accounts
Investors often look to professionals to help them navigate the markets and provide a certain level of service, but there are times when they may feel that an account is being mishandled. As tempting as it may be to find someone to blame for monetary losses, they are often the result of market conditions and investors must be prepared for such risks. However, arbitration or other avenues may be warranted if evidence suggests that a broker recommended an unsuitable investment, committed fraud, or charged excessive commissions by churning the account. In this article, well help you to decide whether your account has been mishandled and if you do need to act on the complaint. (To learn more, see Paying Your Investment Advisor - Fees Or Commissions?)
Your First Steps
If you feel that your broker has not acted in your best interest, try to exhaust all possible remedies with the investment company. After quantifying the loss, schedule a meeting with the primary contact at the investment firm to have an extensive discussion, and listen to the brokers side of the story. If this process does not yield adequate information, escalate the complaint to the next level of management until some type of resolution is reached. This may include various outcomes, including simply waiting for the markets to improve to ending all discussions and proceeding with legal action.
If the dispute is with a broker, you probably already agreed to settle through arbitration when you began working with the firm. In this case, the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD), would handle the arbitration process from start to finish. The groups dispute resolution forum helps resolve matters between investors and securities firms, as well as industry-related issues between individual registered representatives and their firms. (To learn more, see Broker Gone Bad? What To Do If You Have A Complaint and When A Dispute With Your Broker Calls For Arbitration.)
If You Need Legal Representation
As with any potentially lucrative legal proceeding, many legal advisors offer free consultations. Consulting an attorney opens up an outside perspective and can help confirm the appropriate forum for resolving a dispute. This is a good time to begin building a short list of potential litigators, should the need arise. If an arbitration path is appropriate, the list will shrink, as more attorneys handle court cases than arbitration.
While the entire process is simplified in order for any one who has a grievance to file a claim and proceed, the majority of customers pursue their claims in conjunction with a legal team that includes at least one attorney and an expert witness. It is also a good time to set reasonable expectations with potential outcomes and time frames. Do not count on large settlements that include punitive damages, as such generous judgments are rarely rendered. Be prepared to wait months or even years before the arbitration date is set. Depending on the size of the claim and the legal participants, anticipate that arbitration that is not completed in the originally scheduled time frame may be postponed to accommodate participant and panel members schedules.
The Arbitration Process
The table below presents the number of cases handled by FINRA on an annual basis. Typically, the caseload increases in years following volatile financial markets where investors have suffered losses. Caseloads hit historically high levels in 2003, approximately two years after what the tech bubble burst and the stock market plunged.
Year Cases
2002 7,704
2003 8,945
2004 8,201
2005 6,074
2006 4,614
2007 3,238
If arbitration appears to be the best course of action, visit the FINRA website and search pending cases with the investment firm or registered representative in question. The listing will provide a summary and itemization of any pending or closed cases against the firm and its representative or advisor. It will not, however, include every issue or any cases that expunged the record as part of the settlement.
If the search is for a registered investment advisor (RIA) rather than someone who works for a brokerage firm, you will be redirected to the Securities And Exchange Commission (SEC) website, or possibly to a state-sponsored site if the advisor is state licensed. If the search is for a registered representative or a brokerage firm, FINRAs BrokerCheck program will search data from the Central Registration Depository (CRD) registration and licensing database, which gathers data reported on industry registration and licensing forms. BrokerCheck reports professional background information on currently registered brokers, registered securities firms and previously registered parties. One section provides vital information regarding events reported at the CRD, which is required by the securities industry registration and licensing process. Any number of financial disclosures can be listed here, including bankruptcies or unpaid liens. The listing might also contain formal investigations, customer disputes, disciplinary actions and criminal charges or convictions.
Filing a Complaint
If you determine that the portfolio was mishandled, the next step is to file a complaint. FINRA suggests doing so as soon as possible to avoid a delay in arbitration or mediation. Mediation, which can serve as a supplement or replacement for arbitration depending on the outcome, is a voluntary process in which both parties can settle their disputes in a non-binding format. For most claims under $25,000, the process is resolved primarily through written statements filed by each party to FINRA. At any point the claimant, respondent, or arbitrator may request a hearing. These smaller cases can be assigned to a single arbitrator and may settle fairly quickly.
Claim amounts greater than $25,000 are usually assigned to a three-person arbitration panel. Because they typically settle in-person and involve more formalities, they tend to take longer. FINRA offers a complete online claim filing process, and this is where most investors get bogged down. While FINRA has streamlined the process for the layman to follow, it is still a legal proceeding with required documents such as the statement of claim. Many frustrated investors will pursue the services of an attorney at this point.
Evaluate Your Progress
This stage of the process is a good time to step back, evaluate your progress, and set time frames and expectations. Keep in mind, however, that the relationship between you and the representative or advisor has changed. While customers sometimes stay with the company against which they have filed claims, most do not. Depending on the claim or loss, they have probably moved to another firm, liquidated their holdings or made other arrangements. The process from this point on becomes a legal proceeding, although it is slightly less formal than a typical court proceeding; you should view this process as a resolution-in-progress.
Conclusion
FINRA provides a framework for licensing, registration, education, monitoring and policing of the brokerage community to ensure the public receives the best service. While the vast majority of financial service professionals provide excellent service, some accounts are mishandled and FINRA has the process available for anyone to pursue what he or she believes is a valid claim. It is important to remember that all decisions made by either the sole arbitrator or the combined panel are binding and that the judgments are enforceable, as they would be in a court. Finally, consider that while the investor has every right to pursue a claim, doing so carries costs such as filing fees, arbitration and/or mediation fees, and if the panel decides a case is frivolous, legal and other costs will apply.
If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value.
The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers that operate in the over-the-counter (OTC) market. Many equity securities, corporate bonds, government securities, and certain derivative products are traded in the OTC market.
