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Understanding The Ticker Tape
Youve seen them on business programs or financial news networks: a flashing series of baffling letters, arrows and numbers scrolling along the bottom of your TV screen. While many people simply block out the ticker tape, others use it to stay on top of market sentiment and track the activity of certain stocks. What exactly is that cryptic script reeling by? It obviously tells us something about stocks and the markets, but how does one understand the ticker tape and use it to his or her advantage?
Brief History
Firstly, a tick is any movement, up or down, however small, in the price of a security. Hence, a ticker tape automatically records each transaction that occurs on the exchange floor, including trading volume, onto a narrow strip of paper or tape.
The first ticker tape was developed in 1867, following the advent of the telegraph machine, which allowed for information to be printed in easy-to-read scripts. During the late 19th century, most brokers who traded at the New York Stock Exchange (NYSE) kept an office near it to ensure they were getting a steady supply of the tape and thus the most recent transaction figures of stocks. These latest quotes were delivered by messengers, or pad shovers, who ran a circuit between the trading floor and brokers offices. The shorter the distance between the trading floor and the brokerage, the more up-to-date the quotes were.
Ticker-tape machines introduced in 1930 and 1964 were twice as fast as their predecessors, but they still had about a 15 to 20 minute delay between the time of a transaction and the time it was recorded. It wasnt until 1996 that a real-time electronic ticker was launched. It is these up-to-the-minute transaction figures - namely price and volume - that we see today on TV news shows, financial wires and websites; while the actual tape has been done away with, it has retained the name.
Due to the nature of the markets, investors from all corners of the globe are trading a variety of stocks in different lots and blocks at any given time. Therefore what you see one minute on a ticker could change the next, particularly for those stocks with high trading volume, and it could be some time before you see your ticker symbol appear again with the latest trading activity.
Reading the Ticker Tape
Heres an example of a quote shown on a typical ticker tape:
Ticker Symbol The Unique Characters used to identify the company.
Shares Traded The volume for the trade being quoted. Abbreviations are K = 1,000, M = 1 million and B = 1 billion
Price Traded The price per share for the articular trade (the last bid price).
Change Direction Shows whether the stock is trading higher or lower than the previous days closing price.
Change Amount The difference in prie from the previous days close.
Throughout the trading day, these quotes will continually scroll across the screen of financial channels or wires, showing current, or slightly delayed, data. In most cases the ticker will quote only stocks of one exchange, but it is common to see the numbers of two exchanges scrolling across the screen.
You can tell where a stock trades by looking at the number of letters in the stock symbol. If the symbol has three letters, the stock likely trades on the NYSE or American Stock Exchange (AMEX). A four-letter symbol indicates the stock likely trades on the Nasdaq. Some Nasdaq stocks have five letters, which usually means the stock is foreign. This is designated by an F or Y at the end of the stock symbol. To learn more, see Why do some stock symbols have three letters while others have four?
On many tickers, colors are also used to indicate how the stock is trading. Here is the color scheme most TV networks use:
Green indicates the stock is trading higher than the previous days close.
Red indicates the stock is trading lower than the previous days close.
Blue or white means the stock is unchanged from the previous closing price.
Before 2001, stocks were quoted as a fraction, but with the emergence of decimalization all stocks on the NYSE and Nasdaq trade as decimals. The advantage to investors and traders is that decimalization allows investors to enter orders to the penny (as opposed to fractions like 1/16).
Which Quotes Get Priority?
There are literally millions of trades executed on more than 10,000 different stocks each and every day. As you can imagine, its impossible to report every single trade on the ticker tape. Quotes are selected according to several factors, including the stocks volume, price change, how widely they are held and if there is significant news surrounding the companies.
For example, a stock that trades 10 million shares a day will appear more times on the ticker tape than a small stock that trades 50,000 shares a day. Or if a smaller company not usually featured on the ticker has some ground-breaking news, it will likely be added to the ticker. The only times the quotes are shown in predetermined order are before the trading day starts and after it has finished. At those times, the ticker simply displays the last quote for all stocks in alphabetical order.
The Bottom Line
Constantly watching a ticker tape is not the best way to stay informed about the markets, but many believe it can provide some insight. Tick indicators are used to easily identify those stocks whose last trade was either an uptick or a downtick. This is used as an indicator of market sentiment for determining the markets trend.
So next time youre watching TV or surfing a website with a ticker, youll understand what all those numbers and symbols scrolling across your screen really mean. Just remember that it can be near impossible to see the exact price and volume at the precise moment it is being traded. Think of a ticker tape as providing you with a general picture of a stocks current activity.
Equity Securities, including OTCQX, OTCQB and Pink Sheets securities, which improves pricing for investors and results in greater volumes and better overall liquidity. In 2008 FINRA expanded the rule to cover real-time trade reporting and dissemination of trade reports to include OTC ADRs and Foreign Ordinary shares.
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The close represents the final price agreed upon by the buyers and the sellers. In this case, the close is well below the high and much closer to the low.
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
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."
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In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.
Five Things To Know About Asset Allocation
With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold - this is referred to as your asset allocation.
What is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors its the best protection against major loss should things ever go amiss in one investment class or sub-class.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.
We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldnt be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:
Risk vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. Its easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest potential (stocks and derivatives) isnt the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. Its time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you cant keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities. (To learn more about bond investing , see Bond Basics Tutorial.
Dont Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one rule of thumb that many advisors use to determine the proportion a person should allocate to stocks is to subtract the persons age from 100. In other words, if youre 35, you should put 65% of your money into stock and the remaining 35% into bonds, real estate and cash.
But standard worksheets sometimes dont take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that dont capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because its best for you, but because its easy for them. Rules of thumb and planner sheets can give people a rough guideline, but dont get boxed into what they tell you.
Determine your Long and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your childs education, or simply to save up for a new car , you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.
