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Short sellers are subject to price manipulation schemes – or short squeezes. In a short squeeze, traders believing that there are a lot of short sellers begin buying shares to force the price and the short sellers losses higher. These traders hope that the short sellers will be forced to buy pushing the price even higher at which point they can sell their shares at a profit. Short squeezes are easier to execute in illiquid securities.
Introduction To International REITs
Investing in real estate investment trusts (REITS) has long been an excellent way for investors to diversify stock portfolios. In 2007, the global real estate market represented more than $900 billion of equity capitalization and was growing, according to the National Association of Real Estate Investment Trusts (NAREIT). For the longest time, publicly-traded real estate investment trusts were only available in the areas like the U.S. or Australia; now, more foreign countries are adopting similar structures.
Tutorial: Exploring Real Estate Investments
If youre an investor who owns U.S. REITs, you are only seeing part of the total picture. In fact, a shift toward an international REIT portfolio may be more suitable. Expanding an investment portfolio to include international real estate could open the door to potential return opportunities while further dampening portfolio risk. As is said in real estate, its all about location, location, location.
Breakdown of Global REIT Market
Before we begin to dissect the characteristics and benefits of investing in foreign REITs, let us first recap the REIT universe as a whole. A REIT is a corporation that purchases, owns and manages real estate properties and/or mortgage loans. The REIT structure is unique in that REITs are given special tax status that allows them to avoid corporate tax, as long as 90% of the income is distributed to investors. Although the REIT structure avoids double taxation to shareholders, tax losses cannot be passed through. (To read more REIT basics, see What Are REITs? and ourExploring Real Estate Investments tutorial.)
The global real estate securities market has grown significantly as both developed and developing countries move to create REIT or REIT-like corporate structures. Prior to 1990, however, only the U.S., the Netherlands, Australia and Luxembourg had adopted REIT-like structures. In 2007, according to Dimensional Fund Advisors, the global REIT market was dominated by the U.S. (55%), Australia, Great Britain and Japan. Therefore, non-U.S. REITS make up almost half of the global REIT market. The global REIT universe continues to expand; therefore, investors who limit their REIT positions to U.S.-only funds will also likely limit their opportunities. (Keep reading on this subject in The Emergence Of Global Real Estate.)
Benefits of REITs
One of the benefits of REITs when compared to direct equity real estate investments is that investors have the ability to more effectively and efficiently diversify their real estate portfolios because REITs tend to be more liquid. Of course, the biggest advantage offered by REITs is the diversification benefit. Investors strive to locate asset classes that offer low correlations to other positions in their portfolios. The lower the correlation, the lower the idiosyncratic risk. (To learn more about the benefits of diversification, see Introduction To Diversification and Risk And Diversification.)
The chart below illustrates the low correlation that REITs have to other U.S. core indexes over an extended period of time.
Monthly Return Correlation Coefficient: January 1979 to December 2006
-- Equity REIT Index S
Quotes for all OTC securities are available on OTCMarkets.com by entering a symbol in the quote search area at the top left of any page. All OTCQX securities display real-time level 2 quotes while all OTCQB and OTC Pink securities display real-time inside (best bid and ask) quotations. Quotes are updated from 6:00 AM to 4:00 PM on all trading days.
Get A Hold On Mishandled Accounts
Investors often look to professionals to help them navigate the markets and provide a certain level of service, but there are times when they may feel that an account is being mishandled. As tempting as it may be to find someone to blame for monetary losses, they are often the result of market conditions and investors must be prepared for such risks. However, arbitration or other avenues may be warranted if evidence suggests that a broker recommended an unsuitable investment, committed fraud, or charged excessive commissions by churning the account. In this article, well help you to decide whether your account has been mishandled and if you do need to act on the complaint. (To learn more, see Paying Your Investment Advisor - Fees Or Commissions?)
Your First Steps
If you feel that your broker has not acted in your best interest, try to exhaust all possible remedies with the investment company. After quantifying the loss, schedule a meeting with the primary contact at the investment firm to have an extensive discussion, and listen to the brokers side of the story. If this process does not yield adequate information, escalate the complaint to the next level of management until some type of resolution is reached. This may include various outcomes, including simply waiting for the markets to improve to ending all discussions and proceeding with legal action.
If the dispute is with a broker, you probably already agreed to settle through arbitration when you began working with the firm. In this case, the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD), would handle the arbitration process from start to finish. The groups dispute resolution forum helps resolve matters between investors and securities firms, as well as industry-related issues between individual registered representatives and their firms. (To learn more, see Broker Gone Bad? What To Do If You Have A Complaint and When A Dispute With Your Broker Calls For Arbitration.)
If You Need Legal Representation
As with any potentially lucrative legal proceeding, many legal advisors offer free consultations. Consulting an attorney opens up an outside perspective and can help confirm the appropriate forum for resolving a dispute. This is a good time to begin building a short list of potential litigators, should the need arise. If an arbitration path is appropriate, the list will shrink, as more attorneys handle court cases than arbitration.
While the entire process is simplified in order for any one who has a grievance to file a claim and proceed, the majority of customers pursue their claims in conjunction with a legal team that includes at least one attorney and an expert witness. It is also a good time to set reasonable expectations with potential outcomes and time frames. Do not count on large settlements that include punitive damages, as such generous judgments are rarely rendered. Be prepared to wait months or even years before the arbitration date is set. Depending on the size of the claim and the legal participants, anticipate that arbitration that is not completed in the originally scheduled time frame may be postponed to accommodate participant and panel members schedules.
The Arbitration Process
The table below presents the number of cases handled by FINRA on an annual basis. Typically, the caseload increases in years following volatile financial markets where investors have suffered losses. Caseloads hit historically high levels in 2003, approximately two years after what the tech bubble burst and the stock market plunged.
Year Cases
2002 7,704
2003 8,945
2004 8,201
2005 6,074
2006 4,614
2007 3,238
If arbitration appears to be the best course of action, visit the FINRA website and search pending cases with the investment firm or registered representative in question. The listing will provide a summary and itemization of any pending or closed cases against the firm and its representative or advisor. It will not, however, include every issue or any cases that expunged the record as part of the settlement.
If the search is for a registered investment advisor (RIA) rather than someone who works for a brokerage firm, you will be redirected to the Securities And Exchange Commission (SEC) website, or possibly to a state-sponsored site if the advisor is state licensed. If the search is for a registered representative or a brokerage firm, FINRAs BrokerCheck program will search data from the Central Registration Depository (CRD) registration and licensing database, which gathers data reported on industry registration and licensing forms. BrokerCheck reports professional background information on currently registered brokers, registered securities firms and previously registered parties. One section provides vital information regarding events reported at the CRD, which is required by the securities industry registration and licensing process. Any number of financial disclosures can be listed here, including bankruptcies or unpaid liens. The listing might also contain formal investigations, customer disputes, disciplinary actions and criminal charges or convictions.
Filing a Complaint
If you determine that the portfolio was mishandled, the next step is to file a complaint. FINRA suggests doing so as soon as possible to avoid a delay in arbitration or mediation. Mediation, which can serve as a supplement or replacement for arbitration depending on the outcome, is a voluntary process in which both parties can settle their disputes in a non-binding format. For most claims under $25,000, the process is resolved primarily through written statements filed by each party to FINRA. At any point the claimant, respondent, or arbitrator may request a hearing. These smaller cases can be assigned to a single arbitrator and may settle fairly quickly.
Claim amounts greater than $25,000 are usually assigned to a three-person arbitration panel. Because they typically settle in-person and involve more formalities, they tend to take longer. FINRA offers a complete online claim filing process, and this is where most investors get bogged down. While FINRA has streamlined the process for the layman to follow, it is still a legal proceeding with required documents such as the statement of claim. Many frustrated investors will pursue the services of an attorney at this point.
Evaluate Your Progress
This stage of the process is a good time to step back, evaluate your progress, and set time frames and expectations. Keep in mind, however, that the relationship between you and the representative or advisor has changed. While customers sometimes stay with the company against which they have filed claims, most do not. Depending on the claim or loss, they have probably moved to another firm, liquidated their holdings or made other arrangements. The process from this point on becomes a legal proceeding, although it is slightly less formal than a typical court proceeding; you should view this process as a resolution-in-progress.
Conclusion
FINRA provides a framework for licensing, registration, education, monitoring and policing of the brokerage community to ensure the public receives the best service. While the vast majority of financial service professionals provide excellent service, some accounts are mishandled and FINRA has the process available for anyone to pursue what he or she believes is a valid claim. It is important to remember that all decisions made by either the sole arbitrator or the combined panel are binding and that the judgments are enforceable, as they would be in a court. Finally, consider that while the investor has every right to pursue a claim, doing so carries costs such as filing fees, arbitration and/or mediation fees, and if the panel decides a case is frivolous, legal and other costs will apply.
Does it sound too good to be true? Then it probably is. You should never make a decision about investing your money in a particular company solely on the basis of a "hot tip" or someone's advice. It is important that you make an informed decision based on your thorough research which includes the company's annual report, current financial statements and material news.
OTCQX is the intelligent marketplace for the best OTC companies with the highest financial standards and superior information availability.
6 Things To Look For In Earnings Reports
Earnings reports allow current and potential investors to evaluate a companys financial performance. All public companies must follow U.S. Securities and Exchange Commission (SEC) regulations when filing earnings reports – Form 10-Q for quarterly reports and Form 10-K for annual reports. Form 10-Q is submitted following each of the first three fiscal quarters of each year, and Form 10-K after the fourth quarter.
In addition to these filings, companies typically create an earnings press release – a summary of what is included in the 10-Q or 10-K report. While an earnings press release provides investors with a basic snapshot of a company, investors desiring a more comprehensive and candid look at a companys financial situation should review the SEC filings. Knowing what is included in an earnings report, and which metrics to look for, can help investors more accurately evaluate a companys financial health. (For related reading, see How To Decode A Companys Earnings Reports.)
What Is in an Earnings Report?
Earnings report contains financial and other information relevant to a companys financial situation. The report is broken down into two parts as follows:
Part I. Financial Information
• Item 1. Financial Statements
• Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
• Item 3. Quantitative and Qualitative Disclosures About Market Risk
• Item 4. Controls and Procedures
Part II. Other Information
• Item 1. Legal Proceedings
• Item 1A. Risk Factors
• Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
• Item 3. Defaults Upon Senior Securities
• Item 4. (Removed and Reserved)
• Item 5. Other Information
• Item 6. Exhibits.
Reading the Report
While the entire earnings report has information that is significant to the investor, certain elements are considered to be of particular importance to investors evaluating the financial health of a company in which they are already invested or that is a potential investment.
Earnings
Earnings refers to the amount of profit that a company generates during a specific period, and is one of the most studied metrics on a companys financial statement. Earnings are an important metric because they indicate the companys profitability.
Revenues
Revenue is the amount of money that a company receives due to its business activities over a specific period. Revenues that continually increase show positive growth, and earnings typically follow.
Expenses
Expenses are the costs associated with conducting business, and include employee wages, leases and depreciation. As a company grows, its expenses tend to increase correspondingly, so increasing expenses are not necessarily a bad thing. However, when expenses continually grow, as a percentage, more rapidly than revenues and profits, then there may be a problem.
Earnings per Share (EPS)
Earnings per share is important in determining a shares price. It is the portion of a companys profit assigned to each outstanding share of the companys common stock. The value, calculated as Net Income - Dividends on Preferred Stock ÷ Average Outstanding Shares, acts as a gauge of a companys profitability.
Management Discussion and Analysis
Part I also contains the managements take on the financial health of the company. This can include an overview, a discussion comparing the most recent quarter with year-to-date performance and previous quarters, information regarding risks the company is facing, and forward-looking statements. Many CEOs will provide an assessment of where they see their businesses headed. These appraisals, whether carefully optimistic or openly pessimistic, can have an immediate effect on the stocks price. (For additional reading, see Can Earnings Guidance Accurately Predict The Future?)
