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$PAOG about to blow. MJ clinics to fight opioid addiction. President Trump mentioned yesterday fight against opioids are priority in Nashville.
$CHIT - accumulation is nice. Seems to be a link between CHIT, ViCT and PDXP
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$ONCX Patient Recruitment of Second Cohort of Prolanta™ Phase 1 Trial in Advanced Ovarian Cancer https://finance.yahoo.com/news/oncolix-initiates-patient-recruitment-second-120000369.html
$ONCX HOUSTON, Jan. 08, 2018 (GLOBE NEWSWIRE) -- Oncolix, Inc., (ONCX) announced today that the Company’s clinical site investigator has initiated patient recruitment for the second dosing group for the Prolanta™ Phase 1 clinical trial in patients with advanced ovarian cancer. Patient dosing is anticipated to begin during the first quarter of 2018. The drug supply for this dosing group is scheduled to be shipped to the clinic from the contract manufacturer during January.
$ADAC's new online retail store is called CryX - http://www.CryX.shop - and it will feature an option where customers can purchase products at a discount if they use the CryX coin. ADAC has added a special preview option so investors can see the progress on the launch, which is planned for early 2018. The preview is located at: http://www.cryx.shop/preview.html
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Cash Flow On Steroids: Why Companies Cheat
It seems that every year another top athlete is exposed in a doping scandal. But these are people who are trained since birth to believe that all that matters is their performance, so they naturally take a risk on anything likely to increase their chances of winning. Companies, similarly indoctrinated to perform well at all costs, also have a way to inflate or artificially pump up their earnings - its called cash flow manipulation. Here we look at how its done, so you are better prepared to identify it.
Reasons for Cash Flow Manipulation
Cash flow is often considered to be one of the cleaner figures in the financial statements. (WorldCom, however, has proved that this isnt true.)
Companies benefit from strong cash flow in the same way that an athlete benefits from stronger muscles - a strong cash flow means being more attractive and getting a stronger rating. After all, companies that have to use financing to raise capital, be it debt or equity, cant keep it up without exhausting themselves.
The corporate muscle that would receive the cash flow accounting injection is operating cash flow (OCF). It is found in the cash flow statement, which comes after the income statement and balance sheet . (If youd like a refresher, seeWhat Is A Cash Flow Statement? and The Essentials Of Cash Flow.)
How the Manipulation Is Done
Dishonesty in Accounts Payable
Companies can bulk up their statements simply by changing the way they deal with the accounting recognition of their outstanding payments, or their accounts payable. When a company has written a check and sent it to make an outstanding payment, the company should deduct its accounts payable. While the check is in the mail, however, a cash-manipulating company will not deduct the accounts payable with complete honesty and claim the amount in theoperating cash flow (OCF) as cash on hand.
Companies can also get a huge boost by writing all their checks late and using overdrafts. This boost, however, is a result of how Generally Accepted Accounting Principles (GAAP) treat overdrafts: they allow, among other things, for overdrafts to be lumped into accounts payable, which are then added to operating cash flow. This allowance has been seen as a weakness in the GAAP, but until the accounting rules change, youd be wise to scrutinize the numbers and footnotes to catch any such manipulation. (For more on analyzing these, see How To Read Footnotes.)
Selling Accounts Receivable
Another way a company might increase operating cash flow is by selling off its accounts receivable. This is also called securitizing. The agency buying the accounts receivable pays the company a certain amount of money, and the company passes off to this agency the entitlement to receive the money that customers owe. The company therefore secures the cash from their outstanding receivables sooner than the customers pay for it. The time between sales and collection is shortened, but the company actually receives less money than if it had just waited for the customers to pay. So, it really doesnt make sense for the company to sell its receivables just to receive the cash a little sooner - unless it is having cash troubles, and has a reason to cover up a negative performance in the operating cash flow column.
Non-Operating Cash
A subtler steroid is the inclusion of cash raised from operations that are not related to the core operations of the company. Non-operating cash is usually money from securities trading, or money borrowed to finance securities trading, which has nothing to do with business. Short-terminvestments are usually made to protect the value of excess cash before the company is ready and able to put the cash to work in the businesss operations. It may happen that these short-term investments make money, but its not money generated from the power of the businesss core operations.
Therefore, because cash flow is a metric that measures a companys health, the cash from unrelated operations should be dealt with separately. Including it would only distort the true cash flow performance of the companys business activities. GAAP requires these non-operating cash flows to be disclosed explicitly. And you can analyze how well a company does simply by looking at the corporate cash flow numbers in the cash flow statement.
Questionable Capitalization of Expenses
Also a subtle form of doping, we have the questionable capitalization of expenses.
Here is how capitalization works. A company has to spend money to make products. The costs of production come out of net income and therefore operating cash flow. Instead of taking the hit of an expense all at once, companies capitalize the expense, creating an asset on the balance sheet, in order to spread the expense out over time - meaning the company can write off the costs gradually. This type of transaction is still recorded as a negative cash flow on the cash flow statement, but it is important to note that when it is recorded it is classified as a deduction from cash flow from investing activities (not from operating cash flow). Certain types of expenditures - such as purchases of long-term manufacturing equipment - do warrant capitalization because they are a kind of investing activity.
The capitalization is questionable if the expenses are regular production expenses, which are part of the operating cash flow performance of the company. If the regular operating expenses are capitalized, they are recorded not as regular production expenses but as negative cash flows from investment activities. While it is true that the total of these figures - operating cash flow and investing cash flow - remain the same, the operating cash flow seems more muscular than that of companies that deducted their expenses in a timely fashion. Basically, companies engaging in this practice of capitalizing operating expenses are merely juggling an expense out of one column and into another for the purpose of being perceived as a company with strong core operating cash flow. But when a company capitalizes expenses, it cant hide the truth forever. Todays expenses will show up in tomorrows financial statements, at which time the stock will suffer the consequences.
Again, reading the footnotes can help expose this suspicious practice.
Summary
Whether it is the world of sports or the world of finance, people will always find some way to cheat; only a paralyzing amount of regulation can ever remove all opportunities for dishonest competition and business requires reasonable amounts of operating freedom to function effectively. Not every athlete is cycling anabolic steroids, just as many companies are honest on their financial statements . That said, the existence of steroids and dishonest accounting methods mean that we have to treat every gold medalist and every companys financial statement with the proper amount of scrutiny before we accept them.
From a trading perspective, liquidity is the ability of a security to be bought or sold without causing a significant movement in the price of the security. Liquid securities may be bought and sold in large numbers without a dramatic movement in the price of the security.
What Owning A Stock Actually Means
Most people realize that owning a stock means buying a percentage of ownership in the company, but many new investors have misconceptions about the benefits and responsibilities of being a shareholder. Many of these misconceptions stem from a lack of understanding of the amount of ownership that each stock represents. For large companies such as IBM (NYSE:IBM) and General Electric (NYSE:GE), one share is merely a drop in the pond. Even if you owned $1 million worth of shares, youll still be a small potato with very little equity in the actual company. So what does this mean? Lets take a look.
Misconception No.1: I am the boss.
First of all, youre better off not thinking that you can bring your share certificates into the corporate headquarters to boss people around and demand a corner office. As the owner of the stock, youve placed your faith in the companys management and how it handles different situations. If you are not happy with the management, you can always sell your stock, but if you are happy, you should hold onto the stock and hope for a good return.
Furthermore, next time you are pondering whether youre the only person worried about a companys stock price, you should remember that many of the senior company executives, or insiders, probably own as many, if not more, shares than you do.
This isnt a guarantee that the companys stock will do well, but it is a way for companies to give their executives an incentive to maintain or increase the stocks price. Be careful though: insider ownership is a double-edged sword because executives may get involved in some funny business to artificially increase the stocks price and then quickly sell out the personal holdings for a profit.
Even though you cant directly manage the company with your stocks , if your stock has voting rights, vote for the directors who can. These are the people who typically hire upper management, which hires lower management, which hires subordinate employees. Thus, as an owner of common stock, you do get a bit of a say in controlling the shape and direction of the company, even though this say doesnt represent direct control.
Misconception No.2: I get a discount.
Another misconception is that ownership in a company translates into discounts. Now, there are definitely some exceptions to the rule. Berkshire Hathaway (NYSE:BRK.A), for example, has an annual gathering for its shareholders where they can buy goods at a discount from Berkshire Hathaways held companies. Typically, however, the only thing you get with the ownership rights of a stock is the ability to participate in the companys profitability.
Why would it hurt for you to get a discount? Well, this answer can get a little complicated. After some thought, you probably would not want that discount. Lets look at an example of Bens Chicken restaurant (owned by Ben and a couple of his friends) and Corys Brewing Company (owned by millions of different shareholders). Because only a few people own Bens Chicken Restaurant, the discount would only be a small portion of the restaurants income and revenue, which the owners would bear.
For Corys Brewing Company, the loss in income and revenue would also be borne by the owners (the millions of shareholders), but, because revenue is the main driver of stock price and the loss from a discount would mean a drop in stock price, the loss from a discount would be more substantial for Corys Brewing. So, even though an owner of stock may have saved on a purchase of the companys goods, he or she would lose on the investment in the companys stock. Thus, the discount isnt nearly as good as it initially sounds.
Misconception No.3: I own the chair, the desk, the pens, the property, etc.
As an investor in a company, you own a portion of the company (no matter how small that portion is); however, this doesnt mean that you own property of the company. Lets go back to Bens Chicken Restaurant and Corys Brewing Company. Quite often, companies will have loans to pay for property, equipment, inventories and other things needed for operations.
Bens Chicken Restaurant received a loan from a local bank under certain conditions whereby the equipment and property are used as collateral. For a large company like Corys Brewing Company, the loans come in many different forms, such as through a bank or from investors by means of different bond issues. In either case, the owners must pay back the debtors before getting any money back.
For both companies, the debtors - in the case of Corys Brewing Company, this is the bank and the bondholders - have the initial rights to the property, but they typically wont ask for their money back while the companies are profitable and show the capacity to repay the money. However, if either of the companies becomes insolvent, the debtors are first in line for companys assets . Only the money left over from the sale of the company assets is distributed out to the stock holders.
Conclusion
Hopefully weve been able to dispel any misconceptions that some stock holders have about the powers of ownership. Next time you think about taking your stock certificate into the nearest McDonalds (NYSE:MCD) to get a discount on a Happy Meal, fire the employee after he refuses to give it to you, and finally walk out in disgust with a McFlurry machine, you should remind yourself of this article.
Investors must define the order they wish the broker-dealer to execute. There are two main order types: the Limit Order and the Market Order.
Whats The Minimum I Need To Retire?
Can I retire with $1 million dollars? Of course you can. Truth be told, you might be able to retire with much less. Then again, you might not be able to retire with $1 million or $2 million or perhaps even $10 million. It all depends on your personal situation. On thing is sure: you want to make sure your golden years are golden, not merely a struggle for existence. (To learn more read, 10 Steps To Retire A Millionaire.)