For example, if youre planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market . But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.
Time is your Best Friend
The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A bad couple of years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.
Just Do It!
Once youve determined the right mix of stocks, bonds and other investments, its time to implement it. The first step is to find out how your current portfolio breaks down. Its fairly straightforward to see the percentage of assets in stocks vs. bonds, but dont forget to categorize what type of stocks you own (small, mid, or large cap). You should also categorize your bonds according to their maturity (short, mid, long-term). Mutual funds can be more problematic. Fund names dont always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.
There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you dont have, dont worry. Its never too late to get started. Its also never too late to give your existing portfolio a face-lift: asset allocation is not a one-time event, its a life-long process of progression and fine-tuning.
If the order is not marketable, the broker-dealer may create or edit its existing quote on an Inter-dealer Quotation System (e.g. OTC Link) to reflect a new price or size. The quote lets all other broker-dealers know the price which they are willing to buy or sell. Broker-dealers are only required to update their quote if the price of the order is equal or superior to their existing quote.
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The flow of information has become faster with the Internet, and surprises are factored in instantly.
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The security is being promoted to the public, but adequate current information about the issuer has not been made available to the public. OTC Markets believes adequate current information must be publicly available during any period when a security is the subject of ongoing promotional activities having the effect of encouraging trading of the issuer's securities.
The Value Investors Handbook
Value investing, and any type of investing for that matter, varies in execution with each person. There are, however, some general principles that are shared by all value investors. These principles have been spelled out by famed investors like Peter Lynch, Kenneth Fisher, Warren Buffet,John Templeton and many others. In this article, we will look at these principles in the form of a value investors handbook.
Buy Businesses
If there is one thing that all value investors can agree on, its that investors should buy businesses, not stocks. This means ignoring trends in stock prices and other market noise. Instead, investors should look at the fundamentals of the company that the stock represents. Investors can make money following trending stocks, but it involves a lot more activity than value investing. Searching for good businesses selling at a good price based on probable future performance requires a larger time commitment for research, but the payoffs include less time spent buying and selling and fewer commission payments. (False signals can drown out underlying trends. Find out how to tone them down and tune them out in Trading Without Noise.)
Love the Business You Buy
You wouldnt pick a spouse based solely on his or her shoes, and you shouldnt pick a stock based on cursory research. You have to love the business you are buying, and that means being passionate about knowing everything about that company. You need to strip the attractive covering from a companys financials and get down to the naked truth. Many companies look far better when you judge them on basic price to earnings (P/E), price to book (P/B) and earnings per share (EPS) ratios than they do when you look into the quality of the numbers that make up those figures.
If you keep your standards high and make sure the companys financials look as good naked as they do dressed up, youre much more likely to keep it in your portfolio for a long time. If things change, youll notice it early. If you like the business you buy, paying attention to its ongoing trials and successes becomes more of a hobby than a chore.
Simple Is Best
If you dont understand what a company does or how, then you probably shouldnt be buying shares. Critics of value investing like to focus on this main limitation. You are stuck looking for businesses that you can easily understand because you have to be able to make an educated guess about the future earnings of the business. The more complex a business is, the more uncertain your projections will necessarily be. This moves the emphasis from educated to guess.
You can buy businesses you like but dont completely understand, but you have to factor in uncertainty as added risk. Any time a value investor has to factor in more risk, he has to look for a larger margin of safety - that is, more of adiscount from the calculated true value of the company. There can be no margin of safety if the company is already trading at many multiples of its earnings, which is a strong sign that, however exciting and new the idea is, the business is not a value play. Simple businesses also have an advantage, as its harder for incompetent management to hurt the company. (For a complete guide to reading the financial reports, check out our Financial Statements Tutorial.)
Look for Owners, Not Managers
Management can make a huge difference in a company. Good management adds value beyond a companys hard assets. Bad management can destroy even the most solid financials. There have been investors who have based their entire investing strategies on finding managers that are honest and able. To quote Buffett, look for three qualities: integrity, intelligence, and energy. And if they dont have the first, the other two will kill you. You can get a sense of managements honesty through reading several years worth of financials. How well did they deliver on past promises? If they failed, did they take responsibility, or gloss it over? (Find out more about Buffetts investing in Warren Buffett: How He Does It.)
Value investors want managers who act like owners. The best managers ignore the market value of the company and focus on growing the business, thus creating long-term shareholder value. Managers who act like employees often focus on short-term earnings in order to secure a bonus or other performance perk, sometimes to the long-term detriment of the company. Again, there are many ways to judge this, but the size and reporting of compensation is often a dead give away. If youre thinking like an owner, you pay yourself a reasonable wage and depend on gains in your stock holdings for a bonus. At the very least, you want a company that expenses its stock options. (Still wondering how to investigate the top brass? Check out Evaluating A Companys Management.)
When You Find a Good Thing, Buy a Lot
One of the areas where value investing runs contrary to commonly accepted investing principles is on the issue of diversification. There are long stretches where a value investor will be idle. This is because of the exacting standards of value investing as well as overall market forces. Toward the end of a bull market, everything gets expensive, even the dogs, so a value investor may have to sit on the sidelines waiting for the inevitable correction. Time, an important factor in compounding, is lost while waiting, so when you do find undervalued stocks, you should buy as much as you can. Be warned, this will lead to a portfolio that is high-risk according to traditional measures like beta. Investors are encouraged to avoid concentrating on only a few stocks, but value investors generally feel that they can only keep proper track of a few stocks at a time.
One obvious exception is Peter Lynch, who kept almost all of his funds in stocks at all times. Lynch broke stocks into categories and then cycled his funds through companies in each category. He also spent upwards of 12 hours every day checking and rechecking the many stocks held by his fund. As an individual value investor with a different day job, however, its better to go with a few stocks for which youve done the homework and feel good about holding long term. (Learn the basic tenets that helped this famous investor earn his fortune in Pick Stocks Like Peter Lynch.)