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A Guide To Risk Warnings And Disclaimers
Risk is fundamental to the investment process, but remains a concept that is not particularly well understood by most regular investors. For this reason, risk warnings - those vaguely worded, fine print disclaimers at the bottom of any investment documents and websites - are extremely important for both buyers and sellers.
Unfortunately, although there are many warnings out there, they often remain unread or are not sufficiently explicit. An investor needs a substantial level of experience and sophistication to know what is really meant, or an advisor needs to take the time to explain it to the investor carefully in person. Yet, all too often, these conditions do not prevail. Sometimes, sellers obviously prefer to keep people in the dark in order to make a sale. In this article, we will look at the nature of risk warnings in order to figure out what gets the message across properly, and what still leaves investors not truly knowing what they could be getting into.
Where Do These Warnings Appear and Why?
Mainly for legal reasons, firms generally publish some kind of warning in their brochures and on Internet sites. The objective is not only to explain to the investor the nature of the risks involved in the particular kind of investment being offered, but also to ensure that there can be no legal comeback. The warnings are either in a separate Internet link, or in a brochure. In the latter case, it may vary from a rather small footnote to a pretty explicit and large-print explanation of what can go wrong. The length tends to vary from one sentence to a couple of pages.
Examples of Written Warnings
Lets look at some actual written examples of how investors are warned of what might happen to their money. We will see what the firms say and just how useful it is.
Example - Too vague
An investor may get back less than the amount invested. Information on past performance, where given, is not necessarily a guide to future performance.
Or
The capital value of units in the fund can fluctuate and the price of units can go down as well as up and is not guaranteed.
Warnings like these are very common, regrettably. The problem with these is that there is no quantification and the warning does not really hit home. Can you lose 5% or 25%? There is a big difference between the two. It is unlikely that this warning alone will ensure that the unwary investor knows what could potentially happen to his or her money.
Example - Not easily understood by non-experts
The investments and services offered by us may not be suitable for all investors. If you have any doubts as to the merits of an investment, you should seek advice from an independent financial advisor.
This certainly warns people to be careful, but how many investors really understand what is meant by suitability or would bother to double-check? In addition, if the investor trusts the seller, he will think he is being careful. The odds of an investor actually going to an advisor are low.
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Example - Relativity and context given
You should be aware that certain types of funds might carry greater investment risk than other investment funds. These include our Smaller Companies, Pacific Growth and Japan funds.
Now we are moving in the right direction. You can see from this that the same company has other, safer investments , which you may prefer. This is no longer a token warning, and points clearly to lower-risk alternatives.
Example - The losses can be BIG
Investment in the securities of smaller companies can involve greater risk than is generally associated with investment in larger, more established companies that can result in significant capital losses that may have a detrimental effect on the value of the fund.
What is good about this one is that the investor is warned that the losses can be substantial. This is still not quantified, but the point that the investment is not for the faint at heart is clear enough.
Example - Now thats a warning!
You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.
No need for vast experience or a vivid imagination. It is quite clear that you can lose the lot.
Criteria for a Good Risk Warning
There are several criteria that a warning should fulfill if it is to get the right message across:
• Quantification: Although this is not always possible, investors should have some idea as to the proportion of their money that they could lose.
• Warnings should be easy to follow: Any risk warning should be easy to understand. If you dont understand what the risk warning is telling you, dont assume that the investment is right for you just because you trust the seller. An inexperienced investor could easily be advised to buy anything, ranging from a basic stock fund to a highly complex packaged product.
• Signing is important for both parties: If an investor has to sign the warning, this demonstrates its importance to him or her, and provides good protection to the firm. However, never sign anything you dont understand.
• Internet warnings: On the Internet, it is all too easy to click away a warning and carry on with the deal. In a perfect world, the link and entry would be very clear and the investor prompted to take the warning seriously. This is not a perfect world, however, and its up to investors to make sure they read the disclaimer before continuing.
• Personal explanations: This are the only way many investors will really understand the risks of a given investment. If the print warning does not meet your criteria, seek out personal advice. The explanation should be clear and give sufficient detail so you know what you could lose, and how, and what other products might be more or less suitable and appealing. The seller should also make a note of how the warning was presented and, if possible, get the investor to sign this too.
Ask Until You Are Sure
As a private investor, you need to request verbal and/or written information and explanations until you are sure you understand the warnings. Dont stop until you are fully aware, in quantitative terms, of what you stand to gain and lose, and what other potential investments there are with different risk/reward ratios.
The Bottom Line
It is essential that investment risk warnings be clear and sufficient not only to provide legal protection, but also to ensure that the message truly gets home. Firms and advisors should only sell products with a warning that conveys the real level of risk clearly. Unfortunately, what should be done and what is common practice are two different things. As an investor, its crucial to know how much of your money you could lose and what circumstances could cause this to occur. If you are uncomfortable with the risks of the investment, remember there are always lower-risk alternatives.
Even though the market is prone to sudden knee-jerk reactions, hints usually develop before significant moves.
To be quoted on the platform, companies are not required to file with the SEC, although many choose to do so.[6] A wide range of companies are quoted on OTC Markets, including firmly established foreign firms,[7] mostly through American Depositary Receipts (ADRs). In addition, many closely held, extremely small and thinly traded US companies have their primary trading on the OTC Markets platform.
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Surviving Bear Country
A bear market refers to a decline in stock prices of at least 15-20%, coupled with pessimistic sentiment underlying the market. Clearly no stock investor looks forward to these periods. Dont despair, there is hope! In this article we will walk you through some of the most important investment strategies and mindsets that one can use to limit losses - or even make gains - while the stock market is performing in such a manner.
Be Realistic!
First off, having a realistic mindset is one the most important things to do during an economic slowdown. Remember that its normal for the stock market to have negative years - its all part of the business cycle.