Most advisors and financial professionals have been able to boil it down to one number, also known as the holy grail of retirement analysis: the amazing 4% sustainable withdrawal rate. Essentially, this is the amount you can withdraw through thick and thin and still expect your portfolio to last at least 30 years, if not longer. This will determine how long your retirement savings will last, and will help you determine how much money you need for the retirement you want.
So, I Can Retire With $1 Million?
If you are 65 with $1 million, you can expect your portfolio of properly diversified investments to provide $40,000 per year (in todays dollars ) until you are 95. Add that to your Social Security income and you should be bringing in roughly $70,000 a year.
Now, if this isnt enough for you to maintain the lifestyle you want, you have come to your unfortunate answer rather quickly: no, you cannot retire with $1 million.
Now wait a minute, you say, what about my spouse, who is also getting Social Security? What if Im 75, not 65? What if I want to die broke? What if Im getting a government pension and benefits? What if Im planning to retire in Costa Rica? There are many what ifs, but the math is still the math: If you plan on needing a lot more than $40,000 from you retirement nest egg, then the probability of a successful retirement on $1 million is not good.
Projecting Future Expenses
There are a lot of books and articles that discuss longevity risks, sequence of returns, healthcare costs and debt. But knowing how much you need to retire still boils down to projecting your future expenses until the day you die. Ideally, that yearly figure will add up to less than 4% of your nest egg.
So a $1 million dollar portfolio should give you, at most, $40,000 to budget. If you are forced to take out more than $40,000 adjusted for time during your retirement, you are tempting fate and relying on luck to get you by. So, if you want at least $40,000 per year, $1 million is really the least amount of money - the bare minimum - you should have before you launch into retirement.
Retirement planning means maximizing your lifestyle while maintaining a high probability of being able to maintain that lifestyle until the day you die. So scraping together a bare minimum nest egg is like an explorer heading into the jungle for a week with just enough supplies. What if something happens? Why not take extra? As a result, for the vast majority of people, $1 million is not enough if you want a high probability of a great retirement .
Three Types Of Retirees
Typically, we see three categories of people trying to decide if they are ready to retire:
1. Of course you can retire! Live it up and enjoy! If you are at least in your 70s with reasonable expenses, then there is a good chance you and your $1 million fall in this category.
2. The probability for your retirement looks good. Just dont go crazy and buy a Porsche. If you are at least 62 and have always lived a frugal lifestyle, then you and your $1 million are likely going to fall in this category.
3. Lets redefine retirement for you. This is just about everyone else - including early retirees with $1 million living frugally and 70-year-olds with $1 million spending lavishly.
Early retirement , meaning before Social Security and Medicare kick in, with only $1 million is extremely risky. You leave yourself with so few options if things go terribly wrong. Sure, you can go to Costa Rica and eat fish tacos every day. But what if you want to move back to the U.S. someday? What if you want to change? Having more money set aside will provide you with more flexibility and increase the likelihood of continued financial independence to do what you want within reason until the day you die. If you are forced to stay in Costa Rica or get a job, then you didnt make a good decision and plan.
So, once you have your $1 million, concentrate on what you can control - or at least affect. You cant control when you die but you can affect your health costs by doing your best to stay healthy until you qualify for Medicare. You cant control investment returns but you can affect the range of returns. You cant control inflation but you can affect your fixed costs and your variable costs.
Spending and Expenses
A few quick bits on expenses and spending. To a certain extent, retirement planning is the art of accurately matching future income with expenses. People seem to ignore certain expenses. For example, family vacations and a grandchilds wedding gift count the same as dental surgery and car repairs in retirement planning, but people neither include these enjoyable expenses when they are projecting their costs nor do they recognize how hard it is to cut them - try telling one child that you cant help with his wedding after paying for your other childrens weddings!
Conclusion
As a general rule, people who try to determine the minimum amount of retirement savings are usually the least likely to retire. Just getting by isnt a good way to start 30 years of unemployment and diminishing employability. If something unexpected happens, what are your options? Re-enter the work force, change your lifestyle or get more aggressive with your investments? Most people try the latter and pray. Some get lucky, but most dont. This is the equivalent of doubling down in black jack.
If you want to retire with $1 million dollars, it is going to come down to a combination of 1) how you define retirement, 2) your personal inventory of everything in your life: assets, debts, medical, family, etc. and 3) what the future holds. Remember, stuff happens in life. Do you really want to start this 30 year adventure with the bare minimum? Retirement is like most good things, it is much better to be overprepared than to wing it. You can you retire with $1 million dollars, but its better to be safe than sorry – shoot for $2 million!
3 Psychological Quirks That Affect Your Trading
The most troublesome problems we face as traders are the ones that we dont even know exist. Certain human tendencies affect our trading, yet we are often completely unaware they are affecting us and our bottom line. While there are many human tendencies, we will look at three that, if not managed, can block the road toward achieving our financial goals.
The Enemy We Dont Know
When dealing with trading in a technical way, we can see where we erred and attempt to fix it for next time. If we exit a trade too early in a move, we can adjust our exit criteria by looking at a longer time frame or by using a different indicator. However, when we have a solid trading plan and are still losing money, we need to look at ourselves and our own psychology for a solution. (Test your investment strategy before entering the market, but first read Stimulate Your Skills With Simulated Trading.)
When we deal with our own minds, often our objectivity is skewed and, thus, cannot properly fix the problem; the true problem is clouded by biases and superficial trivialities. An example of this is the trader who does not stick to a trading plan, but fails to realize that not sticking to it is the problem, so he continually adjusts strategies, believing that is where the fault rests.
Awareness is Power
While there is no magic bullet for overcoming all of our problems or trading struggles, becoming aware of some possible base issues allows us to begin to monitor our thoughts and actions, so that over time we can change our habits. Awareness of potential psychological pitfalls can allow us to change our habits, hopefully creating more profits, lets look at three common psychological quirks that can often cause such problems.
Sensory Derived Bias
We pull information from around us to form an opinion or bias and this allows us to function and learn, in many cases. However, we must realize that, while we may believe we are forming an opinion based on factual evidence, often we are not. If a trader watches the business news each day and forms an opinion that the market is going higher, based on all the available information, he may feel he came to this conclusion by stripping away the media personnels opinions and only listening to the facts. However, this trader still may face a problem: When the source of our information is biased, our own bias will be affected by that.
Even facts can be presented to give credence to the bias or opinion, but we must remember there is always another side to the story. Furthermore, constant exposure to a single opinion or viewpoint will lead individuals to believe that that is the only practical stance on the subject. Since they are deprived of counter evidence, their opinion will be biased by the available information.
Avoiding the Vague
Also known as fear of the unknown, avoiding what may occur, or what is not totally clear to us, prevents us from doing many things and can keep us locked in an unprofitable state. While it may sound ridiculous to some, traders may actually fear making money. They may not be aware of it consciously, but traders often worry about expanding their comfort zone, or simply fear that their profits will be taken away through taxes. Inevitably, this may lead to self sabotage. Another source of bias may come from trading only in the industry with which one is most familiar, even if that industry has been, and is predicted to continue, declining. The trader is avoiding an outcome because of the uncertainty associated with the investment. (To learn about the home bias, check out Is Biased Investing Holding You Back?)
Looking for penny stocks that skyrocket?
Another common tendency relates to holding onto the losers too long, while selling the winners too quickly. When prices fluctuate we must factor in the magnitude of the movement, to determine if the change is due to noise or is the result of a fundamental effect. Pulling out of trades too quickly often results from ignoring the trend of the security, as investors adopt a risk-averse mentality. On the other hand, when investors experience a loss, they often become risk seekers, resulting in an over-held losing position. These deviations from rational behavior lead to irrational actions, causing investors to miss out on potential gains, due to psychological biases. (For insight into investors attitudes, refer to Understanding Investor Behavior.)
Tangibility of Anticipation
Anticipation is a powerful feeling. Anticipation is often associated with an I want or I need type of mentality. What we anticipate coming is some time in the future, but the feeling of anticipation is here now and it can be an enjoyable emotion. It can be so enjoyable, in fact, that we make feeling anticipation our focus, instead of achieving what it is we are anticipating in the first place. Knowing that a million dollars is going to show up on your doorstep tomorrow would create a fantastic feeling of excitement and anticipation. It is possible to become addicted to this feeling and thus put off taking payment.
While easy money delivered to the door is more than likely to be grabbed by the eager homeowner, when things are not quite as easy to come by, we can fall into using the feeling of anticipation as a consolation prize. Watching billions of dollars change hands each day, but not having the confidence to follow a plan and take a chunk of the money, can mean we subconsciously decided that dreaming about the profits is good enough. We want to be profitable, but wanting has become our goal, not profitability.
What to Do About It
Once we are aware that we may be affected by our own psychology, we realize it may affect our trading on a subconscious level. Awareness is often enough to inspire change, if we do in fact work to improve our trading.
There are several things we can do to overcome our psychological roadblocks, beginning with removing inputs that are obviously biased. Charts dont lie, but our perceptions of them may. We stand the best chance of success if we remain objective and focus on simple strategies that extract profits from price movements. Many great traders avoid the opinions of others, when it comes to the markets, and realize when an opinion may be affecting their trading.
Knowing how the markets operate and move will help us overcome our fear, or greed, while in trades. When we feel we have entered unknown territory where we dont know the outcome, we make mistakes. However, if we have a firm understanding, at least probabilistically, of how the markets move, we can base our actions on objective decision making.
Finally, we need to lay out what we really want, why we want it and how we are going to get there. Listen in on the thoughts that run through your head right when you make a mistake, and think about the belief behind it; then work to change that belief in your everyday life.
The Bottom Line
Our biases can affect our trading, even when we dont think we are trading on biased information. Also, when an outcome appears vague, we err in our judgment, even though we have a conception of how the market is supposed to move. Our anticipations can also be deterrents from achieving what it is we think we want. To aid us in these potential problems, we can remove biased inputs, gain more understanding of market probabilities and define what it is we really want from our trading.
The OTC market is made up of many different types of companies, ranging from OTCQX companies worthy of investor consideration to economically distressed companies to speculative shell companies.
The Changing Role Of Equity Research
Actually, the title of this article is a bit misleading, because the role of research hasnt changed since the first trade occurred under the buttonwood tree on Manhattan Island. What has changed is the environments (bull and bear markets) that influence research.
Research and the Stock Market
The role of research is to provide information to the market. A lack of information creates inefficiencies that result in stocks being misrepresented (over- or under-valued). Analysts use their expertise and spend a lot of time analyzing a stock, its industry and its peer group to provide earnings and valuation estimates. Research is valuable because it fills information gaps so that each individual investor does not need to analyze every stock. This division of labor makes the market more efficient.
Research in Bull and Bear Markets
If the role of research has always been so noble, why is it in such a state of ill-repute? There are two reasons: firstly, the current bear market gives us a new perspective to evaluate the excesses of the last bull market; secondly, investors need to blame somebody.