Risk Factors
Part II of the earnings report contains Item I: Legal Proceedings, and this is where any outstanding lawsuits are reports. Many lawsuits are settled out of court as nuisance claims, but major ones can have a negative effect on the company. Item IA: Risk Factors details any unusual risk to which the company is vulnerable, such as risks associated with new business activity or a proposed change in corporate structure. Extraordinary events, such as natural disasters, are typically overlooked by analysts, since they are unlikely to happen again.
The Bottom Line
While individual metrics, such as revenue, earnings per share and earnings before interest and tax, are important, comparing current performance to that of the previous period, and that of the same period during previous years, is essential. A company is a work in progress, and its performance over time can be a good indicator of its financial health, its ability to adapt to changing market conditions, the productivity of its management and its prospects for future growth.
Be certain that you fully understand the distinctions among these terms, and be certain that the risk level you choose accurately reflects your investment goals. Be sure that the investment products recommended to you reflect the category of risk you have selected.
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
Everything Investors Need To Know About Earnings
You cant get far in the stock market without understanding earnings. Everybody from CEOs to research analysts is infatuated with this often-quoted number. But what exactly do earnings represent? Why do they attract so much attention? Well answer these questions and more in this primer on earnings.
What Are Earnings?
A companys earnings are, quite simply, its profits. Take a companys revenue from selling something, subtract all the costs to produce that product, and, voila, you have earnings! Of course, the details of accounting get a lot more complicated, but underneath all the financial jargon what is really being measured is how much money a company makes.
Part of the confusion associated with earnings is caused by its many synonyms. The terms profit, net income, bottom line and earnings all refer to the same thing.
Earnings Per Share
To compare the earnings of different companies, investors and analysts often use the ratio earnings per share (EPS). To calculate EPS you take the earnings left over for shareholders and divide by the number of shares outstanding. You can think of EPS as a per-capita way of describing earnings. Because every company has a different number of shares owned by the public, comparing only companies earnings figures does not indicate how much money each company made for each of its shares, so we need EPS to make valid comparisons.
For example, take two companies: ABC Corp. and XYZ Corp. They both have earnings of $1 million but ABC Corp has 1 million shares outstanding while XYZ Corp. only has 100,000 shares outstanding. ABC Corp. has EPS of $1 per share ($1 million/1 million shares) while XYZ Corp. has EPS of $10 per share ($1 million/100,000 shares).
Earnings Season
Earnings season is Wall Streets equivalent to a school report card. It happens four times per year; publicly traded companies in the U.S. are required by law to report their financial results on a quarterly basis. Most companies follow the calendar year for reporting, but they do have the option of reporting based on their own fiscal calendars.
Although it is important to remember that investors look at all financial results, you might have guessed that earnings (or EPS) is the most important number released during earnings season, attracting the most attention and media coverage. Before earnings reports come out, stock analysts issue earnings estimates - what they think earnings will come in at. These forecasts are then compiled by research firms into the consensus earnings estimate.
When a company beats this estimate its called an earnings surprise, and the stock usually moves higher. If a company releases earnings below these estimates it is said to disappoint, and the price typically moves lower. All this makes it hard to try to guess how a stock will move during earnings season: its really all about expectations. (For more on this phenonmenon, see Surprising Earnings Results.)
Why Do Investors Care About Earnings?
Investors care about earnings because they ultimately drive stock prices . Strong earnings generally result in the stock price moving up (and vice versa). Sometimes a company with a rocketing stock price might not be making much money, but the rising price means that investors are hoping that the company will be profitable in the future - of course, there are no guarantees that the company will fulfill investors current expectations.
The dotcom boom and bust is a perfect example of company earnings coming in significantly short of the numbers investors imagined. When the boom started, everybody got excited about the prospects for any company involved in the internet, and stock prices soared. Over time, it became clear that the dotcoms werent going to make nearly as much money as many had predicted. It simply wasnt possible for the market to support these companies high valuations without any earnings; as a result, the stock prices of these companies collapsed.
When a company is making money it has two options. First, it can improve its products and develop new ones. Second, it can pass the money onto shareholders in the form of a dividend or a share buyback (see The Lowdown on Stock Buybacks). It really is this simple!
In the first case, you trust the management to re-invest profits in the hope of making more profits. In the second case, you get your money right away. Typically, smaller companies attempt to create shareholder value by reinvesting profits, while more mature companies pay out dividends. Neither method is necessarily better, but both rely on the same idea: in the long run, earnings provide a return on shareholders investments .
Summary
Earnings means profit; its the money a company makes. It is often evaluated in terms of earnings per share (EPS) - this is the most important indicator of a companys financial health. Earnings reports are released four times per year and are followed very closely by Wall Street. In the end, growing earnings are a good indication that a company is on the right path to providing a solid return for investors.
Companies that have submitted information no older than six months to the OTC Markets data and news service or have made a filing on the SEC's EDGAR system in the previous six months are rated as having current information. This category includes shell companies or development stage companies with little or no operations as well as companies without audited financial statements.
6 Common Misconceptions About Dividends
During periods of low yields and market volatility, more than a few experts recommend dividend stocks and funds. This may sound like good advice, but unfortunately, it is often based on misconceptions and anecdotal evidence.
It is time to take a closer look at the six most common reasons why advisors and other experts recommend dividends and why, based on these reasons, such recommendations are often unsound advice.
Misconception No. 1: Dividends are a good income-producing alternative when money market yields are low.
Taking cash and buying dividend stocks isnt consistent with being a conservative investor, regardless of what money markets are yielding. Additionally, there is no evidence that money market yields signal the right time to invest in dividend-focused mutual funds. In fact,money market yields were anemic throughout 2009, a year that is also one of the worst periods for dividend-focused funds in history.
Many advisors also call dividends a good complement to other investments during times of high volatility and low bank yields. In an October 22, 2009 article, financial guru Suze Orman recommended the following dividend funds: iShares Dow Jones Select Dividend Index (NYSE:DVY), WisdomTree Total Dividend (NYSE:DTD)
The OTC market provides an alternative to stock exchange listing for securities of issuers that either choose not to be listed on a U.S. stock exchange or do not meet the relevant listing requirements. The term ‘OTC security’ is a catch–all phrase for any security that is not listed on a U.S. stock exchange.
Great Investors Not Named Buffett
Sometimes it feels as though the name Warren Buffett is morphing into something like the legend of Bloody Mary - say his name three times in a column about investing and readers suddenly appear. It is very much worth mentioning, though, that Warren Buffett is simply one example of a successful investor and businessman. Granted, Mr. Buffett is an excellent example of a successful investor, but readers might be interested in considering the approaches and track records of other investors that have enjoyed considerable professional success, but do not necessarily get the same publicity as Warren Buffett. (This esteemed investor rarely changes his long-term investing strategy, no matter what the market does. See Warren Buffetts Bear Market Maneuvers.)
George Soros
Perhaps it would have seemed impossible to imagine as he was living through World War II, but George Soros became one of the most successful investors in history. With a current net worth north of $14 billion, Soros is largely retired as an active investor. However, he established a remarkable record while running the Quantum Group of hedge funds.
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britains Black Wednesday currency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. Whats more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the worlds elite investors, and even he didnt always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald Perelman
Some will question whether Perelman is properly called an investor. Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlmans activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffetts success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John Paulson
With about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson
Short selling carries with it unlimited risk because the purchase price of a security can rise to any price point. Conversely, long investors (buyers) may only lose the amount invested – if, for example, the security price drops to zero.
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.
The Highest Priced Stocks In America
Why do so few stocks get over $400, or even over $200, and should you care? Most companies care about the price of their stock, and actually take measures to keep it down. Splitting shares or issuing new stock can keep the price low. But price is not the same as value. Shares which are trading for over $1,000 each can make it sometimes tough to even afford a handful of shares.
Berkshire Hathaway (NYSE:BRK.A) $114,700
Berkshire Hathaway has the highest shares on the New York Stock Exchange, so it needs special attention. It is over $110,000 because it doesnt split its shares. Normally a company will complete several 2;1 splits over the years, which doubles the shares outstanding but also cuts the price in half. Famous investor Warren Buffett keeps the price high to deter short-term traders from creating excessive volatility. At one point this year it cost over $140,000 per share. At that price it trades about 450 shares every day. There is a lower priced option with Berkshire Hathaway B shares (NYSE:BRK.B), which trade around $75 which were $3,000 per share until a 50;1 split in 2010.
Buffett created this holding company, which is so big that it doesnt just acquire buildings or factories; instead it often gobbles up whole companies. A true conglomerate, Berkshire owns retail, insurance, railways, furniture stores and more.
Seaboard Corporation (NYSE:SEB) $2,460
Seaboard Corporation went public in 1959 through a merger with Hathaway Industries, Inc. It deals in several areas including ocean transportation, pork production, commodity merchandising as well as an energy producer in the Dominican Republic. As you will see in most of these companies it has never split its shares and operations span several industries.
NVR, Inc. (NYSE:NVR) $700
NVR is a homebuilder and mortgage banking company in the United States. It has also never split any of its stock. Its shares took off in the early 2000s just as the tech bubble was popping. Shares went from $70 to about $700 in about 10 years.
Google Inc. (Nasdaq:GOOG) $600
Google waited until after the dotcom bust to go public when it issued shares in 2004. This was a highly anticipated IPO which closed the day around $100. Since then there have no splits and nearly a 500% return to those who have bought and held.
Priceline.com, Inc. (Nasdaq:PCLN) $525
Priceline held its initial public offering in 1999 at $16 per share. This was in the last stages of the dotcom bubble. About a month later the stock jumped to $120 per share. The bubble burst and the price dropped to around $1.30 by 2001. In 2003 it did a reverse split (1:6) which means every six shares you owned was now one, but that one was worth six times the price. If this split had not happened the current price would be around $87.50 each.
The Washington Post Company (NYSE:WPO) $415
The Washington Post company has not split its shares since it went public in 1971. At that time the class B shares were available to the public at around $26.
White Mountains Insurance Group, Ltd. (NYSE:WTM) $415
White Mountains insurance Group deals in insurance and reinsurance. Buffetts invested in insurance companies back in 1967 which was the beginning of Berkshire Hathaways rise.
Alexanders Inc (NYSE:ALX) $415
Rounding out the over $400 list is Alexanders inc. which is actually a Real Estate Investment Trust (REIT). It allows you to buy shares in a company which invests in properties and distributes the profits in the form of dividends. This means a $3 dividend for every share you hold every three months. This can obviously change.
Low Prices
I once heard a friend say to stay away from stocks with prices is over $200, because a $200 stock would need a $40 increase in price to gain 20%. It would be much easier for a $20 stock to move $4. For the record this is not true, sort of. A lower priced stock can be more volatile but the value of a stock is due to many factors.
Penny stocks, for example, will usually have low volume and can be very small companies. There is often less information available and less coverage by analysts. A single event or a few speculators can easily create huge jumps or drops in share price.
Low prices dont always mean you are dealing with a small company. Take Synovus Financial Corp. (NYSE:SNV) they trade around $2 per share. Because they have 785 million shares outstanding they have a market capitalization of $1.6 billion. Ultimately, the price is based on what that share represents: partial ownership in the company.
Actual Value
To find the true value of these shares you need to look at a variety of metrics, most of which are calculated per share, to make it easier to compare to their price. For example a very popular metric is the price to earnings ratio. Investors basically see how much it costs to buy a part of the profits of the company. The lower the P/E the better the value, but be careful to only compare similar companies. For example if you bought one share of Seaboard Corp. for $2,300 you are paying about $9 for every $1 of earnings over the last year. But take a look at Hormel Foods Corp. (NYSE:HRL) it costs $29 per share but you need to pay $17 for every dollar of earnings. In this case the $2,300 share is a better value. (For more on the P/E ratio check out Profit With The Power Of Price-To-Earnings.)
