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U.S. OTC market contains the same participants and incentives as other U.S. markets. The same is true for trading in OTC securities.
A Beginners Guide To Hedging
Although it sounds like your neighbors hobby whos obsessed with his topiary garden full of tall bushes shaped like giraffes and dinosaurs, hedging is a practice every investor should know about. There is no arguing that portfolio protection is often just as important as portfolio appreciation. Like your neighbors obsession, however, hedging is talked about more than it is explained, making it seem as though it belongs only to the most esoteric financial realms. Well, even if you are a beginner, you can learn what hedging is, how it works and what hedging techniques investors and companies use to protect themselves.
What Is Hedging?
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesnt prevent a negative event from happening, but if it does happen and youre properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.
Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.
Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.
Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging cant help us escape the hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.
How Do Investors Hedge?
Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. Were not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.
Lets see how this works with an example. Say you own shares of Corys Tequila Corporation (Ticker: CTC). Although you believe in this company for the long run, you are a little worried about some short-term losses in the tequila industry. To protect yourself from a fall in CTC you can buy a put option (a derivative) on the company, which gives you the right to sell CTC at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option. (For more information, see this article on married puts or this options basics tutorial.)
The other classic hedging example involves a company that depends on a certain commodity. Lets say Corys Tequila Corporation is worried about the volatility in the price of agave, the plant used to make tequila. The company would be in deep trouble if the price of agave were to skyrocket, which would severelyeat into profit margins. To protect (hedge) against the uncertainty of agave prices, CTC can enter into a futures contract (or its less regulated cousin, the forward contract), which allows the company to buy the agave at a specific price at a set date in the future. Now CTC can budget without worrying about the fluctuating commodity.
If the agave skyrockets above that price specified by the futures contract, the hedge will have paid off because CTC will save money by paying the lower price. However, if the price goes down, CTC is still obligated to pay the price in the contract and actually would have been better off not hedging.
Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate and currency - investors can even hedge against the weather.
The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isnt to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.
Weve been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isnt a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.
What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market. So why learn about hedging?
Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.
Conclusion
Risk is an essential yet precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing the intricate uses of derivatives, learning about how hedging works will help advance your understanding of the market, which will always help you be a better investor.
Semi-Strong Form: Random Walkers
The semi-strong form of market efficiency theorizes that the current price reflects all readily available information. This is sometimes called insider trading.
Investors should always carefully review the financial information of issuers before making investments. Many OTC equities are issued by small companies with limited histories or in economic distress.
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What Are The Odds Of Scoring A Winning Trade?
When many of us think of probabilities, the first thing that comes to mind is a coin toss - having a 50% chance at being right on a given toss. Can something as simple as a coin toss be applied to the market effectively? It can at least provide us with some tools for approaching the markets, and it can be applied in many more ways than one might expect. A traders current views of probability could be completely wrong, and could very well be why they are not making money in the markets. This article is an introduction to the probabilities of trading and to a commonly overlooked but integral part of the financial system - statistics. But dont be scared off by the word statistics; everything will be explained in plain English and without many numbers or formulas.
Understanding the Coin Toss
In the short term, anything can happen; this is why the coin toss is an appropriate analogy for the stock market . Lets assume that at a given moment in time the stock could just as easily move up as it could move down (even in a range, stocks move up and down), thus our probability of making a profit (whether short or long) on a position is 50%.
While hopefully no one would make completely random short-term trades, we will start with this scenario. If we a have an equal probability of making a quick profit (like a coin toss), does a run of profits or losses signal what future outcomes will be? No! Not on random trades. This is a common misconception. Each event still has a 50% probability, no matter what outcomes came prior.
Runs do happen in random 50/50 events. A run refers to a number of identical outcomes that occur in a row. Here is a table displaying the probabilities of such a run; in other words, the odds of flipping a given number of heads or tails in a row.
Run Length
Chance
1
50%
2
25%
3
12.5%
4
6.25%
5
3.125%
6
1.5625%
Here is where we run into problems. Lets say we have just made five profitable trades in a row. According to our table, which is giving us the probability of being right (or wrong) five times in a row based on a 50% chance, we have already overcome some serious odds. The odds of getting the sixth profitable trade looks extremely remote, but actually that is not the case. Our odds of success are still 50%! People lose thousands of dollars in the markets (and in casinos) by failing to realize this. The reason is that the odds from our table are based on uncertain future events and the likelihood they will occur. Once we have completed a run of five successful trades, those trades are no longer uncertain. Our next trade starts a new potential run, and after the results are in for each trade, we start back at the top the table, every time. This means every trade has a 50% of working out. (Learn how to illustrate an asset returns sensitivity read Find The Right Fit With Probability Distributions.)
The reason this is so important is that often, when traders get into the market, they mistake a string of profits or losses as either skill or lack of skill. This is simply not true. Whether a short-term trader makes multiple trades or an investor makes only a few trades a year, we need to analyze the outcomes of their trades in a different way to understand if they are simply lucky or if there is actual skill involved. Statistics apply on all time lines, and this is what we must remember.
Long-Term Results
The above example gave a short-term trade example based on a 50% chance of being right or wrong. But does this apply to the long term? Very much so. The reason is that even though a trader may only take long-term positions, he or she will be doing fewer trades and thus it will take longer to attain data from enough trades to see if simple luck is involved or if it was skill. A short-term trader may make 30 trades a week and show a profit every month for two years. Has this trader overcome the odds with real skill? It would seem so, as the odds of having a run of 24 profitable months is extremely rare unless the odds have shifted more in his favor somehow. (Find out if mutual fund managers can successfully pick stocks or if youre better off with an index fund. Read Is Stock Picking A Myth?)
Now what about a long-term investor who has made three trades over the last two years and has been profitable. Is this trader exhibiting skill? Not necessarily. Currently, this trader has a run of three going, and that is not difficult to accomplish even from totally random results. The lesson here is that skill is not just reflected in the short term (whether that is one day or one year, it will differ by trading strategy ), but will also be reflected in the long term. We need enough trade data to accurately determine whether a strategy is significant enough to overcome random probabilities. And even with this, we face another challenge: while each trade is an event, so is a month and year in which trades were placed.
