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OTC Markets Group established a categorization system to indicate the level of financial and corporate disclosure provided by the companies using its quotation system. Apart from the OTCQX tier, the disclosure categories do not signify issuer quality or merit of any security. Categorization is based on the level and timeliness of a company's disclosure and OTCQB and any of the OTC Pink categories can include both high quality as well as speculative, distressed, or questionable companies. Investors are encouraged to use caution when considering many these companies for investment.
Evaluating A Companys Capital Structure
For stock investors that favor companies with good fundamentals, a strong balance sheet is an important consideration for investing in a companys stock. The strength of a companys balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capital structure. In this article, well look at evaluating balance sheet strength based on the composition of a companys capital structure.
A companys capitalization (not to be confused with market capitalization) describes the composition of a companys permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a companys capital structure is an indication of financial fitness.
Clarifying Capital Structure Related Terminology
The equity part of the debt-equity relationship is the easiest to define. In a companys capital structure, equity consists of a companys common and preferred stock plus retained earnings, which are summed up in the shareholders equity account on a balance sheet. This invested capital and debt, generally of the long-term variety, comprises a companys capitalization, i.e. a permanent type of funding to support a companys growth and related assets.
A discussion of debt is less straightforward. Investment literature often equates a companys debt with its liabilities. Investors should understand that there is a difference between operational and debt liabilities - it is the latter that forms the debt component of a companys capitalization - but thats not the end of the debt story.
Among financial analysts and investment research services, there is no universal agreement as to what constitutes a debt liability. For many analysts, the debt component in a companys capitalization is simply a balance sheets long-term debt. This definition is too simplistic. Investors should stick to a stricter interpretation of debt where the debt component of a companys capitalization should consist of the following: short-term borrowings (notes payable), the current portion of long-term debt, long-term debt, two-thirds (rule of thumb) of the principal amount of operating leases and redeemable preferred stock. Using a comprehensive total debt figure is a prudent analytical tool for stock investors.
Its worth noting here that both international and U.S. financial accounting standards boards are proposing rule changes that would treat operating leases and pension projected-benefits as balance sheet liabilities. The new proposed rules certainly alert investors to the true nature of these off-balance sheet obligations that have all the earmarks of debt.
Is There an Optimal Debt-Equity Relationship?
In financial terms, debt is a good example of the proverbial two-edged sword. Astute use of leverage (debt) increases the amount of financial resources available to a company for growth and expansion. The assumption is that management can earn more on borrowed funds than it pays in interest expense and fees on these funds. However, as successful as this formula may seem, it does require that a company maintain a solid record of complying with its various borrowing commitments.
A company considered too highly leveraged (too much debt versus equity) may find its freedom of action restricted by its creditors and/or may have its profitability hurt as a result of paying high interest costs. Of course, the worst-case scenario would be having trouble meeting operating and debt liabilities during periods of adverse economic conditions. Lastly, a company in a highly competitive business, if hobbled by high debt, may find its competitors taking advantage of its problems to grab more market share .
Unfortunately, there is no magic proportion of debt that a company can take on. The debt-equity relationship varies according to industries involved, a companys line of business and its stage of development. However, because investors are better off putting their money into companies with strong balance sheets, common sense tells us that these companies should have, generally speaking, lower debt and higher equity levels.
Capital Ratios and Indicators
In general, analysts use three different ratios to assess the financial strength of a companys capitalization structure. The first two, the so-called debt and debt/equity ratios, are popular measurements; however, its the capitalization ratio that delivers the key insights to evaluating a companys capital position.
The debt ratio compares total liabilities to total assets . Obviously, more of the former means less equity and, therefore, indicates a more leveraged position. The problem with this measurement is that it is too broad in scope, which, as a consequence, gives equal weight to operational and debt liabilities. The same criticism can be applied to the debt/equity ratio, which compares total liabilities to total shareholders equity. Current and non-current operational liabilities, particularly the latter, represent obligations that will be with the company forever. Also, unlike debt, there are no fixed payments of principal or interest attached to operational liabilities.
The capitalization ratio (total debt/total capitalization) compares the debt component of a companys capital structure (the sum of obligations categorized as debt total shareholders equity) to the equity component. Expressed as a percentage, a low number is indicative of a healthy equity cushion, which is always more desirable than a high percentage of debt.
Additional Evaluative Debt-Equity Considerations
Companies in an aggressive acquisition mode can rack up a large amount of purchased goodwill in their balance sheets. Investors need to be alert to the impact of intangibles on the equity component of a companys capitalization. A material amount of intangible assets need to be considered carefully for its potential negative effect as a deduction (or impairment) of equity, which, as a consequence, will adversely affect the capitalization ratio.