Measure Against Your Best Investment
Anytime you have more investment capital, your aim for investing should not be diversity, but finding an investment that is better than the ones you already own. If the opportunities dont beat what you already have in your portfolio, you may as well buy more of the companies you know and love, or simply wait for better times. During idle times, a value investor can identify the stocks he or she wants and the price at which theyll be worth buying. By keeping a wish list like this, youll be able to make decisions quickly in a correction.
Ignore the Market 99% of the Time
The market only matters when you enter or exit a position; the rest of the time, it should be ignored. If you approach buying stocks like buying a business, youll want to hold onto them as long as the fundamentals are strong. During the time you hold an investment, there will be spots where you could sell for a large profit and others were youre holding an unrealized loss. This is the nature of market volatility.
The reasons for selling a stock are numerous, but a value investor should be as slow to sell as he or she is to buy. When you sell an investment, you expose your portfolio to capital gains and usually have to sell a loser to balance it out. Both of these sales come with transaction coststhat make the loss deeper and the gain smaller. By holding investments with unrealized gains for a long time, you forestall capital gains on your portfolio. The longer you avoid capital gains and transaction costs, the more you benefit from compounding. (Find out how your profits are taxed and what to consider when making investment decisions in Tax Effects On Capital Gains.)
The Bottom Line
Value investing is a strange mix of common sense and contrarian thinking. While most investors can agree that a detailed examination of a company is important, the idea of sitting out on a bull market goes against the grain. Its undeniable that funds held constantly in the market have outperformed cash held outside the market, waiting for a down market. This is a fact, but a deceiving one. The data is derived from following the performance of indexes like the S
In addition, buyers could not be coerced into buying until prices declined below support or below the previous low.
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The Financial Characteristics Of A Successful Company
It is often debated whether a commonly perceived good company, as defined by characteristics, such as competitive advantage, above-average management and market leadership, is also a good company to invest in. While these characteristics of a good company can point toward a good investment, this article will explain how to evaluate the companys financial characteristics to make a final decision. (For further reading on the other characteristics, see 3 Secrets Of Successful Companies.)
Tutorial: Top Stock Picking Strategies
Background
The world of stock picking has evolved. What was once the duty of traditional stock analysts has become an internet phenomenon; stocks are now analyzed by all kinds of people, using all kinds of methods. Furthermore, the speed at which information now travels around the world, has led to increased volatility in stock prices and changes in the way that stocks are evaluated, at least in the short-term. In addition, the advent of self-directed 401(k)s, IRAs and investment accounts, has empowered individual investors to get more involved in the selection of stocks to buy. (Read House Your Retirement With Self-Directed Real Estate IRAs for more on this investment vehicle.)
While the short-term process may have changed, the characteristics of a good company to buy stock in have not. Earnings, return on equity (ROE) and their relative value compared to other companies, are timeless indicators of companies that might be good investments.
Earnings
Earnings are essential for a stock to be considered a good investment. Without earnings, it is difficult to evaluate what a company is worth, except for its book value. While current earnings may have been overlooked during the internet stock boom, investors, whether they knew it or not, were buying stocks in companies that were expected to have earnings in the future. Earnings can be evaluated in any number of ways, but three of the most prominent metrics are growth, stability and quality (Read more about the dotcom boom and other crazes that went wrong in Crashes: What Are Crashes And Bubbles?)
Earnings Growth
Earnings growth is usually described as a percentage, in periods like year-over-year, quarter-over-quarter and month-over-month. The basic premise of earnings growth is that the current reported earnings should exceed the previous reported earnings. While some may say that this is backward-looking and that future earnings are more important, this metric establishes a pattern that can be charted and tells a lot about the companys historic ability to grow earnings. (Read about how earnings can be linked to future growth in PEG Ratio Nails Down Value Stocks.)
While the pattern of growth is important, like all other valuation tools, the relative relationship of the growth rate matters, as well. For example, if a companys long-term earnings growth rate is 5% and the overall market averages 7%, the companys number is not that impressive. On the flip side, an earnings growth rate of 7%, when the market averages 5%, establishes a pattern of growing earnings faster than the market. This measure on its own is only a start, though; the company should then be compared to itsindustry and sector peers. (For related reading, see Five Tricks Companies Use During Earnings Season.)
Earnings Stability
Earnings stability is a measure of how consistently those earnings have been generated. Stable earnings growth typically occurs in industries where growth has a more predictable pattern. Earnings can grow at a rate similar to revenue growth; this is usually referred to as top-line growth and is more obvious to the casual observer. Earnings can also grow, because a company is cutting expenses to add to the bottom line. It is important to verify where the stability is coming from, when comparing one company to another. (For further reading, see Revenue Projections Show Profit Potential.)
Earnings Quality
Quality of earnings factors heavily into the evaluation of a companys status. This process is usually left to a professional analyst, but the casual analyst can take a few steps to determine the quality of a companys earnings. For example, if a company is growing its earnings, but has declining revenues and increasing costs, you can be guaranteed that this growth is an accounting anomaly and will, most likely, not last. (Read more in Earnings: Quality Means Everything.)
Return On Equity
Return on equity (ROE) measures the effectiveness of a companys management to turn a profit on the money that its shareholders have entrusted it with. ROE is calculated as follows:
ROE = Net Income / Shareholders Equity
ROE is the purest form of absolute and relative valuation and can be broken down even further. Like earnings growth, ROE can be compared to the overall market and then to peer groups in sectors and industries. Obviously, in the absence of any earnings, ROE would be negative. To this point, it is also important to examine the companys historical ROE to evaluate its consistency. Just like earnings, consistent ROE can help establish a pattern that a company can consistently deliver to shareholders. (For more on this topic, read Keep Your Eyes On The ROE, Earnings Power Drives Stocks and Profitability Indicator Ratios: Return On Equity.)