A trader who placed 30 trades a week has overcome the daily odds and the monthly odds for a good number of periods. Ideally, proving the strategy over a few more years would erase all doubt that there was luck involved due to a certain market condition . For our long-term trader making trades that last more than a year, it will take at least several more years to prove that his strategy is profitable over this longer time frame and in all market conditions.
When we consider all time frames and all market conditions, we actually begin to see how to be profitable on all time frames and how to move the odds more in our, attaining greater than a random 50% chance of being right. It is worth noting that if profits are larger than losses, a trader can be right less than 50% of the time and still make a profit. (This phenomenon can cause a trader to abandon a proven strategy or risk everything on chance. Find out how to avoid it, check out Random Reinforcement: Why Most Traders Fail.)
How Profitable Traders Make Money
So, obviously people do make money in the markets, and its not just because they have had a good run. So how do we get the odds in our favor? The profitable results come from two concepts. The first concept is based on what was discussed above - being profitable in all time frames or at least winning more in certain periods than is lost in others.
The second concept is the fact that trends exist in the markets, and this no longer makes the markets a 50/50 gamble, as in our coin toss example. Stock prices tend to run in a certain direction over periods of time, and have done this repeatedly over market history. For those of you who understand statistics, this proves that runs (trends) in stocks occur and thus we end up with a probability curve that is not normal (remember that bell curve your teachers always talked about) but is skewed and commonly referred to as a curve with a fat tail. This means that traders can be profitable on a consistent basis if they use trends, even if it is on an extremely short time frame.
Bringing It All Together
If trends exist and thus we can no longer have a random sampling of data (trades) because there is a bias in those trades that will likely reflect a trend, why is the 50% chance example above useful? The reason is that the lessons are still very valid. A trader should not increase his or her position size or take on more risk (relative to position size) simply because of a string of wins, which should not be assumed to occur as a result of skill. It also means that a trader should not decrease position size after having a long profitable run. (Find out if taking the path less traveled will work in your favor - or against it, see Trading Systems: Run With The Herd Or Be A Lone Wolf?)
This information should be good news. New traders can take solace in the fact their researched trading system may not be faulty but rather is experiencing a random run of bad results (or it may still need some refining). It also should put pressure on those who have been profitable to continually monitor their strategies so they remain profitable.
This information can also aid investors when they are analyzing mutual funds or hedge funds. Trading results are often published showing spectacular returns; knowing a little more about statistics can help us gauge whether those returns are likely to continue or if the returns just happened to be a random event. (From picking the right type of stock to setting stop-losses, learn how to trade wisely
Returning to the analysis of Halliburton (HAL)[Hal], we can see that the November high of the trading range (33 to 44) extended more than 20% past the low, making the range quite large relative to the price.
The term "person associated with a broker or dealer" or "associated person of a broker or dealer" means any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of section 15(b) (other than paragraph (6) thereof).
The Benefits Of An Investment Club
Most mutual fund investors would be hard pressed to name more than one or two of the top holdings within their favorite funds. This is because fund investors tend to compare mutual funds on the basis of their performance, without giving much thought to the specific stocks, bonds and other financial instruments held within the fund. By their nature, mutual funds are a passive form of investment: we trust that the mutual fund manager has the expertise to choose the right investments that will provide the best returns in our portfolios.
As individual investors, we rarely have a large enough portfolio to make individual equity or bond selections on our own. As a result, the average retail portfolio is usually insufficiently diversified with individual stock picks, and we mutual fund holders are subjected to undue risk from one or two bad choices forming a large percentage of our total holdings. For these reasons, retail investors who are dissatisfied with the passive approach of mutual funds and want to take a more active role in choosing equities would do well to join an investment club. (Find out more in Benefit From A Winning Investment Club.)
The Benefits of an Investment Club
You can think of an investment club as a small-scale mutual fund where decisions are made by a committee of non-professionals. In fact, an investment club can be established as a legal entity, either as a legal partnership or as a limited liability corporation, making its framework similar in principle to that of a mutual fund. Best of all, an investment club avoids the often burdensome management fees that all mutual funds levy on their unit holders - fees that can have a significant impact on the overall return provided by mutual funds.
But the benefits of an investment club come with a major caveat: the returns (or losses) that the club realizes entirely depend on club members and their abilities to choose the right investments for their pooled funds. When we purchase mutual funds from the major fund companies, we are effectively purchasing the education, experience, skills and discipline of the mutual fund managers entrusted with our money. When we join an investment club, we are attempting to replicate (and improve upon) some of those management attributes, but in a non-professional setting.
A typical investment club will meet on a regular basis (usually every month) to review its existing portfolio and to take suggestions from club members regarding new investment opportunities. The monthly meeting is an open floor, where each club member is able to voice his or her opinion about the suitability of new investments and other concerns regarding the performance of the pooled funds. Unlike any mutual fund, the investment club is a true democracy: here, the collective wisdom of the club members, combined with information theyve gathered through intensive research, serves (in theory) to produce the best investment decisions.
Principles of a Successful Investment Club
The National Association of Investors Corporation (NAIC) is the pre-eminent advocate of collaborative investing. It maintains extensive archives of information for starting and maintaining investment clubs. The NAIC advocates four simple principles which apply as much to making excellent individual investment decisions as they do to making democratic decisions in a club setting:
• Invest regularly.
• Reinvest dividends and capital gains.
• Discover and own leadership growth companies.
• Prudently diversify by company size and industry.
These principles are very much in keeping with a buy-and-hold strategy, characterized by low portfolio turnover rates. The average holding period for equities within NAIC-advocated portfolios is more than six years. The NAICs principles and strategies have enabled it to claim that on average, the long-term performance of NAIC members has generally outperformed market benchmarks. The NAIC boasts a large membership consisting of both individual investors and investment clubs, and it offers services for introducing individuals to clubs in their area. (Learn more about investment clubs in Investment Clubs Pool Assets, Expertise and 4 Tips For Joining An Investment Club.)
Conclusion
You dont need to belong to the National Association of Investors Corporation to see the value in its overarching principles of discipline, diversification, reinvestment and careful selection of top companies. Indeed, you dont even need to belong to an investment club to adopt these principles as part of your individual investment strategy.