After a raging bull market, its easy to forget the bad times. Take, for example, the late 1990s; it was a time of spectacular growth in the equity markets, punctuated by gains in the S
Definition of Fair Value
When market valuations extend beyond historical norms, there is pressure to adjust growth and multiplier assumptions to compensate. If Wall Street values a stock at 50 times earnings and the current assumption is 30 times, the analyst would be pressured to revise this assumption higher.
Broker-dealers cannot use their knowledge of customer orders to provide customers with inferior prices. For example, buying a security for less than a known Limit Order price and then selling the security to the customer at the Limit Order price.
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Economic Indicators For The Do-It-Yourself Investor
Economic indicators are some of the most valuable tools investors can place in their arsenals. Consistent in their release, wide in their scope and range, metrics such as the Consumer Price Index (CPI) and written reports like the beige book are free for all investors to inspect and analyze. Policymakers, most notably those at the Federal Reserve, use indicators to determine not only where the economy is going, but how fast its getting there.
Admittedly, economic indicator reports are often dry and the data is raw. In other words, information needs to be put into context before it can be helpful in making any decisions regarding investments and asset allocation, but there is valuable information in those raw data releases. The various government and non-profit groups that conduct the surveys and release the reports do a very good job of collating and cohesively presenting what would be logistically impossible for any one investor do to on his or her own. Most indicators provide nationwide coverage and many have detailed industry breakdowns, both of which can be very useful to individual investors.
In this article, well touch on the most important aspects of economic indicators and how they relate to individual investors. (For more detailed information, see Economic Indicators To Know.)
What is an economic indicator?
In its simplest form, an indicator could be considered any piece of information that can help an investor decipher what is going on in the economy. The U.S. economy is essentially a living thing; at any given moment, there are billions of moving parts - some acting, others reacting. This simple truth makes predictions extremely difficult - they must always involve a large number of assumptions, no matter what resources are put to the task. But with the help of the wide range of economic indicators, investors are better able to gain a better understanding of various economic conditions.
There are also indexes for coincident indicators and lagging indicators, the components of each are based on whether they tend to rise during or after an economic expansion. (For related reading, see What are leading, lagging and coincident indicators? What are they for?)
Use in Tandem, Use in Context
Once an investor understands how various indicators are calculated and their relative strengths and limitations, several reports can be used in conjunction to make for more thorough decision-making. For example, in the area of employment, consider using data from several releases; by using the hours-worked data (from the Employment Cost Index) along with the Labor Report and non-farm payrolls, investors can get a fairly complete picture of the state of the labor markets. Are increasing retail sales figures being validated by increased personal expenditures? Are new factory orders leading to higher factory shipments and higher durable goods figures? Are higher wages showing up in higher personal income figures? The savvy investor will look up and down the supply chain to find validation of trends before acting on the results of any one indicator release. (For related reading, check out Surveying The Employment Report.)
Personalizing Your Research
Some people may prefer to understand a couple of specific indicators really well and use this expert knowledge to make investment plays based on their analyses. Others may wish to be a jack of all trades, understanding the basics of all the indicators without relying on any one too much. A retired couple living on a combination of pensions and long-term Treasury bonds should be looking for different things than a stock trader who rides the waves of the business cycle. Most investors fall in the middle, hoping for stock market returns to be steady and near long-term historical averages (about 8-10% per year).
Knowing what the expectations are for any individual release is helpful, as well as generally knowing what the macroeconomic forecast is believed to be at become important functions. Forecast numbers can be found at several public websites, such as Yahoo! Finance or MarketWatch. On the day a specific indicator release is made, there will be press releases from news wires such as the Associated Press and Reuters, which will present figures with key pieces highlighted. It is helpful to read a report on one of the newswires, which may parse the indicator data through the filters of analyst expectations, seasonality figures and year-over-year results. For those that use investment advisors, these advisors will probably analyze recently-released indicators in an upcoming newsletter or discuss them during upcoming meetings. (For articles about analyzing and using this data, see Trading On News Releases and A Top-Down Approach To Investing.)
Inflation Indicators - Keeping a Watchful Eye
Many investors, especially those who invest primarily in fixed-income securities, are concerned about inflation. Current inflation, how strong it is, and what it could be in the future are all vital in determining prevailing interest rates and investing strategies.
There are several indicators that focus on inflationary pressure. The most notable in this group are the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI comes out first in any reporting month, so many investors will use the PPI to try and predict the upcoming CPI. There is a proven statistical relationship between the two, as economic theory suggests that if producers of goods are forced to pay more in production, some portion of the price increase will be passed on to consumers. Each index is derived independently, but both are released by theBureau of Labor Statistics. Other key inflationary indicators include the levels and growth rates of the money supply and the Employment Cost Index (ECI). (To learn more, read The Consumer Price Index: A Friend To Investors.)
Economic Output - Stock Investors Inquire Within
The gross domestic product (GDP) may be the most important indicator out there, especially to equity investors who are focused on corporate profit growth. Because GDP represents the sum of what our economy is producing, its growth rate is targeted to be in certain ranges; if the numbers start to fall outside those ranges, fear of inflation or recession will grow in the markets. To get ahead of this fear, many people will follow the monthly indicators that can shed some light on the quarterly GDP report. Capital goods shipments from the Factory Orders Report is used to calculate producers durable equipment orders within the GDP report. Indicators such as retail sales and current account balances are also used in the computations of GDP, so their release helps to complete part of the economic puzzle prior to the quarterly GDP release. (For related reading, see The Importance Of Inflation And GDP and Understanding the Current Account In The Balance Of Payments.)
Other indicators that arent part of the actual calculations for GDP are still valuable for their predictive abilities - metrics such as wholesale inventories, th beige book, the Purchasing Managers Index (PMI) and the Labor Report all shed light on how well our economy is functioning. With the assistance of all this monthly data, GDP estimates will begin to tighten up as the component data slowly gets released throughout the quarter; by the time the actual GDP report is released, there will be a general consensus of the figure. If the actual results deviate much from the estimates, the markets will move, often with high volatility. If the number falls right into the middle of the expected range, then the markets and investors can collectively pat themselves on the back and let prevailing investing trends continue.