Funded debt is the technical term applied to the portion of a companys long-term debt that is made up of bonds and other similar long-term, fixed-maturity types of borrowings. No matter how problematic a companys financial condition may be, the holders of these obligations cannot demand payment as long the company pays the interest on its funded debt. In contrast, bank debt is usually subject to acceleration clauses and/or covenants that allow the lender to call its loan. From the investors perspective, the greater the percentage of funded debt to total debt disclosed in the debt note in the notes to financial statements, the better. Funded debt gives a company more wiggle room.
Lastly, credit ratings are formal risk evaluations by credit-rating agencies - Moodys, Standard
While this may sound easy, technical analysis is by no means easy. Success requires serious study, dedication and an open mind.
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An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement. This segment of the OTC market is occasionally referred to as the "Fourth Market."
There were still two more opportunities (days) to get in on the action. On the third day after the breakout, the stock gapped up and moved above 56.
When You Should Break Your Personal Finance Rules
Youve heard them time and time again, from parents, teachers, TV pundits and even friends: when it comes to personal finance, there are rules that must be followed to be successful. Like most conventional knowledge, most of these tried and true tidbits no longer apply to many of us. You dont need to look back too far to remember a time when conventional knowledge suggested that real estate values would continue to climb, seemingly forever, or that the Great Depression was an isolated event that could never again be possible, considering how far the worlds economies have come since the 1930s. All that being said, most people will continue to follow the same blueprint of financial rules as the generation before them. However, for those of you more interested in taking a more personalized approach to your personal finances, here are some rules that young adults are never supposed to break, but should consider breaking, anyway.
Saving or Investing a Set Portion of Your Income
Im sure youve heard, more times than you can remember, that by saving just a small amount of your pay check every month you can retire at 60, with an astronomically sized savings. Thats all well and good, when youre 60, but what about the 40 or so years of life from now until then? Usually the amount suggested is around 10%, and although the advice may be justifiable, your circumstances may not suit the strategy. For one, many young adults and students need to think about paying for the biggest expenses of their lifetime, such as a new car, home or post-secondary education. Taking away potentially 10 to 20% of available funds would be a definite setback in making said purchases. Additionally, saving for retirement doesnt make a whole lot of sense if you have credit cards or interest bearing loans that need to be paid off. The 19% interest rate on your Visa would probably negate the returns you get from your balanced mutual fund retirement portfolio, five times over. (For related reading, also see 8 Financial Tips For Young Adults.)
Also, saving your money to travel and experience new places and cultures can be an extremely rewarding experience, for a young person whos still not sure about their path in life. Most people cannot justify a year-long trip around the world when they are paying off a mortgage and car payments, not to mention putting away any extra money into their retirement savings. While being fiscally responsible at a young age is important, and thinking about your future in terms of a savings is crucial, the general rule of saving a given amount each period for your retirement may not be the best choice for young people just getting started in the real world. (For more, see Globetrotting On A Budget.)
Going to University
Although it may not be visible from afar, universities are a big business. Try to think of another industry where businesses can charge tens of thousands of dollars for their services, while at the same time receiving donations from happy old customers and receiving preferential tax treatment from Uncle Sam. Dont get me wrong, I am a big believer in the powers of higher education for individuals and society, as a whole. However, as the first-world shifts more and more positions overseas, and post-secondary enrollments continues to climb year after year, the laws of supply and demand are pointing to the contrary. More and more college grads are leaving school with no job prospects and thousands in student loans, and the importance of a college degree seems like a Catch 22. Employers are hesitant to hire applicants who dont have a college degree, however the number of qualified candidates can often far outnumber the positions needing to be filled.
For some, taking another path can pay off in spades. Looking into vocational schools that offer more specific job training at a much lower cost can get you started in the workforce years before your college counterparts. Jobs in construction, the trades and fire fighting can pay very well, be very rewarding and do not require a college degree. Before doing what the rest of your colleagues are doing, by heading off to university, think about what job you would like to do and whether or not you need to spend four years and $80,000 to do it. (For more, read Top 6 Jobs that Dont Require Degrees.)