Future Prospects
The true value of a stock goes beyond the price you pay, or even what you get right now for that price. The true value of a stock is a moving target based on future prospects. Any company can have a great year, but value can be highly dependent on projections. Analysts scrutinize figures such as the potential growth rate of the economy, the strength of the industry and the prospects of specific companies. In the end, high price doesnt always mean overpriced.
FINRA members shall not impose, nor permit to be imposed, non-subscriber access or post-transaction fees against its published quotation in any OTC Equity Security that exceed or accumulate to more than: (a) $0.003 per share, if the published quotation is priced equal to or greater than $1.00; or (b) the lesser of 0.3% of the published quotation price on a per share basis or 30% of the minimum pricing increment under Rule 6434 relevant to the display of the quotation on a per share basis if the published quotation is less than $1.00.
Wars Influence On Wall Street
The world of business has always been a harsh, survival-of-the-fittest environment. Like any realm in which there is competition and the threat of losses, the investing world is rife with conflict. So it is not surprising to see so many military terms creeping into the vocabulary of everyday investors or TV analysts. Take a look at the war-related terms that have invaded the corporate ranks.
Scorched Earth
In 1812, Czar Alexander Romanov decimated the French army that Napoleon led against Russia - even though the French had superior numbers, tactics, quality of soldiers, munitions and everything else youd put on your guaranteed-victory checklist. So how did one of the greatest military minds of all time lose in such a horrendous fashion? The simple answer is the Czars scorched-earth policy: as the Russian army retreated, they burned every shelter, animal and plant that would catch fire, effectively leaving the French army without any found supplies to sustain them through a Russian winter. Napoleons previous campaigns relied heavily on the spoils of war to replenish the troops, so he was utterly unprepared for an adversary who would rather destroy his own kingdom than let another take it.
Scorched earth continues to be a terrifying strategy for aggressors to face. In business mergers and acquisitions, not every takeover is welcome. In order to scare off a hostile firm, the target firm will liquidate all its desirable assets and acquire liabilities. However, this approach can prove to be a suicide pill because, even if it is successful, the company must try to reassemble itself or go down in the flames of a self-inflicted fire. (For more on hostile takeover situaitons, read Corporate Takeover Defense: A Shareholders Perspective.)
Blitzkrieg Tender Offer
In the first two years of the World War II, Nazi Germany crushed its opponents all over Europe by means of the Blitzkrieg or lightning war strategy, a set of tightly focused military maneuvers of overwhelming force. Striking with tanks, artillery and planes in one area, the Nazis defeated Frances supposedly impenetrable Maginot Line, which was still accustomed to the traditional front-based warfare.
The Blitzkrieg strategy used in corporate takeovers is a slight departure from the German warfare of the 1940s. A Blitzkrieg tender offer is an overwhelmingly attractive offer a takeover firm makes to a target firm. The offer is designed to be so attractive that objections are few or non-existent, allowing an extremely quick completion of the takeover. This tender offers allusion to the World War II is based only upon the speed of the conquest; there was nothing alluring or attractive about the Nazis Blitzkrieg.
Dawn Raid
When organized warfare and the military were considered gentlemans affairs, a declaration of war, a location and a time would be issued to the adversary. Raids and guerilla warfare were the arenas of savages and rebels, not the tactics of a self-respecting army. However, the American Civil War, the two World Wars, the Vietnam War and the improvement of weaponry obliterated the old code of warfare, and made it commonplace to attack at any time - including dawn, when sleep is still thick in the enemys eyes. Because at day break the level of preparedness is lower, the dawn raid maximized enemy casualties and so became a standard military practice. This logic has carried over to the corporate sector.
A dawn raid in the investing world occurs when a firm (or investor) purchases a large portion of shares in a target firm at the opening of the market. A stock broker for the hostile firm helps the firm build up a substantial stake (and maybe a controlling interest) in the unsuspecting target. The hostile firm significantly lowers its takeover costs by already holding a big chunk of its prey. Because the process is initiated through a brokerage and at the market opening, the target firm doesnt figure out whats going on until its too late. Even though only 15% of a firms stock can be captured in a dawn raid, this percentage is often enough for a controlling interest. (When an individual investor decides to do this, he or she is referred to as a raider.)
A dawn raid is sneakier and more effective than a formal bid in most cases, but it may lead to resentment from the target firm. Unlike the dawn raid in war, the dawn raid of the corporate world makes the people you just attacked before their morning coffee not just your defeated enemies but now a part of your own army, meaning dissent may soon brew in the ranks.
Capitulation
Capitulation is a term that finds its roots in the Medieval Latin word capitulare which means to draw up terms in chapters. Since the 1600s, however, capitulate has been synonymous with surrender, or defeat, usually military defeat. In the stock market , capitulation refers to the surrendering of any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines, which are indicative of panic selling. After capitulation selling, many people believe the market place essentially becomes a bargain store because everyone who wanted out of a stock, for whatever reason (including forced selling due to margin calls), has sold. It follows logically (but only in theory) that the stock price should reverse or bounce off the lows. Simply put, some investors believe that true capitulation is the sign of a bottom. (To learn more, check out Panic Selling - Capitulation Or Crash?)
War Chest and War Bonds
The gathering of a war chest has been around as long as war. Emperors and kings would begin to amass tithes and taxes long before declaring war, presumably placing the funds in a chest (maybe labeled with a note to attack the Dutch or something). The reason for this hoarding was that experienced warriors cost money: mercenaries made up the bulk of the leadership, and peasants, who were conscripted, provided the cannon fodder.
This tradition of saving up to wage war, either aggressively or defensively, has continued on into the modern world of corporate warfare. Simply put, a war chest refers to the funds a company uses to initiate or defend itself against takeovers.
Rather than pulling out of already stretched budgets, the governments of some countries (U.S. included) use war bonds to raise a war chest. War bonds are government-issued debt, and the proceeds from the bonds are used to finance military operations. War bonds essentially fund a war chest that is voluntarily filled by the public. The appeal for these bonds is purely patriotic as they generally offer a return lower than the market rate. Basically, buying a war bond is supposed to make citizens feel like they are doing their part to support the troops - in the World War II, these bonds were hyped by sentimental persuasion and depictions of the evils of the enemy.
War Babies
War babies are quite common all over the world. Children are classified as war babies if they satisfy one or both of the following:
1. They were born or raised during an invasion of their country.
2. They were fathered by foreign soldiers. This was extremely common in Vietnam. In fact, there are still war babies attempting to gain U.S. citizenship.
In contrast, the war babies of the investing world are the companies that enjoy a jump in stock prices during or before a war (traditionally a time of decline for the market). These companies are usually defense contractors who build munitions, aircraft, artillery, tanks, etc. Although these companies arent the bastard children of foreign soldiers, people usually do avoid claiming war babies in times of peace.
Conclusion
Thats that for the military parade down Wall Street . Military terms have crept into many vocabularies and the fiercly competitive realm of finance is no exception.
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5 Common Mistakes Young Investors Make
When learning any skill, it is best to start young. Investing is no different. Missteps are common when learning something new, but when dealing with money, they can have serious consequences. Investors who start young generally have the flexibility and time frame to take on risk and recover from their money-losing errors, but sidestepping the following common mistakes can help improve the odds of success. (In addition to this article, read Eight Financial Tips For Young Adults.)
1. Procrastinating
Procrastination is never good, but it can be especially detrimental while investing because the markets move so quickly. Good investment ideas are not always easy to find. If, after doing research, a good investment idea arises, it is important to act on it before the rest of the market takes note and beats you to it. Young investors can be prone to not acting on a good idea out of fear or inexperience. Missing out on a good idea can lead a young investor to two very bad scenarios:
1. The investor will revise his opinion upward and still purchase an asset when it is not warranted. Perhaps the investor rightly develops an opinion that an asset priced at $25 should be worth $50. If it moves up to $50 before he or she buys it, the investor may artificially revise the price target to $60 in order to rationalize the purchase.
2. The young investor will look for a replacement. In the previous example, the investor who failed to buy the asset that rose from $25 to $50 may quickly try to identify the next asset that will double. As a result, the investor might purchase another asset quickly, without doing the proper work and research, in order to try to make up for the previous missed opportunity. (Young investors often find themselves with too many options and not enough money. Read more in Competing Priorities: Too Many Choices, Too Few Dollars.)
2. Speculating Instead of Investing
A young investor is at an advantage in his or her investing life. Holding the level of wealth constant, an investors age affects how much risk an he or she can take on. So, a young investor can seek out bigger returns by taking bigger risks. This is because if a young investor loses money, he or she has time to recover the losses through income generation. This may seem like an argument for a young investor to speculate, but it is not.
Any young or novice investor will have an inclination to speculate if they do not fully understand the investment process. Speculation is often the equivalent of gambling, as the speculator does not necessarily have a reason for a purchase except that there is a chance that it may go up in value. This can be dangerous, as there are many experienced professionals waiting to take advantage of their less-experienced counterparts.
Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long term. So, while a diversified portfolio of small-cap growth stocks would not be appropriate for an investor nearing retirement, a young investor is better equipped to take on that risk and can take advantage accordingly.
A final risk of speculation is that a large loss can scar a young investor and affect his or her future investment choices. This can lead to a tendency to shun investing altogether or to move to lower or risk-free assets at an age when it may not be appropriate. (For more insight, seePersonalizing Risk Tolerance.)
3. Using Too Much Leverage
Leverage has its benefits and its pitfalls. If there is ever a time when investors have the ability to add leverage to their portfolios, it is when they are young. As mentioned earlier, young investors have a greater ability to recover from losses through future income generation. However, similar to speculation, leverage can shatter even a good portfolio.
If a young investor is able to stomach a 20-25% drop in his or her portfolio without getting discouraged, the 40-50% drop that would result at two times leverage may be too much to handle. The consequences of such a drop are similar to those resulting from a loss due to speculation: the young investor may become discouraged and overly risk averse for the rest of his investing life. (Want to learn more about leverage? See Leverages Double-Edged Sword Need Not Cut Deep for more.)
4. Not Asking Enough Questions
If a stock drops a lot, a young investor might expect it to bounce right back, but more often than not, it is down for good reason. One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investors perceived value, there is a reason and it is the investors responsibility to find it. Young investors who have not experienced the pitfalls of investing can be particularly susceptible to making decisions without locating all the pertinent information.
5. Not Investing
As mentioned earlier, an investor has the best ability to seek a higher return and take on higher risk when they have a long-term time horizon. Investors have their longest time horizons, and therefore a high tolerance for risk, when they are young. Young people also tend to be less experienced with having money. As a result, they are often tempted to focus on how money can benefit them in the present, without focusing on any long-term goals (such as retirement). Spending money now instead of saving and investing can create bad habits and contribute to a lack of savings and retirement funds. (For more on this, read Young Investors: What Are You Waiting For?)
The Bottom Line
Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life. There are also many risks that a young/less-experienced investor will face when making decisions. Hopefully, avoiding some of the common mistakes above will help young people learn investing early and embark on a fruitful investing career.
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How To Invest In Private Companies
The internet has revolutionized the world of retail stock investing by making vast amounts of financial information quickly and easily available to individual investors. And though still in the early stages, the advent of digital information exchange is also making it easier for more individuals to invest in privately-held companies. Just as eBay has put buyers in contact with sellers of collectibles that used to collect dust on attic shelves, today private companies are much more able to seek out buyers of their securities to allow them to raise capital. TUTORIAL: Advanced Financial Statement Analysis
The drawback to vast amounts of information is the difficultly in knowing what to focus on. Below is a comparison of private companies to public ones, overview of private company types and varieties, investment options currently available for interested investors, and a survey of other considerations to make when investing in private companies.