Mark Your Calendar
Sometimes indicators take on a more valuable role because they contain very timely data. The Institute of Supply Managements PMI report, for instance, is typically released on the first business day of every month. As such, it is one of the first pieces of aggregate data available for the month just ended. While not as rich in detail as many of the indicators to follow, the category breakdowns are often picked apart for clues to things such as future Labor Report details (from the employment survey results) or wholesale inventories (inventory survey).
The relative order in which the indicators are presented does not change month to month, so investors may want to mark a few days on their monthly calendars to read up on the areas of the economy that might change how they think about their investments or time horizon. Overall, asset allocation decisions can fluctuate over time, and making such changes after a monthly review of macro indicators may be wise.
Conclusion
Benchmark pieces of economic indicator data arrive with no agenda or sales pitch. The data just is - and that is hard to find these days. By becoming knowledgeable about the whats and whys of the major economic indicators, investors can better understand the economy in which their dollars are invested, and be better prepared to revisit an investment thesis when the timing is right.
While there is no one magic indicator that can dictate whether to buy or sell, using economic indicator data in conjunction with standard asset and securities analysis can lead to smarter portfolio management for the do-it-yourself investor.
In addition, buyers could not be coerced into buying until prices declined below support or below the previous low.
OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such. Products traded on the exchange must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in trading.
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Is Your Broker Ripping You Off?
Despite the over-hyped stories on the news, most financial professionals are honest, hard-working people. After all, cheating clients isnt a good way to build a strong business and generate referrals; as a result, it isnt a common practice.
That said, the world of financial services can be complicated and confusing at the best of times and when you feel like you have a problem with your broker, it can seem even worse. Fortunately, with a little organization and a bit of elbow grease, most problems can be resolved.
The Process
The first step in the process is to contact your broker or financial advisor. Put your concerns in a letter and deliver it in a way that enables you to confirm receipt. Keep a copy for yourself. Many times, simple misunderstandings or miscommunication can be resolved quickly and easily. If the issue is not resolved, your copy of the letter serves as proof of your efforts to address the situation. (For related reading, see Evaluating Your Broker.)
If sending a letter does not resolve the issue to your satisfaction, the next step is to contact your brokers boss, generally referred to as a branch manager. Once again, do it in writing. If your complaint is legitimate, the branch manager has every incentive in the world to help you resolve it. Successful firms dont want unhappy clients.
If you still arent satisfied with the response you get, you can contact the firms compliance office. In todays heightened regulatory environment, compliance is something that most firms take very seriously. Send your complaint in writing, along with copies of your earlier letters. Provide details about the issue and the steps that you have taken to resolve it. Give the compliance officer 30 days to respond. Should the issue remain unresolved, the fourth step is to contact the regulators.
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) oversees the securities market with a mandate to protect investors. If you file a complaint, the SECs Division of Enforcement will investigate by contacting the parties involved in the issue. In some cases, contact by the SEC leads to dispute resolution. In others, the SEC may take further action, such as filing a lawsuit and/or imposing sanctions. In cases where the company under investigation denies the allegations and no proof exists to contradict the denial, the SEC cannot act in place of a judge. Arbitration or legal action may be required. (To learn more about the SEC, read Policing The Securities Market: An Overview Of The SEC.)
The Financial Industry Regulatory Authority
Previously the National Association of Securities Dealers (NASD), FINRA is responsible for regulating all securities firms doing business in the United States, including registration of securities professionals, writing and enforcing securities laws, keeping the public informed and administering a dispute resolution platform. FINRAs compliance program is designed to address disputes with brokerage firms and their employees. Federal law gives FINRA the authority to discipline firms and individuals that violate the rules. However, disciplinary action is no guarantee that investors will be compensated for losses. The issues that FINRA addresses include the recommendation of unsuitable investments, unauthorized trading, failure to disclose material facts regarding an investment and unauthorized withdrawals from an investors account. FINRA also provides an investor complaint application that allows individual investors to submit a complaint regarding a brokerage firm or broker who has conducted business improperly.
State Securities Regulator
In the United States, each state has its own securities regulator. Contacting your states regulator is another avenue to explore when a dispute arises.
Understand the System
A significant number of investors set themselves up for disappointment because they dont understand their investments and they dont understand the regulatory system. Losing money on an investment is not always a reason to call for help. You need to read the fine print and make sure you understand everything your advisor has proposed for your portfolio - including the potential for a decline in value - before you agree to make the investment. Buying something that you dont understand and then trying to get your money back if the investment loses money is often a recipe for disaster.
The other important issue to remember is that regulators investigate breaches of industry rules and regulations. They do not assist with the recovery of lost money. Even if you have been the victim of an unscrupulous individual, litigation may be required to recover assets.
Mediation and Arbitration
Mediation is an informal, voluntary process whereby an independent third party facilitates a settlement between the parties involved in a dispute. Mediation is a voluntary process, and the outcome is non-binding.
Arbitration is another option. Some types of securities accounts include an agreement in which both parties agree to settle their differences in arbitration should a dispute arise. If you made such an agreement when you opened your account, the arbitrators will apply the applicable laws to your case. In some instances, the entire dispute is handled through written correspondence and records, so be sure to keep copies of all documents that will be relevant to your case. Arbitration decisions are final and binding.
Litigation - The Last Resort
If you have a legitimate compliant and it remains unresolved after you have followed all of the steps in the process in an effort to address it, contact an attorney. Litigation is often a slow and expensive process, and there is no guarantee that you will get the solution that you are seeking.
A far better choice than litigation is to make every effort to avoid this path altogether. Before you invest, learn about the various types of financial services professionals that are available to assist you. Some upfront research can save you a great deal of heartache, and money, later on.
Strengths of Fundamental Analysis
Long-term Trends
Fundamental analysis is good for long-term investments based on very long-term trends. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.