While all of these characteristics may lead to a sound investment in a good company, none of the metrics used to value a company should be allowed to stand alone. Dont make the common mistake of overlooking relative comparisons when evaluating whether a company is a good investment. (For further reading, see Peer Comparison Uncovers Undervalued Stocks and Relative Valuation: Dont Get Trapped.)
Where to Find Information
In order to compare information across a broad spectrum, data needs to be gathered. The internet can be a good place to look, but you have to know where to find it. Since the majority of information on the internet is free, the debate is whether to use the free information or subscribe to a service. A rule of thumb is the old adage, You get what you pay for. For example, if you are looking at comparing earnings quality across a market sector, a free website would probably provide just the raw data to compare. While this is a good place to start, it might behoove you to pay for a service that will scrub the data or point out the accounting anomalies, enabling a clearer comparison. (What youre getting isnt easy to determine. Find out how to get your moneys worth in Investment Services Stump Investors.)
The Bottom Line
While there are many ways to determine if a company that is widely regarded as good, is also a good investment, examining earnings and ROE are two of the best ways to draw a conclusion. Earnings growth is important, but its consistency and quality need to be evaluated to establish a pattern. ROE is one of the most basic valuation tools in an analysts arsenal, but should only be considered the first step in evaluating a companys ability to return a profit on shareholders equity. Finally, all of this consideration will be in vain if you dont compare your findings to a relative base. For some companies, a comparison to the overall market is fine, but most should be compared to their own industries and sectors.
Although they may not be required to make financial information available to the public, many OTC-traded companies do so voluntarily. You can search our Financial Reports to obtain the reports of any issuer that has voluntarily provided their financials and other disclosure to investors via the OTC Disclosure and News Service.
All because the price is the sum value of all views (bullish, bearish or otherwise) held by market participants.
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Companies that follow the International Reporting Standard or the Alternative Reporting Standard by making filings publicly available through the OTC Disclosure
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.
As part of the analysis process, it is important to remember that all information is relative. Industry groups are compared against other industry groups and companies against other companies.
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In order to qualify for the OTCQB marketplace, SEC Reporting companies must be current in required SEC filings. During the time it is labeled Caveat Emptor, any stock that is not in OTC Pink Current Information or OTCQB will also have its quotes blocked.
3 Psychological Quirks That Affect Your Trading
The most troublesome problems we face as traders are the ones that we dont even know exist. Certain human tendencies affect our trading, yet we are often completely unaware they are affecting us and our bottom line. While there are many human tendencies, we will look at three that, if not managed, can block the road toward achieving our financial goals.
The Enemy We Dont Know
When dealing with trading in a technical way, we can see where we erred and attempt to fix it for next time. If we exit a trade too early in a move, we can adjust our exit criteria by looking at a longer time frame or by using a different indicator. However, when we have a solid trading plan and are still losing money, we need to look at ourselves and our own psychology for a solution. (Test your investment strategy before entering the market, but first read Stimulate Your Skills With Simulated Trading.)
When we deal with our own minds, often our objectivity is skewed and, thus, cannot properly fix the problem; the true problem is clouded by biases and superficial trivialities. An example of this is the trader who does not stick to a trading plan, but fails to realize that not sticking to it is the problem, so he continually adjusts strategies, believing that is where the fault rests.
Awareness is Power
While there is no magic bullet for overcoming all of our problems or trading struggles, becoming aware of some possible base issues allows us to begin to monitor our thoughts and actions, so that over time we can change our habits. Awareness of potential psychological pitfalls can allow us to change our habits, hopefully creating more profits, lets look at three common psychological quirks that can often cause such problems.
Sensory Derived Bias
We pull information from around us to form an opinion or bias and this allows us to function and learn, in many cases. However, we must realize that, while we may believe we are forming an opinion based on factual evidence, often we are not. If a trader watches the business news each day and forms an opinion that the market is going higher, based on all the available information, he may feel he came to this conclusion by stripping away the media personnels opinions and only listening to the facts. However, this trader still may face a problem: When the source of our information is biased, our own bias will be affected by that.
Even facts can be presented to give credence to the bias or opinion, but we must remember there is always another side to the story. Furthermore, constant exposure to a single opinion or viewpoint will lead individuals to believe that that is the only practical stance on the subject. Since they are deprived of counter evidence, their opinion will be biased by the available information.
Avoiding the Vague
Also known as fear of the unknown, avoiding what may occur, or what is not totally clear to us, prevents us from doing many things and can keep us locked in an unprofitable state. While it may sound ridiculous to some, traders may actually fear making money. They may not be aware of it consciously, but traders often worry about expanding their comfort zone, or simply fear that their profits will be taken away through taxes. Inevitably, this may lead to self sabotage. Another source of bias may come from trading only in the industry with which one is most familiar, even if that industry has been, and is predicted to continue, declining. The trader is avoiding an outcome because of the uncertainty associated with the investment. (To learn about the home bias, check out Is Biased Investing Holding You Back?)
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Another common tendency relates to holding onto the losers too long, while selling the winners too quickly. When prices fluctuate we must factor in the magnitude of the movement, to determine if the change is due to noise or is the result of a fundamental effect. Pulling out of trades too quickly often results from ignoring the trend of the security, as investors adopt a risk-averse mentality. On the other hand, when investors experience a loss, they often become risk seekers, resulting in an over-held losing position. These deviations from rational behavior lead to irrational actions, causing investors to miss out on potential gains, due to psychological biases. (For insight into investors attitudes, refer to Understanding Investor Behavior.)