In every bull market, there are excesses that become apparent only in the bear market that follows. Whether it is tulips or transistors, each age has its mania that distorts the normal functioning of the market. In the rush to make money, rationality is the first casualty. Investors rush to jump on the bandwagon and the market over-allocates capital to the hot sector(s). This herd mentality is the reason why bull markets have funded so many me-too ideas throughout history.
Research is a function of the market and is influenced by these swings. In a bull market, investment bankers, the media and investors pressure analysts to focus on the hot sectors. Some analysts morph into promoters as they ride the market. Those analysts that remain rational practitioners are ignored and their research reports go unread. During the late 1990s, the business media catered to the audiences demands and gave the spotlight to the famous talking heads that are now under investigation.
Seeking to blame someone for investment losses is a normal event in bear markets. It happened in the 1930s and the 1970s, and its occurring today. Some of the criticisms are deserved, but the need to provide information has not changed.
Research in Todays Market
To discuss the role of research in todays market, we need to differentiate between Wall Street research and other research. Wall Street research is provided by the major brokerage firms, both on and off Wall Street. Other research is produced by independent research firms and small boutique brokerage firms.
This differentiation is important. First, Wall Street research has become focused on big cap, very liquid stocks and ignores the majority (over 60% based on research) of publicly-traded stocks. This myopic focus on a small number of stocks is the result of deregulation and industry consolidation. In order to remain profitable, Wall Street firms have focused on big-cap stocks to generate highly lucrative investment banking deals and trade profits.
Those companies that are likely to provide the research firms with sizable investment banking deals are the stocks that are determined worthy of being followed by the market. The stocks long-term investment potential is secondary. The second reason to distinguish Wall Street from other research is that most of the blame for the excesses of the last bull market is rightfully placed on Wall Street.
Other research is filling the information gap created by Wall Street. Independent research firms and boutique brokerage firms are providing research on the stocks that have been orphaned by Wall Street. Investors, now educated in the benefits of electronic trading, may not be willing to support boutique brokerage firms for their research by opening an account and paying higher commissions.
This means that independent research firms are becoming the main source of information on the majority of stocks, but investors are reluctant to pay for research, because they dont really know what they are paying for until well after the purchase. Unfortunately, not all research is worth buying. I have purchased reports from reputable sources only to find them inaccurate and misleading. (For more reasons to do your research read: What Is The Impact Of Research On Stock Prices?)
Who Pays for Research? Big Investors Do!
The ironic thing is that while research has proven to be valuable, individual investors do not seem to want to pay for it. This may be because, under the traditional system, brokerage houses provided research in order to gain and keep clients. Investors just had to ask their brokers for a report and retained it at no charge. What seems to have gone unrealized is that the commissions pay for that research.
A good indicator of the value of research is the amount institutional investors are willing to pay for it. Institutional investors hire their own analysts to gain a competitive edge over other investors. They also pay (often handsomely) independent research firms for additional research. Institutions also pay for the sell-side research they receive (either with dollars or by giving the supplying brokerage firm trades to execute). All this amounts to big money, but the institutions realize that research is integral to making successful investment decisions. (For more read The Impact of Sell-Side Research.)
If investors are unwilling to buy research how will the market correct the imbalance caused by the lack of coverage? The solution may be found by looking at the issue a slightly different way.
The Growing Role of Fee-Based Research
Fee-based research increases market efficiency and bridges the gap between investors who want research (without paying) and companies who realize that Wall Street is not likely to provide research on their stock. This research provides information to the widest possible audience at no charge to the reader because the subject company has funded the research.
It is important to differentiate between objective fee-based research and research that is promotional. Objective fee-based research is analogous to the role of your physician. You pay a physician not to tell you that you feel good, but to give you his or her professional and truthful opinion of your condition.
Legitimate fee-based research is a professional and objective analysis and opinion of a companys investment potential. Promotional research is short on analysis and full of hype. One example of this is the fax and email reports about the penny stocks that will supposedly triple in a short time.
Legitimate fee-based research firms have the following characteristics:
1. They provide analytical, not promotional services.
2. They are paid a set annual fee in cash; they do not accept any form of equity, which may cause conflicts of interest.
3. They provide full and clear disclosure of the relationship between the company and the research firm so investors can evaluate objectivity.
Companies who engage a legitimate fee-based research firm to analyze their stock are trying to get information to investors and improve market efficiency. Such a company is making the following important statements:
1. That it believes its shares are undervalued because investors are not aware of the company.
2. That it is aware that Wall Street is no longer an option.
3. That it believes that its investment potential can withstand objective analysis.
The National Investor Relations Institute (NIRI) was probably the first group to recognize the need for fee-based research. In January 2002, NIRI issued a letter emphasizing the need for small-cap companies to find alternatives to Wall Street research in order to get their information to investors. More recently, the NIRI is conducting a survey on research alternatives and will possibly have a session on this topic at their national conference this year. (For more information on fee-based research read Fee-Based Research: The Good, The Bad And The Ugly.)
The Bottom Line
The reputation and credibility of a company and the research firm depends on the efforts they make to inform investors. A company does not want to be tarnished by being associated with disreputable research. Similarly, a research firm will only want to analyze companies that have strong fundamentals and long-term investment potential.
Once a broker-dealer receives an order, they often go through the following steps/decisions as part of the trading process.
3 Essential Rules For New Investors
The investing landscape can be extremely volatile, and changes year after year, but there is a lot to be said for investing in what you really know and understand. Considering the enormous number of products on offer, and the nature of the industry, it is not that simple to be simple, but it can certainly be done. First, we will take a look at the potential difficulties of understanding investments, and then well look at how new investors can invest safely, suitably and sensibly.
How Much Do We Really Understand?
One could argue that the only asset that is fully understandable is cash in the bank, or some form of fixed deposit. Here, you know exactly how much you will earn and that you will get your capital back. The problem is that you will be lucky to beat inflation, and simply leaving your money in cash is not the answer; it is just not a productive investment.
Moving a bit up the risk ladder, we get to bonds. Given the variety of bonds and bond funds, understanding what you get is also not necessarily that simple. Government bonds are fairly straightforward, but, again, they dont pay much. Municipal bonds pay a little more and are usually tax exempt, but are not going to satisfy the average investors retirement needs. So to really earn anything, you need a variety of bonds, probably some corporate ones, plus, arguably some foreign ones. Yet, these start to become complex and more risky, depending on various factors relating to the issuing company or country. Likewise, bond funds may depend on a number of managerial and financial issues. (Learn more in the Bond Basics Tutorial.)
The same applies to stocks, mutual funds and so on. Even real estate funds have proven to be less reliable and straightforward than many people might think. Direct real estate purchases are more understandable in one sense – what you see is what you get. But then again, there can be unknowns relating to the market, taxation, the location, disclosure by the seller and so on.
Similarly, alternative investments, like hedge funds, can be extremely complex. Infrastructure, too, is without doubt a great idea in principle, but the nitty-gritty of investing in it is not such a sure thing. No matter how sound the principle of a particular investment, there is almost always someone or something out there that can make it go wrong. And as for certificates of deposit (CD), they are probably the hardest type of investment to understand. Given yield curves, expectations and potential early withdraw penalties, they may be the easiest to missell. (Analyzing a hedge fund will help you determine whether its a good investment - and a good fit. Read Hedge Fund Due Diligence, for more.)
Tracker funds, on the other hand, are relatively simple to understand – you are indeed just buying the market, but the markets themselves are not so easy to deal with and understand. Furthermore, the tracker market is becoming more sophisticated and complex. This all sounds very daunting. But in fact, one can still invest simply and understandably, at low cost and with a good, diversified portfolio that is likely to perform well over time.
How Can We Invest Sensibly, Suitably and Simply?
The above section certainly implies that we really know very little about a lot of asset classes and investments. Nonetheless, there are many ways of ensuring that you are investing in what you know. One can really invest in a straightforward manner, and understand what one is doing.
Many veteran investors have simple diversified portfolios, and look more at asset allocation. Spending hours performing regression analysis is not an option for many part-time investors. For example, Steven Goldberg, of Kiplinger, has said in his Value Added Web Column that: Most people wish they didnt have to be investors, and that they lead busy enough lives without having to worry about stocks, bonds and mutual funds. Goldberg therefore recommends sticking with index funds that simply mirror the market and only attempt to be average. He even argues that one only needs three index funds, one covering the U.S. equity market, another with international equities and the third tracking a bond index. (Use these rules to guide you on the road to financial freedom, check out The 10 Commandments Of Investing.)
Trackers are sometimes better than actively managed funds. Lower fees, low turnover and a combination of available investor education makes index investing extremely attractive. So, a really straightforward mix of these funds is transparent, cheap and does as good (or better) a job as more complex and expensive vehicles. Despite the above, to be fair, there are a lot of good managed funds out there. With a bit of effort, you can find reliable and understandable equity and bond funds with which you can relax.
A good piece of advice is to start searching through Investopedia.coms tutorial section, namely to start with simple investments and then expand and extend as you learn more. Specifically, mutual funds or exchange-traded funds are a good way to get going, and one can then move on to individual stocks, real estate and further down the line, even a sensible amount into resources or hedge funds.
It is interesting to note the book title, How Buffett Does It: 24 Simple Investing Strategies from the Worlds Greatest Value Investor (James Pardoe, McGraw-Hill, 2005), about the worlds greatest pro. Buffett himself comments that Wall Street dislikes too much simplicity. The reason is that brokers make money out of complexity. But one does not have to fall for this.
Conclusions
The more you learn, the better. But above and beyond this, you can (and probably should) avoid investments that you do not even understand in principle. A small number of index funds seems a very good solution. (You might want to check out Getting Started In Stocks.)
Also, go on sound recommendations. If your parents-in-law have been investing for 20 years in some mixed fund which has served them well, there is a better chance that it will continue to do so. On the other hand, if you get a phone call from someone who you met in a pub last week and who wants to give you a hot tip as a big favor, be more skeptical.
Likewise, there are many independent financial advisors around who get paid only for their time and not on commission. Their job is to understand what they recommend, without the pressure of having to sell to earn a commission. And make sure you diversify, not only into asset classes, but possibly into different banks and fund providers. Then, if something goes wrong that neither you nor anyone else seemed to understand after all, the losses are not so disastrous. Always bear in mind that too many bits and pieces also create complexity which can lead to errors.
The Two Sides Of Dual-Class Shares
It sounds too good to be true: own a small portion of a companys total stock, but get most of the voting power. Thats the truth behind dual-class shares. They allow shareholders of non-traded stock to control terms of the company in excess of the financial stake. While many investors would like to eliminate dual-class shares, there are several hundred companies in the United States with dual A and B listed shares, or even multiple class listed shares. So, the question is, whats the impact of dual-class ownership on a companys fundamentals and performance? (To learn more, see The ABCs Of Mutual Fund Classes.)
What Are Dual-Class Shares?
When the Internet company Google went public, a lot of investors were upset that it issued a second class of shares to ensure that the firms founders and top executives maintained control. Each of the Class B shares reserved for Google insiders would carry 10 votes, while ordinary Class A shares sold to the public would get just one vote. (To learn more, see When Insiders Buy, Should Investors Join Them?)