Generally, OTC Markets will remove Caveat Emptor designation once the security meets the qualifications for OTC Pink Current Information or OTCQB and we are satisfied that there is no longer a public interest concern, typically no sooner than 30 days. For information on how to qualify for the OTC Pink Current Information tier, please visit the Upgrade Your OTC Tier page.
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A Beginners Guide To Managing Your Money
Online brokers and easy access to financial data make investing your money as easy as starting a savings account, but in a world where the Internet has made do-it-yourselfers out of many, is investing a do-it-yourself activity and if it is, why not just fire your financial advisor or pay less fees to your mutual funds and set up a portfolio of your own? See: Risk and Diversification
The Internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now E*TRADE Financial. (For related reading, see Brokers and Online Trading.)
The Effect
That one trade changed how investment products are transacted, researched and discussed. Computerized trading has resulted in highly liquid markets making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data that the professionals use, and websites like Stocktwits set up entire communities of investors and traders who exchange information in real time.
But just because its possible, does that mean that managing your own money is a good idea? Professional investors have a saying, The stock market is an expensive place to learn how to invest . They understand that its easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with little financial background may offer a false sense of security.
Tools are only as good as the knowledge and experience of the person using them. Does a high priced software package used by the worlds best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in medicine a top performing surgeon?
Theres no doubt that the Internet has given the retail investor the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser? (To learn more, read 4 Steps To Building A Profitable Portfolio.)
Modern Portfolio Theory
First, understand modern portfolio theory (MPT) and gain an understanding of how asset allocation is determined for an individual based on their individual factors. In order to gain a true understanding of these principals, youll have to dig deeper than the top level Internet blog articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.
Along with efficiency comes the dynamic nature of risk tolerance. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor. (Read how to determine What Is Your Risk Tolerance?)
Academic Understanding of Risk
In the plethora of free resources, risk is treated too benignly. The term risk tolerance has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. Its much more than that.
Risk is a behavior that is hard to understand rationally because investors often act opposite of their best interests. A study conducted by Dalbar, Inc. showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.
Since risk is a behavior, its extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. Day traders, often seen as having a high risk tolerance, may actually have an extremely low tolerance because theyre unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. Thats hard to do when youre working with your own money.
Efficient Market Hypothesis
Do you know how likely you are to out invest the overall market? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?
Efficient Market Hypothesis (EMH) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or fair value.
For the retail investor trying to pick individual stock names hoping to achieve gains that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits, but over a sustained period of decades, this strategy breaks down, say the proponents of EMH.
Even the brightest investment minds employing teams of researchers all over the world havent been able to beat the market over a sustained period. According to famed investor Charles Ellis in his book, Winning The Losers Game: Timeless Strategies For Successful Investing.
Opponents of this theory cite investors like Warren Buffett who have beat the market for most of his life, but what does EMH mean for the individual investor? Before deciding on your investing strategy , you need the knowledge and statistics to back it up.
If youre going to pick individual stocks in the hopes that theyll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If youre planning to invest in stocks for dividends, is there evidence that proves that an income strategy works? Would investing in an index fund be the best way? Where can you find the data needed to make these decisions? (For additional reading, see 7 Controversial Investing Theories.)
Experience
What do you do for a living? If you have a college degree, you might be one of the people who say that you didnt become highly skilled as a result of your degree but instead, because of the experience you amassed. When you first started your job were you highly effective from the very beginning?
Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your retirement savings isnt an option.
Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes its hypersensitive to news events and other times it brushes them off. Some stocks are highly volatile while others have muted reactions.
The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for learning to invest while also gaining experience before committing real money to the markets. (Learn to trade with the Investopedia Stock Simulator, risk free!)
The Bottom Line
Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the Internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge? Your answer might be yes, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be OK, but leave your retirement money to the professionals.
Trend lines tend to match lows better on semi-log scales.
Semi-log scales are useful for long-term charts to gauge the percentage movements over a long period of time. Large movements are put into perspective.
If the broker-dealer cannot, or chooses not to, execute the trade internally, they must attempt to execute the trade with another broker-dealer. This often means accessing the security on OTC Markets Group’s OTC Dealer application and ascertaining whether the order is marketable. Marketable orders are orders where the price specified can immediately be executed in the market. Market Orders are, by definition, marketable. Limit Orders are marketable if the limit price is better than or equal to the bid price (for sell orders) or ask price.
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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From the PeopleSoft (PSFT)[PSFT] example, we can see that support can turn into resistance and then back into support. PeopleSoft found support at 18 from Oct-98 to Jan-99 (green oval), but broke below support in Mar-99 as the bears overpowered the bulls. When the stock rebounded (red oval), there was still overhead supply at 18 and resistance was met from Jun-99 to Oct-99.
This trading process example is very basic but it helps to explain how the OTC market efficiently trades in excess of $600 million on a daily basis.
Buy-And-Hold Investing Vs. Market Timing
If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment . Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles.
For investors in the stock market , it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles.
However, whats even more important than how you define long term is how you design the strategy you use to make long-term investments . This means deciding between passive and active management. Read on to learn more.
Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature. Figure 1 shows the potential benefits of holding positions for longer periods of time. According to research conducted by Charles Schwab Company in 2012, between 1926 and 2011, a 20-year holding period never produced a negative result.
Source: Schwab Center for Financial Research
Figure 1: Range of S
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Even though deviations will occur and there will be periods when securities are overvalued or undervalued, these anomalies will disappear as quickly as they appeared, thus making it almost impossible to profit from them.
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.
5 Ways To Invest In Travel And Tourism
Most consumers are familiar with the travel and tourism industry from using its services for some needed rest and relaxation during family and related vacations. However, these same activities can be invested in, with many publicly-traded firms offering travel activities for the end benefit of growing the capital of their underlyingshareholders. Listed below are five areas of the travel and tourism market that could prove lucrative from an investing standpoint. It could also help committed travelers better understand the landscape and hunt down some travel deals.