Tangibility of Anticipation
Anticipation is a powerful feeling. Anticipation is often associated with an I want or I need type of mentality. What we anticipate coming is some time in the future, but the feeling of anticipation is here now and it can be an enjoyable emotion. It can be so enjoyable, in fact, that we make feeling anticipation our focus, instead of achieving what it is we are anticipating in the first place. Knowing that a million dollars is going to show up on your doorstep tomorrow would create a fantastic feeling of excitement and anticipation. It is possible to become addicted to this feeling and thus put off taking payment.
While easy money delivered to the door is more than likely to be grabbed by the eager homeowner, when things are not quite as easy to come by, we can fall into using the feeling of anticipation as a consolation prize. Watching billions of dollars change hands each day, but not having the confidence to follow a plan and take a chunk of the money, can mean we subconsciously decided that dreaming about the profits is good enough. We want to be profitable, but wanting has become our goal, not profitability.
What to Do About It
Once we are aware that we may be affected by our own psychology, we realize it may affect our trading on a subconscious level. Awareness is often enough to inspire change, if we do in fact work to improve our trading.
There are several things we can do to overcome our psychological roadblocks, beginning with removing inputs that are obviously biased. Charts dont lie, but our perceptions of them may. We stand the best chance of success if we remain objective and focus on simple strategies that extract profits from price movements. Many great traders avoid the opinions of others, when it comes to the markets, and realize when an opinion may be affecting their trading.
Knowing how the markets operate and move will help us overcome our fear, or greed, while in trades. When we feel we have entered unknown territory where we dont know the outcome, we make mistakes. However, if we have a firm understanding, at least probabilistically, of how the markets move, we can base our actions on objective decision making.
Finally, we need to lay out what we really want, why we want it and how we are going to get there. Listen in on the thoughts that run through your head right when you make a mistake, and think about the belief behind it; then work to change that belief in your everyday life.
The Bottom Line
Our biases can affect our trading, even when we dont think we are trading on biased information. Also, when an outcome appears vague, we err in our judgment, even though we have a conception of how the market is supposed to move. Our anticipations can also be deterrents from achieving what it is we think we want. To aid us in these potential problems, we can remove biased inputs, gain more understanding of market probabilities and define what it is we really want from our trading.
The choice of data compression and time frame depends on the data available and your trading or investing style.
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They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster's ruse. //
5 Dumb Things Investors Do With Their Money
The beginning of a new year is usually a good time to reflect on the past in order to make certain resolutions about the coming one. In investing, future success can have little to do with what has worked well in the past. Trying to predict short-term market movements is also generally an investment strategy that can lead you to financial ruin. Keeping these perspectives in mind, below are five of the dumbest things you can do with your money in 2012.
Trade Volatility
Lately, it has been en vogue to consider volatility its own asset class. Trading volatility has become possible through vehicles based off the Chicago Board Options Exchange Market Volatility Index, or VIX for short. A range of exchange-traded funds (ETFs) have been created so that investors can make bets on the extent to which the market bounces up and down. There are even ETFs that let investors gain twice the exposure to market volatility, which can be used to make bets on both advances and declines in the market.
The problem, as with most short-term strategies, is developing a compelling trading strategy capable of predicting market volatility. Trading VIX-related indexes may make sense for hedging near-term market fluctuations, but there is simply not going to be any way to predict market moves with any certainty. Major inflection points in the market are missed by the best investors and include the credit crisis, flash crash and latest concerns over sovereign debt levels in Europe. Without a crystal ball, speculating on future market volatility has to be one of the dumbest things investors can do with their money. (To learn more on volatility, read A Simplified Approach To Calculating Volatility.)
Buy Bond Funds
U.S. interest rates have been on a steady decline since around 1980 when they reached the double digits. These days, shorter-term rates are hovering around zero, while the 30-Year Treasury Bond rate is extremely low at roughly 3%. These low rates qualify as all-time lows in many instances, such as for bank Certificate of Deposits (CDs), mortgages and U.S. Treasury rates.
Savvy investors, including Pimcos Bill Gross, have lamented at the low interest rate environment. Sadly enough, Grosss near-term call on the appeal of U.S. Treasuries has left his flagship Pimco Total Return Fund badly lagging its index and an estimated 84% of its peer group. Given the low historical rates, many see it as only a matter of time before rates start to rise. As bond prices move in the opposite direction of yields, there is the potential for sizable losses for many investors in bond funds. At the very least, investors should consider investing in individual bonds to at least ensure the return of their principal at maturity. (For related reading, see Bond Basics.)
Speculate in Currencies
As with trading volatility, speculating in short-term currency movements is another dubious investment strategy. As with most investing, a long-term perspective can be much more meaningful. The Economist magazine issues a Big Mac Index, the origin of which has been described as a light-hearted way to make exchange-rate theory more digestible. Namely, it looks at the price of a Big Mac across the world as a proxy for the extent that currencies are either undervalued or overvalued, relative to each other. Specifically, it states that in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country.
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Betting on short-term movements in currencies is a certifiably dumb strategy, as shorter-term fears and emotions can push currency relationships far off from what is reasonable over the long haul. The carry trade, or borrowing in a currency with a low interest rate to invest in one with a higher interest rate, is a case in point. A popular carry trade in recent years involved borrowing in the Japanese yen, and it has unraveled at various times, including during the credit crisis in 2007 and natural disasters earlier this year. As with many short-term market movements, many speculators were caught by surprise. (For more information, read The Big Mac Index: Food For Thought.)
Load Up on Gold
A market strategist at Fifth Third Bank recently suggested that investors in gold implement a gambling strategy that also works in Las Vegas. After a big win or run up in any investment, put your initial capital back in your pocket and continue to play with house money. This minimizes the potential that an investment, such as gold, which has had an amazing price run, stops for a breather or gives up most of its original gains. Investors in residential real estate back in 2005 and 2006 would have been well served with this strategy, and while gold may continue to have a strong run (gold is up more than 150% over the past five years, while the stock market is flat), buying it aggressively at these levels is likely a very foolish trading strategy.
