Corporate actions affect the rights and privileges of the shareholders largely. Shareholders are of two kinds, the common shareholders and the preferred shareholders. Companies do offer their shareholders with voting rights if agreed by the board of directors. The following corporate actions can have a great impact on the fortune of shareholders.
Liquidation:
In case of liquidation of a company, the common shareholders are at a maximum risk. The funds raised by the liquidation of a company would be distributed to the preferred shareholders first. However, preferred shareholders do not enjoy voting rights in the company, hence would not be able to influence corporate actions.
Capital Redemption:
In this process, the registered owners avail the facility of redemption of capital either by cash payment or by new securities. Capital Reduction is one step ahead of capital redemption where the excess capital is distributed to the shareholders.
Conversion of Securities:
Shareholders are also affected by dealing in convertible securities. For instance, if a particular
shareholder is holding convertible preference shares, the company may declare that he or she can get them converted into debentures or ordinary shares.
Conversion can be full or partial. In a partial conversion, the shareholders are required to convert only a percentage of their shares. In full conversion, no such option is available.
Minority Offer:
At times, a small group of shareholders is required to sell their shares to a large group that is already holding a majority stock. This is termed a minority offer. This may not always be done with the consent of the minority shareholders.
The board of directors determines the fate of minority shareholders. This is an important corporate action, which affects the shareholders significantly.
Stock Split:
The board of directors sometimes decides to split the company shares in order to boost the liquidity of the stock. Although more shares would be available to in the market to buy or sell, this action does not add much value to the company stock. Stock split also leads to dilution in companies earnings per shares, commonly known as EPS.
Interest Payment:
At times, the profit earned by the company can be further distributed amongst the shareholders in the form of interest. Different companies have different policies in this regard and some prefer not giving any interest at all, but utilizing the profits for further expansion.
It is in the long-term interest of shareholders if the company able to grow its business significantly. However, most of the investors prefer to gain immediate rewards rather than waiting for the share prices to appreciate. In order to understand the above mentioned and other related corporate actions better, there is lot of information available in the Internet.
In addition, many companies provide software to help organizations to make documents related to the above corporate actions in an easy and cost effective way. Shareholders and investors, who are indirectly the owners of the company in which they hold stakes, need to have complete understanding of the impact of corporate actions on the value of share prices.
Thursday, February 25, 2010
Tuesday, February 23, 2010
Difference Between Paper Trading And Live Trading!
If I want to become an investor as defined in the cash flow quadrant by Robert Kiyosaki, then I will need to learn from professional investors. Thus, I had signed up for a few seminars to learn. After attending a few seminars on option trading, stock trading and future trading, I realized that professional traders always have a trading system. And they always follow their trading systems. On top of that, I have learned that as a beginner, I should start off with paper trading.
What is the obvious difference between paper trading and live trading?
In paper trading, no money is involved. Transaction is done based on imaginary money. This means that I can afford to make mistakes in my trading practice using the trading system since no money is involved.
Some brokerage companies do provide an account that allows both paper trading and live trading. The advantage of such account is that it allows a realistic simulation of the live stock market. The share prices of all stocks are real but the transactions are false.
For example, I can setup my account with an imaginary amount of $10,000. Then, I will practice on how to filter and select the appropriate stock to invest based on the trading system. Next, I will decide at what price to buy the stock. Let say I intend to invest in a stock that is currently trading at $13 in the stock market. I will need to key in the buy order and wait for the share price to hit $12. If the share price hit $12, then my account will record that I have 'bought' the share.
Next I have to decide when to sell my shares based on the trading system. Let say I decide to sell at $15. I will key in my sell order and wait for the stock to really reach the price $15 in the live stock market before my sell order is considered to be successful.
After a period of practice, I will be able to learn from my mistakes and improve on my trading skills. Learning from mistakes is the key to success based on my understanding of the Rich Dad's series by Robert Kiyosaki. After 3 to 6 months of practice, I will be able to make consistent profits. Then it is time for me to enter the real market.
This brings me the second main difference between paper trading and live trading, which is emotions. When I trade with real money, there is fear of losing money if the share price goes down. As a result, I will be reluctant to sell my shares if I am losing money. I may keep on holding to the shares even though thetrading system tells me to sell. The share price may goes down further. In the end, I will end up losing more money.
When the share price goes up, greed will arise in me. Thus, I will end up not selling even though the trading system tells me to do so. The share price may reverse and goes down. Instead of making money, I will end up losing money. Poor management of emotions is the key to fail at stock investment.
The third main difference between papers trading and live trading is the risk of addiction. I realize that when I am trading real money in the live market, I always want to keep track of the share price . After keying the buy order, I will have the desire to keep checking every other minute whether I have successful bought the shares. If my buy order is successful executed, I will have the desire to keep checking whether the share price have gone up. If the share price goes up, I will feel excited and happy. If the share price goes down, I will feel depressed and sad. This is like an alcoholic addict who drinks to feel high. However, the next day, he will get hang over.
The next difference between papers trading and live trading is that it allow me to gain real experience. Real life experience is the critical component of success as learned from the Rich Dad's series. I can learn all the theories about investment. I may even 'paper trade' investment. But if I do take actions to do the real things, I will never master the investment skills.