Private Companies versus Public Companies
Overall, it is much easier to invest in a publicly-traded firm. Public companies, especially larger ones, can easily be bought and sold on the stock market and therefore have superior liquidity and a quote market value. Conversely, it can be years before a private firm can again be sold and prices must be negotiated between the seller and buyer.
In addition, public companies must file financial statements with the Securities and Exchange Commission (SEC), making it easy to track how they are doing on a quarterly and annual basis. Private companies are not required to provide any information to the public, so it can be extremely difficult to determine their financial soundness, historical sales and profit trends.
Investing in a public company may seem far superior to investing in a private one, but there are a handful of benefits to not being public. A major criticism of many public firms is that they are overly focused on quarterly results and meeting Wall Street analyst short-term expectations. This can cause them to miss out on long-term value creating opportunities, such as investing in a product that may take years to develop, hurting profits in the near term. Private firms can be better managed for the long term as they are out of Wall Streets reach. An annual report by the World Economic Forum has detailed that productivity increases when a public firm is taken private. They can also create more jobs when run more efficiently and profitably.
Being an owner of a private firm also means sharing more directly in the underlying firms profits. Earnings may grow at a public, firm but they are retained unless paid out as dividends or used to buy back stock. Private firm earnings can be paid directly to the owners. Private owners can also have a larger role in the decision-making process at the firm, especially those with large ownership stakes.
Types of Private Companies
From an investment standpoint, a private company is defined by its stage in development. For instance, when an entrepreneur is first starting a business he or she usually receives funding from a friend or family member on very favorable terms. This stage is referred to as angel investing, while the private company is known as an angel firm. Past the start-up phase is venture capital: investing where a group of more savvy investors comes along and offers growth capital and managerial know-how and other operational assistance. At this stage a firm is seen to have at least some long-term potential.
Past this stage can be mezzanine investing, which consists of equity and debt, the last of which will convert to equity if the private company cant meet its interest payment obligations. Later-stage private investing is simply referred to as private equity and is currently a multi-billion dollar business with many large players.
For investors, the stage of development a private company is in can help define how risky it is as an investment. For instance, approximately 40% of angel investments fail and the risk falls the more developed and profitable a private company becomes. And although the goal of many private firms is to eventually go public and provide liquidity for company founders or other investors, other private business may prefer to stay private given the benefits given above. Family businesses may also prefer privacy and the handing of ownership across generations. These are important matters to become aware of when deciding to invest in a private company. (To learn more, see What Is Private Equity?)
How to Invest in Private Companies
Early-stage private investing offers the most investment opportunities but is also the most risky. As a result, joining an angel investor organization or investment group may be a good idea to make the process easier and potentially spread the investment risks across a wide group of firms. Venture funds also exist and solicit outside partners for investing capital.
As noted above, the internet has quickly become a central source to find these types of organizations, while other websites have sprung up to fill a void and put buyers and sellers of many types of private companies together. Online sources also have made it easier to at least locate basic information on a private firm. This can be done by visiting the companys websites, and reading online blogs and articles that discuss the firm and its industry.
Other resources that can be used include small or private business brokers that specialize in buying and selling these firms. Private equity is also an option, and ironically a number of the largest private equity firms are publicly traded so can be purchased by any investor. A number of mutual funds can also offer at least some exposure to private companies.
Other Considerations
Overall, it is important to reiterate that private companies are illiquid and require very long investing time frames. Most investors will also need an eventual liquidity event to cash out. This includes when the company goes public, buys out private shareholders, or is bought out by a rival or another private equity firm. And just like with any security, private companies need to be valued to determine if they are fairly valued, overvalued or undervalued.
It is also important to note that investing directly in private firms is usually reserved only for wealthy individuals. The motivation is that they can handle the additional illiquidity and risk that goes with private investing. The SEC definition calls these wealthy individuals accredited investor or qualified institutional buyer (QIB) when considering institutions.
The Bottom Line
It is now easier than ever to invest in private companies, but an investor still has to do his or her homework. Investing directly is still not going to be a viable option for most investors, but there are still ways to gain exposure to private firms through more diversified investment vehicles. Overall, an investor definitely has to work harder an overcome more obstacles when investing in a private firm as compared to a public one, but they work can be worth it as there are a number of advantages to be gained by investing in private companies.
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6 Misconceptions About Investing Young
Investing is seen by many as an arduous task - one that is complicated, risky and best left to other people. It is often easier to avoid investing altogether, than confront it head on. A natural human reaction is to create excuses that rationalize why one has chosen to avoid an activity. Investing at a young age is no exception: a variety of misconceptions about investing young perpetuates the idea that investing is best left to older people and experts. This article will examine several of these misconceptions that are often used as an excuse to delay or avoid investment activity.
SEE: Young Investors: What Are You Waiting For?
I dont have enough money.
While it is true that young adults are usually inundated with debt - from student loans, car payments and mortgages - many can find at least a small amount of money to invest on a monthly or yearly basis. Contributing to employer-sponsored plans, such as 401(k)s, can allow a small investment to grow over time, particularly when matched by the employer. The power of compounding creates a golden opportunity for young investors, even those on a tight budget. It is important to keep in mind that investing does not have to involve huge positions; it is possible to invest in a very small number of stock shares.
I dont know anything about investing.
Ignorance is not an excuse to avoid investing. Young investors have many years to study, research and develop proficiency in investing techniques and strategies. A wealth of information is available to tech-savvy young adults, from financial and education websites, to social media pages, webinars and the many advanced trading platforms that are available for free or for a limited monthly fee.
Investing is too risky.
Many young adults are keenly aware of the economic crisis and the resulting chaos that ensued. While investing can be risky, it can be managed in a way that keeps it from being too risky, however that is defined for each individual. Young investors with a low risk tolerance can select more conservative portfolios, like blue-chip stocks and bonds. Investors with a higher tolerance for risk can enter more aggressive positions with higher reward potential.
Investing can wait till Im older.
Young investors have to contribute less to make more money over time than older investors. This is due to the power of compounding. A person who starts at age 20 and invests $100 per month until age 65 (a total contribution of $54,000) will have more than $200,000 when he or she reaches age 65, assuming a 5% return. If the person delays investing until age 40, he or she will have to contribute $334 each month (a total contribution of $100,200) to arrive at the same $200,000 by age 65.
Investing is for old people and Wall Street types.
While the media do portray many investors either as wizened old men or young, power-hungry Wall Street types, most investors are ordinary people, both young and old, wealthy and not. Even though we often hear You are never too old to start investing (or saving for retirement), the opposite is true as well: people are never too young to start investing.
My 401(k) should be all I need.
Depending on social security and 401(k)s can be risky. It is difficult to predict where social security will be in future years, and many investors learned the hard way in the last decade that employee-sponsored retirement plans dont always work out. Starting young and diversifying through a variety of investment vehicles is the best way to secure ones financial future.
The Bottom Line
Young adults often have so many distractions that it is difficult to set aside the time to think about investing. In addition to being busy with friends, work and hobbies, this age group is often burdened by a significant amount of debt, making investing seem like something that will have to wait. Despite these common misconceptions about investing young, those who do start studying, researching and investing young, have many advantages over those who wait, including the power of compounding and the ability to weather a certain degree of risk.
Unlike other loans, like for a car or a home, that allow you to pay back a fixed amount every month, when you buy stocks on margin you can be faced with paying back the entire margin loan all at once if the price of the stock drops suddenly and dramatically.
The 3 Moral Types Managing Your Money
In the late 1970s, business academic Archie Carroll published some now classic work on corporate ethics and social responsibility. His work includes the well-known CSR Pyramid (Corporate Social Responsibility), which deals with stakeholders, economic responsibilities, philanthropy and many other related issues.
Of particular relevance to private investors, however, are the three moral types commonly encountered in the industry. Your financial fate is influenced very substantially by whether your broker and/or his/her firm is immoral, amoral or moral. Each type is clearly differentiated from one another and you only want to give your money to the moral ones; the immoral and the amoral are to be avoided like the plague. We will now take a look at the differences between the three methods and what this could mean for your savings.
The Immoral, the Amoral and the Moral
Immoral brokers , fund managers and firms do not care about you at all. They want to make money out of you and not for you. They are motivated only by self-interest and regard clients as factors of production to be exploited, manipulated and bled. There can be no doubt that even though such people are only fit to be shunned, they abound in the industry, which has led to many mis-selling and mismanagement scandals, not to mention major crises in recent and less recent years. Some are in jail, and many others should be.
Amoral sellers are arguably not as bad, but they are bad enough. While not blatantly dishonest, they look after themselves and just do not bother about ethics. They keep to the letter of the law, but the spirit of the law is ignored. Therefore, they fulfill their regulatory obligations, but they do not look after your interests. They are unlikely to fleece you outright, but they can lose you a lot of money through indifferent management and bad advice.
Moral people are the only ones who deserve your money. They will treat your fairly, do their best for you and sell you only what they truly believe is what you want and what is suitable for you. Fortunately, there are such people out there, but the two groups of baddies and mega-baddies are there as well, and they all want your money. Only the moral ones have a conscience, and can be trusted and relied upon.
Why Is it Like This?
Human nature has produced all three types of morality for at least 2000 years, particularly in the context of money and wealth, and that is not going to change. All professions have their black sheep, but because the financial services industry deals only with money, it has more of these than elsewhere. Furthermore, due to the nature of the industry, there is a lot of money to be made from selling excessively risky and other forms of lousy products to the unwary; and the unwary have been around since the year dot.
This precarious scenario is exacerbated by the complexity of the industry; there are a plethora of local and international products. Furthermore, it is horrendously easy to present products so that they sound far better than they really are. People are also genuinely tempted by greed and offers that are too good to be true. This is an environment in which amorality and immorality thrive.
In fact, in this day and age, dishonest people with some financial or selling skills can make a fortune with minimal risk. Why pick locks, blow up safes or ride your horse into town with guns blazing, when you can put on a snazzy suit and pretend to be a gentleman, selling the investment of a lifetime?
SEE: 8 Ethics Guidelines For Brokers
How Do You Find the Moral Ones?
As is always the case, you need to be as educated as you can on investment issues, shop around and double check. I would also emphasize that there are other ways to spot what type of seller you are dealing with.
My experience is that you can tell a lot by observing how the brokers you deal with personally handle you and your money. If they seem to really want you to understand what you are getting, that is good. If they offer you a wide range of products and do not push just one or two, that is better. If the range includes various alternative risk-return combinations, some of which really do not earn so much for the seller, such as trackers, and funds with low or no up-front fees, then you could be dealing with a moral person.
Body language is also important. Keep an eye open for some telltale and quite reliable signs of lying. These include blinking, speech errors and hesitation, self-touching and doing weird things with ones hands. Jittery feet are supposed to be a reliable sign that you are dealing with the wrong moral type. Given the importance of body language, it is often safer to ensure that you deal with sellers personally, rather than just by email or on the phone.
In general, be perceptive and have a healthy level of cynicism. In this industry, cynicism is a good investment.
SEE: Choosing A Compatible Broker
The Bottom Line
What we have here are the good, the bad and the ugly aspects of the investment industry. These types are here to stay, but you can avoid the immoral and the amoral by being careful and watching for warning signs. Watch out for pushy selling, products or policies that you do not understand, and for patterns of behavior that just dont seem right. Make sure your money stays your own and grows over time. It can also help to understand some of the ethical issues your broker faces.
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An Introduction To Shareholder Activism
Share and Share Alike
The power of followership cannot be overrated. A hackneyed phrase, strength in numbers can and has been used to desired effect by shareholders for their benefit. The shareholders themselves can also be large institutions, such as public employee retirement systems. The recent results for say-on-pay at various annual general meetings are but one example. Management misdeeds and corporate fraud in the early and late 2000s led to the passage of Sarbanes-Oxley (2002) and Dodd-Frank (2010) legislation that has empowered shareholders to some degree. Here is an overview of the mechanics of shareholder voting and its true motivation.