Invest in Social Media
The fact that many social media firms continue to push through initial public offerings (IPOs) in the face of a difficult stock market should serve as a solid indicator that these companies have unknown underlying business appeal over the long haul. Firms including Groupon, LinkedIn, Facebook, Zynga and Twitter may be growing sales rapidly, but they are spending just as much to advertise and boost sales.
Collectively, they have unproven business models, barriers to entry are very low as competing sites are rather easy to develop, and hundreds of millions of dollars of investment capital are pursuing only a handful of good ideas in the space. It all spells a recipe for disaster, for investors looking to invest these days. (For related reading, see How An IPO Is Valued.)
The Bottom Line
Smarter investment choices include buying into blue-chip stocks and even residential real estate in many markets in the U.S. With a long-term perspective, many wise investment choices can be made. The dumber ones generally consist of trying to predict short-term market movements and piling into investments that have had very strong price runs or are extremely popular.
After each bounce off support, the stock traded all the way up to resistance. Resistance was first established by the September support break at 42.5.
Behold the $PSYC BarChart Technical Analysis NITE-LYNX
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Designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The Limited Information category also includes companies that may not be troubled, but are unwilling to provide disclosure pursuant to to OTC Pink Basic Disclosure Guidelines. Companies in this category have limited financial information not older than six months available on the OTC Disclosure
Dividend Facts You May Not Know
Money For Nothing is not only the title of a song by Dire Straits in the 80s, but also the feeling many investors get when they receive a dividend. All you have to do is buy shares in the right company and youll receive some of its earnings. How exciting is that? However, despite the advantage, there are several implications involved in the paying and receiving of dividends that the casual investor may not be aware of. This article will explain several of these. But first, lets begin with a short primer.
What Are Dividends?
Dividends are one way in which companies share the wealth generated by running the business. They are usually a cash payment, often drawn from earnings, paid to the investors in a company - the shareholders. These are paid on an annual or, more commonly, a quarterly basis. The companies that pay them are usually more stable and established, not fast growers. Those still in the rapid growth phase of their life cycle tend to retain all the earnings and reinvest them into the business.
Price Implications
When a dividend is paid, several things can happen. The first of these is what happens to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades . For most dividends this is usually not observed amidst the up and down movement of a normal days trading. However, this becomes easily apparent on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the companys market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.
Historical prices stored on some public websites, such as Yahoo! Finance, also adjust the past prices of the stock downward by the dividend amount. Another price that is usually adjusted downward is the purchase price for limit orders. Because the downward adjustment of the stock price might trigger the limit order, the exchange also adjusts outstanding limit orders . The investor can prevent this if his or her broker permits a do not reduce (DNR) limit order. Note, however, that not all exchanges make this adjustment. The U.S. exchanges do, but the Toronto Stock Exchange, for example, does not
On the other hand, stock option prices are usually not adjusted for ordinary cash dividends unless the dividend amount is 10% or more of the underlying value of the stock.
Implications for Companies
Dividend payments, whether they are cash or stock, reduce retained earnings by the total amount of the dividend. In the case of a cash dividend, the money is transferred to a liability account called dividends payable. This liability is removed when the company actually makes the payment on the dividend payment date, usually a few weeks after the ex-dividend date. For instance, if the dividend was $0.025 per share and there are 100 million shares outstanding, retained earnings will be reduced by $2.5 million and that money eventually makes its way to the shareholders.
In the case of a stock dividend , though, the amount removed from retained earnings is added to the equity account, common stock at par value, and brand new shares are issued to the shareholders. The value of each shares par value does not change. For instance, for a 10% stock dividend where the par value is 25 cents per share and there are 100 million shares outstanding, retained earnings is reduced by $2.5 million, common stock at par value is increased by that amount and the total number of shares outstanding increases to 110 million.
This is different from a stock split, although it looks the same from a shareholders point of view. In a stock split , all the old shares are called in, new shares are issued, and the par value is reduced by the inverse of the ratio of the split. For instance, if instead of a 10% stock dividend, the above company declares an 11-to-10 stock split, the 100 million shares are called in and 110 million new shares are issued, each with a par value of $0.22727. This leaves the common stock at par value accounts total unchanged. The retained earnings account is not reduced either.
Implications for Investors
Cash dividends, the most common sort, are taxed at either the normal tax rate or at a reduced rate of 5% or 15% for U.S. investors. This only applies to dividends paid outside of a tax-advantaged account such as an IRA.
The dividing line between the normal tax rate and the reduced or qualified rate is how long the underlying security has been owned. According to the IRS, to qualify for the reduced rate, an investor has to have owned the stock for 60 consecutive days within the 121-day window centered on the ex-dividend date. Note, however, that the purchase date does not count toward the 60-day total.
Cash dividends do not reduce the basis of the stock.
Capital Gains
Sometimes, especially in the case of a special, large dividend, part of the dividend is actually declared by the company to be a return of capital. In this case, instead of being taxed at the time of distribution, the return of capital is used to reduce the basis of the stock, making for a larger capital gain down the road, assuming the selling price is higher than the basis. For instance, if you buy shares with a basis of $10 each and you get a $1 special dividend, $0.55 of which is return of capital, the taxable dividend is $0.45, the new basis is $9.45 and you will pay capital gains tax on that $0.55 when you sell your shares sometime in the future. (To read more about this, see A Long-Term Mindset Meets Dreaded Capital-Gains Tax.)
There is a situation, though, where return of capital is taxed right away. This happens if the return of capital would reduce the basis below $0.00. For instance, if the basis is $2.50 and you receive $4 as a return of capital, your new basis would be $0 and you would owe capital gain tax on $1.50.