Online Travel Providers
As with many industries, revenue continues to shift to the internet when it comes to providing travel and tourism services. Stock brokers have been replaced in large part with online trading platforms, while traditional travel agents have had to compete with online websites that allow consumers to shop for low prices and convenient schedules.
Leading online travel providers include publicly-traded players such as Orbitz, Priceline and Expedia. In particular, Priceline has been highly successful in driving traffic to its website to book flights and bid for cheap, last minute travel deals. Over the past five years, it has seen sales and profits grow around 20% annually. This growth has fully shown through in its stock price, which is up around 1,000% in the past five years.
Cruising
The cruise line industry has been in existence for more than a century, but still is not that widespread as a travel choice for many consumers. Carnival, the largest cruise line operator in the world, has estimated that only 3.4% of the population in North America has ever been on a cruise. The percentages are even lower in the rest of the world.
Capacity is also growing nicely; Carnival estimates the entire industry has seen average annual capacity growth of roughly 5.6 to 6.9% over the past five years.
Hotels
The hotel industry is dominated by a couple of leading international players. This includes publicly-traded firms Marriott and Starwood Hotels, as well as privately owned Hilton. These companies have largely blanketed their home United States market and are now growing internationally. In Starwoods case, 84% of its new hotel pipeline was international. These chains have also pursued the managing of properties for hotel owners, as well as timeshares where they sell the rights for consumers to use their properties for a week, or more, during each calendar year. (For additional reading, see Timeshares: Dream Vacation Or Money Pit?)
Maga-resorts
Large resort operators combine the development of hotels with other entertainment and related amenities. Publicly-traded operators in this space include Gaylord Entertainment, which owns the Opryland resort in Nashville and other properties in Texas, Florida and Maryland. It specializes in massive resorts that allow big travel groups to host conventions and other giant gatherings.
Vail Resorts owns some of the best-known ski resorts in Colorado and surrounding areas. This includes Vail Mountain, Breckenridge and Beaver Creek Resort. Of course, Walt Disney specializes in kid-friendly theme parks, hotels and entertainment complexes, such as Disney World in Florida and Disneyland in California.
Casinos
Las Vegas-style gambling is growing rapidly across Asia. Macao has grown into the largest gambling market in the world and has seen the building of massive casino resorts from Las Vegas-based firms such as Wynn Resorts and Las Vegas Sands. Both are publicly traded companies. This growth is expanding to other parts of Asia, including Singapore, and potentially Vietnam and Japan.
The Bottom Line
These are just some of the many opportunities to invest in the travel and tourism industries across the world. Overseas growth, especially in emerging market economies, should continue to outpace that in more developed markets in North America and Europe. However, as with the online travel space, there will always be pockets that are picking up market share in every part of the world. (To learn more, read An Evaluation Of Emerging Markets.)
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If prices move above the upper band of the trading range, then demand is winning. If prices move below the lower band, then supply is winning.
Once broker-dealers accept an offer to trade through OTC Link or through another means of communication, they must report, clear, and settle the trade. Part of this process is the confirmation of the trade with the investor; however, the trade will not be complete until final settlement (the delivery of funds by the buyer and securities by the seller), which, for equity securities is generally three business days after the trade date (T 3).
Signs That It Might Be Time To Sell
As a novice investor youre likely to focus most of your time on what to buy and when. Being a successful investor is as much about knowing when to sell as when to buy. But how do you know when its time to sell? What are the best reasons to liquidate a holding? Here are a few important basic principles about why and when you should let go of part of your portfolio. (Check out Signs A Stock Is Ready To Slide for more.)
Significant Corporate Structural Problems or Concerns
Every company is going to have peaks and valleys. However, if one of your investments has underlying structural problems, it may indicate that it doesnt have the business legs to go the distance. Pay close attention to news about a high turnover rate of its executive staff or Board of Directors, excessive executive compensation (particularly in light of mediocre or poor corporate earnings), questionable corporate ethics, etc. In addition, any company with long-standing, aging leadership should have a clear succession plan in place.
Unexplained Executive Stock Sell-Off
Corporate executives often receive large blocks of stock and/or stock options as part of their compensation package. Periodically they may choose to sell a portion for various personal reasons (i.e. a desire to diversify). However, when several executives at a company sell large blocks of stock it could indicate a lack of confidence in their own company. You can learn what a companys leaders are doing with their stock (if theyre buying or selling) because they are required to file Form 4 with the SEC, which you can research by using the SECs online Edgar database. If theyre selling it might be a sign for you to do the same.
Cutting or Canceling Dividends
While a companys decision to cut its dividends doesnt necessarily spell stock price doom, it can raise a red flag. Cutting or canceling stock dividend payouts is a move to conserve cash. The important question is why? For example, a company could anticipate needing cash if credit becomes tight during a difficulty economy (i.e. a recession) and choose to cut dividends accordingly. Or it could be a means of preserving cash needed to finance the acquisition of a competitor. However, it could mean that the company has mounting debt that it needs to repay or that its simply too low on cash to pay out dividends. Do a little digging to learn if the announcement indicates that its the time to sell.
Inexplicable High P/E Ratio Compared To Competitors
The P/E ratio is a companys stock price compared to its earnings. If a company has an inexplicably higher P/E ratio than its competitors, it means that its stock costs more but is generating the same earnings as lower-priced shares at firms operating in the same market. Companies may have overpriced stock due to investor enthusiasm, and without accompanying earnings results over time, it will unfortunately have no place to go but down. An inexplicably high P/E ratio might indicate that its time to sell and reinvest with a competitor that has a lower P/E ratio.
Sustained Decline in Corporate Earnings
Corporate earnings are an important piece of the puzzle known as stock valuation . If earnings are down - and particularly if they stay down - the stock price tends to follow. Youll want to know that little tidbit before you hold on to your investment too long.