Long Term Investing / Investing in Riskier Assets When Youre Young
The rule of thumb for young investors is that they should have a long-term outlook on their investments and stick to a buy and hold philosophy. This rule is one of the easier ones to justify breaking. For one, investors who followed the rules of buy and hold are still stinging from the credit crisis that occurred during 2007 and 2008. Savvy investors find attractive entry and exit points for stocks and use volatility in the markets to their advantage. Being able to adapt to changing markets can be the difference between making money, or limiting your losses, compared to sitting idly by and watching as your hard earned savings shrink. Short-term investing has its advantages at any age.
Now, if youre no longer married to the idea of long-term investing, you can stick to less risky investments, as well. The logic was, since young investors have such a long investment time horizon, they should be investing in higher risk ventures, since they have the rest of their lives to recover from any losses they may suffer. However, if you dont want to take on undue risk in your short to medium-term investments, you dont have to. The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon. Keep in mind that an investment should make sense for both aspects, and youll no longer need to follow these old and tired investing rules.
The Bottom Line
The personal finance realm may have more smart tips and healthy tidbits than any other. Although these convenient rules of thumb are meant as general guidelines for the majority of people, remember that you are an individual. These were just a few personal finance rules that dont work for many young adults, there are countless others. Examine your own situation closely and do what makes the most sense for you financially, and chances are youll end up in the same place these rules are meant for you to reach.
Group Selection
If the prognosis is for an expanding economy, then certain groups are likely to benefit more than others. An investor can narrow the field to those groups that are best suited to benefit from the current or future economic environment.
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Portfolio Mismanagement: 7 Common Stock Errors
Ignorance may be bliss, but not knowing why your stocks are failing and money is disappearing from your pockets is a long way from paradise. In this article, well uncover some of the more common investing faux pas, as well as provide you with suggestions on how to avoid them.
1. Ignoring Catalysts
The financial pundits, trade journals and business schools teach that proper valuation is the key to stock selection. This is only half of the picture because calculating P/E ratios and running cash flow spreadsheets can only show where a company is at a given point in time - it cannot tell us where it is heading.
Therefore, in addition to a quantitative evaluation of a company, you must also do a qualitative study so that you can determine which catalysts will drive earnings going forward.
Some good questions to ask yourself include:
• Is the company about to acquire a very profitable enterprise?
• Is a potential blockbuster product about to be launched?
• Are economies of scale being realized at the companys new plant and are margins about to rise dramatically?
• What will drive earnings and the stock price going forward?
2. Catching the Falling Knife
Investors love to buy companies on the cheap, but far too often, investors buy in before all of the bad news is out in the public domain, and/or before the stock stops its free fall. Remember, new lows in a companys share price often beget further new lows as investors see the shares dropping, become disheartened and then sell their shares. Waiting until the selling pressure has subsided is almost always your best bet to avoid getting cut on a falling knife stock. (To learn more, read How Investors Often Cause The Markets Problems.)
3. Failing to Consider Macroeconomic Variables
You have found a company you want to invest in. Its valuation is superior to that of its peers. It has several new products that are about to be launched, and sales could skyrocket. Even the insiders are buying the stock, which bolsters your confidence all the more.
But if you havent considered the current macroeconomic conditions, such as unemployment and inflation, and how they might impact the sector you are invested in, youve made a fatal mistake!
Keep in mind that a retailer or electronics manufacturer is subject to a number of factors beyond its control that could adversely impact the share price. Things to consider are oil prices, labor costs, scarcity of raw materials, strikes, interest rate fluctuations and consumer spending. (For more on these factors, see Macroeconomic Analysis and Where Top Down Meets Bottom Up.)
4. Forgetting About Dilution
Be on the lookout for companies that are continuously issuing millions of shares and causing dilution, or those that have issued convertible debt. Convertible debt may be converted by the holder into common shares at a set price. Conversion will result in a lower value of holdings for existing shareholders.
A better idea is to seek companies that are repurchasing stock and therefore reducing the number of shares outstanding. This process increases earnings per share (EPS) and it tells investors that the company feels that there is no better investment than their own company at the moment. (You can read more about buybacks in A Breakdown Of Stock Buybacks.)
5. Not Recognizing Seasonal Fluctuations
You cant fight the Fed. By that same token, you cant expect that your shares will appreciate even if the companys shares are widely traded in high volumes. The fact is that many companies (such as retailers) go through boom and bust cycles year in and year out. Luckily, these cycles are fairly predictable, so do yourself a favor and look at a five-year chart before buying shares in a company. Does the stock typically wane during a particular part of the year and then pick up during others? If so, consider timing your purchase or sale accordingly. (To learn more, see Capitalizing On Seasonal Effects.)