Basis is also adjusted in the case of stock splits and stock dividends. For the investor, these are treated the same way. Taking our 10% stock dividend example, assume that you hold 100 shares of the company with a basis of $11. After the payment of the dividend, you would own 110 shares with a basis of $10. The same would hold true if the company had a 11-to-10 split instead of that stock dividend.
Finally, as with everything else regarding investment record keeping, it is up to the individual investor to track and report things correctly. If you have purchases at different times with different basis amounts, return of capital, stock dividend and stock split basis adjustments must be calculated for each. Qualified holding times must also be accurately tracked and reported by the investor, even if the 1099-DIV form received during tax season states that all paid dividends qualify for the lower tax rate. The IRS allows the company to report dividends as qualified, even if they are not, if the determination of which are qualified and which are not is impractical for the reporting company.
Conclusion
Many investors see dividends as money for nothing, but the implications surrounding paying and receiving dividends can mean a lot of work for both the company and the investor. If you reinvest your dividends through a dividend reinvestment plan (DRIP) or equivalent, the paperwork and tracking of basis can become quite tedious. There is no such thing as a free lunch. As with every other aspect of investing, accurate records are important and it would probably behoove you to use a spreadsheet or similar tool to track such details.
More information can be found in various publications available from the IRS, especially Publication 550.
Others might use a combination of long-term and short-term charts. Long-term charts are good for analyzing the large picture to get a broad perspective of the historical price action. Once the general picture is analyzed, a daily chart can be used to zoom in on the last few months.
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Short selling is a trading strategy where an investor, believing that a security is over-valued, borrows (from a broker-dealer or institutional investor) and sells a security and then repurchases and returns (to the broker-dealer or institutional investor) the security at a lower price. The difference between the sale price and the purchase price is the investor’s profit.
Interpreting Your Brokers Reports
Each month, most brokers or banks send a printout of information about your investments, often accompanied by a cover letter and some other documentation. While these statements provide ongoing updates about your investments and how they have performed, the quality and presentation of the information varies. The documents and printouts are frequently unclear and investors often have trouble deciphering what is important and how to interpret the material, even after discussions with a broker. In this article, well give you some guidelines for interpreting the important information contained in these brokerage reports. (Make sure your broker is working for you with Is Your Broker Acting In Your Best Interest? and Evaluating Your Broker.)
Asset Allocation and Risk
Typically, your portfolio structure is presented as a breakdown of the various asset classes in which it is invested. Your asset allocation includes stocks, bonds, cash equivalents, alternative investments, real estate and natural resources. You may also see a breakdown within a specific asset class, such as segregating equities by market capitalization or bonds according to the type of issuer.
One problem is that the report will often not specify the level of risk you are taking in your portfolio or, even worse, will categorize it incorrectly. A moderate level of risk might entail a roughly even allocation between stocks and bonds, or at most, a 60/40 split. However, brokerage firms often categorize portfolios containing 80% equities as medium risk. Other reports simply do not address the level of risk, or insert the term medium risk somewhere discreetly at the top, bottom or side of the page, where the unwary investor barely notices it. You should be kept clearly informed of the level of risk of your overall portfolio, and if your asset allocation seems too aggressive or conservative for you, then talk to your financial advisor about the issue. (To read more on these topics, see Determining Risk And The Risk Pyramid, Risk And Diversification and How Risky Is Your Portfolio?)
Performance of Your Portfolio
Next, look at your portfolios performance for the most recent period reported, and how it compares with past performance. If returns are not satisfactory to you, talk to the advisor and determine whether any changes may be needed. A simple listing of cost, current value and other figures, with no meaningful analysis or discussion, is not very helpful.
In addition to seeing how your portfolio has performed, you need to know how well, or poorly, it has performed, compared with other investments. Comparing investment performance to benchmarks, such as market indexes or industry statistics, will provide a yardstick for evaluating your own portfolio. (Keep reading about this in Benchmark Your Returns With Indexes.)
For example, the Standard
Each unit of measure is the same throughout the entire scale. If a stock advances from 10 to 80 over a 6-month period, the move from 10 to 20 will appear to be the same distance as the move from 70 to 80. Even though this move is the same in absolute terms, it is not the same in percentage terms.
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If a broker-dealer decides to trade they can communicate with other broker-dealer(s) using OTC Link – OTC Markets Group’s electronic messaging and trade negotiation system – or they may contact the broker-dealer through other means of communication and negotiate the trade.
The 6 Most Common Portfolio Protection Strategies
The key to successful long-term investing is the preservation of capital. Warren Buffett, arguably the worlds greatest investor, has one rule when investing - never lose money. This doesnt mean you should sell your investment holdings the moment they enter losing territory, but you should remain keenly aware of your portfolio and the losses youre willing to endure in an effort to increase your wealth. While its impossible to avoid risk entirely when investing in the markets, these five strategies can help protect your portfolio.
Diversification
One of the cornerstones of Modern Portfolio Theory (MPT) is diversification. In a market downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one. Investors create deeper and more broadly diversified portfolios by owning a large number of investments in more than one asset class, thus reducing unsystematic risk. This is the risk that comes with investing in a particular company as opposed to systematic risk, which is the risk associated with investing in the markets generally.
Non-Correlating Assets
According to some financial experts, stock portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic risk. Unfortunately, systematic risk is always present and cant be diversified away. However, by adding non-correlating asset classes such as bonds, commodities, currencies and real estate to a group of stocks, the end-result is often lower volatility and reduced systematic risk due to the fact that non-correlating assets react differently to changes in the markets compared to stocks; when one asset is down, another is up.
Ultimately, the use of non-correlating assets eliminates the highs and lows in performance, providing more balanced returns. At least thats the theory. In recent years, however, evidence suggests that assets that were once non-correlating now mimic each other, thereby reducing the strategys effectiveness. (See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. Check out Modern Portfolio Theory: Why Its Still Hip.)