My purpose to share about paper trading and live trading is mainly to highlight that proper management of emotions is the key to success. If I can manage my fear and greed in investment, I will be in a better shape to win at investment. This is because I will be able to think better in a calm state.
* DISCLAIMER *
The author only provides the material and information as a layperson's views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.
All the materials, information and procedure in this book are only the author's personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.
The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.
The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.
What is the obvious difference between paper trading and live trading?
In paper trading, no money is involved. Transaction is done based on imaginary money. This means that I can afford to make mistakes in my trading practice using the trading system since no money is involved.
Some brokerage companies do provide an account that allows both paper trading and live trading. The advantage of such account is that it allows a realistic simulation of the live stock market. The share prices of all stocks are real but the transactions are false.
For example, I can setup my account with an imaginary amount of $10,000. Then, I will practice on how to filter and select the appropriate stock to invest based on the trading system. Next, I will decide at what price to buy the stock. Let say I intend to invest in a stock that is currently trading at $13 in the stock market. I will need to key in the buy order and wait for the share price to hit $12. If the share price hit $12, then my account will record that I have 'bought' the share.
Next I have to decide when to sell my shares based on the trading system. Let say I decide to sell at $15. I will key in my sell order and wait for the stock to really reach the price $15 in the live stock market before my sell order is considered to be successful.
After a period of practice, I will be able to learn from my mistakes and improve on my trading skills. Learning from mistakes is the key to success based on my understanding of the Rich Dad's series by Robert Kiyosaki. After 3 to 6 months of practice, I will be able to make consistent profits. Then it is time for me to enter the real market.
This brings me the second main difference between paper trading and live trading, which is emotions. When I trade with real money, there is fear of losing money if the share price goes down. As a result, I will be reluctant to sell my shares if I am losing money. I may keep on holding to the shares even though thetrading system tells me to sell. The share price may goes down further. In the end, I will end up losing more money.
When the share price goes up, greed will arise in me. Thus, I will end up not selling even though the trading system tells me to do so. The share price may reverse and goes down. Instead of making money, I will end up losing money. Poor management of emotions is the key to fail at stock investment.
The third main difference between papers trading and live trading is the risk of addiction. I realize that when I am trading real money in the live market, I always want to keep track of the share price . After keying the buy order, I will have the desire to keep checking every other minute whether I have successful bought the shares. If my buy order is successful executed, I will have the desire to keep checking whether the share price have gone up. If the share price goes up, I will feel excited and happy. If the share price goes down, I will feel depressed and sad. This is like an alcoholic addict who drinks to feel high. However, the next day, he will get hang over.
The next difference between papers trading and live trading is that it allow me to gain real experience. Real life experience is the critical component of success as learned from the Rich Dad's series. I can learn all the theories about investment. I may even 'paper trade' investment. But if I do take actions to do the real things, I will never master the investment skills.
My purpose to share about paper trading and live trading is mainly to highlight that proper management of emotions is the key to success. If I can manage my fear and greed in investment, I will be in a better shape to win at investment. This is because I will be able to think better in a calm state.
* DISCLAIMER *
The author only provides the material and information as a layperson's views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.
All the materials, information and procedure in this book are only the author's personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.
The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.
The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.
Wednesday, February 17, 2010
Investment Analysis Tools
Even if you conduct a fundamental analysis on your target company, before you invest, you will want to use a few tools to help you dig deeper and discover more about the company. Sometimes, this can be more useful than any charts or graphs you can obtain.
1. Earnings per Share
This means that the company is not by itself an indication of how much its stocks are worth - other factors such as industry trends must be considered. Earnings per share is much more useful information than earnings by itself. Earnings per share (EPS) is calculated by dividing the net earnings by the number of outstanding shares. For example: ABC company had net earnings of $1 million and 100,000 outstanding shares for an EPS of 10 (1,000,000 / 100,000 = 10. . This information is useful for comparing two companies in a certain industry but should not be the deciding factor when choosing stocks.
2. Price to Earning Ratio
The Price to Earning Ratio (P/E) shows the relationship between stock price and company earnings. It is calculated by dividing the share price by the Earnings per Share. In our example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E is 5 (50 / 10 = 5. . The P/E tells you how much investors are willing to pay for that particular companys earnings. P/Es can be read in a variety of ways. A high P/E could mean that the company is overpriced or it could mean that investors expect the company to continue to grow and generate profits. A low P/E could mean that investors are wary of the company or it could indicate a company that most investors have overlooked.
3. Price to Sales Ratio
When a company has no earnings, there are other tools available to help investors judge its worth. New companies in particular often have no earnings, but that does not mean they are bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies. It is calculated by dividing the market cap (stock price times number of outstanding shares) by total revenues. An alternate method is to divide current share price by sales per share. P/S indicates the value the market places on sales. The lower the P/S the better the value.
4. Price to Book Ratio
Book value is determined by subtracting liabilities from assets. The value of a growing company will always be more than book value because of the potential for future revenue. The price to book ratio (P/B) is the value the market places on the book value of the company. It is calculated by dividing the current price per share by the book value per share (book value / number of outstanding shares). Companies with a low P/B are good value and are often sought after by long term investors who see the potential of such companies.
5. Dividend Yield
If all you are looking for are big dividends, then you are a smart investor. Dividend yield is useful for determining the percentage return a company pays in the form of dividends. It is calculated by dividing the annual dividend per share by the stocks price per share. Some people invest in a very successful company and don't end up seeing any profits.