6. Missing Sector Trends
Some stocks do buck the larger trend; however, this behavior usually occurs because there is some huge catalyst that propels the stock either higher or lower. For the most part, companies trade in relative parity to their peers. This keeps their stock price movements within a trading band or range. Keep this in mind as you consider your entry/exit points in a stock.
Also, if you own stock in a semiconductor company (for example), understand that if other semiconductor companies are experiencing certain problems, your company will too. The same is true if the situation was reversed, and positive news hit the industry.
7. Avoiding Technical Trends
Many people shy away from technical analysis, but you dont have to be a chartist to be able to identify certain technical trends. A simple graph depicting 50-day and 200-day moving averages as well as daily closing prices can give investors a good picture of where a stock is headed. (To learn about this method, read the Basics Of Technical Analysis.)
Be wary of companies that trade and/or close below those averages. It usually means the shares will go lower. The same can be said to the upside. Also remember that as volume trails off, the stock price typically follows suit.
Lastly, look for general trends. Has the stock been under accumulation or distribution over the past year? In other words, is the price gradually moving up, or down? This is simple information that can be gleaned from a chart. It is truly surprising that most investors dont take advantage of these simple and accessible tools.
The Bottom line
There are a myriad of mistakes that investors can and do make. These are simply some of the more common ones. In any case, it pays to think about factors beyond what will propel the stock you own higher. A stocks past and expected performance in comparison to its peers, as well as its performance when subjected to economic conditions that may impact the company, are some other factors to consider.
There is no central ‘exchange’ in the OTC market; therefore, broker-dealers must communicate and trade directly with other broker-dealers. In order to notify other broker-dealers that they are willing to trade a security at a particular price, broker-dealers post their ‘quotes’ on an Inter-dealer Quotation system such as OTC Link. The aggregation and ranking of these quotes defines the ‘market’ for a security. The highest ‘bid’ (purchase price) and lowest ‘ask or offer’ (sale price) becomes the ‘inside market’ or NBBO – the National Best Bid and Offer.
To keep pace with the market, it makes sense to look directly at the price movements. More often than not, change is a subtle beast.
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The Alphabet Soup Of Stocks
If youve ever watched financial TV or read financial papers, you may have heard of classifications like cyclical, growth and income stocks . As if the difference between preferred and common stocks wasnt enough, there are now more categories to add to the confusion! In this article, well try to replace the confusion with some clarity and logic.
Stocks and the Business Cycle
Many stocks can be broken into categories that denote the way in which different stocks perform during various times of the year or periods of the business cycle:
• Seasonal - These companies are characterized by the different levels of demand they face throughout the year. A snow shovel manufacturer, for example, is probably not very busy in the summer. Another seasonal effect is the increase in retail sales during the holidays. Butinvesting in seasonal stocks doesnt mean that you can automatically gain a healthy profit simply by purchasing a retail stock in the fall and selling it just after Christmas - not all seasonal stocks are guaranteed to do well, even during their peak seasons. When you analyzefinancial statements for a seasonal stock , you need to compare results to the same season of the previous year. (For related reading, see Analyzing Retail Stocks.)
• Non-Seasonal - These stocks are not affected by the change of seasons. Certain companies produce or sell goods that have what we call an inelastic demand curve. A good example is a peanut butter manufacturer - the demand for peanut butter is generally not affected by the weather or holidays.
• Cyclical - These companies, whose business activities intensely follow the business cycles of the economy, are always the first stocks to reflect a recession or an expansion. These companies dont necessarily intend to follow the business cycle, it just so happens that their products share this relationship with the economy. A good example of a company with cyclical stock would be a car manufacturer or an airline company. Luxury is one of the factors in the relationship between these stocks and the business cycle. Take Porsche, for example: when the economy is doing well, the sales of these fine automobiles rise. Conversely, when the economy goes into a slump, sales slow down.
• Non-Cyclical - This is the opposite of a cyclical stock. Profits of a non-cyclical stock do not change readily with the business cycle. These are companies that provide us with essentials, such as healthcare and food. Also referred to as defensive stocks, these stocks dont rely on the economic environment for increased sales. A perfect example is the diaper industry: regardless of whether the economy is busting or booming, parents have to buy diapers for their babies.
• Stocks and Dividends
Adding to the confusion, stocks are also classified according to their type of dividend payout schemes. Now remember, this is separate from what we have already discussed. Dividend payouts have little to do with the seasonal demands a company faces; instead, they are determined by each companys individual policies and objectives.