But there are clear benefits to the discipline and decision-making typical of investment clubs. By maintaining a strict regimen of regular meetings, investment clubs force individual investors to adopt an active investment style, in which portfolio review is ongoing and investment decisions - whether to buy, sell or hold - are constantly made.
Furthermore, the decision-making power of the investment club resides in its democracy. Each member brings his or her own education, experience and skills to the group, all of which are used to their fullest when evaluating and debating a decision. The power of the mutual fund comes from professional management that may be able to beat average market returns. The power of the investment club comes from the collective talents of numerous individual members.
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Demo Accounts A Good (But Imperfect) Indicator Of Investing Skills
Demo accounts are advertised all over the internet, and people who surf financial sites are often exposed to many ads inducing them to open a demo account. Demo account trading is the new form of paper trading. The old-fashioned paper trade involved writing down entries and exits to see how a methodology played out in the market. Demo accounts allow the trader to do this on a computerized simulator. The simulated trading environment does provide a trader with the opportunity to get used to the software they will be using with their broker to trade the markets, but when a person moves to live trading after the demo account, there are several shocks they need to prepare for.
Why the Shock?
Many traders trade profitably in a demo account, but when they move to live trading with their own money, a succession of losses may occur one after the other. Why does this happen?
1. Demo accounts provide better execution than live trading .
Demo accounts will normally fill a market order at the price showing on the screen. When an order is placed in the live market, it is subject to slippage, and therefore it is quite common for market orders to not be filled at the price expected, or in the case of large orders, for at least a portion of the position to be acquired at a different price than is expected.
Demo accounts will also generally give early fills when bidding or offering. Bids and offers in the live market are also subject to a queue. Bidding at the current bid price does not guarantee a fill, as only a few shares or contracts may be filled at that price. In a demo account, it is hard to know which orders would actually have been executed in the live market. This is true of entries and exits, and thus results attained from a demo account are highly subjective at best, and completely inaccurate at worst.
2. Demo accounts often provide more capital than what the trader will actually be using for live trading.
Demo software generally allows the trader to choose the amount of capital he or she would like to simulate trading with. The amounts vary, but are often very large and beyond the actual capital the trader has for trading his own account.
Simulated trading with more capital than will actually be traded provides an unrealistic safety net. More capital allows for small losses to be more easily recouped, while a loss on a smaller account is harder to recoup.
It is also important to note that even share lots (100 shares) in more expensive instruments, which were easy to afford in the high-capital demo account, may be beyond the capacity of the trader in a live account. The instruments and volume traded in the simulator may not be able to be replicated with real capital. A trader may be able to trade several lots of Google at $500/share, but unless he or she has similar capital for live trading, he or she may be unable to trade those higher priced instruments at all.
3.
A demo account cannot simulate the emotions of fear and hope (also called greed) that the trader will experience with real money.
This is one of the most jarring differences between simulated and live trading. A fear of losing ones own capital can wreak havoc on a proven trading system and prevent the trader from implementing it properly. Greed (or hoping a losing position will come back to profitability) can have the same effect, keeping the trader in a trade long after it should have been exited.
When real money is on the line, money that can have a potential material impact (or is perceived to have a potential impact), it is far different from trading a demo account where success or failure has no material impact on the persons life.
Can Demo Trading Be Made More Realistic?
Demo trading does have some benefits, as it gives new traders a general idea of how the market and a companys software works. So, can you trade a demo account in a certain way to make it more realistic? While a demo account can never offer the same results that would be realized in live trading, there are several things you can do when testing out systems on a demo platform to make the results as realistic as possible.
1. Make Realistic Assumptions
If a bid or offer is placed, and you can see that the bid or offer was within one tick or one cent of the low or high of that move, assume that your order was not filled. The demo may show this order was filled, but in the actual market, this may not happen. Remove the profits or losses from these trades from the net profit/loss shown on the simulator – as if the trade never existed. Only assume bids or offers are filled if price trades through the bid or offer by at least a cent more. For thinly traded stocks or low-volume stocks this buffer should be expanded.
2. Account for Slippage
On market orders assume at least a one-cent slippage on high volume stocks, and assume larger slippage in lower volume or more volatile stocks.
3. Trade With Modest Capital
If possible, trade the same amount of capital in the demo account as will be traded in the live market. If the demo does not allow this, trade only a fraction of the demo account capital. Dont access any funds from the demo capital which would be in excess of live trading funds.
4. Get Personal
Pretend the money is real as much as possible. Monitor emotions and how trades are affecting you psychologically while those emotions are felt. Since demo capital provides no real loss or profits, the sense of loss or profit needs to be added in by the trader. One method of doing this is to withhold something you enjoy if you fail to follow your trading plan, or give yourself a small reward when the trading plan is followed (regardless of profit or loss).
Summary
Demo accounts can provide some benefit to new traders, as they allow the trader to become familiar with trading software and get a sense of how the market works. The problem is that simulated results rarely correlate to actual trading results. Therefore, the trader must be aware that execution, capital and emotions can be different when trading real money as opposed to fake money. Traders can, however, make demos more realistic by excluding profits/losses on orders that are unlikely to have been filled in the real market, factoring in slippage, keeping the demo account capital in line with what will actually be traded and making demo losses and profits (and thus emotions) real by incorporating external stimulus.
Conversely, active securities with current disclosure tend to have tighter spreads because market makers believe they have sufficient knowledge of the company and the security to buy and sell with confidence.
NITE-LYNX $MJNA BarChart Technical Analysis
http://www.barchart.com/technicals/stocks/MJNA
1What is Fundamental Analysis?
Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies.
Managing A Portfolio Of Mutual Funds
After youve built your portfolio of mutual funds, you need to know how to maintain it. This week, we talk about how to manage a mutual-fund portfolio by walking through four common strategies:
The Wing-It Strategy
This is the most common mutual-fund strategy. Basically, if your portfolio does not have a plan or a structure, then it is likely that you are employing a wing-it strategy. If you are adding money to your portfolio today, how do you decide what to invest in? Are you one that searches for a new investment because you do not like the ones you already have? A little of this and a little of that? If you already have a plan or structure, then adding money to the portfolio should be really easy. Most experts would agree that this strategy will have the least success because there is little to no consistency.