1. Earnings per Share
This means that the company is not by itself an indication of how much its stocks are worth - other factors such as industry trends must be considered. Earnings per share is much more useful information than earnings by itself. Earnings per share (EPS) is calculated by dividing the net earnings by the number of outstanding shares. For example: ABC company had net earnings of $1 million and 100,000 outstanding shares for an EPS of 10 (1,000,000 / 100,000 = 10. . This information is useful for comparing two companies in a certain industry but should not be the deciding factor when choosing stocks.
2. Price to Earning Ratio
The Price to Earning Ratio (P/E) shows the relationship between stock price and company earnings. It is calculated by dividing the share price by the Earnings per Share. In our example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E is 5 (50 / 10 = 5. . The P/E tells you how much investors are willing to pay for that particular companys earnings. P/Es can be read in a variety of ways. A high P/E could mean that the company is overpriced or it could mean that investors expect the company to continue to grow and generate profits. A low P/E could mean that investors are wary of the company or it could indicate a company that most investors have overlooked.
3. Price to Sales Ratio
When a company has no earnings, there are other tools available to help investors judge its worth. New companies in particular often have no earnings, but that does not mean they are bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies. It is calculated by dividing the market cap (stock price times number of outstanding shares) by total revenues. An alternate method is to divide current share price by sales per share. P/S indicates the value the market places on sales. The lower the P/S the better the value.
4. Price to Book Ratio
Book value is determined by subtracting liabilities from assets. The value of a growing company will always be more than book value because of the potential for future revenue. The price to book ratio (P/B) is the value the market places on the book value of the company. It is calculated by dividing the current price per share by the book value per share (book value / number of outstanding shares). Companies with a low P/B are good value and are often sought after by long term investors who see the potential of such companies.
5. Dividend Yield
If all you are looking for are big dividends, then you are a smart investor. Dividend yield is useful for determining the percentage return a company pays in the form of dividends. It is calculated by dividing the annual dividend per share by the stocks price per share. Some people invest in a very successful company and don't end up seeing any profits.
Sunday, February 14, 2010
Candlestick Charting - A Peek Into Market Psychology
Candlestick charting was developed by Japanese rice traders over four centuries ago and could quite possibly be the oldest form of technical analysis. Since technical analysis is not only predicting probable price moves but also assessing market psychology, candlestick charting is probably the best tool to give the trader these answers in the shortest amount of time. Once a trader becomes familiar with candlestick charting, he or she can get a quick and highly visual signal because of the story candlesticks tell. Strict adherers to candlestick methodology take positions based on very short term patterns given by candlestick tradition. While candle stick charting is relatively unknown, and therefore unpracticed by the common investor, their use among active traders is growing. The greatest benefit candlestick charts provide the technical analyst is the ease of use and interpretation. The same price action, quickly seen using candlestick charts, may go unnoticed while scrolling through bar charts.
While analysis of chart patterns takes experience and some practice, so too will candlesticks. However, after learning the basic signals, candlesticks can provide the novice trader a shorter learning curve and also shorten the learning curve to chart reading in general. I like using bar charts to find chart patterns, and then switch to candlesticks for a closer look. Candlestick charts are especially useful when analyzing areas of consolidation such as triangles and flags for signs of reversal or continuation.
The major signals in candlestick theory are reversal signals. Some of these signals are considered so strong by serious candlestick practitioners they will enter a trade based on its signal alone, without the need for conformation. Since I rarely see the price of a stock "turn on a dime", I usually keep an eye on the stock and enter a trade when the price retests support or resistance.
While I've incorporated candlestick charting into my trading strategies for quite some time, I have learned that there are a few technical criteria that will enhance the candlestick reversal signal. Some of these criteria include:
" Heavy volume on the reversal day - I look for volume to be greater than one and a half times normal volume.
" Greater than average price movement on the reversal day - I look for the price to exceed its normal daily price range and appear longer on the chart than most daily candles.
" Stock price that is heavily overbought or oversold - I look for the price to accelerate away, but in the same direction as the current trend.
" Signal forms on technical support - I look for the reversal signal to reveal itself on a trend line, moving average or horizontal support.
While candlestick charting is enjoying a following that has grown in recent years, it should be viewed as just another tool the trader uses to profit in the market, not as a foolproof method of entering or exiting a stock. The signals tell a story of the psychology of the market. Sometimes the signals are only valid for a short period of time, but at key levels of support and resistance the reversal signals given by candlestick patterns can tip the trader off to a healthy price move.
My suggestion to any active trader is to take some time and learn the major candlestick reversal signals. There are many good books and courses available on the internet that are reasonably priced and will allow the trader to learn at his or her own pace.
While analysis of chart patterns takes experience and some practice, so too will candlesticks. However, after learning the basic signals, candlesticks can provide the novice trader a shorter learning curve and also shorten the learning curve to chart reading in general. I like using bar charts to find chart patterns, and then switch to candlesticks for a closer look. Candlestick charts are especially useful when analyzing areas of consolidation such as triangles and flags for signs of reversal or continuation.