SEE: Proxy Voting Gives Fund Shareholders A Say
Activists Toolkit
Shareholder activism is expressed through the proxy statement. More than mere ballots describing a particular issue to a shareowner requesting him or her to take action, proxy statements are assets as the decisions that they ask stockholders to make impact the value of their company. Voting on these matters is akin to taking a decision on a referendum at the ballot box on the merits (or lack thereof) of a political candidate. Investors need to do their homework, rather than merely rubberstamping managements recommendations. Once they have done so, they have the choice of completing the card accompanying the proxy statement and mailing it in or attending the annual general meeting to vote the shares in person. The latter option may be preferable if issues to be discussed are particularly important.
In this way, the shareholder is able to ask questions, the answers to which may inform his ultimate decision. While management often files the proxy statement, outside parties may do so as well. The latters interest may differ from management. Investors should note that whereas public companies are required to file an annual proxy statement, investment companies, by contrast, only do so when a specific issue needs to be put before the shareholders.
SEE: Knowing Your Rights As A Shareholder
Requisite disclosures are part of every proxy statement, varying by the issue at hand:
• Types of voting shares must be disclosed and the control accorded to each share class, along with disclosure of ownership by management and individuals with greater than 5% of outstanding shares.
• The independent public accountant must be disclosed, fees paid for audit services, and records kept of any disputes and whether firm representatives will attend the AGM. The investor should look for any sign that independence and objectivity on the part of the auditor is somehow compromised.
A summary of typical proxy proposals and their required disclosures:
Issue Required Disclosure
Election of Company Directors Names, ages, tenure, role(s) in the company, business relationships with the company, meetings that the board held in the past twelve months.
Remuneration A clear description of who gets paid what for their respective roles (e.g.(non) employee directors)
Executive Compensation Plan features, eligible persons, funding links to service (e.g defined benefit plan), prices, expiry dates, strike prices of warrants, rights or options, which do (not) require shareholder approval, tax consequences to the company/recipient.
Capital Structure Title, amount of securities to be issued or modified, fee for the transaction and anticipated use of funds; financial statements with managements discussion of financial condition.
Corporate Actions (mergers, acquisitions, spinoffs, etc.) Transaction details, financials of acquirer and acquired companies, discussion of effects of the corporate action, financials.
Property Acquisition or Disposition Type and location, fee paid or received, including basis therefore, name and address of seller or buyer.
Restatement of Financial Accounts The type of restatement and when effective, rationale for restatement and date anticipated resultant effect on company accounts.
Investment Advisory and Fee Changes A table with current and anticipated fees (e.g advisory, transfer, custody)
Distribution Fee Changes The 12b-1 fee rate, to whom the fee may be paid and the payment amounts to those affiliated with the fund or advisor.
Investments Permitted/Strategy A clear description of the change in permissible investments or strategy.
Investors should look for potential conflicts of interest. Are the interests of management sufficiently aligned with those of shareholders?
Shareholder activism is an outgrowth of corporate governance. Company directors are supposed to mind the store. If they do not, it is the responsibility of shareholders to step forward, weigh the merits of proposals and vote accordingly.
SEE: Putting Management Under The Microscope
In Whose Interest?
Traditionally a tool for exacting changes in the public company to benefit shareholders, shareholder activism is not without its critics who contend that certain interest groups stand behind the aegis of corporate democracy to advance (an) agenda(s) that might not necessarily benefit the shareholder, such as the pursuit of public policy initiatives and legislative or regulatory agendas. Socially responsible investment funds (SRI) may have a reform-minded, rather than profit-maximizing goal (e.g. environmental issues, human rights, practices that accord with religious beliefs, such as Christian values and Islamic finance).
The number of shareholder proposals is a function of a companys industry. Energy and mineral companies with the ability to harm the environment would, ceteris paribus, come in for greater criticism than technology groups. At issue in the maelstrom of shareholder activism is whether certain proposals advanced properly fall within the remit of a shareholder vote. Might they not be better resolved at the ballot box? A practice referred to as interest-group capture uses the share vote where the legislation might be a preferable alternative. Some examples of this are proposals on corporate political spending and the Taft-Hartley plans share votes to obtain concessions from management.
The Bottom Line
When evaluating any proposal, the investor needs to ask the right questions. What does the proposal ask him or her to evaluate, who is putting forth the proposal and, ultimately, whom does it serve? The answers to these questions will determine who truly benefits from such proposals.
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The Knowledge-Experience Continuum: Where Do You Fall?
It is only through studying the practicalities of investments that people learn and understand how it really works. Even so, their knowledge and understanding always has its limits, and learning and doing are two very different things.
These issues apply to a greater or lesser extent to almost everyone in the industry - theory and practice are often worlds apart, but many people dangerously treat them as one and the same.
In this article, we will look at what constitutes learning, understanding, experience and real expertise, as well as what sets the limits. The basic issue is that when it comes to investing, there is a huge gap between theory and practice. For this reason, it is important to take a look at the different levels of knowledge and how we achieve them.
The Dangers of Theoretical Knowledge
People who study business or economics in college generally learn passively just to pass exams. Many do not really understand the material until they start teaching the same theories. And even then, this is still just theory. Practice happens when students apply this theory in their personal investing.
Even business professors who write articles in related areas, such as economics, tend to do so theoretically and do not necessarily know much about the real world of investment. In fact, their own investments may be run by other people.
Unfortunately, some types of theory just arent helpful in practice. For example, although a good theoretical knowledge of economics, should help you learn quickly about real-world investments; unfortunately, the theory alone is of little practical use. Knowing about supply and demand, neoclassical interest rate theory and Keynesian cross diagrams is light years away from the real world of conflicts of interest, commission-hungry brokers and failed attempts at market timing. In other words, these theoretical models often assume the world has very specific and predictable conditions; does this sound like the world you live (and invest) in? (For related reading, see Economics Basics.)
In the world of investment, theory alone can even be dangerous, and this applies particularly to a limited degree of practical knowledge. The old saying that a little knowledge is a dangerous thing applies in this context, because it can inspire confidence in the investor, even when he or she has little experience and should be cautious.
The main problem is that the investment industry does not work the way an inexperienced person is likely to think. For example, who would ever dream that many fund managers try to beat an index and fail? How could the man in the street know that brokers may sell risky investments because these bring in the most money? Similarly, naive investors might put too much confidence in their brokers abilities and assume that they know what theyre doing without further investigation. Unfortunately, mismanagement is not uncommon, but for an investor with limited experience, this may not be apparent.
Experience Versus Real Expertise
As you now know, passive knowledge alone does not count for much; you need to actually do things to develop real expertise and skills. Nonetheless, it is also possible to have a lot of experience with something, without having a profound understanding of how it works. (To learn from experienced money managers, read Words From The Wise On Active Management.)
For example, someone who simply works in a bank may administer funds and other assets for years and or decades and not really know much about them. This is particularly the case with routine activities at lower levels. Another danger is that someone who worked with pensions for 20 years may get transferred to hedge funds two weeks before you turn up with your money. This person is then very experienced, but perhaps not in the right area.
The combination of directly relevant experience and various aspects of sophistication is really essential to good money management, both on the part of the investor and his or her broker /advisor. Motivation is also vital. This means being genuinely interested in and caring about your portfolio. If you do your own investing, this may not be a problem, but if you hire a broker, you will need to find one who is motivated to help you. No amount of education and experience counts if it is not applied appropriately. These are complex issues, but they are of fundamental importance.
Knowledge in One Area Is Still Ignorance in Another
Given the extraordinarily wide range of investments, someone who knows a lot about stocks may know (almost) nothing about bonds. And even a government bond expert could be relatively ignorant about the ins and outs of corporate bonds. The term experienced investor can therefore be extremely misleading.
Only experience in a specific sector is really likely to help. The extent to which knowledge with one asset class applies to another, for example, is extremely variable and cannot be taken for granted. Therefore, never assume that someone has the right package of skills, experience and expertise to advise or work in a particular field - do your research and determine exactly what experience a professional has and how directly it applies to his or her current line of work.
The Knowledge-Experience Continuum
Given the above, we can divide up private investors into three main knowledge-experience categories:
1. The Know Nothings. The first category would be those who, for all intents and purposes, know nothing. Almost everyone earns some money and perhaps even invests part of it, but if this is purely passive, uninterested and unmotivated, people can go through their entire adult lives without gaining any real knowledge or understanding of the investment process and what it entails.
2. The Know A Littles. The next group would be those with a limited degree of knowledge and experience. This knowledge could be very theoretical, such as from university economics or even some college finance courses, or it could be more practical, from reading newspapers, magazines and books.
Many people fall into this category. They know a bit or even a fair amount about stocks, bonds and real estate, but this knowledge may remain superficial and narrow. They would not necessarily know what constitutes a high versus low-risk portfolio or the difference between amutual fund and a hedge fund . They still have to rely heavily on the experts.
3. The Know A Lots. Moving on from the above level, there are obviously those with above-average or advanced levels of knowledge and experience. These people have been reading extensively for years, maybe even teaching or writing on investments or have been managing their own money or that of others quite actively. Despite this, they too will inevitably have gaps in their knowledge and experience.
Applying the Continuum to People in the Industry
When it comes to investment professionals , the three groups above still apply, but with some important differences. Professionals are extremely varied in terms of their area(s) of expertise and commitment to customers, so it is important to find out not only how experienced a professional is, but also in what areas.
Conclusions
What people really know, understand and can do in the investment industry is absolutely fundamental to managing your money or hiring someone else to manage your money properly. A complex interplay of education, motivation, relevance and sophistication all determine whether an investor or a professional can successfully manage a portfolio. It is therefore extremely important to know who you are really dealing with. This in itself constitutes one of the great challenges of the investment scene.
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Digging Deeper Into Bull And Bear Markets
Almost every day in the investing world, you will hear the terms bull and bear to describe market conditions. As common as these terms are, however, defining and understanding what they mean is not so easy. Because the direction of the market is a major force affecting your portfolio, its important you know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects you.
What Are Bear and Bull Markets?
Used to describe how stock markets are doing in general - that is, whether they are appreciating or depreciating in value - these two terms are constantly buzzing around the investing world. At the same time, because the market is determined by investors attitudes, these terms also denote how investors feel about the market and the ensuing trend.
Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the countrys economy is strong and employment levels are high.
On the other hand, a bear market is one that is in decline. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.
Where Did the Terms Come From?
The origins of the terms bull and bear are unclear, but here are two of the most common explanations:
1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that bears its name, will swipe its paws downward upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match. Matches using bulls and bears (whether together or gains other animals) took place in the Elizabethan era in London and were also a popular spectator sport in ancient Rome.
2. Historically, the middlemen who were involved in the sale of bearskins would sell skins that they had not yet received and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for bearskin jobbers, and the term stuck for describing a person who expects or hopes for a decrease in the market.
Characteristics of a Bull and Bear Market
Although we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics of the bull and bear markets that investors should be aware of. The following list describes some of the factors that generally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for typifying either bull or bear markets:
• Supply and Demand for Securities - In a bull market, we see strong demand and weak supply for securities. In other words, many investors are wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop. (For more on this, read Economics Basics: Demad and Supply.)
• Investor Psychology - Because the markets behavior is impacted and determined by how individuals perceive that behavior, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, most everyone is interested in the market, willingly participating in the hope of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to move their money out of equities and into fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market. (For related reading, see Taking A Chance On Behavioral Finance.)
• Change in Economic Activity - Because the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.
How to Gauge Market Changes
The key determinant of whether the market is bull or bear is the long-term trend, not just the markets knee-jerk reaction to a particular event. Small movements only represent a short-term trend or a market correction. Of course, the length of the time period that you are viewing will determine whether you see a bull or bear market.