Market-Timing Strategy
The market timing strategy implies the ability to get into and out of sectors or assets or markets at the right time. The ability to market time means that you will forever buy low and sell high. Unfortunately few investors buy low and sell high because investor behavior is usually driven by emotions instead of logic. The reality is most investors tend to do exactly the opposite – buy high and sell low. This leads many to believe that market timing does not work in practice. No one can accurately predict the future with any consistency.
Buy-and-Hold Strategy
This is by far the most commonly preached investment strategy . The reason for this is that statistical probabilities are on your side. Markets generally go up 75% of the time and down 25% of the time. If you employ a buy-and-hold strategy and weather through the ups and downs of the market, you will make money 75% of the time. If you are to be more successful with other strategies to manage your portfolio, you must be right more than 75% of the time to be ahead. The other issue that makes this strategy most popular is it is easy to employ. This does not make it better or worse. It is just easy to buy and hold.
Performance-Weigthing Strategy
This is somewhat of a middle ground between market timing and buy and hold. With this strategy, you will revisit your portfolio mix from time to time and make some adjustments. Lets walk through an oversimplified example using real performance figures.
Lets say that at the end of 1996, you started with an equity portfolio of four mutual funds and split the portfolio into equal weightings of 25% each.
After the first year of investing, the portfolio is no longer an equal 25% weighting because some funds performed better than others.
The reality is that after the first year, most investors are inclined to dump the loser (Fund D) for more of the winner (Fund A). However, the right strategy is to do the opposite to practice sell high, buy low. Performance weighting simply means that you sell some of the funds that did the best to buy some of the funds that did the worst. Your heart will go against this logic but it is the right thing to do because the one constant in investing is that everything goes in cycles.
In year four, Fund A has become the loser and Fund D has become the winner.
Performance weighting this portfolio year after year means that you would have taken the profit when Fund A was doing well to buy Fund D when it was down. In fact, if you had re-balanced this portfolio at the end of every year for five years, you would be further ahead as a result of performance weighting.
Its all about discipline.
The key to portfolio management is to have a discipline that you adhere to. The most successful money managers in the world are successful because they have a discipline to manage money and they have a plan. Warren Buffet said it best: To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
Investors should clearly understand that trading practices for OTC securities are different from those of securities traded on exchanges. Your broker-dealer or the broker-dealer they route your order to, may not provide you with limit order display or instantaneous executions in OTC securities.
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There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price). Just as stock prices fluctuate, so too do growth and multiplier assumptions. Are we to believe Wall Street and the stock price or the analyst and market assumptions?
Dissecting Declarations, Ex-Dividends And Record Dates
Have the workings of dividends and dividend distributions mystified you too? Chances are its not the concept of dividends that confuses you; the ex-dividend date and date of record are the tricky factors. In this article well sort through the dividend payment process and explain on what date the buyer of the stock gets to keep the dividend.
Before we explain how it all works, lets go over some of the basics to ensure we have the proper foundation to understand the more complex issues. Some investment terms are thrown around more often than Frisbees on a hot summer day, so its important that we define exactly what were talking about.
Different Types of Dividends
The decision to distribute a dividend is made by a companys board of directors. There is nothing requiring a company to pay a dividend, even if the company has paid dividends in the past. However, many investors view a steady dividend history as an important indicator of a good investment, so most companies are reluctant to reduce or stop their dividend payments. (For more information on buying dividend paying stocks , see the articles How Dividends Work for Investors and The Importance of Dividends.
Dividends can be paid in various different forms, but there are two major categories: cash and stock. The most popular are cash dividends. This is money paid to stockholders , normally out of the corporations current earnings or accumulated profits.
For example, suppose you own 100 shares of Corys Brewing Company (ticker: CBC). Cory has made record sales this year thanks to an unusually high demand for his unique peach flavored beer. The company therefore decides to share some of this good fortune with the stockholders and declares a dividend of $0.10 per share. This means that you will receive a check from Corys Brewing Company for $10.00 ($0.10*100). In practice, companies that pay dividends usually do so on a regular basis of four times a year. A one-time dividend such as the one we just described is referred to as an extra dividend.
The stock dividend, the second most common dividend paying method, pays additional shares rather than cash. Suppose that Corys Brewing Company wishes to issue a dividend but doesnt have the necessary cash available to pay everyone. He does, however, have enough Treasury stock to meet the requirements of the dividend payout. So instead of paying cash, Cory decides to issue a dividend of 0.05 new shares of CBC for every existing one. This means that you will receive five shares of CBC for every 100 shares that you own. If any fractional shares are left over, the dividend is paid as cash (because stocks cant trade fractionally).
Another type of dividend is the property dividend, but it is used rarely. This type of allocation is a physical transfer of a tangible asset from the company to the investors. For instance, if Corys Brewing Company was still insistent on paying out dividends but didnt have enough Treasury stock or enough money to pay out all investors, the company could look for something physical (property) to distribute. In this case, Cory might decide that his unique peach beer would be the best substitute, so he could distribute a couple of six-packs to all the shareholders.
The Important Dates of a Dividend
There are four major dates in the process of a company paying dividends:
• Declaration date - This is the date on which the board of directors announces to shareholders and the market as a whole that the company will pay a dividend.
• Ex-date or Ex-dividend date - On (or after) this date the security trades without its dividend. If you buy a dividend paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-dividend date, you wont get the dividend. Conversely, if you want to sell a stock and still receive a dividend that has been declared you need to sell on (or after) the ex-dividend day. The ex-date is the second business day before the date of record.
• Date of record - This is the date on which the company looks at its records to see who the shareholders of the company are. An investor must be listed as a holder of record to ensure the right of a dividend payout.
• Date of payment (payable date) - This is the date the company mails out the dividend to the holder of record. This date is generally a week or more after the date of record so that the company has sufficient time to ensure that it accurately pays all those who are entitled.
Why All These Dates?
Ex-dividend dates are used to make sure dividend checks go to the right people. In todays market, settlement of stocks is a T 3 process, which means that when you buy a stock , it takes three days from the transaction date (T) for the change to be entered into the companys record books.
As mentioned, if you are not in the companys record books on the date of record, you wont receive the dividend payment. To ensure that you are in the record books, you need to buy the stock at least three business days before the date of record, which also happens to be the day before the ex-dividend date.