• Growth
- Growth stocks are known for their lack of dividends and rapidly increasing market prices. Defined by their tendency to grow faster than the market, these companies generally reinvest all earnings into infrastructure in order to maintain rapid growth, rather than directly paying out their earnings to investors. Young technology companies are often considered to be high growth, but the main characteristic of growth companies is that they believe that plowing earnings back into the research and development of new products benefits shareholders more than a dividend check every three months.
• Income - These stocks arent (usually) growth hungry, or theyve already reached their maximum growth potential. Income stocks prices do not tend to fluctuate a great deal. However, they do pay dividends that are higher than average. The value of an income stock depends on its reliability and track record in paying dividends. Generally, the longer a company has maintained dividend payments, the greater its value to investors. Historical examples of income stocks are real estate investment trusts (REITS) and utility stocks, many of which pay out annual dividends of 5% or more. (Learn how dividends benefit investors in The Power Of Dividend Growth.)Stock Slang Terms
Finally, the financial industry uses many slang terms to describe and categorize stocks. These terms arent always intuitive, but they do have their place in the financial world. Here are some of the many terms used to characterize stocks:
• Blue Chip – These are companies that are cream-of-the-crop, old-school and everlasting. Blue chips tend to be market mammoths, and have proven their ability to survive through both good times and bad. The term comes from poker, where blue chips are the ones with the highest value. These companies are generally expensive to purchase but can be safe bets. General Electric (NYSE:GE), Wal-Mart (NYSE:WMT) and IBM (NYSE:IBM) have all established themselves as blue chips.
• Penny Stock - The term penny stock is used to denote stocks that trade for less than a dollar, but can also refer to stocks that are considered very speculative. These stocks are generally new to the market, with no reputation or history to fall back on. Penny stocks present the possibility of large gains or losses. (For related reading, check out Spot Hotshot Penny Stocks.)
• Bo Derek – This is a term created by traders in the late 70s to describe the perfect stock. Back then, actress Bo Derek was considered the perfect 10. This slang term might be a little dated for a new generation of investors, as Bo Derek was famous in another era.
Conclusion
Now, how do these terms fit with one another you might ask? Well, next time you hear a cyclical income stock referred to as a real Bo Derek, youll know what it means. A stocks categorization can be varied and prone to change in different situations. Stocks that were once speculative may become blue chip, cyclical stocks can become non-cyclical due to some widespread economic changes and seasonal stocks may reduce their exposure to seasonal pressures by exporting goods. Changing times mean that dynamic companies will change their visions and goals. The important thing is to not only remember what category a stock falls under, but also how it compares to other stocks of the same group.
Current Information - Reporting companies that submit filings to regulators with powers of review and that make the filings publicly available or non-reporting companies that make current information publicly available on the OTC Disclosure and News Service pursuant to OTC Markets OTC Pink Basic Disclosure Guidelines.
Peter Lynch On Playing The Market
Even though the reality of investing is often extremely disappointing or worse, the literature in the field can be outstanding. There is no shortage of excellent books, or of journalistic and academic writing. In this article, well take a look at Peter Lynchs One Up on Wall Street and get an overview of the kind of timeless advice that he provides. (For more, see Pick Stocks Like Peter Lynch.)
Tutorial: Stock Picking Strategies
Market Timing and Daring to be Different
Lynch sums up issues on market timing beautifully. His basic idea is that, not only is it difficult to predict the markets, but small investors can be both pessimistic and optimistic at all the wrong times. Basically, it can be self-defeating to try to invest in good markets and get out of bad ones. Thats not to imply that the small investor doesnt know what theyre doing, but rather that accurate market timing, especially in the short run, is unlikely. The critical point is that you dont have to be able to predict the stock market to make money with it.
Some of the best and most successful professional traders have an uncanny ability to sniff out really good stocks, before they become trendy and overpriced. According to Lynch, this is because the risks of the stock market can be reduced by proper play, just like the risks of stud poker.
Overheated Markets
What Lynch makes clear is that there are bad times to buy. This is not market timing, it is simply true that sometimes the market is dangerously high and at other times, way too low; for buyers, this can be appealingly low. Although, according to him, there is no absolute division between safe and rash places to invest, experts, or just ordinary, sensible people who take the trouble to find out, can find reliable signs of where they should be investing. When people are getting greedy, excessively risk-friendly, and are taking too many chances, the market should be avoided, or exposure to it at least reduced. (To learn more, see our Market Crashes Tutorial.)