Designed to give specific shareholders voting control, unequal voting shares are primarily created to satisfy owners who dont want to give up control, but do want the public equity market to provide financing. In most cases, these super-voting shares are not publicly traded and company founders and their families are most commonly the controlling groups in dual-class companies.
Who Lists Them?
The New York Stock Exchange allows U.S. companies to list dual-class voting shares. Once shares are listed, however, companies cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares. (For more information, see The NYSE And Nasdaq: How They Work.)
Many companies list dual-class shares. Fords dual-class stock structure, for instance, allows the Ford family to control 40% of shareholder voting power with only about 4% of the total equity in the company. Berkshire Hathaway Inc., which has Warren Buffett as a majority shareholder, offers a B share with 1/30th the interest of its A-class shares, but 1/200th of the voting power. Echostar Communications demonstrates the extreme power that can be had through dual-class shares: founder and CEO Charlie Ergen has about 5% of the companys stock, but his super-voting class-A shares give him a whopping 90% of the vote.
Good or Bad?
Its easy to dislike companies with dual-class share structures, but the idea behind it has its defenders. They say that the practice insulates managers from Wall Streets short-term mindset. Founders often have a longer term vision than investors focused on the most recent quarterly figures. Since stock that provides extra voting rights often cannot be traded, it ensures the company will have a set of loyal investors during rough patches. In these cases, company performance may benefit from the existence of dual-class shares.
With that said, there are plenty of reasons to dislike these shares. They can be seen as downright unfair. They create an inferior class of shareholders and hand over power to a select few, who are then allowed to pass the financial risk onto others. With few constraints placed upon them, managers holding super-class stock can spin out of control. Families and senior managers can entrench themselves into the operations of the company, regardless of their abilities and performance. Finally, dual-class structures may allow management to make bad decisions with few consequences.
Hollinger International presents a good example of the negative effects of dual-class shares. Former CEO Conrad Black controlled all of the companys class-B shares, which gave him 30% of the equity and 73% of the voting power. He ran the company as if he were the sole owner, exacting huge management fees, consulting payments and personal dividends. Hollingers board of directors was filled with Blacks friends who were unlikely to forcefully oppose his authority. Holders of publicly traded shares of Hollinger had almost no power to make any decisions in terms of executive compensation, mergers and acquisitions, board construction poison pills or anything else for that matter. Hollingers financial and share performance suffered under Blacks control. (To learn more, see Mergers And Acquisitions: Understanding Takeovers.)
Academic research offers strong evidence that dual-class share structures hinder corporate performance. A Wharton School and Harvard Business School study shows that while large ownership stakes in managers hands tend to improve corporate performance, heavy voting control by insiders weakens it. Shareholders with super-voting rights are reluctant to raise cash by selling additional shares--that could dilute these shareholders influence. The study also shows that dual-class companies tend to be burdened with more debt than single-class companies. Even worse, dual-class stocks tend to under-perform the stock market.
The Bottom Line
Not every dual-class company is destined to perform poorly--Berkshire Hathaway, for one, has consistently delivered great fundamentals and shareholder value. Controlling shareholders normally have an interest in maintaining a good reputation with investors. Insofar as family members wield voting power, they have an emotional incentive to vote in a manner that enhances performance. All the same, investors should keep in mind the effects of dual-class ownership on company fundamentals.
Broker-dealers are required to report their trades to FINRA within 30 seconds of the execution. This information is then disseminated by FINRA to the market. OTC Markets Group offers this ‘real-time’ trade data within a number of its products (OTC Dealer, OTC Quote.com, OTCIQ – Market Intelligence). All other trade information is on a 15 minute delayed basis.
A Guide To Investor Fees
Fees are one of the most important determinants of investment performance and something that every investor should focus upon. This article will show why fees are so important, list some of the typical fees investors can expect to pay, and focus on some investment types that generally carry high (and low) fees. (Discover how investment strategies and expense ratios impact your mutual funds returns. Check out Stop Paying High Mutual Fund Fees.) TUTORIAL: Choosing Quality Mutual Funds Why Fees Matter
It is easy for investors to forget about fees when focusing upon other important subjects such as asset allocation or security selection. However, in addition to the overall market movements and an individuals stock picking abilities, the level of fees that investors pay is one of the most important determinants of investor performance.
The following example might astonish you. The numbers below assume that you contribute $3,000 to your retirement account in year one. Each year, as your salary increases, you increase your contribution by $250. So in year two, you contribute $3,250, in year three you contribute $3,500, and in year four you contribute $3,750. You then continue to gradually increase your contributions for the remainder of your career (30 years) and earn an 8% annualized return on your diversified portfolio. Although you earn 8% gross returns, your net return will be reduced by the amount of fees you pay. The higher the fees, the lower the return you actually receive.
The only difference in the investment programs in the chart below is the level of fees - everything else is identical. Look at the difference in the amount that you end up with at retirement, depending upon how much you pay in fees each year. The numbers are nothing short of staggering.
Gross
Return Fees Net
Return Account
Value
Without Fees Account
Value
With Fees Amount
Lost
Due To Fees
8.00% 0.50% 7.50% $648,118.44 $596,477.60 ($51,640.84)
8.00% 0.75% 7.25% $648,118.44 $572,454.51 ($75,663.93)
8.00% 1.00% 7.00% $648,118.44 $549,551.41 ($98,567.03)
8.00% 1.50% 6.50% $648,118.44 $506,887.81 ($141,230.63)
8.00% 2.00% 6.00% $648,118.44 $468,078.69 ($180,039.75)
Source: From Piggybank to Portfolio
A common retirement goal is to be able to withdraw between 3-5% of an investment portfolio each year during retirement. In the scenario above, if two individuals had invested throughout their careers in a similar manner, but one person had paid 0.50% in fees and the other had paid 2.00%, the difference in their annual income during retirement would be more than $5,000 each year. That means that one person would have $420 less each month on which to live, just because they had paid excessive fees on their investment portfolio during their working years. (If you are investing small amounts regularly into an exchange-traded fund, be sure to do it right. See Dollar-Cost Averaging With ETFs.)
Sample Fees
Hopefully, the above example has convinced you of the importance of fees. While it is not always necessary to aim for the lowest possible fees in a portfolio, it is generally a good idea to select investments and investment providers that fall in the range of those available. With that in mind, the matrix below demonstrates some typical fees. (Note: the fees in the matrix below are indicative and are intended to serve as a starting point for further research and analysis.)
Online Brokers Stock Trade ($) Option Trade ($)
Brokerage 1 8.95 8.95 0.75 per contract
Brokerage 2 7.99-9.99 7.99-9.99 0.75 per contract
Brokerage 3 7.95 7.95 0.75 per contract
Brokerage 4 9.99 9.99 0.75 per contract
Brokerage 5 7.00 7.00 1.25 per contract
ETFs Issuer X Issuer Y
S
A good starting point for research is the OTC market tier structure – which quickly indicates the level and timeliness of information available for OTC companies.
How To Double Your Money Every 6 Years
Double your money, fast! Do those words sound like the tagline of a get-rich-quick scam? If you want to analyze offers like these or establish investment goals for your portfolio, theres a quick-and-dirty method that will show you how long it will really take you to double your money. Its called the rule of 72, and it can be applied to any type of investment. (For more ideas on how you can double your money, check out 5 Ways To Double Your Investment.)
TUTORIAL: Investing 101
How the Rule Works
To use the rule of 72, divide the number 72 by an investments expected annual return. The result is the number of years it will take, roughly, to double your money. For example, if the expected annual return of about 2.35% (the current rate on Ally Banks 5-year high-yield CD) and you have $1,000 to invest, it will take 72/2.35 = 30.64 years for you to accumulate $2,000.
Depressing, right? CDs are great for safety and liquidity, but lets look at a more uplifting example: stocks. Its impossible to actually know in advance what will happen to stock prices. We know that past performance does not guarantee future returns. But by examining historical data, we can make an educated guess. According to Standard and Poors, the average annualized return of the S
7 Lessons To Learn From A Market Downturn
You can never really understand investing until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.
Lesson #1: Evaluate Your Egg Baskets
Youre pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.
If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments. (Read Personalizing Risk Tolerance to find out how much uncertainty you can stand.)
Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type. For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time. (For more information, read Diversification: Its All About (Asset) Class.)
Lesson #2: No Such Thing as a Sure Thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.
The perfect chart interpretation, fundamental analysis, or tarot card reading wont predict every possible incident that can impact your investment.
• Use due diligence to mitigate risk as much as possible.
• Review quarterly and annual reports for clues on risks to the companys business as well as their responses to the risks.
• You can also glean industry weaknesses from current events and industry associations.
More often, an investment is impacted by a combination of events. Dont kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc. (Learn how to find companies that manage risk well in The Evolution Of Enterprise Risk Management.)
Lesson #3: Proper Risk Management
You thought an investment was risk-free, but it wasnt. The lesson: Every investment has some type of risk.
You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk. (See Measuring And Managing Investment Risk for information on keeping necessary risk under control.)
Lesson #4: Liquidity Matters
You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit (CD) or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.
Penny stocks are the secret to 2000% profits!
Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash. (Learn how to take advantage of the safety of the money market in our Money Market tutorial.)
Lesson #5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.
Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution. (Doing nothing can mean good returns. Find out more in Patience Is A Traders Virtue.)
Lesson #6: Be Your Own Advisor
The market news gets bleaker every day - now youre paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.
Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:
• Pay attention and understand the news, then analyze the financials yourself. (Read What You Need To Know About Financial Statements for help.)
• Determine if the information represents a significant downward financial trend, a major negative shift in a companys business, or just a temporary blip.
• Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you cant tell.
• Conduct an industry analysis of the companys competitors.
After a thorough evaluation, you can decide if your portfolio needs a change. (For more information, read Do You Need a Financial Advisor?)
Lesson #7: When to Sell and When to Hold
The market indicators dont seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.
Dont be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years. (For more information, read Selling Losing Securities For A Tax Advantage.)
Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but dont forget to evaluate your overall asset allocation. (Read more in Asset Allocation: One Decision To Rule Them All.)
Conclusion
Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others mistakes before they become yours.
The OTC market and broker-dealers’ activities in the market are regulated by The Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) and various state securities regulators. In addition, companies with SEC-registered securities are regulated by the SEC. OTC Markets Group is neither a stock exchange nor self-regulatory organization (SRO) and is not regulated by FINRA or the SEC.
Forces That Move Stock Prices
Have you ever wondered about what factors affect a stocks price? Stock prices are determined in the marketplace, where seller supply meets buyer demand. But unfortunately, there is no clean equation that tells us exactly how a stock price will behave. That said, we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors and market sentiment.
Fundamental Factors
In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (earings per share (EPS), for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owners return on his or her investment. When you buy a stock , you are purchasing a proportional share of an entire future stream of earnings. Thats the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.
Part of these earnings may be distributed as dividends, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.
As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream.
Copyright © 2008 Investopedia.com
About the Earnings Base
Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power . Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.