For instance, the last two weeks could have shown the market to be bullish while the last two years may have displayed a bearish tendency. Thus, most agree that a decided reversal in the market should be ascertained by the degree of the change: if multiple indexes have changed by at least 15-20%, investors can be quite certain the market has taken a different direction. If the new trend does continue, it is because investors are perceiving a changes in both market and economic conditions and are thus making decisions accordingly.
Not all long movements in the market can be characterized as bull or bear. Sometimes a market may go through a period of stagnation as it tries to find direction. In this case, a series of up and downward movements would actually cancel-out gains and losses resulting in a flat market trend.
What To Do?
In a bull market, the ideal thing for an investor to do is take advantage of rising prices by buying early in the trend and then selling them when they have reached their peak. (Of course, determining exactly when the bottom and the peak will occur is impossible.) On the whole, when investors have a tendency to believe that the market will rise (thus being bullish), they are more likely to make profits in a bull market. As prices are on the rise, any losses should be minor and temporary. During the bull market, an investor can actively and confidently invest in more equity with a higher probability of making a return.
In a bear market, however, the chance of losses is greater because prices are continually losing value and the end is not often in sight. Even if you do decide to invest with the hope of an upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the profitability will be found in short selling or safer investments such as fixed-income securities. An investor may also turn to defensive stocks, whose performances are only minimally affected by changing trends in the market and are therefore stable in both economic gloom and boom. These are industries such as utilities, which are often owned by the government and are necessities that people buy regardless of the economic condition.
Conclusion
There is no sure way to predict market trends, so investors should invest their money based on the quality of the investments. At the same time, however, you should have an understanding of long-term market trends from a historical perspective. Because both bear and bull markets will have a large influence over your investments, do take the time to determine what the market is doing when you are making an investment decision. Remember though, in the long term, the market has posted a positive return.
The most difficult decision is the investment decision which should be based on thorough research on the company and security. OTCMarkets.com provides investors with comprehensive, in-depth data, including trade data, company news, and company financials to help facilitate an investor’s investment decisions.
Profiting In A Post-Recession Economy
People will always question what the future economy will look like after it suffers a recession. Though there are different implications with each recession - owing to its causes and the governmental and financial changes that are brought about - the economy will definitely shift and there will emerge new economic practices and trends for industries, consumers and investors.
Following the depths of the 2007-2009 recession theres a new world characterized by:
• Non-existent consumer discretionary spending
• Tighter credit and borrowing standards
• Reduced home ownership
• Increased consumer savings
The above effects will serve to:
• Hold down corporate profit growth
• Restrict employment growth
• Likely reduce future expected market returns
Despite the above, investors have options and opportunities as long as they keep their expectations in line with the expected future outcome. Some wonderful investment opportunities exist for investors in all stages of life.
Industries to Look For
When it comes to investing in the economy defined by the characteristics above, one question should dominate your investment consideration: Does this company make an essential or non-essential product?
When times are tough, people respond with their wallets. Unless folks are given great incentives, they wont buy unless they have to. In that kind of environment, I would favor food companies to retailers, healthcare providers to homebuilders, and defense contractors to automakers. Things like food, medicine and national security are musts in this world. An extra purse or a new car or bigger homes are not. And heres the best part: most of the companies that provide these necessary goods will continue to be around for a long time. (These type of companies are normally grouped in a sector called consumer staples – to learn more see A Guide To Consumer Staples.)
When economies are sour, the stock market tends to punish all companies regardless of what line of business they are in. In other words, a business like a Kraft or Johnson and Johnson that sell essential food and health products all over the world may likely see its shares suffer along with other discretionary businesses like retailers. And you can be comforted by the fact that even in tough times, people still need to buy food and Tylenol. Looking for these types of companies will likely earn you market-beating returns during the several years following a recession, despite an overall sluggish economy.
Despite the temptation, avoid retailers and other companies that make non-discretionary consumer goods. Such companies will likely experience reduced profit margins as they are forced to mark down their products to entice consumers.
Importance of Commodities
Commodities are the most fundamental of human essentials. Things like wheat, corn, oil, zinc, copper and coal. While you might not physically buy some of these commodities, you cant go through a normal day without them. Every time you turn on a light switch or power up your stove, the electricity used is provided by coal or natural gas. Grains are the basic building blocks for all the foods we eat. Oil, besides being refined into gasoline, goes in things like plastic, carpets, soaps and detergents.
Besides being essentials, commodities also have inflationary pricing power. If the government prints massive amounts of money to combat the recession, inflation will likely happen. It might not happen immediately afterwards, but it will rear its ugly head. Commodities, for those reasons are a good place to be.
Fertilizer companies are also great considerations. Fertilizer is the necessary ingredient to boost crop yield - that is, producing more food from the same amount of land. As the global population grows, so will the need to maximize food production. When looking at commodity plays, focus on the larger businesses with the quality assets such as the large integrated oil companies. We will always need oil and the biggest companies have the deepest pocket book to continue providing us with the black gold during various pricing environments. Otherwise look for those companies that are the low cost producers.
International Investment Exposure
To illustrate why investors should also consider diversifying internationally we can take a look at the 2007-2009 recession. Although this was a global economic recession, it didnt affect every country equally. According to J.D. Power Asia-Pacific, as of 2009, it was estimated that there were 820 cars for every 1,000 people in the US. In China, the figure was 34 cars per 1,000. Numbers like this illustrate the potential in countries like China, Brazil and India.
Major international commodity companies are now almost certain to have exposure to the growth in China. Such businesses enable investors to get the exposure without having to invest directly in China. The growth engines for companies like Johnson and Johnson is the fact that billions of people outside the U.S. will need its products.
Conclusion
As long as investors are aware of the likely economic shifts that lie before them in a post-recession environment, the opportunity to make excellent investments is there.
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How Dividends Work For Investors
During the dotcom boom of the late 1990s, the notion of dividend investing was laughable. Back then, everything was going up in double-digit percentages, and nobody wanted to fool around with the meager 2-3% gain from dividends. After all, we were in the new economy: the rules had changed and companies that paid dividends were too old economy.
As Bob Dylan once sang, The times, they are a-changin. After the bull market of the 90s ended, the fickle mob once again found dividends attractive. For many investors, dividend-paying stocks have come to make a lot of sense. In this article, well explain what dividends are and how you can make them work for you. (For background reading, see The Power Of Dividend Growth.)
Background on Dividends
A dividend is a cash payment from a companys earnings; it is announced by a companys board of directors and distributed among stockholders. In other words, dividends are an investors share of a companys profits, given to him or her as a part-owner of the company. Aside fromoption strategies, dividends are the only way for investors to profit from ownership of stock without eliminating their stake in the company.
When a company earns profits from operations, management can do one of two things with the profits. It can choose to retain them - essentially reinvesting them into the company with the hope of creating more profits and thus further stock appreciation. The other alternative is to distribute a portion of the profits to shareholders in the form of dividends. (Management can also opt to repurchase some of its own shares - a move that would also benefit shareholders. Read more about it in The Lowdown on Stock Buybacks.)
A company must keep growing at an above-average pace to justify reinvesting in itself rather than paying a dividend. Generally speaking, when a companys growth slows, its stock wont climb as much, and dividends will be necessary to keep shareholders around. This growth slowdown happens to virtually all companies after they attain a large market capitalization. A company will simply reach a size at which it no longer has the potential to grow at annual rates of 30-40% like a small cap, regardless of how much money is plowed back into it. At a certain point, the law of large numbers makes a mega-cap company and growth rates that outperform the market an impossible combination.
The changes witnessed in Microsoft (Nasdaq:MSFT) in 2003 are a perfect illustration of what can happen when a firms growth levels off. In January 2003, the company finally announced that it would pay a dividend: Microsoft had so much cash in the bank that it simply couldnt find enough worthwhile projects to spend it on - you cant be a high-flying growth stock forever!
The fact that Microsoft started to pay dividends did not signal the companys demise; it simply indicated that Microsoft had become a huge company and had entered a new stage in its life cycle, which meant it probably would not be able to double and triple at the pace it once did.
Dividends Wont Mislead You
By choosing to pay dividends, management is essentially conceding that profits from operations are better off being distributed to the shareholders than being put back into the company. In other words, management feels that reinvesting profits to achieve further growth will not offer the shareholder as high a return as a distribution in the form of dividends.
There is another motivation for a company to pay dividends: a steadily increasing dividend payout is viewed as a strong indication of a companys continuing success. The great thing about dividends is that they cant be faked. They are either paid or not paid, increased or not increased.
This isnt the case with earnings, which are basically an accountants best guess of a companys profitability. All too often, companies must restate their past reported earnings because of aggressive accounting practices, and this can cause considerable trouble for investors, who may have already based future stock price predictions on these (unreliable) historical earnings. (To learn more about evaluating earnings, read Earnings: Quality Means Everything.)
Expected growth rates are also unreliable. A company can talk a big game about wonderful growth opportunities that will pay off several years down the road, but there are no guarantees that it will make the most of its reinvested earnings. When a companys robust plans for the future (which impact its share price today) fail to materialize, your portfolio will very likely take a hit.
However, you can rest assured that no accountant can restate dividends and take back your dividend check. Moreover, dividends cant be squandered away by the company on business expansions that dont pan out. The dividends you receive from your stocks are 100% yours. You can use them to do anything you like: pay down your mortgage, spend it as discretionary income or buy the stock of a company you think has better growth prospects.
Who Determines Dividend Policy?
The companys board of directors decides what percentage of earnings will be paid out to shareholders, and then puts the remaining profits back into the company. Although dividends are usually dispersed quarterly, it is important to remember that the company is not obligated to pay a dividend every single quarter. In fact, the company can stop paying a dividend at any time, but this is rare, especially for a firm with a long history of dividend payments. (To learn more about this problem, read Is Your Dividend At Risk?)
If people were used to getting their quarterly dividends from a mature company, a sudden stop in payments to investors would be akin to corporate financial suicide. Unless the decision to discontinue dividend payments was backed by some kind of strategy shift, say investing all retained earnings into robust expansion projects, it would indicate that something was fundamentally wrong with the company. For this reason, the board of directors will usually go to great lengths to keep paying at least the same dividend amount.
How Stocks That Pay Dividends Resemble Bonds
When assessing the pros and cons of dividend-paying stocks, you will also want to consider their volatility and share price performance as compared to those of outright growth stocks that pay no dividends.
Because public companies generally face adverse reactions from the marketplace if they discontinue or reduce their dividend payments, investors can be reasonably certain they will receive dividend income on a regular basis for as long as they hold their shares. Therefore, investors tend to rely on dividends in much the same way that they rely on interest payments from corporate bonds and debentures.
Since they can be regarded as quasi-bonds, dividend-paying stocks tend to exhibit pricing characteristics that are moderately different from those of growth stocks. This is because they provide regular income, similar to a bond, but still provide investors with the potential to benefit from share price appreciation if the company does well.
Investors looking for exposure to the growth potential of the equity market, combined with the safety of the (moderately) fixed income provided by dividends, should consider adding stocks with high dividend yields to their portfolio. A portfolio with dividend-paying stocks is likely to see less price volatility than a growth stock portfolio. (This is why dividends are often considered to be a good recessionary investment. Read Dividend Yield For The Downturn to learn more.)
Conclusion
A company cant keep growing forever. When it reaches a certain size and exhausts its growth potential, distributing dividends is perhaps the best way for management to ensure that shareholders receive a return from the companys earnings. A dividend announcement may be a sign that a companys growth has slowed, but it is also evidence of a sustainable capacity to make money. This sustainable income will likely produce some price stability when paid out regularly as dividends. Best of all, the cash in your hand is proof that the earnings are really there, and you can reinvest or spend them as you see fit.