The major signals in candlestick theory are reversal signals. Some of these signals are considered so strong by serious candlestick practitioners they will enter a trade based on its signal alone, without the need for conformation. Since I rarely see the price of a stock "turn on a dime", I usually keep an eye on the stock and enter a trade when the price retests support or resistance.
While I've incorporated candlestick charting into my trading strategies for quite some time, I have learned that there are a few technical criteria that will enhance the candlestick reversal signal. Some of these criteria include:
" Heavy volume on the reversal day - I look for volume to be greater than one and a half times normal volume.
" Greater than average price movement on the reversal day - I look for the price to exceed its normal daily price range and appear longer on the chart than most daily candles.
" Stock price that is heavily overbought or oversold - I look for the price to accelerate away, but in the same direction as the current trend.
" Signal forms on technical support - I look for the reversal signal to reveal itself on a trend line, moving average or horizontal support.
While candlestick charting is enjoying a following that has grown in recent years, it should be viewed as just another tool the trader uses to profit in the market, not as a foolproof method of entering or exiting a stock. The signals tell a story of the psychology of the market. Sometimes the signals are only valid for a short period of time, but at key levels of support and resistance the reversal signals given by candlestick patterns can tip the trader off to a healthy price move.
My suggestion to any active trader is to take some time and learn the major candlestick reversal signals. There are many good books and courses available on the internet that are reasonably priced and will allow the trader to learn at his or her own pace.
Friday, February 12, 2010
Investing in Equities
A lot of investors go about their investments in an illogical way. They're given a tip from their broker on basis of some rumor or news. They impulsively buy the scrip and afterwards wonder why they bought the stock.
Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on bseindia or nseindia website. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.
Broadly one should abide by following guidelines:-
1. Business of Company
Buy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.
2. Study the past performance
All companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.
3. Know the promoters
The Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.
4. Future outlook of the company
Although a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.
5. Stock price
The share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company’s present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap. To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:
P/E ratio = Market price of the share
Earning per share (EPS)*
*EPS = Profit After Tax (PAT)
Total number of shares issued by the company
You can find information on the EPS, PAT and total number of shares issued by the company from its annual report.
Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%. But at the same time you must keep a stop loss and sell if there is major shift in sector trend.
Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on bseindia or nseindia website. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.
Broadly one should abide by following guidelines:-
1. Business of Company
Buy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.
2. Study the past performance
All companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.
3. Know the promoters
The Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.
4. Future outlook of the company
Although a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.
5. Stock price
The share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company’s present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap. To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:
P/E ratio = Market price of the share
Earning per share (EPS)*
*EPS = Profit After Tax (PAT)
Total number of shares issued by the company
You can find information on the EPS, PAT and total number of shares issued by the company from its annual report.
Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%. But at the same time you must keep a stop loss and sell if there is major shift in sector trend.
Tuesday, February 9, 2010
Forex Trading Course: Become a Captain of your Money Rather then a Slave
Forex Trading Course and Your Cash
We're all becoming internationally connected these days. We are brought closer by the Internet, written publications, and mobile phones. Before these inventions, countries rarely had contact with each other apart from battles and trading. Only explorers got to see and experience the world. Today is very different from the past years. Now, one can know the events in other countries as simply as you can find out news about your next-door neighbors. Businesses have become international. Even in this world where we're so connected, however, our worlds are very different. We share goods and supplies, but we have to remember our economies are very separate things.
Economies are fueled by supply, demand, and money. Since different countries use different currencies, it could be a problem when doing business internationally. That's why there are exchange rates to approximate a currency's value compared to another. These exchange rates are always changing. A Forex Trading strategy is useful in this scenario.
If you're searching for supplemental income, you can earn money online with Forex Trading.
You'll know how to make money on exchange rates and take part in the change in economies with a Forex Trading course. You can take the course over the World Wide Web, anytime. Also, as soon as you've finished the course and learn how to create aForex Trading strategy, you can continue doing your work over the Internet.
Forex Trading is a great money-making chance because you earn what you work for. You'll even be your own manager.
You have a chance to know the economy of both the country you are in and various countries around the globe. This is a world that's ever shifting and you can be involved in it. There are always opportunities to buy and sell because of shifting economies and this makes the market very profitable.
Spending time to research into a Forex Trading course may improve the way you look at investing forever. Why not spend time to examine another way to gainfully handle your money? You won't be your money's slave anymore because you'll be its captain. A Forex course might be the very thing that opens the door of opportunity for you.
We're all becoming internationally connected these days. We are brought closer by the Internet, written publications, and mobile phones. Before these inventions, countries rarely had contact with each other apart from battles and trading. Only explorers got to see and experience the world. Today is very different from the past years. Now, one can know the events in other countries as simply as you can find out news about your next-door neighbors. Businesses have become international. Even in this world where we're so connected, however, our worlds are very different. We share goods and supplies, but we have to remember our economies are very separate things.
Economies are fueled by supply, demand, and money. Since different countries use different currencies, it could be a problem when doing business internationally. That's why there are exchange rates to approximate a currency's value compared to another. These exchange rates are always changing. A Forex Trading strategy is useful in this scenario.
If you're searching for supplemental income, you can earn money online with Forex Trading.
You'll know how to make money on exchange rates and take part in the change in economies with a Forex Trading course. You can take the course over the World Wide Web, anytime. Also, as soon as you've finished the course and learn how to create aForex Trading strategy, you can continue doing your work over the Internet.