Leap Puts and Other Option Strategies
Between 1926 and 2009, the S
General Steps to Fundamental Evaluation
Even though there is no one clear-cut method, a breakdown is presented below in the order an investor might proceed.
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Indicates companies that are not able or willing to provide disclosure to the public markets - either to a regulator, an exchange or OTC Markets Group. Companies in this category do not make Current Information available via OTC Markets Group's News Service, or if they do, the available information is older than six months. This category includes defunct companies that have ceased operations as well as 'dark' companies with questionable management and market disclosure practices. Publicly traded companies that are not willing to provide information to investors should be treated with suspicion and their securities should be considered highly risky.
Trust In Utilities
Utilities become desirable, to both novice and seasoned investors, whenever the market or the economy is going through a downturn. Picking individual utility companies to invest in can be time consuming, and if you choose poorly, you will not take part in the benefits that investing in public utilities can provide.
Mutual funds that specialize in utility companies are most often where investors place their money. They offer instant diversification, but that comes at a price – in the form of management fees, which are normally passed along to investors. Utility trusts that operate or invest in public utilities can be a good alternative for many investors. (For more on mutual fund fees, take a look at Stop Paying High Mutual Fund Fees.)
What Are Utility Trusts?
Utility trusts are a type of income trust that are less growth focused than traditional income trusts. An income trust is simply an investment trust that holds income-generating assets; in this case, it would be utilities. The income produced is passed on to the investors (usually called unitholders). These payments are generally higher than a typical stock dividend because, relative to income trusts, non-income trusts use more of their income to fuel more growth instead of paying it out to shareholders.
Income trusts typically aim to pay out a consistent cash flow to their unitholders. It is important to remember that, like dividend-paying stocks, income trusts do not guarantee a dividend, though they strive to pay one. If the underlying business loses money, the trust can reduce or eliminate payouts altogether.
Understanding Utilities
A public utility is a company or organization that operates and maintains the infrastructure for a public service. Public utility companies are subject to state and government regulation, and can either be privately or publicly owned. The biggest difference between the two is that a privately-owned utility may be listed on a stock exchange. Prices charged by public utility companies are regulated by the state or local government. In order for a public utility to charge higher prices, it needs to get approval from a committee. However, these can often take time and have little to no guarantee that the rate increases will be approved. (To learn more about these companies, be sure to check out the Utilities Industry Handbook.)
Advantages of Utility Trusts
Public utility companies are relatively safe and constant when it comes to dividend return. This predictable dividend makes cash flows similar to a bonds cash flow, and therefore they react similarly to changes in interest rates - but not always. Also, like a bond, a higher yield generally means taking on higher risk. The income produced by the underlying utility companies held in a utility trust is easily passed along to the unit holders. The portfolio for a utility trust usually does not change often, which ensures a steady dividend stream if the underlying companies are stable.
The Government Cloud
When it comes to public utility companies, one cannot escape the role the government plays. Each utility company - whether private or public - has to deal with government regulations and red tape. The biggest trend among government in regards to public utilities is deregulation. As of September 2010, 27 states have either passed legislation or are in the process of restructuring the electric power industry (8 of those have suspended their restructuring for now).
Electric utilities have gone through the most dramatic change due to deregulation. Most public utility companies that deal with electricity no longer generate the power. Instead, they service and maintain the grid the power is delivered on. Private companies are now generating the power and selling it to the public utility companies. Investors thinking about public utilities need to be watchful of government regulations and climate when they choose this field. (To learn more about deregulation, read Free Markets: Whats The Cost?)
One concern when it comes to this sector is that, thus far, governments have been hesitant to allow public utilities to raise rates, which makes it challenging to recoup their investment in capital spending and construction of new plants. Government regulations and the restriction on rate increases is what sent the public service of New Hampshire into Chapter 11 for the construction of the Seabrook Nuclear Power Plant. Keeping an eye on the climate in Washington can help an investor looking to put their money into this sector.
When to Invest
When it comes to utilities, there are better times to buy than others, and its important to remember that public utility companies are considered a defensive play. Tough economic times usually benefit utilities, as people still need water, electricity and natural gas to flow uninterrupted, regardless of the economy.
Also, lower interest rates make the steady and high dividend yields offered by utility companies an attractive place to invest. Those interested in capturing income from their investments look to utility companies as a good place to put their money. Keep an eye on a turning market and rising rates, which typically have an inverse effect on the public utilities stock price. (For more defensive investing, read Guard Your Portfolio With Defensive Stocks.)
Green Movement
One of the biggest risks facing public utility companies is the green energy movement, and electric utility companies are feeling the pressure. Whether they create or buy the electricity, governments want the power to be created from renewable sources. This can be costly to upgrade and, with the existing government reluctance to allow public utility companies to recoup their capital expenditure through raising rates, it can hurt the dividend. Any time funds that could otherwise be paid out to shareholders in the form of dividends are instead used for improvement, lower cash flow to the investor in the short term is inevitable. So be careful if your primary interest is on a steady dividend cash flow from utilities, and the utilities are making a lot of capital expenditures instead of paying it out as dividends.
When it comes to investing in utility trusts, one must look at the portfolio and the underlying companies carefully. The risks common to public utility companies should be screened by investors looking to invest their money with a utility trust. So, if there are risks that can affect the future dividend payout of one of these utilities, steer clear of that utility trust.
Summing It All Up
Utility trusts are a great way to invest in the public utility sector. Public utilities are a great place to invest in during tough economic times and tough market conditions. Their inverse relationship with interest rates means you can still make money when the economy is not doing as well. Trusts offer an investor an easy way to quickly diversify within the public utilities sector without having the costs that are associated with mutual funds. Dividends are paid out quickly to trustees, so earning a steady income is possible.
It is also important to know a stock's price history. If a stock you thought was great for the last 2 years has traded flat for those two years, it would appear that Wall Street has a different opinion.
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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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