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Conglomerates: Cash Cows Or Corporate Chaos?
Conglomerates are companies that either partially or fully own a number of other companies. Not long ago, sprawling conglomerates were a prominent feature of the corporate landscape. Vast empires, such as General Electric (NYSE:GE) and Berkshire Hathaway (NYSE:BRK.A), were built up over many years with interests ranging from jet engine technology to jewelry. Corporate hodgepodges like these pride themselves on their ability to avoid bumpy markets. In some cases, they have produced impressive long-term shareholder returns - but this doesnt mean that corporate conglomerates are always a good thing for investors. If youre interested in investing in these behemoths, there are a few things you should know. Here we explain what conglomerates are and give you an overview of the pros and cons of investing in them.
The Case for Conglomerates
The case for conglomerates can be summed up in one word: diversification. According to financial theory, because the business cycle affects industries in different ways, diversification results in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another venture. In other words, if Berkshire Hathaways brick-making division has a bad year, the loss might be offset by a good year in its insurance business.
At the same time, a successful conglomerate can show consistent earnings growth by acquiring companies whose shares are more lowly rated than its own. In fact, GE and Berkshire Hathaway have both promised - and delivered - double-digit earnings growth by applying this investment growth strategy.
The Case Against Conglomerates
However, the prominent success of conglomerates such as GE and Berkshire Hathaway is hardly proof that conglomeration is always a good idea. There are plenty of reasons to think twice about investing in these stocks , particularly in 2009, when both GE and Berkshire suffered as a result of the economic downturn, proving that size does not make a company infallible.
Investment guru Peter Lynch uses the phrase diworsification to describe companies that diversify into areas beyond their core competencies. A conglomerate can often be an inefficient, jumbled affair. No matter how good the management team, its energies and resources will be split over numerous businesses, which may or may not be synergistic.
For investors, conglomerates can be awfully hard to understand, and it can be a challenge to pigeonhole these companies into one category or investment theme. This means that even managers often have a hard time explaining their investment philosophy to shareholders. Furthermore, a conglomerates accounting can leave a lot to be desired and can obscure the performance of the conglomerates separate divisions. Investors inability to understand a conglomerates philosophy, direction, goals and performance can eventually lead to share underperformance.
While the counter-cyclical argument holds, there is also the risk that management will keep hold of businesses with poor performance, hoping to ride the cycle. Ultimately, lower-valued businesses prevent the value of higher-valued businesses from being fully realized in the share price . (For further reading, see The Ups And Downs Of Investing In Cyclical Stocks.)
Whats more, conglomerates do not always offer investors an advantage in terms of diversification. If investors want to diversity risk, they can do so by themselves, by investing in a few focused companies rather than putting all of their money into a single conglomerate. Investors can do this far more cheaply and efficiently than even the most acquisitive conglomerate can.
The Conglomerate Discount
The case against conglomerates is a strong one. Consequently, the market usually applies a haircut to the piecewise, or sum-of-parts, value - that is, it frequently values conglomerates at a discount to more focused companies. This is known as the conglomerate discount. According to a 2001 article in CFO Magazine, academic studies have suggested in the past that this discount could be as much as 10-12%, but more recent academic inquiries have concluded that the discount is closer to 5%. Of course, there are some conglomerates that command a premium but, in general, the market ascribes a discount.
The conglomerate discount gives investors a good idea of how the market values the conglomerate as compared to the sum value of its various parts. A deep discount signals that shareholders would benefit if the company were dismantled and its divisions left to run as separate stocks.
Lets take a shot at calculating the conglomerate discount using a simple example. Well use a fictional conglomerate called DiversiCo, which consists of two unrelated businesses: a beverage division and a biotechnology division.
DiversiCo has a stock market valuation of $2 billion and total debt of $0.75 billion. Its beverage division has balance sheet assets of $1 billion, while its biotechnology division has $0.75 billion worth of assets. Focused companies in the beverage industry have median market-to-book values of 2.5, while pure play biotech firms have market-to-book values of 2. DiversiCos divisions are fairly typical companies in their industries. From this information, we can calculate the conglomerate discount:
Example - Calculating the Conglomerate Discount
Total Market Value DiversiCo:
= Equity Debt
= $2 billion $0.75 billion
= $2.75 billion
Estimated Value Sum of the Parts:
= Value of Biotech Division Value of Beverage Division
= ($0.75 billion X 2) ($1 billion X 2.5)
= $1.5 billion $2.5 billion
= $4.0 billion
So, the conglomerate discount amounts to:
= ($4.0 billion - $2.75 billion)/$4.0 billion
= 31.25%
Copyright ??2009 Investopedia.com
DiversiCos conglomerate discount of 31.25% seems unusually deep. Its share price does not reflect the true value of its separate divisions. It becomes clear that this multibusiness company could be worth significantly more if it were broken up into individual businesses. Consequently, investors may push for divesting or spinning off its beverage and biotech divisions to create more value. If that were to happen, Diversico might be worth closer examination as a buying opportunity.
What to Look For
The big question is whether investing in conglomerates makes sense. The conglomerate discount suggests it does not. But there may be a silver lining. If you invest in conglomerates that break up into individual pieces through divestitures and spinoffs, you could capture an increase in value as the conglomerate discount disappears. As a general rule, you stand to get greater returns when conglomerates break up than when they are built.
That said, some conglomerates do command a valuation premium - or at least a slim conglomerate discount. These are extremely well-run companies. They are managed aggressively, with clear targets set for divisions. Underperforming companies are quickly sold, or divested. More importantly, successful conglomerates have financial rather than strategic or operating objectives, adopting strict approaches to portfolio management .
If you choose to invest in conglomerates, look for ones with financial discipline, rigorous analysis and valuation, a refusal to overpay for acquisitions and a willingness to sell off existing businesses. As with any investment decision , think before you buy and dont assume that big companies always come with big returns.
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Make Money Trading Earnings Announcements
If you watch the financial news media, youve seen how earnings releases work. Its like the big game on Sunday; it comes with hours, and sometimes days, of endless experts providing their predictions of what the numbers will look like, and other experts providing their strategies of how to invest or trade based on the news. Some would say that it is media overhype at its finest and if you watch the endless flurry of graphics and earnings central music, its hard to argue.
But for the individual investor , is there money to be made in earnings announcements? As with most topics on Wall Street, there are a flurry of opinions, and it will ultimately come down to individual choice, but here are two of those opinions to help you decide for yourself.
SEE: Profit From Earnings Surprises With Straddles And Strangles
Why You Should Try
According to CNBC, the percentage of S
No Information - Companies that are not able or willing to provide disclosure to the public markets - either to a regulator, an exchange or OTC Markets.
Why Being A Copycat Investor Can Get You Hurt
While some investors are trailblazers and do their own research, many investors attempt to mimic the portfolios of well-known investors, such as Warren Buffett of Berkshire Hathaway, in the hope of being able to cash in on those investors world-class returns. But copying anotherinvestors portfolio, particularly an institutional investors portfolio, can actually be quite dangerous. So, before you jump on the copycat bandwagon, get to know the pitfalls of this approach to investing.
An Inability to Adequately Diversify Holdings
It is not uncommon for a major institutional investor, such as a mutual fund, to own more than 100 stocks in a given portfolio. Even Berkshire Hathaway (Warren Buffetts investment vehicle), which has a tendency to invest in fewer stocks as opposed to more, owns shares in some 38 (as of June 30, 2008) different public companies! (Read Build A Baby Berkshire and Warren Buffetts Best Buys to learn more about investing like Warren Buffett.)
Institutional investors like Warren Buffett are able to spread their risk over a number of companies so that if one particular company, sector, industry, or even country hits a rough patch, there are other investment holdings that may pick up the slack. Unfortunately, most individual investors have neither the funds, nor the financial wherewithal to ever achieve such diversification. (See what can happen when diversification goes too far in The Dangers Of Over-Diversification
So what do investors do when they realize that they cannot maintain as many positions as an institutional investor?
Usually, the individual investor will copy or mimic a small portion of the institutions holdings (that is, heavily invest in some holdings and ignore others entirely). Unfortunately, this is where trouble can occur – especially if one or more of those core holdings heads south.
An individual investors inability to adequately mimic an institutions diversification profile and mitigate risk is a major reason why many individuals fail to outperform major mutual funds - even if they maintain similar holdings. (To find out more about institutional sponsorship as a gauge of stock quality, read Institutional Investors And Fundamentals: Whats The Link?)
Different Investment Horizons
Many people like to refer to themselves as longer-term investors, but when it comes down to it, most investors want to see results in the first 12 to 24 months that they own a particular stock.
In fact, according to an often-cited November 2001 study by Gavin Quill (a senior vice president and director of research studies at Financial Research Corporation, a financial services research and consulting firm), mutual fund holding periodsin 2000 were only about three years! That is well shy of the more than 30 years that Berkshire Hathaway has owned shares of Washington Post Company. In other words, on average, institutions seem to have much more patience than their individual-investor counterparts do. (Read more about how investing for the long haul can benefit you in Long-Term Investing: Hot Or Not?)
In short, even if individual investors achieve diversification similar to the institutions they are looking to mimic, they might not be able afford or have the patience to sit on a given investment for five or 10 years, as they may need to tap into the funds to buy a home, to pay for school, to have children or to take care of an emergency situation, and doing so may adversely impact their investment performance .
All states require financial institutions, including brokerage firms, to report when personal property has been abandoned or unclaimed after a period of time specified by state law — often five years. Before a brokerage account can be considered abandoned or unclaimed, the firm must make a diligent effort to try to locate the account owner.
Portfolio Management Tips For Young Investors
Too many young people rarely, or never, invest for their retirement years. Some distant date, 40 or so years in the future, is hard to imagine. However, without investments to supplement retirement income, if any, retirees will have a difficult time paying for lifes necessities. TUTORIAL:Stocks Basics
Smart, disciplined, regular investment in a portfolio of diverse holdings, can yield good long-term returns for retirement and provide additional income throughout an investors working life.
An often stated reason for not investing is a lack of knowledge and understanding of the stock market. This objection can be overcome through self-education and step-by-step through the years, as an investor learns by investing. Classes in investing are also offered by a variety of sources, including city and state colleges, civic and not-for-profit organizations, and there are numerous books targeted to the beginning investor.
However, youve got to start investing now; the earlier you begin, the more time your investments will have to grow in value. Heres a good way to start building a portfolio, and how to manage it for the best results. (For related reading, see Top 5 Books For Young Investors.)
Start Early
Start saving as soon as you go to work by participating in a 401(k) retirement plan, if its offered by your employer. If a 401(k) plan is not available, establish an Individual Retirement Account (IRA) and earmark a percentage of your compensation for a monthly contribution to the account. An easy, convenient way to save in an IRA or 401(k) is to create an automatic monthly cash contribution. Keep in mind, the savings accumulate and the interest compounds without taxes, as long as the money is not withdrawn, so its wise to establish one of these retirement investment vehicles early in your working life.
Another reason to start saving early is that usually the younger you are, the less likely you are to have burdensome financial obligations: a spouse, children and mortgage, for example. That means you can allocate a small portion of your investment portfolio to higher risk investments, which may return higher yields.
When you start investing while young, before your financial commitments start piling up, youll probably also have more cash available for investing and a longer time horizon before retirement. With more money to invest for many years to come, youll have a bigger retirement nest egg.
To illustrate the advantage of value investing as soon as possible, assume you invest $200 every month starting at age 25. If you earn a 7% annual return on that money, when youre 65 your retirement nest egg will be approximately $525,000. However, if you start saving that $200 monthly at age 35 and get the same 7% return, youll only have about $244,000 at age 65. (For additional reading, see Accelerating Returns With Continuous Compounding.)