Forex Trading is a great money-making chance because you earn what you work for. You'll even be your own manager.
You have a chance to know the economy of both the country you are in and various countries around the globe. This is a world that's ever shifting and you can be involved in it. There are always opportunities to buy and sell because of shifting economies and this makes the market very profitable.
Spending time to research into a Forex Trading course may improve the way you look at investing forever. Why not spend time to examine another way to gainfully handle your money? You won't be your money's slave anymore because you'll be its captain. A Forex course might be the very thing that opens the door of opportunity for you.
Monday, February 8, 2010
How I Reduce My Investment Risk
Ideally, investors try to buy a stock when the price has reached a support level (a level at which the price is as low as it will go) and sell the stock when it hits a resistance level (a level at which the price is as high as it will go). This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go. In this article, we will focus on the two most popular strategies that you can use to invest without having to worry about market timing.
Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares ofstock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.
An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managedto buy IBM at an average price of $100 per share.
The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certainstock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.
Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.
Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments. If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of myinvestment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of myinvestment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.
Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as thestock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price. But, neither of these strategies are necessarily full-proof. Make sure you know something about the company you are going to invest in before you go forward.
Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares ofstock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.
An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managedto buy IBM at an average price of $100 per share.
The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certainstock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.
Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.
Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments. If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of myinvestment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of myinvestment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.
Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as thestock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price. But, neither of these strategies are necessarily full-proof. Make sure you know something about the company you are going to invest in before you go forward.
Tips for Online Stockmarket Trading
Traders in shares, indices, forex or commodities should always have a backdrop of basic rules, which revolve around going with the trend, limiting losses and good money management. In other papers, we have covered these items extensively, together with how to avoid mistakes and other important factors to watch when trading CFDs. There are, however, some commonsense rules that do not have to be applied to rigorously, but add another level of comfort within what can be a very stressful process.
A simple first rule – watch the cost
Market makers and other brokers are not stupid, and the setting of prices and spreads (or slippage) depends on several factors including time of the day, volatility and before and after news items. If you have a system that is not tailored to quick, intra-day moves, and your chosen timeframe is to look for results within anything up to a month, then minute by minute timing is less important than getting the overall picture correct.
On that basis you need to reduce your slippage costs as much as possible, so the time to place trades should be when the spreads are narrowest. After a while you should be used to the normal minimum spreads on mostshares , and unless there is a pressing need to immediately deal (maybe on a profits warning or takeover news), then it pays to always ensure the spread is at the minimum before dealing.
This means not trading in the first few minutes of the trading day as buyers and sellers position themselves for the session. Sometimes the whole market may not only be marked down, for instance on a heavy fall in Far Eastern stocks overnight, but spreads might be wider because of the frenetic nature of early dealing. After a while though the spreads should usually return to normal, and you can deal more comfortably.
Example: You have a system that uses 3% targets and 2% stops, and say you normally buy and sell Royal Bank of Scotland shares with a minimum 1p spread, which represents a 0.05% or 5 basis point spread. From time to time the spread widens and can be as much as 5p after an outside event or early in the morning. This means that if applied to both sides of the trade, dealing on this wider spread would cost an additional 0.4% or 40 more basis points and effectively negates almost half of the edge of your system, which is fairly serious.
Moving on from this, it pays to stick to the biggest and most liquid stocks for the majority of your trading and this is a quick list of the leaders in the UK and which have the narrowest spreads:
Banks: Barclays, HBOS, HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered
Beverages: Diageo, SAB Miller
Food producers: Unilever
Food retailing: Tesco
Household Goods: Reckitt Benckiser
Insurance: Aviva, Prudential
Mining: Anglo American, BHP Billiton, Rio Tinto, Xstrata
Oils: BP, Royal Dutch Shell, BG Group
Pharmaceuticals: Astra Zeneca, Glaxo Smithkline
Telecoms: BT, Vodafone
Tobacco: BAT Industries
Utilities: National Grid
Rule 2: Get to know a few stocks very closely and increase your knowledge
Many market professionals focus on one area of the market, and some simply trade a handful or even just one issue, be it a particular commodity, Treasury bond orstockmarket index. You will probably find that you become accustomed to the ebbs and flows of certain shares, and if you feel you are on the boil with these companies, then you have an edge.
If you decide to focus on say ten UK shares, you should get to know their trading ranges, average daily volume, sentiment to their particular sector, previous support and resistance levels, the tone of previous management comments and when news is due.
Furthermore, it goes without saying that when trading commodity stocks including miners and oil companies, you need to be aware of movements in the price and direction of principal metals and crude oil. Because there are other factors in play when institutions buy or sell in the market, such as dividend payments, overall market action or takeover hopes, share price movements can sometimes lag a rise or fall in the underlying commodity, but this is very important to each company’s overall profitability. Likewise, overall retail sales figures are important to the retail sector, which is obvious, and the health of the housing market and interest rates affect financial stocks.
A couple of extra rules
The ‘trend is your friend’ is a valid theme throughout swing trading, but it pays to only go long when the price offers further upside potential, or there is another volume and/or candlestick signal, otherwise you risk buying at the top. The aim is to ride an established trend, so while it is OK to miss the first part of a move, you should not buy when a trend may be about to reverse.