The way earnings power is measured may also depend on the type of company being analyzed. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
About the Valuation Multiple
The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.
What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).
In summary, the key fundamental factors are:
• The level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share)
• The expected growth in the earnings base
• The discount rate, which is itself a function of inflation
• The perceived risk of the stock.
Technical Factors
Things would be easier if only fundamental factors set stock prices! Technical factors are the mix of external conditions that alter the supply of and demand for a companys stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth.) Technical factors include the following:
• Inflation - We mentioned inflation as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples and high inflation drives low multiples). Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies.
• Economic Strength of Market and Peers - Company stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements - as opposed to a companys individual performance - determines a majority of a stocks movement. (There has been research cited that suggests the economic/market factors account for 90%!) For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as guilt by association drags down demand for the whole sector.
• Substitutes - Companies compete for investment dollars with other asset classes on a global stage. These include corporate bonds, government bonds, commodities, real estate and foreign equities. The relation between demand for U.S. equities and their substitutes is hard to figure, but it plays an important role.
• Incidental Transactions - Incidental transactions are purchases or sales of a stock that are motivated by something other than belief in the intrinsic value of the stock. These transactions include executive insider transactions, which are often prescheduled or driven by portfolio objectives. Another example is an institution buying or shorting a stock to hedge some other investment. Although these transactions may not represent official votes cast for or against the stock, they do impact supply and demand and therefore can move the price.
• Demographics - Some important research has been done about the demographics of investors. Much of it concerns these two dynamics: 1) middle-aged investors, who are peak earners that tend to invest in the stock market , and 2) older investors who tend to pull out of the market in order to meet the demands of retirement. The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples.
• Trends - Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as success breeds success and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean. Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are trendy does not help us predict the future. (Note: trends could also be classified under market sentiment.)
• Liquidity - Liquidity is an important and sometimes under-appreciated factor. It refers to how much investor interest and attention a specific stock has. Wal-Marts stock is highly liquid and therefore highly responsive to material news; the average small-cap company is less so. Trading volume is not only a proxy for liquidity, but it is also a function of corporate communications (that is, the degree to which the company is getting attention from the investor community). Large-cap stocks have high liquidity: they are well followed and heavily transacted. Many small-cap stocks suffer from an almost permanent liquidity discount because they simply are not on investors radar screens.
Market Sentiment
Market sentiment refers to the psychology of market participants, individually and collectively. This is perhaps the most vexing category because we know it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased and obstinate. For example, you can make a solid judgment about a stocks future growth prospects, and the future may even confirm your projections, but in the meantime the market may myopically dwell on a single piece of news that keeps the stock artificially high or low. And you can sometimes wait a long time in the hope that other investors will notice the fundamentals.
Market sentiment is being explored by the relatively new field of behavioral finance. It starts with the assumption that markets are apparently not efficient much of the time, and this inefficiency can be explained by psychology and other social sciences. The idea of applying social science to finance was fully legitimized when Daniel Kahneman, a psychologist, won the 2002 Nobel Memorial Prize in Economics. (He was the first psychologist to do so.) Many of the ideas in behavioral finance confirm observable suspicions: that investors tend to overemphasize data that come easily to mind; that many investors react with greater pain to losses than with pleasure to equivalent gains; and that investors tend to persist in a mistake.
Some investors claim to be able to capitalize on the theory of behavioral finance. For the majority, however, the field is new enough to serve as the catch-all category, where everything we cannot explain is deposited.
Summary
Different types of investors depend on different factors. Short-term investors and traders tend to incorporate and may even prioritize technical factors. Long-term investors prioritize fundamentals and recognize that technical factors play an important role. Investors who believe strongly in fundamentals can reconcile themselves to technical forces with the following popular argument: technical factors and market sentiment often overwhelm the short run, but fundamentals will set the stock price in the long-run. In the meantime, we can expect more exciting developments in the area of behavioral finance since traditional financial theories cannot seem to explain everything that happens in the market.
Investor-focused companies may use either the OTCQX requirements, SEC Reporting or OTC Markets Alternative Reporting Standard to provide transparency to individual investors and the professional investment community. These services increase the flow of information, raise the profile of OTC companies, improve price discovery, and increase trading and liquidity in the OTC market.
What Is A Pyramid Scheme?
A pyramid scheme is a fraudulent investing plan that has unfortunately cost many people worldwide their hard-earned savings. The concept behind the pyramid scheme is simple and should be easy to identify; however, it is often presented to potential investors in a disguised or slightly altered form. For this reason, it is important to not only understand how pyramid schemes work, but also to be familiar with the many different shapes and sizes they can take. (Many investors do not understand how to determine the level of risk their individual portfolios should bear. Find out for yourself in Determining Risk And The Risk Pyramid.)
The Scheme
As its name indicates, the pyramid scheme is structured like a pyramid. It starts with one person - the initial recruiter - who is on top, at the apex of the pyramid. This person recruits a second person, who is required to invest $100 which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person will make $900 with just a $100 investment.
The 10 new people become recruiters and each one is in turn required to enlist an additional 10 people, resulting in a total of 100 more people. Each of those 100 new recruits is also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of all of the money received minus the initial $100 paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure (meaning there are no more recruits). (From pyramid schemes to envelope stuffing, there are a lot of scams masquerading as legitimate part-time work.
The Fraud
The problem is that the scheme cannot go on forever because there is a finite number of people who can join the scheme (even if all the people in the world join). People are deceived into believing that by giving money they will make more money (with an investment of just $100, you will receive $900 in return). But no wealth has been created; no product has been sold; no investment has been made; and no service has been provided.
The fraud lies in the fact that it is impossible for the cycle to sustain itself, so people will lose their money somewhere down the line. Those who are most vulnerable are those towards the bottom of the pyramid, where it becomes impossible to recruit the number of people required to pay off the previous layer of recruiters. This kind of fraud is illegal in the Unites States and most countries throughout the world. It is estimated that 90% of people who get involved in a pyramid scheme will lose their money. (Lower levels of liquidity in exchange-traded funds make it harder to trade them profitably.
Fraud Disguised
Because people are attracted to the idea of making a quick buck with very little effort, many different forms of disguised pyramid schemes have succeeded in fooling people. Despite the illusion of legality presented by these revamped schemes, they are still illegal. It is thus important to recognize the characteristics of such so-called investment plans .
Many schemes will adopt the guise of gift-giving or loans that take place in investment clubs because none of these activities are technically illegal. However, the practice of donating a gift (tax free up to $10,000 in the U.S.) to someone (the recruiter), then having to recruit people into the club in order to receive a return on your investment (or your gift, rather) is essentially a pyramid scheme in disguise. (Joining an investment club isnt a get-rich-quick scheme, but it can help you learn the ropes or sharpen your investing skills. Learn more in Benefit From A Winning Investment Club.)
Multi-Level Marketing (MLM)
Legal multi-level marketing (MLM) involves being recruited in order to sell a product or service that actually has some inherent value. As a recruit, you can make a profit from the sales of the product or service, so you dont necessarily have to recruit more salespeople below you. And while you may be encouraged to recruit other salespeople whose sales would give you more profit, you can stick to just selling the product directly to the consumer if you choose.
A pyramid scheme MLM, however, will most likely sell a product with no independent value. The product could take the form of reports of some kind, for example, or mailing lists. In this kind of pyramid scheme, you would be required to recruit new members into the MLM in order to make a profit and keep the MLM alive. Joining the MLM is the only reason anyone would buy the products sold by this pyramid scheme.
Ponzi Schemes
Named after Charles Ponzi, who ran such a plot from 1919-1920, the Ponzi scheme is a fraudulent investment plan. It is not necessarily a pyramid, which is hierarchical. In a Ponzi scheme, there is one person who takes peoples money as an investment and does not necessarily tell them how their returns will be generated. As such, the peoples return on investment could be generated by anything; it could come from money taken from new investors - which means new investors essentially pay off the old investors - or even from money made by gambling in Las Vegas.
Chain Letters
Chain letters can be received electronically or through snail mail and are not illegal on their own. However, they take on the form of a pyramid scheme when the letter asks you to donate a certain amount of money (even just 5 cents) to the people on a list, then delete the name of the first person on the list, add your name, and forward the letter to a certain number of other people. The next people receiving the letter are then asked to do the same thing, so that you can receive your money as well. By forwarding the letter, you are asking people to give money with the promise of making money.
Conclusion
It is easy to see how a pyramid scheme can work, but participating in it (regardless of the form in which it is presented) involves deception and fraud because not everyone will receive the money that is promised in return.
As with any other investment plan you consider entering, it is important to ask the right questions. How will this money be invested? What is the rate of return? Who will be investing it? Talk to professionals and do your research before placing your money anywhere. And always remember that if a plan promises youll get rich quick with no risk or doesnt tell you how your money will be invested, you should raise a red flag and exercise caution before getting on board.
Characteristic of some advance fee fraud solicitations and other fraudulent schemes to deceive and defraud unwary investors is the use of websites and e-mail addresses ending in “.us” or “.org” and containing “.gov” as part of the domain address. We are not aware of any U.S. government agency that has a website or e-mail address that ENDS in anything other than “.gov”, “.mil”, or “fed.us”. Accordingly, investors should beware any website or correspondence purporting to be from a U.S. government agency bearing an e-mail address that does not end in “.gov”, “.mil”, or “fed.us”.
Pros And Cons Of Offshore Investing
Offshore investing is often demonized in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. While its true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.
Tutorial: Personal Income Tax Guide
What Is Offshore Investing?
Offshore investing refers to a wide range of investment strategies that capitalize on advantages offered outside of an investors home country. We will briefly touch on the advantages and disadvantages of offshore investing. The particulars are far beyond the scope of this introductory article.
There is no shortage of money-market, bond and equity assets offered by reputable offshore companies that are fiscally sound, time-tested and, most importantly, legal.
Advantages
There are several reasons why people invest offshore:
Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual. (For additional information, read What is an Emerging Market Economy?)
In recent years, however, the U.S. government has become increasingly aware of the tax revenue lost to offshore investing, and has created more defined and restrictive laws that close tax loopholes. Investment revenue earned through offshore investment is now a focus of regulators and the tax man alike. According to the U.S. Internal Revenue Service (IRS), U.S. citizens and residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade U.S. federal income tax on capital gains can be prosecuted for tax evasion. Therefore, although the lower corporate expenses of offshore companies can translate into better gains for investors, the IRS maintains that U.S. taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. (To learn more, see How International Tax Rates Impact Your Investments.)
Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax. However, the trustor of an offshore asset-protection fund will still be taxed on the trusts income (the revenue made from investments under the trust entity), even if that income has not been distributed.
Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesnt mean that offshore investors are criminals with something to hide. Its also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investors identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors dont like the public at large knowing what stocks theyre investing in. Multi-millionaire investors dont want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.
Because nations are not required to accept the laws of a foreign government, offshore jurisdictions are, in most cases, immune to the laws that may apply where the investor resides. U.S. courts can assert jurisdiction over any assets that are located within U.S. borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect not be held physically in the United States.
Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatize sectors that were formerly under government control. Chinas willingness to privatize some industries has investors drooling over the worlds largest consumer market. (To read more, see Investing Beyond Your Borders.)
Disadvantages
Tax Laws are Tightening - Tax agencies like the IRS arent ignorant of offshore strategies. Theyve clamped down on some traditional ways of tax avoidance. There are still loopholes, but most are shrinking more and more every year. In 2004, the IRS amended the Internal Revenue Code (IRC) and began to collect taxes from both American corporations that operate out of another country and American citizens and residents who earn money through offshore investments. (For more information on tax laws that affect offshore investors, see the IRS International Taxpayer - Expatriation Tax.)
Cost - Offshore Accounts are not cheap to set up. Depending on the individuals investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.
How Safe Is Offshore Investing?
Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to offer fairly secure investment opportunities. More than half of the worlds assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable investment advisor, accountant, and lawyer who specializes in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (For more information, see Investment Scams: Prime Banks.)
Conclusion
We are not lawyers, tax accountants or offshore investment experts in any country. Every individuals situation is different. Offshore investment is beyond the means of most investors, and above the risk tolerance of others.
Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, do your research before parting with your money - unless youre prepared to lose it.
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Play The Market Like Tiger Plays Golf
Very few people on this planet have earned the title of greatest ever. In investing , many would argue that this distinction goes to Warren Buffett; in golf, its Tiger Woods. But in this world you do not need to be the best to achieve success. However, we are fortunate that those who are considered the best have laid out lessons for us that can help us become more successful. (Read about Buffett in our articles on The Greatest Investors.)
Both Warren Buffett and Tiger Woods do a few simple things spectacularly well to achieve their goals. While odds are quite high that you will never become Woods or Buffett, you dont have to in order to succeed. There are a lot of subtle yet critical similarities between golf and investing. If you pay attention to how they go about perfecting their craft, you can gain a lot of wisdom that will set you ahead of the pack.
Practice Makes Perfect
How Tiger Woods practices may be one of the most intriguing activities in all of sports. People are often advised that practice makes perfect. In other words, continue to practice, practice, practice, and you will get better. While theres no doubt that practice very often leads to improvement, its not practice that sets Woods apart; its perfect practice.
When Woods is on the driving range hitting balls, he is not just hitting balls for the sake of it. Instead, he hits every single ball with a specific target in mind. Woods will hit 500 balls a day with a specific target for each one.
The parallel for investors is constant discipline. Many investors incorrectly invest just for the sake of investing - without any discipline or specific target in mind. As a result, new investors have no idea how to navigate the course or manage risk. Investors often buy most of their stocks with the same expectations - that the stock price will go up - without giving any consideration to the existing competition, the quality of management and the level of difficulty of the current market layout.
What It Takes to Win
When the course is easy - in a bull market - every shot you take looks like a good one. It doesnt seem to matter what price you pay, the favorable landscape makes you look like an expert. However, the real danger lies in the fact that the longer this persist the greater the likelihood that you begin confusing your investment acumen with what is really going on: favorable conditions. This happened during the internet boom in the 1990s and the majority of people never had a chance to cash in on their spectacular gains. In fact, many actually lost lots of money when things came crashing down.
When the investing layout is hard, as it is during bear markets and recessions, its crucial to understand shooting par could likely be the long-term winner. As stock prices begin to rapidly rise, they often become riskier propositions, but most investors naively do not see it that way and continue to buy. Then when the course gets hard, the wrong lessons they learned on the easy course cost them dearly.
Invest with Purpose
Like Woods, investors should always invest with a specific target in mind. When stock prices rise dramatically without any regard for valuation, ignore the fact that some people may make superior returns over the next several months or year. Very often, the majority of those folks wont have the faintest idea when the goods times will end and all those profits will vanish.
Always invest with a specific target in mind. Be cautious when everyone is excited about buying stocks because that usually means paying a very rich price. Consider bonds, or high quality dividend paying stocks that usually dont attract as much excitement as the Amazons or Googles of the world. Sometimes shooting even par often produces the winning score.
Manage Your Expectations
Theres a saying that goes in order to finish first, you must first finish. There is tremendous wisdom in those words for investors. Success in investing is very often highly correlated to longevity. If you can navigate the market storms and not suffer catastrophic losses, then you are able to capitalize on the opportunities available when stocks prices are discounted. As is so often the case, many investments funds go out of businesses when the markets collapse, which is the absolute worst time to exit the game.
Tiger Woods does a brilliant job of managing his expectations. He doesnt go out on Thursday focusing on the leader board and trying to come out on top that day. Instead he plays his game against the course, fully aware that it is the person who remains consistent during the tournament who usually comes into Sundays round with the best chance to take home the trophy. Of course, during the course of play, Woods, like many investors, will often weigh the risk rewards of a difficult or low probability shot and make his decision based on the benefit gained.
Learn from the Best
Long-term success is not a result of luck. However, discipline and hard work often leads to opportunities that might not otherwise appear, and to outsiders this is often viewed as simple luck. Examine the approach of guys like Tiger Woods and Warren Buffett, learn from their successes and failures and youve already got a head start.
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What Is Money?
Everyone uses money . We all want it, work for it and think about it. If you dont know what money is, you are not like most humans. However, the task of defining what money is, where it comes from and what its worth belongs to those who dedicate themselves to the discipline ofeconomics. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and want. Here we look at the multifaceted characteristics of money. (Get A Short-Term Advantage In The Money Market. This investment vehicle is often the perfect stop-gap measure for growing your money.)
What is Money?
Before the development of a medium of exchange, people would barter to obtain the goods and services they needed. This is basically how it worked: two individuals each possessing a commodity the other wanted or needed would enter into an agreement to trade their goods.
This early form of barter, however, does not provide the transferability and divisibility that makes trading efficient. For instance, if you have cows but need bananas, you must find someone who not only has bananas but also the desire for meat. What if you find someone who has the need for meat but no bananas and can only offer you bunnies? To get your meat, he or she must find someone who has bananas and wants bunnies .
The lack of transferability of bartering for goods, as you can see, is tiring, confusing and inefficient. But that is not where the problems end: even if you find someone with whom to trade meat for bananas, you may not think a bunch of them is worth a whole cow. You would then have to devise a way to divide your cow (a messy business) and determine how many bananas you are willing to take for certain parts of your cow. (It can be hard to talk about money with your children, especially when times are tough. Talking About Money When Times Are Tough has some tips to make it easy.)
To solve these problems came commodity money, which is a kind of currency based on the value of an underlying commodity. Colonialists, for example, used beaver pelts and dried corn as currency for transactions. These kinds ofcommodities were chosen for a number of reasons. They were widely desired and therefore valuable, but they were also durable, portable and easily stored.
Another example of commodity money is the U.S. currency before 1971, which was backed by gold. Foreign governments were able to take their U.S. currency and exchange it for gold with the U.S. Federal Reserve. If we think about this relationship between money and gold, we can gain some insight into how money gains its value: like the beaver pelts and dried corn, gold is valuable purely because people want it.
It is not necessarily useful - after all, you cant eat it, and it wont keep you warm at night, but the majority of people think it is beautiful, and they know others think it is beautiful. Gold is something you can safely believe is valuable. Before 1971, gold therefore served as a physical token of what is valuable based on peoples perception. You dont need an MBA to learn how to save money and invest in your future.
Impressions Create Everything
The second type of money is fiat money, which does away with the need to represent a physical commodity and takes on its worth the same way gold did: by means of peoples perception and faith. Fiat money was introduced because gold is a scarce resource and economies growing quickly couldnt always mine enough gold to back their money requirement. For a booming economy, the need for gold to give money value is extremely inefficient, especially when, as we already established, value is really created through peoples perception.
Fiat money, then becomes the token of peoples apprehension of worth - the basis for why money is created. An economy that is growing is apparently doing a good job of producing other things that are valuable to itself and to other economies. Generally, the stronger the economy, the stronger its money will be perceived (and sought after) and vice versa. But, remember, this perception, although abstract, must somehow be backed by how well the economy can produce concrete things and services that people want.
That is why simply printing new money will not create wealth for a country. Money is created by a kind of a perpetual interaction between concrete things, our intangible desire for them, and our abstract faith in what has value: money is valuable because we want it, but we want it only because it can get us a desired product or service.
How is it Measured?
Sure, money is the $10 bill you lent to your friend the other day and dont expect back anytime soon. But exactly how much money is out there and what forms does it take? Economists and investors ask this question everyday to see whether there is inflation or deflation. To make money more discernible for measurement purposes, they have separated it into three categories:
• M1 – This category of money includes all physical denominations of coins and currency, demand deposits, which are checking accounts and NOW accounts, and travelers checks. This category of money is the narrowest of the three and can be better visualized as the money used to make payments.
• M2 – With broader criteria, this category adds all the money found in M1 to all time-related deposits, savings deposits, and non-institutional money-market funds. This category represents money that can be readily transferred into cash.
• M3 – The broadest class of money, M3 combines all money found in the M2 definition and adds to it all large time deposits, institutional money-market funds , short-term repurchase agreements, along with other larger liquid assets.
By adding these three categories together, we arrive at a countrys money supply, or total amount of money within an economy.
How Money is Created
Now that weve discussed why and how money, a representation of perceived value, is created in the economy, we need to touch on how the central bank (the Federal Reserve in the U.S.) can manipulate the money supply.
Among other things, a central bank has the ability to influence the level of a countrys money supply. Lets look at a simplified example of how this is done. If it wants to increase the amount of money in circulation, the central bank can, of course, simply print it, but as we learned, the physical bills are only a small part of the money supply.
Another way for the central bank to increase the money supply is to buy government fixed-income securities in the market. When the central bank buys these government securities, it puts money in the hands of the public. How does a central bank such as the Federal Reserve pay for this? As strange as it sounds, they simply create the money out of thin air and transfer it to those people selling the securities! To shrink the money supply, the central bank does the opposite and sells government securities. The money with which the buyer pays the central bank is essentially taken out of circulation. Keep in mind that we are generalizing in this example to keep things simple.
Conclusion
Remember, as long as people have faith in the currency, a central bank can issue more of it. But if the Fed issues too much money, the value will go down, as with anything that has a higher supply than demand. So even though technically it can create money out of thin air, the central bank cannot simply print money as it wants.
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Buy-And-Hold Investing Vs. Market Timing
If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment . Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles.
For investors in the stock market , it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles.
However, whats even more important than how you define long term is how you design the strategy you use to make long-term investments . This means deciding between passive and active management. Read on to learn more.
Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature. Figure 1 shows the potential benefits of holding positions for longer periods of time. According to research conducted by Charles Schwab Company in 2012, between 1926 and 2011, a 20-year holding period never produced a negative result.