Diversify
Select stocks across a broad spectrum of market categories. This is best achieved in an index fund. Invest in conservative stocks with regular dividends, stocks with long-term growth potential, and a small percentage of stocks with better returns, along with higher risk potential. If youre investing in individual stocks, dont put more than 4% of your total portfolio into one stock. That way, if a stock or two suffers a downturn, your portfolio wont be too adversely effected. Certain AAA rated bonds are also good investments for the long term, either corporate or government. Long-term U.S. Treasury bonds, for example, are safe and pay a higher rate of return than short- and mid-term bonds. (To learn more on investing in bonds, read Bond Basics: Different Types Of Bonds.)
Keep Costs to a Minimum
Invest with a discount brokerage firm. Another reason to consider index funds when beginning to invest is that they have low fees. Because youll be investing for the long-term, dont buy and sell regularly in response to market ups and downs. This saves you commission expenses and management fees, and may prevent cash losses when the price of your stock declines.
Discipline and Regular Investing
Make sure that you put money into your investments on a regular, disciplined basis. This may not be possible if you lose your job, but once you find new employment, continue to put money into your portfolio.
Asset Allocation and Re-Balance
Assign a certain percentage of your portfolio to growth stocks, dividend paying stocks, index funds and stocks with a higher risk, but better returns.
When your asset allocation changes (i.e., market fluctuations change the percentage of your portfolio allocated to each category), re-balance your portfolio by adjusting your monetary stake in each category to reflect your original percentage. (For more information, read Five Things To Know About Asset Allocation.),
Tax Considerations
A portfolio of holdings in a tax-deferred account, a 401(k), for example, builds wealth faster than a portfolio with tax liability. You pay taxes on the amount of money withdrawn from a tax deferred retirement account. A Roth IRA also accumulates tax free savings, but the account owner doesnt have to pay taxes on the amount withdrawn. To qualify for a Roth IRA, your modified adjusted gross income must meet IRS limits and other regulations. Earnings are federally tax free if youve owned your Roth IRA for at least five years and youre older than 59.5, or if youre younger than 59.5, have owned your Roth IRA for at least five years and the withdrawal is due to your death or disability, or for a first time home purchase.
The Bottom Line
Disciplined, regular, diversified investment in a tax deferred 401(k), IRA or a potentially tax-free Roth IRA, and smart portfolio management can build a significant nest egg for retirement. A portfolio with tax liability, dividends and the sale of profitable stock can provide cash to supplement employment or business income. Managing your assets by re-allocation and keeping costs, such as commissions and management fees, low, can produce maximum returns. If you start investing as early as possible, your stocks will have more time to build value. Finally, keep learning about investments throughout your life, both before and after retirement. The more you know, the more your potential portfolio return, with proper management, of course.
Understanding The Income Statement
The income statement is one of the three financial statements - the other two are the balance sheet and cash flow statement - with which stock investors need to become familiar. The purpose of this article is to provide the less-experienced investor with an understanding of the components of the income statement in order to simplify investment analysis and make it easier to apply it to your own investment decisions.
In the context of corporate financial reporting, the income statement summarizes a companys revenues (sales) and expenses quarterly and annually for its fiscal year. The final net figure, as well as various others in this statement, are of major interest to the investment community. (To learn more about reading financial statements, see What You Need To Know About Financial Statements, Footnotes: Start Reading The Fine Print and Introduction To Fundamental Analysis.)
General Terminology and Format Clarifications
Income statements come with various monikers. The most commonly used are statement of income, statement of earnings, statement of operations and statement of operating results. Many professionals still use the term P
OTC derivatives can lead to significant risks. Especially counterparty risk has gained particular emphasis due to the credit crisis in 2007. Counterparty risk is the risk that a counterparty in a derivatives transaction will default prior to expiration of the trade and will not make the current and future payments required by the contract.[2] There are many ways to limit counterparty risk. One of them focuses on controlling credit exposure with diversification, netting, collateralisation and hedging.
Contemplating Collectible Investments
If you have much space for storage, your attic and garage might be stuffed with old furniture, books and other items youve held onto over the years. If this is the case, you may be sitting on a few valuable collectibles just waiting to make you money. That said, you are just as likely to be looking at little more than a pile of junk. In this article well take a look at collectibles as an investment and help you decide whether this emotional market is a good place to park your money.
All Things Old Made New Again
140,000,000 B.C: A young Allosaurus missteps and finds itself mired in a sink hidden beneath the underbrush. Millions of geological ages later, an amateur paleontologist helps him out - or at least what was left of his head. In 2005, the Allosaurus restored skull sells for the high price of $600.
1908: Honus Wagner of the Pittsburgh Pirates hits his tenth home run and ends the year with a .354 batting average, marking one of the best years of his career. The next year, the American Tobacco Company commemorates Wagner by putting a trading card inside its cigarette packages. Less than 60 make it into stores before it is discovered that Honus is vehemently against smoking. In 2000, Wagners cigarette trading card is sold on EBay for $1.1 million.
1962: Stan Lee creates a superhero who has to worry about rent, his ailing aunt and passing his next test - all in addition to saving the world. Peter Parkers misadventure with a radioactive spider hit the stands with a $0.12 cover price. And, in 2006, the first edition of The Amazing Spider-Man is among the most valuable comics with a price around $6,000 or more, according to Wizard: The Guide To Comics pricing guide.
These are all examples of the strange and wonderful world of collectibles. While there is no denying the thrill of owning a juvenile Allosaurus skull, is collecting really a form of investment?
All That Glitters ...
The reason we began by discussing a fossil, a comic and a baseball card is that people have no qualms about calling them collectibles. However, when you speak about diamonds, gold and other precious materials, people tend to call theminvestments . In theory, these materials - and even stocks - could be termed collectibles because their price is based more on what people are willing to pay for them (or market value) than on their actual intrinsic value. But in the practical world, precious metals and stocks have an intrinsic value. For metals, this value is based on rarity and the fact that if you melt it, burn it or bend it, you still have the same atomic substance in the end. For stocks, the value is produced by the underlying brick and mortar company that the share represents - a company that is generating earnings to justify the prices you pay for its stock.
What makes collectibles different is that even a little damage can erase all of a collectibles value. This is because a collectibles value is based on emotional factors like nostalgia. These emotional factors can be as erratic as they are powerful. If you were asked whether people would be willing to pay more for a dinosaur skull or a baseball card, even if you chose one over the other you would give them both a higher value than, say, a torn up baseball card or a box of bone fragments. Those items you would probably call worthless (unless you are an archaeologist or a fan of papier-mâché).
The 20-Year Itch
It is said that nostalgia runs in 20-year cycles. In other words, the things that are popular now will become collectibles in 20 years when people want to reconnect with their past. This doesnt mean that you can buy the top 10 items from consumer polls, incubate them for 20 years and then sell them for a fortune. It means that some items this year will become collectibles if they meet two conditions: rarity and appeal.
Rarity is becoming a harder thing to find as mass production methods allow companies to (over)fill demand without incurring that much extra cost. Beanie Babies have devalued as more and more product lines are introduced. It is profitable for a company to sell as many products as it takes to satiate demand, and that mentality destroys a future collectors profits. (For more on this concept, check out Economics Basics.)
Appeal is also a difficult thing to nail down. To make money at collecting, you have to predict what will become popular in retrospect - perhaps something that is not in high demand now will become popular in the future, either because they are rare or they were not fully appreciated at the time. For example, in the 1950s and 1960s, wing-tipped plastic sun glasses with glass lenses were sold for a few dollars in drugstores, but they can now fetch hundreds of dollars in collectors markets.
Reasons Not To Buy Collectibles
Mark-ups
When you buy a collectible from a dealer, that dealer is usually marking up the price to make a profit. Unlike collectors, dealers do not have the luxury of holding an item for years and years while the value may or may not increase - they have sales to make and a business to run.
Maintenance
Many collectibles require special care to keep them in top condition. These can range in cost from the $1 plastic cover used to keep hockey cards safe to a special room with moisture, heat and light monitors to lengthen a paintings life. On top of the storage costs, there are the added costs of buying insurance for the more valuable types of collectibles as well as paying to have professionals, appraisers, restorers and dealers look at the collectible before you sell it. A collectible doesnt produce income while you hold it, and it may actually eat income while you wait for it to increase in value.
Wear
Most categories of collectibles - from Pokemon cards to antique plumbing fixtures - have a manual classifying how much an item is worth in pristine condition and what sorts of damage degrades it by what percentage of value. For example, a well-read copy of the aforementioned Amazing Spiderman #1 may only be worth 30-60% of the $6,000 list price, depending on what type and what degree of wear it shows.
Counterfeiting
Most museums display dinosaur fossils models - not the real thing. Can you tell the difference between an Allosauras skull made of plaster and cement and one made of fossilized bone? No matter how experienced the appraiser, forgeries do make it to the dealers and then through to the collectors, which could leave you holding a very expensive piece of criminal art.
Low Returns
Collectibles tend to have lower returns than a stock market index fund, a money market account and most bond funds. If you took an average of the returns on all collectibles – which is practically impossible to do given some have little or no market to measure – it would be dismal compared to the S
Be wary of buying stocks on margin. Make sure you understand how a margin account works, and what happens in the worst case scenario before you agree to buy on margin.
The Christmas Saints Of Wall Street
There is something about twinkling lights, garlands and gifts that causes a change in people - not the same change as a good eggnog with double the rum does, but its not far off. At Christmas time, people are merrier and more generous than usual. The Red Cross and UNICEF see moredonations in December than they do in all the other 11 months combined. People that usually sprint toward the office with their collars up and their eyes straight may be more likely to drop change into an outstretched hand or donation pot. Strangers exchange greetings instead of suspicious glares - this is the Christmas spirit.
This Christmas season, we will look at some people whose Christmas spirit doesnt leave when the pine needles drop. They may not be in the same league as ol Saint Nick, but they arent far off.
The Old Guard
Philanthropy on Wall Street is not a recent event. It has, however, been in need of a pick-up since the recession pinched, squeezed and finally stemmed the flow of big money into charity. The original saints of Wall Street can still be felt by tracing your finger down a list of libraries, hospitals, foundations, research centers, womens shelters and other projects aimed at helping the less fortunate. If you do this, youll find that some names occur more often than others.
Steel, Oil and Cars
The old guard, consisting of Andrew Carnegie, John D. Rockefeller, Andrew W. Mellon and Henry Ford, all made their fortunes in oil, steel or a combination of the two - cars, ships, etc. Charity came to these men late in life, and it is sometimes said that much of their philanthropy was giving back the money they made from crushing unions and creating unfair monopolies. While there is truth to these claims, it is also true that most of what we call unsavory business practices in hindsight were commonplace in their time. Carnegie, Rockefeller, Mellon and Fords devotion to education, medical care and the fight against poverty made them stand out at a time when the worlds richest people hoarded their money within their families. These men, and the foundations they left behind, have given billions of dollars to improve life in America.
The Next Generation
Whereas the philanthropists of the past were based in heavy industry, the next generation is largely made of tech street barons and stock gurus. Here are few of the members of the new generation of philanthropists:
Gordon and Betty Moore (Intel)
Gordon Moore was one of the co-founders of Intel Corporation. With his wife Betty, he has made donations in the hundreds of millions of dollars to two main causes: environmental conservation (with a focus on marine life) and medicine. The latter grew out of Betty Moores bad experiences with hospitals. Betty and her husband have funded training programs for nurses in the hope of preventing common medical mistakes. The Moores also have given generously to improving secondary education, culminating in a $600-million gift to the California Institute of Technology in 2001.
Michael and Susan Dell
Michael Dell, founder of Dell Computers, and his wife Susan have been increasing their involvement in philanthropy every year since Michael stepped down as the CEO in July 2004, leaving behind a profitable company through which he amassed a large personal fortune. Having four young children of their own, the Dells have used their wealth to advance childrens causes (heath, education and medicine). The Michael
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