Nothing, says Lynch, is more dangerous than extremely overpriced stocks, and it is possible to know when this is the case. There is nothing intrinsically wrong with the stocks of good companies; what is wrong is the way people invest. This can apply just as much to so-called professionals, as to the investor on the street. Likewise, for people who just do not have the time horizon for stocks, even buying blue chips would be too risky. Lynch stresses that it is important to remember that the market, like individual stocks, can move in the opposite direction of the fundamentals. If stocks, or more likely, too much of your money in them, are unsuitable for your needs and appetite for risk, dont even think about it. Diversification is the essence of sensible investing. (To learn more, see The Importance Of Diversification.)
What Most Brokers Really Do and Dont
If you are a small investor, dont expect too much attention from the industry. Lynch warns that theres an unwritten rule in the industry that, the bigger the client, the more talking the portfolio manager has to do to please him. If you are a small fish, he may not bother much at all, just leaving the money at the mercy of the market.
Its an ugly reality that most brokers just do not have the guts to buy into unknown companies. Believe it or not, the average Wall Street professional isnt looking for reasons to buy exciting stocks, and when these companies rocket up, the broker will have all manner of excuses for not having bought.
How to Do It
Lynch explains that the next investment is never like the last one and yet we cant help readying ourselves for it anyway. The economy and markets evolve in a mixture of the unpredictable and the predictable. We cannot know how the future will unfold, but we can still invest prudently and make money. The significance of this simple fact cannot be overemphasized. The trick is to buy great companies, especially those that are undervalued and/or underappreciated. Alternatively, if you pick the right stock the market will take care of itself.
There are some common characteristics of companies that should be avoided like the plague. By using such methods as cash, debt, price to earnings ratios, profit margins, book value and dividends, you can get a pretty good idea about whether a company is worth buying into.
Its also a good idea to keep checking; after all, sooner or later every popular, fast-growing industry becomes a slow-growing industry. There is a tendency to think things will never change, and while you may always want to keep some stalwarts in your portfolio, these, too, need to be monitored. (For more, see Fundamental Analysis For Traders.)
Other Classic Blunders and Seriously Dangerous Delusions
Apart from all the above, Lynch teaches that there are many disastrous things that many people think, and do, again and again, but which can easily be avoided. You dont need to time the market to believe that if its gone down so much already, it cant get much lower. By the same token, people who think they can always tell when a stock has hit the bottom, are themselves going to get hit.
In the same vein, do not believe that stocks always come back or that conservative stocks dont fluctuate much. Similarly, believing that when the stock goes up youre right, or when its down, youre wrong, can cost you a lot of money.
The Bottom Line
Lynch summarizes his book with some succinct advice: It is inevitable that there will be sharp declines in the market that present buying opportunities. To come out ahead, you dont have to be right all the time. Nevertheless, trying to predict the market in the short term is impossible. Companies dont grow without good reason and fast growers wont stay that way forever. If you dont think you can beat the market, for whatever reason, buy a mutual fund and save both the work and the money; dont count on the industry to do a great job, on your behalf.
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Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via these facilities. An exchange has the benefit of facilitating liquidity, mitigates all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price is not necessarily made public information.
The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand.
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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.)
The OTC market is made up of many different types of companies, ranging from OTCQX companies worthy of investor consideration to economically distressed companies to speculative shell companies.
In that same vein, what works for one particular stock may not work for another. A 50-day moving average may work great to identify support and resistance for IBM, but a 70-day moving average may work better for Yahoo.
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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.
5 ETFs Flaws You Shouldnt Overlook
Exchange-traded funds (ETFs) can be a great investment vehicle for small and large investors alike. These popular funds, which are similar to mutual funds but trade like stocks, have become a popular choice. However, there are some disadvantages that investors need to be aware of before jumping into the world of ETFs. In this article, we will look at some of the disadvantages of ETFs. Good information is an investors most important tool. Read on to find out what you need to know to make an informed decision.
Trading Fees
One of the biggest advantages to ETFs is that they trade like stocks. As a result, investors can buy and sell during market hours as well as put advanced orders on the purchase such as limits and stops. Conversely, a typical mutual fund purchase is made after the market closes, once thenet asset value of the fund is calculated. (To read more about ETFs, see Introduction To Exchange-Traded Funds.)
Every time you buy or sell a stock you pay a commission; this is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investments performance. No-load mutual funds, on the other hand, are sold without a commission or sales charge, which makes them advantageous, in this regard, compared to ETFs. It is important to be aware of trading fees when comparing an investment in ETFs to a similar investment in a mutual fund. (For more about how commissions can affect your portfolio, read Dont Let Brokerage Fees Undermine Your Returns.)