Source: Schwab Center for Financial Research
Figure 1: Range of S
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4 Ways Bonds Can Fit Into Your Portfolio
February 02, 2012 | Filed Under » Bonds, Fixed Income, Interest Rates, Investing Basics, Portfolio Management
Since the early 1980s, interest rates have been on a secular decline. Since the credit crisis, governments across the world have worked to flood global financial markets with liquidity, which includes low interest rates, to try and stoke economic growth. This has served to push most interest rates to all-time lows, be it those paid on government securities, mortgage rates or the rates that banks borrow from and lend to each other. (For related reading, see Forces Behind Interest Rates.)
See: Bond Basics
With interest rates across the board so low, there is a pretty wide consensus that they will trend up in 2012 and beyond. Because bond prices move in the opposite direction of interest rates, investors holding bonds have a good chance of losing money on their holdings over the next few years. However, as with any asset class, there are pockets of the market where investors should be able to protect their principal and earn reasonable rates of returns in their bond portfolios. Below are four ways that bonds can fit into your investment profile during 2012.
Municipal Bonds
About a year ago, market strategist Meredith Whitney boldly predicted that municipal bonds in the United States would eventually see hundreds of billions of dollars in defaults, as local municipalities struggle with lower tax revenue due to the credit crisis and also find it difficult to operate after years of generous retirement benefit promises and relatedoperating costs. Other strategists echoed her negative sentiment, which served to send many investors fleeing from municipal bond funds and individual bond positions.
Lower demand has served to push bond prices down and rates up. The rate on an AAA-rated five-year municipal bond is currently at roughly 0.79%, which is currently below the current Treasury bond yield of about 0.86% for the same maturity. Additionally, municipal bonds are generally exempt from federal taxes as well as most state and local tax rates. As a result, the tax equivalent yield is even higher, and moving into lower-rated bonds that are still investment grade could garner higher rates. A five-year A-rated municipal bond yields approximately 1.35%. (To learn more, read Avoid Tricky Tax Issues On Municipal Bonds.)
Corporate Bonds
AAA corporate bonds with a five-year maturity currently yields around 1.8%, which compared to the yield of municipal bonds with the same rating is more than double. A 20-year AAA corporate bond rate is somewhat decent at around 4.45%, though it requires locking up your money in a security that doesnt reach maturity until two decades later. As with the municipal bonds, sacrificing quality but still sticking in the investment grade category can allow for some pick up in yield. For instance, those brave enough to invest in bonds issued by banks and other financial institutions, can find yield to maturities of as much as 9%.
High-Yield Bonds
Sticking on the braver side of the bond market, high-yield bonds - which is a euphemism for junk bonds - offer plenty of opportunity to gamble for yields that can match the returns of stocks. A current perusal of some high-yield bonds, which are of a much lower credit rating than the investment grade bonds mentioned above, offer yield to maturities into the double digits. Clearly, the bonds with yields in the teens on up carry significant default risk, meaning investors can lose all of their money if the firm falls into further financial distress or ends up declaringbankruptcy. (Also, check out Junk Bonds: Everything You Need To Know.)
Convertible Bonds
Convertible bonds are an interesting subset of the bond market in that they combine features of traditional bonds with stocks. Like a bond, convertibles usually have a maturity date and pay a regular coupon, which should appeal to income-minded investors. They also tend to trade like a bond in a weak market environment or when company fundamentals are weak. But they also have the upside of a stock as they are convertible into the underlying companys stock. As such, they can trade much like a stock as it reflects the performance of the stock they are convertible into. Coupon rates vary and are generally quite low, but, again, offer more upside if the underlying stock performs well.
The Bottom Line
The bond market generally does not favor investors these days. The fact that companies, governments and municipalities are jumping at the chance to issue debt at low interest rates speaks to the fact that rates are at historic lows. Recently, a 10-year Treasury bond was issued with a coupon rate below 2%, which is the first time rates were ever this low. Despite the challenging overall outlook for the asset class, there are plenty of opportunities to find ways for bonds to fit into your portfolio.
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The Power Of Dividend Growth
Many investors think of dividend-paying companies as boring, low-return investment opportunities. Compared to high-flying small cap companies, whose volatility can be pretty exciting, dividend-paying stocks are usually more mature and predictable. Though this may be dull for some, the combination of a consistent dividend with an increasing stock price can offer an earnings potential powerful enough to get excited about.
High Dividend Yield?
Understanding how to gauge dividend-paying companies can give us some insight into how dividends can pump up your return. A common perception is that a high dividend yield, indicating the dividend pays a fairly high percentage return on the stock price, is the most important measure; however, a yield that is considerably higher than that of other stocks in an industry may indicate not a good dividend but rather a depressed price (dividend yield = annual dividends per share/price per share). The suffering price, in turn, may signal a dividend cut or, worse, the elimination of the dividend.
The important indication of dividend power is not so much a high dividend yield but high company quality, which you can discover through its history of dividends, which should increase over time. If you are a long-term investor, looking for such companies can be very rewarding. (To learn about how dividend payouts can help you through a market downturn, see Dividend Yield For The Downturn.)
Watch: Dividend
Dividend Payout Ratio
The dividend payout ratio, the proportion of company earnings allocated to paying dividends, further demonstrates that the source of dividend profitability works in combination with company growth. Therefore, if a company keeps a dividend payout ratio constant, say at 4%, but the company grows, that 4% begins to represent a larger and larger amount. (For instance, 4% of $40, which is $1.60, is higher than 4% of $20, which is 80 cents).
Lets demonstrate with an example:
Lets say you invest $1,000 into Joes Ice Cream company by buying 10 shares, each at $100 per share. Its a well-managed firm that has a P/E ratio of 10, and a payout ratio of 10%, which amounts to a dividend of $1 per share. Thats decent, but nothing to write home about since you receive only a measly 1% of your investment as dividend.
However, because Joe is such a great manager, the company expands steadily, and after several years, the stock price is around $200. The payout ratio, however, has remained constant at 10%, and so has the P/E ratio (at 10); therefore, you are now receiving 10% of $20 in earnings, or $2 per share. As earnings increase, so does the dividend payment, even though the payout ratio remains constant. Since you paid $100 per share, your effective dividend yield is now 2%, up from the original 1%.
Watch: Dividend Yields
Now, fast forward a decade: Joes Ice Cream Company enjoys great success as more and more North Americans gravitate to hot, sunny climates. The stock price keeps appreciating and now sits at $150 after splitting 2 for 1 three times. (If you are uncertain about share splits, check out Understanding Stock Splits.)
This means your initial $1,000 investment in 10 shares has grown to 80 shares (20, then 40, and now 80 shares) worth a total of $12,000. If the payout ratio remains the same and we continue to assume a constant P/E of 10, you now receive 10% of earnings ($1,200) or $120, which is 12% of your initial investment! So, even though Joes dividend payout ratio did not change, because he has grown his company the dividends alone rendered an excellent return - they drastically expanded the total return you got, along with the capital appreciation. (For more on what dividends can do for investors, see The Importance Of Dividends.)
For decades, many investors have been using this dividend-focused strategy by buying shares in household names such as Coca-Cola (Nasdaq:COKE), Johnson
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The Basics Of Corporate Structure
CEOs, CFOs, presidents and vice presidents: whats the difference? With the changing corporate horizon, it has become increasingly difficult to keep track of what people do and where they stand on the corporate ladder. Should we be paying more attention to news relating to the CFO or the vice president? What exactly do they do?
Corporate governance is one of the main reasons that these terms exist. The evolution of public ownership has created a separation between ownership and management . Before the 20th century, many companies were small, family owned and family run. Today, many are large international conglomerates that trade publicly on one or many global exchanges.
In an attempt to create a corporation where stockholders interests are looked after, many firms have implemented a two-tier corporate hierarchy. On the first tier is the board of governors or directors: these individuals are elected by the shareholders of the corporation. On the second tier is the upper management: these individuals are hired by the board of directors. Lets begin by taking a closer look at the board of directors and what its members do.
Board of Directors
Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves individuals chosen from within the company. This can be a CEO , CFO, manager or any other person who works for the company on a daily basis. The other type of representative is chosen externally and is considered to be independent from the company. The role of the board is to monitor the managers of a corporation, acting as an advocate for stockholders. In essence, the board of directors tries to make sure that shareholders interests are well served.
Board members can be divided into three categories:
• Chairman – Technically the leader of the corporation, the chairman of the board is responsible for running the board smoothly and effectively. His or her duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the companys business strategy , representing management and the board to the general public and shareholders, and maintaining corporate integrity. A chairman is elected from the board of directors.
• Inside Directors – These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level management from within the company. Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of companys management team.
• Outside Directors – While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased and impartial perspectives on issues brought to the board.
Management Team
As the other tier of the company, the management team is directly responsible for the day-to-day operations (and profitability) of the company.
• Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible for the entire operations of the corporation and reports directly to the chairman and board of directors. It is the CEOs responsibility to implement board decisions and initiatives and to maintain the smooth operation of the firm, with the assistance of senior management . Often, the CEO will also be designated as the companys president and therefore also be one of the inside directors on the board (if not the chairman). (To learn about what CEOs sometimes do but shouldnt, see Pages From The Bad CEO Playbook.)
• Chief Operations Officer (COO) – Responsible for the corporations operations, the COO looks after issues related to marketing, sales, production and personnel. More hands-on than the CEO, the COO looks after day-to-day activities while providing feedback to the CEO. The COO is often referred to as a senior vice president.
• Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO is responsible for analyzing and reviewing financial data , reporting financial performance, preparing budgets and monitoring expenditures and costs. The CFO is required to present this information to the board of directors at regular intervals and provide this information to shareholders and regulatory bodies such as the Securities and Exchange Commission (SEC). Also usually referred to as a senior vice president, the CFO routinely checks the corporations financial health and integrity.
How Does This Affect Your Investment?
Together, management and the board of governors have the ultimate goal of maximizing shareholder value . In theory, management looks after the day-to-day operations, and the board ensures that shareholders are adequately represented. But the reality is that many boards are made up of management.
When you are researching a company, its always a good idea to see if there is a good balance between internal and external board members. Other good signs are the separation of CEO and chairman roles and a variety of professional expertise on the board from accountants, lawyers and executives. Its not uncommon to see boards that are comprised of the current CEO (who is chairman), the CFO and the COO, along with the retired CEO, family members, etc. This does not necessarily signal that a company is a bad investment, but, as a shareholder, you should question whether such a corporate structure is in your best interests.
Minimum Quotation Size Requirements for OTC Equity Securities (FINRA Rule 6433) – FINRA members acting as market makers by submitting quotations into an inter-dealer quotation system must adhere to the minimum size requirements set by FINRA. For example, all quotations with a price less than or equal to $.50 must have a minimum size of 5,000 shares.
The Risks Of Investing In Emerging Markets
Investing is always risky business; corporate scandals regularly surface in the news, corporate bonds are frequently downgraded, accounting fraud is often revealed and market imperfections such as the flash crash continuously bring a level of uncertainty. Even the most stable domestic blue chip companies will face times of tremendous volatility.