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As you can see by the diagram above, if you buy on the ex-dividend date (Tuesday), which is only two business days before the date of record, you will not receive the dividend because your name will not appear in the companys record books until Friday. If you want to buy the stock and receive the dividend, you need to buy it on Monday. (When the stock is trading with the dividend the term cum dividend is used). But, if you want to sell the stock and still receive the dividend, you need to sell on or after Tuesday the 6th.
*Note: Different rules apply if the dividend is 25% or greater of the value of the security. In this case, the Financial Industry Regulatory Authority (FINRA) indicates that the ex-date is the first business day following the payable date. For further details on dividend issues, search FINRAs website.
A Money Machine?
Now that we understand that a dividend can be received by purchasing the stock before the ex-date, can we make more money? Nope, its not that easy. Remember, everybody knows when the dividend is going to be paid, and the market sees the dividend payout as a time when the company is giving out a part of its profits (reducing its cash). So the price of the stock will drop approximately by the amount of the dividend on the ex-dividend date. The word approximately is crucial here. Due to tax considerations and other happenings in the market, the actual drop in price may be slightly different. In any case, the point is that you cant make free profits on the ex-dividend date.
Conclusion
The reasons for and effects of all these dates are by no means easy to grasp. Its important to clear up any confusion between ex-dividend and record dates. But always keep in mind that when youre investing in a dividend paying stock, its more crucial to consider the quality of the company than the date on which you buy in.
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Limit Order – a limit order does have a set price and therefore may only be executed at the set price; however, a limit order may never get executed because the market may move away from the set price. Those who use limit orders risk not having a order executed.
Once this information becomes public knowledge, prices adjust instantaneously, so it is virtually impossible to profit from such news.
Are Investing Seminars Worth It?
As the old saying goes, free advice is worth every penny you pay for it. Contrary to this ancient witticism, in some cases this advice could be very valuable. It depends on the source of the advice and what the adviser wants from those being advised. TUTORIAL: Investing 101 In the wake of the recent financial crisis, a virtual deluge of investment advice, packaged as investment seminars, has been offered free to the public in mailed letters, brochures and flyers, and in other forms of advertising and promotions. The recipient of these marketing messages justifiably wonders: Which among the many seminars offered would be beneficial? Heres how to answer that question.
Investment seminars may be broadly classified in two varieties:
•The seminar with something for sale.
•The seminar with no specific investment for sale.
The most common seminar is the first variety. These something-specific-for-sale seminars are offered by an individual, company, or institution such as a bank, insurance company or brokerage firm. While they do offer investment information, the seminars are designed principally to sell products and or services to the attendees. For every sale made, the seller receives a commission. So keep in mind that while these seminars impart information, they are also sales pitches. (For related reading, see The Sales Commission Dilemma.)
Most Frequently Sold Products/Services
Annuities, sold by financial planners and advisers, insurance companies, banks and brokers. Annuities generally provide the buyer with a lifetime return (with certain exceptions, spelled out in the contract) on a lump sum investment. Bonds of many kinds (i.e. debt, meaning contractual obligations to pay a certain rate of interest on a principal amount over a specified period of time). Stocks and balanced portfolios of stocks. Many seminars will offer a free portfolio analysis - meaning theyll look at all your investments and advise you on what to sell and what to buy for better returns, with relative safety and perhaps a small percentage allocated to a higher-risk, higher-return investment on your investments. As usual, the adviser-seller receives a commission on all sales. (For related reading, see What Is A Registered Investment Advisor?)
Specific targeted investment advice for retirement, for accumulating enough money for a college education for children or grandchildren, and for setting up trusts, among other investments and investment services offered. Brokers and brokerage firms often conduct seminars on trading stocks, stock options, commodities, and foreign currency. These can be high risk speculations for inexperienced investors and special caution is advised before trading in these often volatile markets.
Finally, seminars which offer information about esoteric investments which may yield high returns, should be regarded with a prudent skepticism. Sales pitches may hype certainemerging markets, foreign bonds, private equity firms, copper mines in Africa, derivatives of various types, and similar investment vehicles, suggesting that in best-case scenarios, the returns will be high. These may turn out to be successful investments, but pending regulatory oversight, certified audits and more transparency about the investment, investors are urged to be wary. (For more on emerging markets, see What Is An Emerging Market Economy.)
No Specific-Investments For Sale Seminars
Seminars which offer nothing for sale and are strictly informational or educational may provide the most benefits to attendees. Because nothing is for sale, the information provided is not skewed toward the usual biases which favor certain investments over others of roughly equal returns and safety.
Often, these seminars are given by independent financial advisers, or by authors of books on investments, media columnists or commentators, newsletter publishers, Website writers and other speakers with no specific investment to sell. But the financial advisers want to sell their expert advice, and may invite seminar attendees to make an appointment for a personal one-on-one consultation to discuss their investment goals and how to achieve them. Most likely at that meeting the adviser will try to sell fee-based and or performance-based services.
The writers and publishers who conduct investment seminars will probably try to sell their books, newsletters, Web subscriptions and other forms of information to the attendees.
Heres What to Do and Not to Do at Both Types of Seminars:
If you dont understand something, ask questions. If its too complicated, ask to see it in writing. If you still dont understand the investment and how it works, steer clear. Ask to see the credentials of anyone purporting to be a certified financial planner. Ask for references. Maintain a high level of skepticism, especially when no-risk, high-return investments are touted. Keep in mind, the higher the projected return, the higher the risk, and in some cases, you can lose all the money you invest. Get a second opinion from an outside, disinterested source if youre considering an investment. Dont be rushed into buying something on the spot because the sales person says the markets are moving quickly and if you dont buy now youll miss the profits.
If you do invest, experts say dont allocate more than 4% of your total portfolio to any one investment. That way, if the investment produces a loss, you wont be hurt too badly. (Learn how to weed out those who are just out to make a quick buck. For more, see Find The Right Financial Advisor.)
The Bottom Line
Investment seminars can be worth your time, but keep in mind that theres usually something for sale at most of them. Nevertheless, like your daily newspaper or favorite magazines or informational website, along with the advertisements of goods and services for sale, theres plenty of useful information and newsworthy stories. The same holds true for most investment seminars.