Broker upgrades and newspaper tips are a waste of time, because they are usually already factored into the market by the time it is your turn to place a trade. Whilst some analysis can be excellent and thought provoking, the persons giving the advice may sometimes have a different agenda. Price and volume action is the key when trading, but of course for longer term decision making the fundamentals must be examined as well.
A simple first rule – watch the cost
Market makers and other brokers are not stupid, and the setting of prices and spreads (or slippage) depends on several factors including time of the day, volatility and before and after news items. If you have a system that is not tailored to quick, intra-day moves, and your chosen timeframe is to look for results within anything up to a month, then minute by minute timing is less important than getting the overall picture correct.
On that basis you need to reduce your slippage costs as much as possible, so the time to place trades should be when the spreads are narrowest. After a while you should be used to the normal minimum spreads on mostshares , and unless there is a pressing need to immediately deal (maybe on a profits warning or takeover news), then it pays to always ensure the spread is at the minimum before dealing.
This means not trading in the first few minutes of the trading day as buyers and sellers position themselves for the session. Sometimes the whole market may not only be marked down, for instance on a heavy fall in Far Eastern stocks overnight, but spreads might be wider because of the frenetic nature of early dealing. After a while though the spreads should usually return to normal, and you can deal more comfortably.
Example: You have a system that uses 3% targets and 2% stops, and say you normally buy and sell Royal Bank of Scotland shares with a minimum 1p spread, which represents a 0.05% or 5 basis point spread. From time to time the spread widens and can be as much as 5p after an outside event or early in the morning. This means that if applied to both sides of the trade, dealing on this wider spread would cost an additional 0.4% or 40 more basis points and effectively negates almost half of the edge of your system, which is fairly serious.
Moving on from this, it pays to stick to the biggest and most liquid stocks for the majority of your trading and this is a quick list of the leaders in the UK and which have the narrowest spreads:
Banks: Barclays, HBOS, HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered
Beverages: Diageo, SAB Miller
Food producers: Unilever
Food retailing: Tesco
Household Goods: Reckitt Benckiser
Insurance: Aviva, Prudential
Mining: Anglo American, BHP Billiton, Rio Tinto, Xstrata
Oils: BP, Royal Dutch Shell, BG Group
Pharmaceuticals: Astra Zeneca, Glaxo Smithkline
Telecoms: BT, Vodafone
Tobacco: BAT Industries
Utilities: National Grid
Rule 2: Get to know a few stocks very closely and increase your knowledge
Many market professionals focus on one area of the market, and some simply trade a handful or even just one issue, be it a particular commodity, Treasury bond orstockmarket index. You will probably find that you become accustomed to the ebbs and flows of certain shares, and if you feel you are on the boil with these companies, then you have an edge.
If you decide to focus on say ten UK shares, you should get to know their trading ranges, average daily volume, sentiment to their particular sector, previous support and resistance levels, the tone of previous management comments and when news is due.
Furthermore, it goes without saying that when trading commodity stocks including miners and oil companies, you need to be aware of movements in the price and direction of principal metals and crude oil. Because there are other factors in play when institutions buy or sell in the market, such as dividend payments, overall market action or takeover hopes, share price movements can sometimes lag a rise or fall in the underlying commodity, but this is very important to each company’s overall profitability. Likewise, overall retail sales figures are important to the retail sector, which is obvious, and the health of the housing market and interest rates affect financial stocks.
A couple of extra rules
The ‘trend is your friend’ is a valid theme throughout swing trading, but it pays to only go long when the price offers further upside potential, or there is another volume and/or candlestick signal, otherwise you risk buying at the top. The aim is to ride an established trend, so while it is OK to miss the first part of a move, you should not buy when a trend may be about to reverse.
Broker upgrades and newspaper tips are a waste of time, because they are usually already factored into the market by the time it is your turn to place a trade. Whilst some analysis can be excellent and thought provoking, the persons giving the advice may sometimes have a different agenda. Price and volume action is the key when trading, but of course for longer term decision making the fundamentals must be examined as well.
Don't Be A Stock Scam Victim
Infomercials touting stock trading systems are ubiquitous on late night television. These infomercials generally showcase examples of people turning small sums of money into making $100,000 plus in a year. Sound too good to be true? It is, and don't be a victim by falling for these traps.
There is a lot of people out there touting stock advice and other investment schemes. Some of these are legitimate; some are not. This article will help you identify those "systems" out there that will just suck themoney out of your pocket. Here are the top warning signs:
1. The "system" uses options trading. When you buy stock, you are buying a small share of a major company. If you buy a share of McDonalds, you become a very small owner of the worldwide giant. Stock options, on the other hand, are essentially bets on a stock's price. You do not own the stock; you buy an option to buy the stock. You make a bet with another trader about the price of the stock's movement. Unlike the stock market, the stock options market is zero-sum. Whatever you gain, the other guy loses and vice versa. People who succeed at stock options are generally insiders that work at the Chicago Board of Options Exchange. Betting against these guys is like betting Kobe Bryant that you can beat him at basketball.
2. The infomercial (or advertisement) showcases people who make a certain amount of money a day or a certain amount of money during one trade. The proper way of identifying good investors is what percentage they grew their income compared to the market. For example, an excellent investor will make a 15% return on hismoney in the market when the stock market only produced a 10% return on average during a year. When an infomercial talks about how someone makes a lot of money per day or per trade, they are banking that the viewer knows nothing about the stock market and can be fooled by such claims.