If you are deciding between similar ETFs and mutual funds, be aware of the different fee structures of each, including the trading fees. And remember, actively trading ETFs like stocks can severely reduce your investment performance as commissions can quickly pile up.
Underlying Fluctuations
ETFs, like mutual funds, are often lauded for the diversification that they offer to investors. However, it is important to note that just because an ETF contains more than one underlying position doesnt mean that it cant be affected by volatility.
The potential for large swings will mainly depend on the scope of the fund. An ETF that tracks a broad market index such as the S
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The flow of information has become faster with the Internet, and surprises are factored in instantly.
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
The National Quotation Bureau changed its name to Pink Sheets LLC in 2000 and subsequently to Pink OTC Markets in 2008. The company eventually changed to its current name, OTC Markets Group, in 2010.[5] Today, a network of over 160 broker-dealers price and trade a wide spectrum of securities on the OTC Markets platform.
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A Brief History Of Exchange-Traded Funds
In less than 20 years, exchange-traded funds (ETFs) have become one of the most popular investment vehicles for both institutional and individual investors. Often promoted as cheaper, and better, than mutual funds, ETFs offer low-cost diversification, trading and arbitrage options for investors. Now with over $1 trillion assets under management, new ETF launches number from several dozen to hundreds, in any particular year. ETFs are so popular that many brokerages offer free trading in a limited number of ETFs to their customers. (For related reading, see Introduction To Exchange-Traded Funds.)
Beginning at the Beginning
The idea of index investing goes back quite a while; trusts or closed-end funds were occasionally created with the idea of giving investors the opportunity to invest in a particular type of asset. None of these really resembled what we now call ETFs, though.
The first real attempt at something like an ETF was the launch of Index Participation Shares for the S
How Are Charts Formed?
We will be explaining the construction of line, bar, candlestick and point
FINRA members may not trade for their own account at prices that are equal to or better than the prices of limit orders that they have received from their customers or from another FINRA member firm on behalf of its customers. Protecting customer limit orders encourages the use of such orders by the investing public and results in more capital committed to securities trading in the secondary markets by a source other than securities dealers. The protection of customer limit orders for all OTC securities was implemented in the 4th quarter of 2008.
How To Manage Your Company Stock
If you work for a larger corporation theres a good chance that you have access to company stock as part of your compensation package. Your company may issue stock options or you may have access to company stock in your 401(k) retirement plan or an employee stock purchase plan. Heres what you need to know about managing company stock.
Its Not Different
When you think about your company stock, do you see it as a different kind of investment than you would make in the stock market? Does it feel more stable and secure to you since you know so much about the company? Holding company stock as part of your overall investment portfolio is no different than buying the stock of another company through your brokerage account.
The truth is that you likely have very little knowledge of news and events that would directly affect the price of the stock. Its illegal for company management to give you advance knowledge of coming events and if youre one of the decision makers that has access to the knowledge, youre aware of the tight restrictions you have when trading your stock.
Dont adopt a false sense of security because you work there. History is filled with past employees of now bankrupt companies that were left holding worthless company stock, (Enron, Lehman Brothers, etc.)
Dont Own More Than 10%.
If your main investment dollars are in a 401(k), no more than 10% of your 401(k) should be in company stock and some experts advise much less. If you have investments outside of your 401(k), your company stock should make up no more than 10% of your entire portfolio. How would you feel if you lost 10% of your portfolio? If that scares you, trim your company stock down to 5% or even less.
How About Company Stock Options?
Many employees make the mistake of letting their stock options gain too much value, because they dont understand how they work. They also dont understand that the value of stock options degrade over time. If youre awarded stock options, typically you receive a certain amount of options that have to go through a vesting period - this means that you cant exercise these options right away. Once youre able to exercise the options, you want the options to be above the strike price before you exercise.
Employee stock options not only have a minimum amount of time that goes by before you exercise the option, theres also a maximum. Count these options as part of your overall portfolio and although you shouldnt let this part of your portfolio become too large, when to exercise the options is complicated and best done with the help of a trusted financial adviser. Make sure they discuss the tax implications with you.
Should You Sell?
According to Reuters, purchasing company stock is on the decline and for good reason. For investors without the time or experience to manage individual stocks, mutual funds, some exchange traded funds and index funds are better, more diversified alternatives to owning single company stocks, even if the company happens to be your employer. If you dont have a high level of stock market knowledge, owning company stock outside of stock options is a bad idea.
The Bottom Line
The company stock you own in one of the many forms should not violate the rules of good diversification. No more than 10% of your portfolio should be in any one stock even if the company supplies your paycheck. Also remember that like any investment, company stock comes with the same risk as any other single stock. Dont hold a false sense of security since the company happens to employ you.