Emerging markets offer numerous benefits to investors such as elevated economic growth rates, higher expected returns and diversification benefits. However, there are a number of important risks to consider before investing in regions outside of the developed world. (Emerging markets provide new investment opportunities, but there are risks - both to residents and foreign investors. See What Is An Emerging Market Economy?)
1) Foreign Exchange Rate Risk
Foreign investments in stocks and bonds will typically produce returns in the local currency of the investment. As a result, investors will have to convert this local currency back into their domestic currency. An American who purchases a Brazilian stock in Brazil will have to buy and sell the security using the Brazilian real. Therefore, currency fluctuations can impact the total return of investment. If, for example, the local value of a held stock increased by 5%, but the real depreciated by 10%, the investor will experience a net loss in terms of total returns when selling and converting back to U.S. dollars.
2) Non-Normal Distribution
North American market returns arguably follow a pattern of normal distributions. As a result, financial models can be used to price derivatives and make somewhat accurate economic forecasts about the future of equity prices. Emerging market securities, on the other hand, cannot be valuated using the same type of mean-variance analysis. Also, because emerging markets are undergoing constant changes, it is almost impossible to utilize historical information in order to draw proper correlations between events and returns.
3) Lax Insider Trading Restrictions
Although most countries claim to enforce strict laws against insider trading, none have proved to be as rigorous as America in terms of prosecuting unfair trading practices. Insider trading and various forms of market manipulation introduce market inefficiencies, whereby equity prices will significantly deviate from their intrinsic value. Such a system can be subject to extreme speculation, and can also be heavily controlled by those holding privileged information.
4) Less Liquidity
Emerging markets are generally less liquid than those found in the developed world. This market imperfection results in higher broker fees and an increased level of price uncertainty. Investors who try to sell stocks in an illiquid market face substantial risks that their orders will not be filled at the current price, and the transactions will only go through at an unfavorable level. Additionally, brokers will charge higher commissions, as they have to make more diligent efforts to find counterparties for trades. Illiquid markets prevent investors realizing the benefits of fast transactions.
5) Difficulty Raising Capital
A poorly developed banking system will prevent firms from having the proper access to financing that is required to grow their businesses. Attained capital will usually be issued at a high required rate of return, increasing the companys weighted average cost of capital (WACC). The major concern with having a high WACC is that fewer projects will produce a high enough return to yield a positive net present value. Therefore, financial systems found in developed nations do not allow companies to undertake a higher variety of profit-generating projects. (This asset class has left much of its unstable past behind. Find out how to invest in it, in Investing In Emerging Market Debt.)
6) Poor Corporate Governance System
A solid corporate governance structure within any organization is correlated with positive stock returns. Emerging markets sometimes have weaker corporate governance systems, whereby management, or even the government, has a greater voice in the firm than shareholders. Furthermore, when countries have restrictions on corporate takeovers, management does not have the same level of incentive to perform in order to maintain job security. While corporate governance in the emerging markets has a long road to go before being considered fully effective by North American standards, many countries are showing improvements in this area in order to gain access to cheaper international financing.
7) Increased Chance of Bankruptcy
A poor system of checks and balances and weaker accounting audit procedures increase the chance of corporate bankruptcy. Despite that bankruptcy is common in every economy, such risks are most common outside of the developed world. Within emerging markets, firms can more freely cook the book to give an extended picture of profitability. Once the corporation is exposed, it experiences a sudden drop in value. This is not to say that such occurrences do not happen in North America and Europe.
Because emerging markets are viewed as being more risky, they will have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy.
8) Political Risk
Political risk refers to uncertainty regarding adverse political decisions. Developed nations tend to follow a free market discipline of low government intervention, whereas emerging market businesses are often privatized upon demand. Some additional factors that contribute to political risk are: possibility of war, tax increase, loss of subsidy, change of market policy, inability to control inflation and laws regarding resource extraction. Major political instability can also result in civil war and a shutdown of industry, as workers either refuse or are no longer able to do their jobs. (Find out how these worldly offerings can spice up your portfolio. Check out Go International With Foreign Index Funds.)
Conclusion
Investing in emerging markets can produce substantial returns to ones portfolio. However, investors must be aware that all high returns must be judged within the risk and reward framework. The aforementioned risks are some of the most prevalent that must be assessed prior to investing. Unfortunately, however, the premiums associated with these risks can often only be estimated, rather than determined on a concrete basis.
Broker-dealers may charge an additional ‘access fee’ to broker-dealers who want to trade at their quoted price. The fee maximums are based on the tick size (> .01) or price (< .01). OTC Markets QAP (Quote Access Payment) functionality allows broker-dealer to dynamically set their fees or rebates.
6 Proven Methods For Selling Stocks
Choosing a time to sell a stock can be a very difficult task. It is especially difficult because, for most traders, it is hard to separate their emotions from their trades. The two human emotions that generally affect most traders with regards to selling a stock are greed and fear of regret. The ability to manage these emotions is key to becoming a successful trader.
Rising Profits
For example, many investors dont sell when a stock has risen 10 to 20% because they dont want to miss out on more returns if the stock shoots to the moon. This is due to their greed and the hope that the stock they picked will be a big winner. On the flip side, if the stock fell by 10 to 20%, a good majority of investors still wont sell because of their fear of regret. If they sell and the stock proceeds to rebound significantly, theyll be kicking themselves and regretting their actions.
So when should you sell your stock? This is a fundamental question that investors constantly struggle with. You need to separate out the emotion from your trading decisions. Fortunately, there are some commonly used methods that can help an investor make the process as mechanical as possible. In this article, I will look at six general strategies to help decide when to sell your stock.
Valuation-Level Sell
The first selling category well look at is called the valuation-level sell. In the valuation level sell strategy, the investor will sell a stock once it hits a certain valuation target or range. Numerous valuation metrics can be used as the basis, but some common ones that are used are the price-to-earnings (P/E) ratio, price-to-book (P/B), and price-to-sales (P/S). This approach is popular among value investors who buy stocks that are undervalued. It can be a good signal to sell when a stock becomes overvalued based on certain valuation metrics.
As an illustration of this method, suppose an investor holds stock in Wal-Mart that they bought when the P/E ratio was around 13 times earnings. The trader looks at the historical valuation of Wal-Mart stock and sees that the five-year average P/E is 15.5. From this, the trader could decide upon a valuation sell target of 15.5 time earnings as a fixed sell signal. So the trader has used a reasonable hypothesis to take the emotion out of his decision making. (For more on the P/E, see Profit With The Power Of Price-To-Earnings.)
Opportunity Cost Sell
The next one well look at is called the opportunity cost sell. In this method, the investor owns a portfolio of stocks and would sell a stock when a better opportunity presents itself. This requires a constant monitoring, research and analysis on both your own portfolio and potential new stock additions. Once a better potential investment has been identified, the investor would reduce or eliminate a position in a current holding that isnt expected to do as well as the new stock on a risk-adjusted return basis.
Deteriorating Fundamentals Sell
The deteriorating fundamental sell rule will trigger a stock sale if certain fundamentals in the companys financial statements fall below a certain level. This sell strategy is slightly similar to the opportunity cost in the sense that a stock sold using the previous strategy has likely deteriorated in some way. When basing a sell decision on deteriorating fundamentals, many traders will focus mainly on the balance sheet statement with emphasis on liquidity and coverage ratios. (Learn more about the balance sheet in Breaking Down The Balance Sheet.)
For example, suppose an investor owns the stock of a utilities company that pays a relatively high and consistent dividend. The investor is holding the stock mainly because of its relative safety and dividend yield. Furthermore, when the investor bought the stock, its debt-to-equity ratio was around 1.0 and its current ratio was around 1.4.
In this situation, a trading rule could be established so that the investor would sell the stock if the debt/equity ratio rose over 1.50, or if the current ratio ever fell below 1.0. If the companys fundamentals deteriorated to those levels – thus threatening the dividend and the safety - this strategy would signal the investor to sell the stock.
Down-from-Cost and Up-from-Cost Sell
The down-from cost sell strategy is another rule-based method that triggers a sell based on the amount, in percent, that youre willing to lose. For example, when an investor purchases a stock he may decide that if the stock falls 10% from where he bought it at, he would sell the stock.
Similar to the down-from cost strategy, the up-from cost strategy will trigger a stock sale if the stock rises a certain percentage. Both the down-from-cost and up-from-cost methods are essentially a stop-loss measure that will either protect the investors principal or lock in a specific amount of profit. The key to this approach is selecting an appropriate percentage that triggers the sell by taking into account the stocks historical volatility and the amount you would be willing to lose.
Target Price Sell
If you dont like using percentages, the target price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as seen by the popularity of the stop-loss orders with traders and investors. Common target prices used by investors are typically ones based on valuation model outputs such as the discounted cash flow model. Many traders will base target price sells on arbitrary round numbers or support and resistance levels, but these are less sound than other fundamental based methods.
Bottom Line
Learning to accept a loss on your investment is one of the hardest things to do in investing. Oftentimes, what makes investors successful is not just their ability to choose winning stocks, but also their ability to sell stocks at the right time.
Many foreign issuers adhere to the listing requirements of qualified Non-US Stock Exchanges[8] and make their home country disclosure available in English.[9] There are also a significant number of US issuers who are current in their reporting to regulators[10] such as the U.S. Securities and Exchange Commission (SEC) or make available ongoing quarterly and audited annual financial reports through OTC Markets Group.
Why Expense Ratios Are Important To Investors
The most valuable pieces of advice ever shared regarding investing of any kind, in ascending order of importance:
1. Fundamental analysis is crucial. Technical analysis is akin to fortune telling by interpreting patterns in tea leaves.
2. Its not a game or a hobby. Spend hours researching an investment when others are spending minutes. Spend days when others are spending hours. Done right, youll still enjoy a stupendous return on your time.
3. You make your money going in.
Its straightforward math, and easy to overlook or dismiss in its simplicity. An overpriced asset is that much harder to gain a return on than an underpriced or properly priced one. Wait for a real estate bubble (or, say, the hoopla surrounding a social networking sites much-anticipated initial public offering) to subside and then buy; yourmargin for error and potential for return should increase correspondingly.
The Price of Management
Were not talking about normal price fluctuations, here, or the inherent unpredictability that comes with almost any investment. Rather, were looking at whats essentially a surcharge on the price of the investment, levied before you buy. For example, take two new cars with the same model, same color and same options. One dealer sells the first vehicle for $22,000, out the door. The other sells the identical vehicle for $22,000, but with a $495 non-negotiable advertising and marketing assessment. Do you need to be told to buy the former? Its like purchasing a residential air filter in Vancouver, Washington (and paying 8% state sales tax) instead of going across the river and buying the same thing in Portland (Oregon levies no sales tax).
This is how it goes with mutual funds, the financial product of choice for most casual and many sophisticated investors. While no two funds are indistinguishable, two similarly constituted funds can come with price tags that differ considerably. Why? Varying expense ratios.
Its understandable that a mutual funds price costs more than the prices of its components. It costs money to create a fund. The fund has to be set up, registered and maintained. The firm that created it and that hired its managers has to be compensated. However, to what tune? The U.S. Securities
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