3. The "system" promises amazing returns. An amazing return in the stock market is 13% a year, compared to the long-term average of 10%. If an infomercial is going to lead you to believe that you can double yourmoney in a year or less, run. It's a scam.
4. Most infomercial scams induce you to visit a free seminar, then expect you to pay an exorbitant amount (several thousand) to attend another seminar, then expect you pay an even greater amount for software or other advice. If it follows this pattern, run.
There is a lot of people out there touting stock advice and other investment schemes. Some of these are legitimate; some are not. This article will help you identify those "systems" out there that will just suck themoney out of your pocket. Here are the top warning signs:
1. The "system" uses options trading. When you buy stock, you are buying a small share of a major company. If you buy a share of McDonalds, you become a very small owner of the worldwide giant. Stock options, on the other hand, are essentially bets on a stock's price. You do not own the stock; you buy an option to buy the stock. You make a bet with another trader about the price of the stock's movement. Unlike the stock market, the stock options market is zero-sum. Whatever you gain, the other guy loses and vice versa. People who succeed at stock options are generally insiders that work at the Chicago Board of Options Exchange. Betting against these guys is like betting Kobe Bryant that you can beat him at basketball.
2. The infomercial (or advertisement) showcases people who make a certain amount of money a day or a certain amount of money during one trade. The proper way of identifying good investors is what percentage they grew their income compared to the market. For example, an excellent investor will make a 15% return on hismoney in the market when the stock market only produced a 10% return on average during a year. When an infomercial talks about how someone makes a lot of money per day or per trade, they are banking that the viewer knows nothing about the stock market and can be fooled by such claims.
3. The "system" promises amazing returns. An amazing return in the stock market is 13% a year, compared to the long-term average of 10%. If an infomercial is going to lead you to believe that you can double yourmoney in a year or less, run. It's a scam.
4. Most infomercial scams induce you to visit a free seminar, then expect you to pay an exorbitant amount (several thousand) to attend another seminar, then expect you pay an even greater amount for software or other advice. If it follows this pattern, run.
How Does Forex Market Differ From Other Markets
To novices the difference may appear to be great between the forex market and other markets, say equity market. But this is not to suggest that they are similar. Not many of the experienced traders have dared to crossover the boundaries of their trusted market domains unless they made sufficient preparations and studied the new market.
Forex Market Has Unique Characteristics despite Similarities, Before we discussed the similarities let's see how the forex market differs from stock markets. So here are the differences.
1. The forex market is a 24 hours trading market unlike stock market and is not country specific. Major markets open at Tokyo and when it closes, London takes over and then the New York market goes live till the next day when Tokyo market opens again. This seamless continuity isn't available in case ofstock trading.
2. The above point also characterizes that the concept of single exchange trading as nullified and what takes its position is over-the-counter trading.
3. The equity market is the market of countless number of equities that are governed by a number of technical and micro economic parameters and indices which are all absent inforex market.
4. Forex market is the biggest exchange market in the world and not even the transactions of the entire world's equity markets' put together can match this even by half. So liquidity is never a question mark.
5. There are no commissions to be paid to the brokers for the simple reason that you are directly dealing in currency and not the securities or bonds which are negotiable instruments and thus have a weakness to fluctuate sharply.
6. Currencies can depreciate over long periods but can never be zero; this is a highly unthinkable scenario in forex market and traders can hold their short positions for as long as they possibly can without the fear of getting their capital wiped out.
Similarities in the Markets
Despite all these differences, both markets have some semblance and similarities too. But the similarities are not sufficiently significant, as I said in the beginning, so as to facilitate a walkover across the markets. Let us take a look at the similarities now.
1. The long term trading strategies are same as both require strong fundamental analyses of the stock or
Forex Market Has Unique Characteristics despite Similarities, Before we discussed the similarities let's see how the forex market differs from stock markets. So here are the differences.
1. The forex market is a 24 hours trading market unlike stock market and is not country specific. Major markets open at Tokyo and when it closes, London takes over and then the New York market goes live till the next day when Tokyo market opens again. This seamless continuity isn't available in case ofstock trading.
2. The above point also characterizes that the concept of single exchange trading as nullified and what takes its position is over-the-counter trading.
3. The equity market is the market of countless number of equities that are governed by a number of technical and micro economic parameters and indices which are all absent inforex market.
4. Forex market is the biggest exchange market in the world and not even the transactions of the entire world's equity markets' put together can match this even by half. So liquidity is never a question mark.
5. There are no commissions to be paid to the brokers for the simple reason that you are directly dealing in currency and not the securities or bonds which are negotiable instruments and thus have a weakness to fluctuate sharply.
6. Currencies can depreciate over long periods but can never be zero; this is a highly unthinkable scenario in forex market and traders can hold their short positions for as long as they possibly can without the fear of getting their capital wiped out.
Similarities in the Markets
Despite all these differences, both markets have some semblance and similarities too. But the similarities are not sufficiently significant, as I said in the beginning, so as to facilitate a walkover across the markets. Let us take a look at the similarities now.