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The OTC Bulletin Board (OTCBB) is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are not listed on a national securities exchange. Securities quoted on the OTCBB include domestic, foreign and American depository receipts (ADRs).
Some buying interest began to become evident around 44 in mid- to late-February. Notice the array of candlesticks with long lower shadows, or hammers, as they are known.
Invest Without Stress
Many investors get a lot of anxiety chasing mutual fund returns, hoping that history repeats itself while they are in the fund. In fact, a fund which has already yielded large returns has less of a chance to do so again when compared with its peer group. A better idea, rather than stressing out over the vagaries of the financial markets, is to look for wisdom in time-tested, academic methods. Once your high-quality investment plan is set up, relax. Let your investment compound, understanding that the plan is rooted in knowledge, not hype.
Good Soil
As with growing a garden, you want to invest in good soil (strategy). Accordingly, you can expect there to be some rainy days (bear market) with the sunny (bull market). Both are needed for overall growth. Once a garden (money) starts to grow, dont uproot it and replant, lest it wither and die. Set up your investment wisely and then let it grow.
Academic research creates good soil. The body of knowledge about the market goes through a rigorous review process where primary goal is truth or knowledge rather than profit. Thus, the information is disinterested - something you should always look for in life to make wise decisions.
Greatly distilling this body of knowledge, here are a few key points to remember when it comes to investing in the stock market .
Risk and Return
This concept is similar to the saying there is no free lunch. In money terms, if you want more return, you are going to have to invest in funds that have a greater probability of going south (high risk). Thus, the law of large numbers really comes into play here, since investing in small, unproven companies may yield better potential returns, while larger companies which have already undergone substantial growth may not give you comparable results.
Market Efficiency
This concept says that everything you need to know about conventional investments is already priced into them. Market efficiency supports the concept of risk and return; thus, dont waste your time at the library with a Value Line investment unless it provides entertainment value. Essentially, when you look at whether or not to invest in a large corporation, it is unlikely that you are going to find any information different from what others have already found. Interestingly, this also gives insight into how you make abnormal returns by investing in unknown companies like Bobs Tomato Shack, if you really have the time and business acumen to do the front-line research.
Modern Portfolio Theory
Modern portfolio theory (MPT) basically says that you want to diversify your investments as much as possible in order to get rid of company- or stock-specific risk, thus incurring only the lowest common denominator - market risk. Essentially, you are using the law of large numbers in order to maximize returns while minimizing risk for a given market exposure.
Now here is where things get really interesting! We just found the way to optimize your risk-return tradeoff for a given market level of risk by being well diversified in your investments. However, you can further adjust the investment risk downwards by lending money (investing some of it in risk-free assets) or upwards by borrowing it (margin investing).
Best Market Portfolio
Academics have created models of the market portfolio , consisting of a weighted sum of every asset in the market, with weights in the proportions that the assets exist in the market. Many think of this as being like the S
All corporate actions, including: symbol changes, venue changes (new to the OTC), OTC Tier changes, Caveat Emptor status changes, Splits, Dividends, and Deletes are available within the Corporate Actions section.
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These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline.
Diversifying Your Portfolio With Real Estate And Infrastructure
Real estate is undoubtedly a significant element of asset allocation, and should form a component of any institutional or personal investment portfolio. Also increasing in importance is infrastructure, which has similar advantages to real estate. Based on research at the University of Regensburg in Germany, this article will consider some of the main asset allocation issues in this context.
Both real estate and infrastructure constitute attractive investments for risk-averse investors, especially during bear markets. There are similarities and differences between the two, and you can construct a truly optimal portfolio by fully exploiting them. (For more on optimizing portfolios, see Achieving Optimal Asset Allocation.)
Diversification Through Real Estate and Infrastructure
The diversification benefits of direct and indirect real estate investments are well known, and diversifications role in institutional portfolios has been investigated extensively. The different correlations to those of stocks and bonds are extremely helpful for avoiding portfolio volatility.
In the U.S., there is a huge need to invest in and improve the infrastructure in many respects, so there is plenty of potential in the market. Pretty much all investors should take advantage of this potential to diversify more effectively than ever and in an extremely promising sector.
In the past, infrastructure has received relatively less attention, along with other alternative assets such as commodities and private equity. There has been a move away from the old-school conventional portfolios comprising equities, bonds, cash and real estate.
The allocation to real estate in particular could be affected if alternative investments significantly diversify returns from conventional investments. In fact, infrastructure has become a focus of attention and found its way into institutional portfolios, and to a lesser extent, private ones. (For more on asset allocation, see Five Things To Know About Asset Allocation.)
What makes infrastructure so appealing is that it seems quite similar to direct real estate in terms of big lot sizes and illiquidity, but also offers general stability and stable cash flows. The research on infrastructure lags behind that of real estate, and Tobias Dechant and Konrad Finkenzeller from Regensberg have attempted to bridge this gap.
Portfolio Optimization with Real Estate and Infrastructure
This research project, and earlier work in the field, demonstrates that direct infrastructure is an important element of portfolio diversification, and that firms tend to overallocate to real estate if they do not also invest in infrastructure. This is an important finding given that infrastructure is really helpful for risk-averse investors - especially in equity market downturns.
There is considerable variation in the recommended, relative amounts that should be invested in these two asset classes, The range extends from zero to as high as 70% (mainly in real estate), depending on the time frame, state of the markets and the methods used to derive the optimum.
The maximum total amount usually recommended for real estate and infrastructure allocations is about 25%, which is considerably higher than actual institutional allocations. It is important to note that efficient allocations in practice depend on numerous factors and parameters, and no specific mix proves to consistently superior. (For related reading, see Asset Allocation: The First Step Towards Profit.)
The blend of real estate and infrastructure is also controversial, but one study by Terhaar et al. (2003), for instance, suggests an even split. Some experts believe that about 5% is sufficient for each. In crisis periods, this can be three or even four times higher.
Another important finding is that real estate and infrastructure may be more useful in terms of diversification than through actual returns. Given the controversy on effective asset allocation and the turbulence in real estate markets, this is a major issue. The latter highlights the benefits of using not only real estate, but also infrastructure.