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?
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OTC Markets organizes and disseminates price and company information making the marketplace more transparent, efficient and investor friendly. We have created the OTC market tiers to motivate OTC companies to provide more information to investors and we offer companies products and services to help them get their information out on our network for all investors to find.
“The Spread” is a term that applies to all markets and represents the difference between the highest bid price and the lowest ask price. For example if “the bid” is $10.00 and “the ask” is $11.00, then the spread is $1.00. The spread is one of the ways that broker-dealers, specifically market makers (a type of broker-dealer that provides liquidity by quoting and trading both sides of the market), make money.
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.
The difference in detail can be seen with the daily and weekly chart comparison above.
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Companies that have submitted information no older than six months to the OTC Markets data and news service or have made a filing on the SEC's EDGAR system in the previous six months are rated as having current information. This category includes shell companies or development stage companies with little or no operations as well as companies without audited financial statements.
How To Avoid Investing Too Conservatively
If you dont do anything, you cant lose money. That might be true with slot machines, horse racing and the lottery, but its not true with investing . Skilled investors know that the price of doing nothing or not enough can result in losses; not the lost value of stocks or mutual funds, but other losses not plainly visible to the eye of a new investor. Heres what you need to know about how these losses can affect you.
Beware of Inflation
If you have a few decades behind you, you probably remember the days of being a kid, where you could hop on your bike with a quarter, take it to a local store and buy a piece of candy. As you got older, you remember buying gasoline for less than a dollar per gallon.
Your money had more buying power back in those days, but today a quarter has to be combined with other quarters to have much buying power and a gallon of gas is close to $4. For an investor, inflation is fundamentally important; just as inflation has contributed to changes in the price of gas over the years, it can have a surprising affect on your investments, if youre not prepared for it.
Dont Hold Cash
Holding onto cash for long periods of time, waiting for the market to bottom, reduces the value of your money. You might be able to earn 1% from a savings account right now but if the current rate of inflation is 2.3%, inflation is causing an annual loss of 1.3%.
Holding cash for short periods of time is a wise investment choice, but over the long term youre silently losing purchasing power, and purchasing power is the only reason we hold currency. How do you combat inflation? Put that money to work but only in investments that earn a rate of return higher than the rate of inflation.
Junk Bonds
Because interest rates are so low, getting gains that beat inflation from government or investment grade bonds is sometimes difficult. Junk bonds, also known as high-yield bonds in the form of a low-fee mutual fund or exchange-traded funds (ETFs), can pay yields of more than 7%, in some cases. The downside is the increased level of risk, but for many investors the level of risk is appropriate. Bonds have been in a bull market for the past few years and theres no guarantee that the bull market will continue. Always have an exit strategy in place.
International Funds
Many investors have heard that investing in big companies in developed countries may not provide the growth necessary to outpace inflation; however, investing in the eurozone, China or many other countries has proven to be too risky. Investing too conservatively can harm your portfolio, but taking on too much risk can cause even worse results. To account for world events, make conservative asset allocations changes to your portfolio, instead of an all or nothing approach.
Own Real Estate
Many current and former homeowners may still be recovering from the housing crisis, and theres no guarantee that the market is now in recovery or will recover in the near future. For those with a long-term investment objective, owning a home will keep pace with inflation and even beat it. Some investors are putting the cash to work by purchasing distressed properties and renting in this red hot rental market.
Consider Gold
For years, gold held the distinction of being a shiny way to battle inflation but theres no guarantee that, going forward, gold will provide that protection. Still, CNBCs Jim Cramer advises owning gold for just that purpose. Gold in its physical form is better than gold ETFs or other stock market products, but owning large amounts of gold and protecting it from theft or loss is difficult.
The Bottom Line
Investing too conservatively usually means not taking on enough risk to beat the effects of inflation. The key for each investor is to take on enough risk to beat inflation without moving outside of his or her risk tolerance. The best way to strike the perfect balance is to find a trusted financial adviser to evaluate each individual situation.
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Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time-consuming, which can limit the amount of research that can be performed. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company.
OTC derivatives are significant part of the world of global finance. The OTC derivatives markets are large and have grown exponentially over the last two decades. The expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. The notional outstanding of OTC derivatives markets rose throughout the period and totaled approximately US$601 trillion at December 31, 2010.[5] In the past two decades, the major internationally active financial institutions have significantly increased the share of their earnings from derivatives activities.
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