Falling Operating Cash Flow Compared to Net Income
Operating cash flow is the amount of cash a company has coming in and how much it pays out within a specific amount of time. Net income is a companys bottom line profit or loss. While a business may be able to show a positive net income on paper, that profit may be in accounts receivable (AR) and the company could be cash-poor. Without adequate cash it may have to assume debt for financing operations. Debt means the company is paying interest just to operate, and without cash to fund day-to-day obligations, the riskier the companys long-term viability becomes. Watch these two variables to know when it might be time to pull out. (To learn more, see Operating Cash Flow: Better Than Net Income?)
Falling Gross and Operating Margins
Margin is the amount of profit a company makes on a sale. Gross margin is a companys profit on sales before factoring in all costs, such as interest and taxes. If a companys gross margin is falling, that could mean that the company is slashing prices (due to increased competition) or that cost of production is rising and the company cant increase prices to offset it.
A companys operating margin is the companys estimated profit after subtracting costs. Falling operating margin means the company is spending more money than it is making. A combination of sustained falling gross and operating margins may mean the company is having a difficult time of managing costs and/or its product price point. Either way it could mean that its time to sell.
High Debt-to-Equity Ratio
A high debt-to-equity ratio means that a company is carrying significantly more debt than it has in shareholder investment. If the ratio is greater than one, the company is operating more on the basis of debt than equity. Its important to know the generally acceptable debt-to-equity ratio for companies within an industry before you respond to a high number by dumping a stock. However, if the ratio continues to climb over time without explanation - and especially if the ratio is excessively high beyond either competitor or industry standards - it might be a signal to sell.
Sustained Increase in Corporate Receivables Compared to Sales
A companys accounts receivables is how much it has billed out and is waiting to be paid. There are a few reasons that receivables begin to climb:
• Clients/customers are in a cash crunch and are taking longer to pay their bills than in the past
• A company is falling behind in getting bills out
• A company has chosen to extend its payment due dates to accommodate customers financial strain or as a financial benefit to entice customer sales and/or loyalty
You can gauge a companys receivables compared to sales by reviewing its quarterly income statement and comparing the receivables (balance sheet) ratio to sales (income). Always compare numbers during the same period (i.e. a certain month or quarter) from one year to the next. If the company has sustained prolonged payment delays it could begin to erode its stock price.
Significant Market Shrinkage Or Product Commoditization
If a company holds a small percentage of its market and that overall market shrinks, it will need to quickly adapt to the new market fundamentals and innovate to establish a stronger position. If a companys competitors have quickly replicated its product and driven down the cost, the game has changed. If its not the lowest-cost producer or it doesnt have significant brand strength to charge higher prices for a product (i.e. Starbucks for coffee), it will need to respond quickly. Pay attention to the market trends for the companies in your portfolio and make sure that they have strong, effective responses to market shrinkage or product commoditization or your investment is ultimately what will shrink in value.
Hostile M
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Subjectivity
Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation, an average-case valuation and a worst-case valuation. However, even on a worst-case valuation, most models are almost always bullish, the only question is how much so. The chart below shows how stubbornly bullish many fundamental analysts can be.
Conversely, active securities with current disclosure tend to have tighter spreads because market makers believe they have sufficient knowledge of the company and the security to buy and sell with confidence.
The 3 Biggest Risks Faced By International Investors
Investing internationally has often been the advice given to investors looking to increase the diversification and total return of their portfolio. The diversification benefits are achieved through the addition of low correlation assets of international markets that serve to reduce the overall risk of the portfolio. However, although the benefits of investing internationally are widely accepted theories, many investors are still hesitant to invest abroad. In this article, well discuss the reasons why this may be the case and help highlight key concerns for investors so they can make a more informed decision.
Transaction Costs
Likely the biggest barriers to investing in international markets are the transaction costs. Although we live in a relatively globalized and connected world, transactions costs can still vary greatly depending on which foreign market you are investing in. Brokerage commissions are almost always higher in international markets compared to domestic rates. In addition, on top of the higher brokerage commissions, there are frequently additional charges that are piled on top that are specific to the local market, which can include stamp duties, levies, taxes, clearing fees and exchange fees.
As an example, here is a general breakdown of what a single purchase of stock in Hong Kong by a U.S. investor could look like on a per trade basis:
Fee Type Fee
Brokerage Commission HK$299
Stamp Duty
0.1%
Trading Fees 0.005%
Transaction Levy 0.003%
TOTAL HK$299 0.108%
In addition, if you are investing through a fund manager or professional manager, you will also see a higher fee structure. To become knowledgeable about a foreign market to the point where the manager can generate good returns, the process involves spending significant amounts of time money on research and analysis. These costs will often include the hiring of analysts and researchers who are familiar with the market, accounting expertise for foreign financial statements, data collection, and other administrative services. For investors, these fees altogether usually end up showing up in the management expense ratio.
One way to minimize transaction costs on buying foreign stock is through the use of American Depository Receipts (ADRs). ADRs trade on local U.S. exchanges and can typically be bought with the same transaction costs as other stocks listed on U.S. exchanges. It should be noted however, that although ADRs are denominated in U.S. dollars, they are still exposed to fluctuations in exchange rates that can significantly affect its value. A depreciating foreign currency relative to the USD will cause the value of the ADR to go down, so some caution is warranted in ADRs. (For more, see An Introduction To Depository Receipts.)
Currency Risks
The next area of concern for retail investors is in the area of currency volatility. When investing directly in a foreign market (and not through ADRs), you have to exchange your domestic currency (USD for U.S. investors) into a foreign currency at the current exchange rate in order to purchase the foreign stock. If you then hold the foreign stock for a year and sell it, you will have to convert the foreign currency back into USD at the prevailing exchange rate one year later. It is the uncertainty of what the future exchange rate will be that scares many investors. Also, since a significant part of your foreign stock return will be affected by the currency return, investors investing internationally should eliminate this risk.