Also significant is the revelation that the targeted rate of return impacts on the appropriate level of real estate. Investors with higher portfolio return targets (who wish to earn more, but with more risk), may wish to devote less to real estate and infrastructure. This depends a lot on the state of these markets in relation to the equity markets in terms of whether the latter is in an upward or downward phase. (Asset allocation takes care of nearly 94% of your portfolios investment profile. For more, see Asset Allocation: One Decision To Rule Them All.)
The exact allocations to real estate and infrastructure depend on various parameters. Apart from the expected rate of portfolio return mentioned above, there is also the issue of how risk is defined. Other relevant factors include attitudes towards infrastructure in general, and how this relates to other alternative investments. In practice, these allocation decisions are complex, and higher or lower optima are therefore possible for different investors at different times.
Conclusions
If there is one thing that remains the top priority for all investors its having a well diversified portfolio. There is simply no substitute for this, but there is a lot of untapped potential in the market. Real estate investment, but also infrastructure, can play a vital role in optimizing portfolios. This mainly pertains to institutions, but also for private investors. Private investors can generally benefit from more diversification.
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.
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Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears.
The 8 Most Volatile Sectors
Just like people, stocks seem to have their own personalities. Some are volatile, bouncing all over the short term, rapidly up and down in price like a yo-yo. Others are relatively docile and move more slowly, with a small changes in price on a steady pace over long periods of time. Volatility may be caused by a variety of factors - among them are trader emotions like fear and panic, which can cause massive sell offs or buying sprees.
In a jittery, uncertain market with nervous investors, major news events, both positive and negative, can cause big price moves, either down or up. Wars, revolutions, famines, droughts, strikes, political unrest, recessions or depressions, inflation, deflation, bankruptcies of major industries and fluctuations in supply and demand can all cause stock prices to drop precipitously.
Some big hedge funds and private equity firms, with excessive debt incurred to finance stock market investments, have been forced to sell assets in a declining market to pay off margin calls. These large-lot sales also cause big declines in stock prices.
The Sectors
Technology was the most volatile sector, according to a 2009 study conducted by a firm that tracked U.S. stock performance in the S
OTC Markets Group and the FINRA OTCBB distribute their market data to broker-dealers, investment professionals, market data re-distributors, and financial websites, including OTCMarkets.com.
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6 Proven Methods For Selling Stocks
Choosing a time to sell a stock can be a very difficult task. It is especially difficult because, for most traders, it is hard to separate their emotions from their trades. The two human emotions that generally affect most traders with regards to selling a stock are greed and fear of regret. The ability to manage these emotions is key to becoming a successful trader.
Rising Profits
For example, many investors dont sell when a stock has risen 10 to 20% because they dont want to miss out on more returns if the stock shoots to the moon. This is due to their greed and the hope that the stock they picked will be a big winner. On the flip side, if the stock fell by 10 to 20%, a good majority of investors still wont sell because of their fear of regret. If they sell and the stock proceeds to rebound significantly, theyll be kicking themselves and regretting their actions.
So when should you sell your stock? This is a fundamental question that investors constantly struggle with. You need to separate out the emotion from your trading decisions. Fortunately, there are some commonly used methods that can help an investor make the process as mechanical as possible. In this article, I will look at six general strategies to help decide when to sell your stock.
Valuation-Level Sell
The first selling category well look at is called the valuation-level sell. In the valuation level sell strategy, the investor will sell a stock once it hits a certain valuation target or range. Numerous valuation metrics can be used as the basis, but some common ones that are used are the price-to-earnings (P/E) ratio, price-to-book (P/B), and price-to-sales (P/S). This approach is popular among value investors who buy stocks that are undervalued. It can be a good signal to sell when a stock becomes overvalued based on certain valuation metrics.
As an illustration of this method, suppose an investor holds stock in Wal-Mart that they bought when the P/E ratio was around 13 times earnings. The trader looks at the historical valuation of Wal-Mart stock and sees that the five-year average P/E is 15.5. From this, the trader could decide upon a valuation sell target of 15.5 time earnings as a fixed sell signal. So the trader has used a reasonable hypothesis to take the emotion out of his decision making. (For more on the P/E, see Profit With The Power Of Price-To-Earnings.)
Opportunity Cost Sell
The next one well look at is called the opportunity cost sell. In this method, the investor owns a portfolio of stocks and would sell a stock when a better opportunity presents itself. This requires a constant monitoring, research and analysis on both your own portfolio and potential new stock additions. Once a better potential investment has been identified, the investor would reduce or eliminate a position in a current holding that isnt expected to do as well as the new stock on a risk-adjusted return basis.
Deteriorating Fundamentals Sell
The deteriorating fundamental sell rule will trigger a stock sale if certain fundamentals in the companys financial statements fall below a certain level. This sell strategy is slightly similar to the opportunity cost in the sense that a stock sold using the previous strategy has likely deteriorated in some way. When basing a sell decision on deteriorating fundamentals, many traders will focus mainly on the balance sheet statement with emphasis on liquidity and coverage ratios. (Learn more about the balance sheet in Breaking Down The Balance Sheet.)
For example, suppose an investor owns the stock of a utilities company that pays a relatively high and consistent dividend. The investor is holding the stock mainly because of its relative safety and dividend yield. Furthermore, when the investor bought the stock, its debt-to-equity ratio was around 1.0 and its current ratio was around 1.4.
In this situation, a trading rule could be established so that the investor would sell the stock if the debt/equity ratio rose over 1.50, or if the current ratio ever fell below 1.0. If the companys fundamentals deteriorated to those levels – thus threatening the dividend and the safety - this strategy would signal the investor to sell the stock.
Down-from-Cost and Up-from-Cost Sell
The down-from cost sell strategy is another rule-based method that triggers a sell based on the amount, in percent, that youre willing to lose. For example, when an investor purchases a stock he may decide that if the stock falls 10% from where he bought it at, he would sell the stock.
Similar to the down-from cost strategy, the up-from cost strategy will trigger a stock sale if the stock rises a certain percentage. Both the down-from-cost and up-from-cost methods are essentially a stop-loss measure that will either protect the investors principal or lock in a specific amount of profit. The key to this approach is selecting an appropriate percentage that triggers the sell by taking into account the stocks historical volatility and the amount you would be willing to lose.