1. The long term trading strategies are same as both require strong fundamental analyses of the stock or
Tips For Choosing The Best Stockbroker
Choosing a stock broker can be an annoying task. While they all seem the same, there are differences in commission rates that you should be aware of. Depending on the type of investor you are, you may end up paying too many fees depending on the broker you choose. Here are some tips for choosing the best stock broker, depending on the type of investor you are.
1. Casual investor. If you are casual investor with a moderate amount of capital ($200k or less), then chances are most of your money is in ETFs or index funds. In this case, a discount broker is fine. You will rarely make many trades and you do not need much advice since you are just investing in standard, safe investments. A brokerage like TD Ameritrade is good for you since they have $9.99 trades.
2. Frequent trader. If you are a chartist, then finding a broker with low fees is a very high priority. Most discount brokers will give discounts to people who trade frequently. One example is E-trade. Another site like Interactive Brokers might be good for you too. Be careful with this sort of investment style, as fees may gobble up all of your profits!
3. High net worth investor. If you have $1 million+ in the stock market, then chances are you can get a discount on how much you pay per trade. This is especially the case with the established, big firms such as Fidelity. Fidelity offers $8 trades to those with $1 million+ in their Fidelity accounts.
4. Short seller. If you plan on selling many stocks short, you need a broker that has access to these shares so that you can short them. Most of these brokerages will be able to short mid and large caps for you, but many do not have access to a large percentage of the small cap stocks. Interactive Brokers might be the best broker for short sellers.
1. Casual investor. If you are casual investor with a moderate amount of capital ($200k or less), then chances are most of your money is in ETFs or index funds. In this case, a discount broker is fine. You will rarely make many trades and you do not need much advice since you are just investing in standard, safe investments. A brokerage like TD Ameritrade is good for you since they have $9.99 trades.
2. Frequent trader. If you are a chartist, then finding a broker with low fees is a very high priority. Most discount brokers will give discounts to people who trade frequently. One example is E-trade. Another site like Interactive Brokers might be good for you too. Be careful with this sort of investment style, as fees may gobble up all of your profits!
3. High net worth investor. If you have $1 million+ in the stock market, then chances are you can get a discount on how much you pay per trade. This is especially the case with the established, big firms such as Fidelity. Fidelity offers $8 trades to those with $1 million+ in their Fidelity accounts.
4. Short seller. If you plan on selling many stocks short, you need a broker that has access to these shares so that you can short them. Most of these brokerages will be able to short mid and large caps for you, but many do not have access to a large percentage of the small cap stocks. Interactive Brokers might be the best broker for short sellers.
Successful Stock Trading Tips
Trading stocks online isn’t for the faint at heart, especially when one good market day can result in an unexpected crash the next. The vast number of stock trading platforms from some of the biggest names in finance offer stock solutions to experts right on down to a day trader or novice. Before you begin investing your life savings into an unpredictable market economy, keep these stock trading tips in mind.
• Pay attention to industry trends-If an up and coming website or company gets extensive media attention or business, consider purchasing stock from them.
• Don’t be afraid to invest for fear of loss…the quicker you buy stocks, the faster you can make a profit.
• Know your trade options: some services allow you to use your mobile phone for trades, as well as faxing or over-the-phone.
• If you cancel a trade, make sure it’s complete before making another trade. Simply because you receive a cancellation receipt, it may have already gone through. Know who to contact for trading.
• Don’t trade with a company you don’t know anything about. If possible, look into their investment history, so you know you’re trading reputable stock.
• Join an online stock trading service that provides up-to-date market forecasts and comprehensive market overview features. When trading, you need access to instant stats.
6Star Reviews cites online stock trading services TD Ameritrade and Zecco as great choices in personal investment that incorporate the latter. Zecco offers great rates and 10 free trades a month if stock brokers meet the minimum balance requirement.
Options trades are $4.50 a trade, which is a low rate that new traders will surely appreciate. Similarly, TD Ameritrade runs specials such as 30-day commission-free trades and a $100 bonus on current new account openings. Before signing up with a particular company, consider your level of trading expertise, as well as your financial resources, as some sites offer lower rates than others.
• Pay attention to industry trends-If an up and coming website or company gets extensive media attention or business, consider purchasing stock from them.
• Don’t be afraid to invest for fear of loss…the quicker you buy stocks, the faster you can make a profit.
• Know your trade options: some services allow you to use your mobile phone for trades, as well as faxing or over-the-phone.
• If you cancel a trade, make sure it’s complete before making another trade. Simply because you receive a cancellation receipt, it may have already gone through. Know who to contact for trading.
• Don’t trade with a company you don’t know anything about. If possible, look into their investment history, so you know you’re trading reputable stock.
• Join an online stock trading service that provides up-to-date market forecasts and comprehensive market overview features. When trading, you need access to instant stats.
6Star Reviews cites online stock trading services TD Ameritrade and Zecco as great choices in personal investment that incorporate the latter. Zecco offers great rates and 10 free trades a month if stock brokers meet the minimum balance requirement.
Options trades are $4.50 a trade, which is a low rate that new traders will surely appreciate. Similarly, TD Ameritrade runs specials such as 30-day commission-free trades and a $100 bonus on current new account openings. Before signing up with a particular company, consider your level of trading expertise, as well as your financial resources, as some sites offer lower rates than others.
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