The solution to mitigating this currency risk, as any financial professional will likely tell you, is to simply hedge your currency exposure. However, not many retail investors know how to hedge currency risk and which products to use. There are tools such as currency futures, options, and forwards that can be used to hedge this risk, but these instruments are usually too complex for a normal investor. Alternatively, one tool to hedge currency exposure that may be more user-friendly for the average investor is the currency ETF. This is due to their good liquidity, accessibility and relative simplicity. (If you want to learn the mechanics of hedging with a currency ETF, see Hedge Against Exchange Rate Risk With Currency ETFs.)
Liquidity Risks
Another risk inherent in foreign markets, especially in emerging markets, is liquidity risk. Liquidity risk is the risk of not being able to sell your stock quickly enough once a sell order is entered. In the previous discussion on currency risk we described how currency risks can be eliminated, however there is typically no way for the average investor to protect themselves from liquidity risk. Therefore, investors should pay particular attention to foreign investments that are, or can become, illiquid by the time they want to close their position.
Further, there are some common ways to evaluate the liquidity of an asset before purchase. One method is to simply observe the bid-ask spread of the asset over time. Illiquid assets will have wider bid-ask spread relative to other assets. Narrower spreads and high volume typically point to higher liquidity. Altogether, these basic measures can help you create a picture of an assets liquidity.
Bottom Line
Investing in international stocks is often a great way to diversify your portfolio and get potentially higher returns. However, for the average investor, navigating the international markets can be a difficult task that can be fraught with challenges. By understanding some of the main risks and barriers faced in international markets, an investor can position themselves to minimize these risks. Lastly, investors face more than just these three risks when investing abroad, but knowing these key ones will start you off on a strong footing.
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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?
Investors everyday transfer their accounts from one brokerage firm to another. Account transfers are generally completed without a problem, often within two to three weeks. If you are planning on transferring your account, read our publication, Transferring Your Brokerage Account: Tips on Avoiding Delays.
Dollar-Cost Averaging Pays
Dollar-cost averaging (DCA) is a wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. This type of systematic investment program is familiar to many investors, as they practice it with their 401(k) and 403(b) retirement plans. When it comes to implementing investment strategies based on dollar-cost averaging, there may be no better investment vehicle than the no-load mutual fund - the structure of these mutual funds almost seems to have been designed with dollar-cost averaging in mind. Here we look at why, helping you use dollar-cost averaging when investing in mutual funds .
Review of Dollar-Cost Averaging
Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. Its a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you dont have to invest the time and effort to monitor market movements and strategically time your investments.
Why Dollar-Cost Averaging Works Well With Mutual Funds
The expense ratio that mutual fund investors pay to invest in a fund is a fixed percentage of your contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. Compared tostock trades , for example, where a flat commission is charged on each transaction, the value of the fixed-percentage expense ratio is startlingly clear. Consider the following:
Example A
• By making a $25 installment in a mutual fund that charges a 20 basis-point expense ratio, you pay $0.05, which amounts to a 0.2% fee.
• By making a $250 lump-sum investment in the same fund, you pay $0.50, or a 0.2% fee.
Example B
• By making a $25 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10, which amounts to a 40% fee.
• By making a $250 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10.00, which amounts to a 4% fee.
The examples above show that you have to buy more stock in order for the percentage of the commissions to go down. In comparison, the structure of the mutual fund expense ratio makes the investment more accessible: the no-commission trading of the mutual fund coupled with low minimum investment requirements allows almost everyone to afford mutual funds.
Furthermore, many mutual funds waive their required minimums for investors who set up automatic contribution plans (plans that put dollar-cost averaging into action). All this enables low-wage earners and folks with tight budgets to invest $10 or $25 or another nominal amount on a regular basis without worrying about the impact of trading costs. While small contributions may not seem impressive at first glance, they enable investors to get into the habit of saving, and can really add up over the course of a lifetime thanks to the power of compounding.
Of course, dollar-cost averaging with mutual funds isnt a strategy that is limited to use by the less than affluent. If you have a large sum of money and invest it all at once, you face the risk that declining financial markets will take a huge chunk out of your portfolio. Dollar-cost averaging offers the perfect solution to your dilemma. To facilitate a long-term strategy for investing large sums of money, many mutual funds offer investors the ability to make a lump-sum investment in a money market fund, from which predetermined amounts are automatically invested into a designated higher-risk mutual fund at pre-arranged intervals. Its a convenient, cost-efficient solution that mitigates concerns about investing a large sum of money at the wrong time.
A Long-Term Strategy
Regardless of the amount of money that you have to invest, dollar-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not years. Because of these trends, dollar-cost averaging is generally not a particularly valuable short-term strategy.
Consider, for example, an investor making 10 purchases of a mutual funds shares over the course of a month. While it is unlikely that the purchase price of the shares will be identical for each transaction, it is also unlikely that they will differ significantly over such a short time frame.
On the other hand, over the course of a market cycle lasting five or 10 years and including a bull market and a bear market, the price of a given security is likely to change significantly. Dollar-cost averaging will help to ensure that your average cost per share represents both the premiumsof a bull market and the discounts of a bear market, as opposed to just the premiums usually paid by investors in a bull market.
Conclusion: Keep Costs in Mind
While low, percentage-based expense ratios make mutual funds the perfect vehicle for dollar-cost averaging, it pays to exercise caution when it comes to your investments . Some mutual funds charge low-balance fees, sales loads, purchase fees and/or exchanges fees. Be sure to read the disclosure materials prior to investing and make sure you are aware of all expenses associated with your investments.
For thou convenience $COHO BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/COHO
During this 90-day period, an investor may still purchase securities with the cash account, but the investor must fully pay for any purchase on the date of the trade. For more information on the 90-day freeze, please read our investor bulletin “Trading in Cash Accounts – Beware of the 90-Day Freeze under Regulation T,” and the cash account provisions of the Federal Reserve Board’s Regulation T.
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