Target Price Sell
If you dont like using percentages, the target price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as seen by the popularity of the stop-loss orders with traders and investors. Common target prices used by investors are typically ones based on valuation model outputs such as the discounted cash flow model. Many traders will base target price sells on arbitrary round numbers or support and resistance levels, but these are less sound than other fundamental based methods.
Bottom Line
Learning to accept a loss on your investment is one of the hardest things to do in investing. Oftentimes, what makes investors successful is not just their ability to choose winning stocks, but also their ability to sell stocks at the right time.
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.
To be quoted on the platform, companies are not required to file with the SEC, although many choose to do so.[6] A wide range of companies are quoted on OTC Markets, including firmly established foreign firms,[7] mostly through American Depositary Receipts (ADRs). In addition, many closely held, extremely small and thinly traded US companies have their primary trading on the OTC Markets platform.
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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.
It is important to be aware of these biases when analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will overshadow the analysis.
If the broker-dealer cannot, or chooses not to, execute the trade internally, they must attempt to execute the trade with another broker-dealer. This often means accessing the security on OTC Markets Group’s OTC Dealer application and ascertaining whether the order is marketable. Marketable orders are orders where the price specified can immediately be executed in the market. Market Orders are, by definition, marketable. Limit Orders are marketable if the limit price is better than or equal to the bid price (for sell orders) or ask price.
Dont Go Broke Buying Bankrupt Stocks
Sometimes, when stocks drop precipitously, they can easily over do it on the downside, as panic-selling ensues. These large declines can provide an attractive entry point for investors. The problem is that the biggest declines in stocks often occur the day that a company files for bankruptcy. Does that mean that bankrupt stocks can be a good buy? No, although some people dont realize that. Before buying that company that just filed Chapter 11, know the facts, and find out why any amount of money put in is bound to be lost.
When a Company Liquidates
Companies do not want to go bankrupt. Management will lose their jobs, and usually have equity at risk in the company. Companies declare or get forced into bankruptcy as a last resort, because they are having trouble paying their debt and need to gain protection from creditors. If the company liquidates or reorganizes, it needs to pay back everyone else in line before the common shareholders.
The hierarchy of claims goes like this: Bondholders including all classes (ie. subordinated, unsubordinated, secured, unsecured) have first claim to any assets or payments. After that the company may need to make payments for taxes, employees, trustees, etc. Then comes preferred equity holders, and, if there are any, the common equity holders get the leftovers. Its unlikely that shareholders receive anything.
When a Company Restructures
Even when the company will remain a going concern after emerging from chapter 11, the old shares are generally canceled with no payment to holders. New shares are issued, generally as a form of payment to debt holders.
An example of this was Delta Airlines. Delta filed Chapter 11 in 2005 and, following the filing, common shares traded over the counter on the pink sheets. Under its plan of reorganization, Delta was to issue new shares upon emergence from bankruptcy and cancel the old shares, with holders receiving no value. Delta even set up an online Restructuring FAQs for Investors, where they specifically outlined how old shareholders will receive nothing. The website stated:
Under the proposed plan of reorganization, current holders of Delta common stock would receive no distribution, and the securities would be canceled upon the effective date of the plan. Delta has indicated for some time that the company expected its common stock would not have any value under any plan of reorganization the company might propose, which is not uncommon in Chapter 11 proceedings.
The company also explicitly pointed out: Since the expected value of the Company will be less than creditors claims, we will not be able to exchange old stock for new stock.
Despite this clear declaration that holders of old stock would receive nothing, shares exchanged hands at 13 cents just a week before the shares were set to be canceled. Thirteen cents doesnt seem like a lot of money , but for those who were buying 10,000 shares, the loss a week later was a very real $1,300.
Why Bankrupt Stocks Dont Trade at Zero
As weve seen with Delta, the residual value of the shares is zero, so why doesnt every stock trade at zero after declaring bankruptcy? Stocks generally get close to zero on the day of the bankrupt, but can rise afterwards - sometimes even doubling or tripling. This affords some lucky individuals big gains. It is basically equivalent to a lottery ticket and generally has no basis whatsoever. So speculators, much like those who ride other penny stocks , make quick trades in the stocks trying to make big profits, but they also experience big losses. This type of strategy makes little sense with bankrupt stocks, as someone is buying something worth nothing, and hoping to sell it to someone else for more. It is an extreme example of the greater fool theory.
The other reason why a bankrupt stock wont trade at zero is because in rare cases some value may emerge for the common shareholders to claim. This will occur in a situation where the company is able to sell assets for higher than expected prices and can pay off everyone in line, and still have some left over. This, I remind you, is very rare. As stated above, the reason a company declares or gets forced into bankruptcy is because it cannot afford to pay its creditors. (Instead of investing in equity, some investors invest in distressed debt to make a profit; learn more in our article Distressed Debt An Avenue To Profit In Corporate Bankruptcy.)
What About Price-to-Book Value?
A commonly used metric to judge the value of a company is its book value. When looking at book value, the stock of a bankrupt company may look compelling, as it will trade for a small fraction of book value. This, however, cannot be used to determine that there is value in the stock. First, book value contains many things that are of little or no value during bankruptcy, such as goodwill. On top of this, any assets that get sold off in a bankruptcy proceeding will likely receive distressed prices, as buyers will not pay up for assets in liquidation.
The Bottom Line
Dont buy bankrupt stocks. Unless you have some great research on the stock and the bankruptcy proceedings, and have truly figured out that the company can generate enough cash to pay all claims and then some, there is no reason to do it. While buying a stock that was trading at $20 and is now at 20 cents may seem compelling, the vast majority of the time that 20 cents is worth nothing. So why throw away money and look like a fool? If youre looking for something else to buy, I have a great price on a bridge in Brooklyn. For related reading, check out Taking Advantage of Corporate Decline.
For thou convenience $GORXQ BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/GORXQ
Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical.
SEC filings are available on this website under a company's "Financials" tab and on the SEC's website. Some OTC-traded companies do not have filing or reporting requirements with the SEC. For a detailed explanation of registration and reporting requirements and the exemptions available from those requirements, please see the SEC's Small Business Question and Answer Page.
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