Archive for Stock Terms & Definitions

Learning Financial Planning through Asset Allocation

In order to understand the meaning of “asset allocation”, one should pay in mind that even the best performing asset differs from one year to the other and cannot be predicted easily. Thus, a safe mood is to invest in more than one asset class. Thus, by diversifying the overall risk (for you will be waiting for a variety of returns), you will have a more justified, fundamental asset allocation. Some critics describe this diversification as the “only free lunch found in the investment game”. Moreover, because of the problems associated with “active management” that have been discovered by academic research, many investors are drawn to the increasingly popular passive investment style.

Thus, to financially plan you asset allocation, you should start searching for the appropriate asset that reflects your abilities and the risks you expect.

Asset Classes Include:

- Bonds

- Cash

- Stocks

- Foreign currency

- Real estate

- Natural resources

- Luxury collectables (wine, cars, art, … etc)

- Precious metals

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The Advantages and Potential Problems of the Red Flags and their Material Adverse Effect

“Red Flags” are often used to refer to a stock with potential problems. It, therefore, draws analysts’ attention. However, there is not a fixed standard for its identification, for that depends on the methodology of investment used. Thus, the same investment can be positive and negative at the same time, depending on the investor interested in it; for example, if you are looking for an undiscovered company, you will look for low institutional ownership, but the same type of ownership is considered negative to a pension fund that is looking for blue chips.

There are usually some important red flags that you, as an investor, should look for. Major among these is the “Material Adverse Effect” (MAE). This flag indicates that something is extremely wrong, such as a decline in profitability or even the bankruptcy of the firm/business.

Thus, although the SEC (Securities and Exchange Commission) and the legal boilerplates prefer to disclose as many problems as they can, red flags, especially the MAE, will provide investors with crucial information, helping him/her to avoid mistakes of investment.

More Types of Investment Funds: Index Funds, Fixed Income funds & Asset Manager Funds

Index funds aim to construct investments that mimic the movements of an index of a particular financial market. The fund manager can accomplished this by setting up a mutual fund composed of stocks in the S&P 500, and by keeping the stocks in amounts equal to the proportions they represent as members of the index. The idea here is not to beat the S&P 500 but to match its performance with a mutual fund. Not a bad goal considering the S&P 500 averaged returns of 17.3% in the 1990s while mutual funds could only manage 13.9% during that same time period. Another advantage with these funds is the low expense ratios, which are the costs charged to shareholders. The Vanguard S&P 500 expense ratio, 0.18% in 2006, is less than one fifth the expense ratios of the average mutual fund.

Fixed income funds are mutual funds that seek to preserve a set income stream by investing in very secure investments like highly rated corporate bonds and government bonds. They can provide monthly income, diversify a portfolio, or a higher level of liquidity for the investor. These are generally lower risk investments with a lower return, but a return that can be counted on to remain, thus the term “fixed income fund.” Many of these funds also have expense ratios below 1%.

Asset manager funds seek to match investment with the lifestyle or risk-tolerance of the investor. For example, the more risk-tolerant the investor, the longer the investor has until retirement so that fund would be composed more of equity (stocks) and less of bonds that have a slower rate of return. As the investor becomes less risk-tolerant, that fund will become more composed of bonds and less of equity. These types of funds are usually more actively managed than, say, the index funds and can have higher expense ratios. This is true with Fidelity’s Asset Manager 85% (85% equity) at 0.87% in 2006 and Asset Manager 20% (20% equity) at 0.58% in 2006, respectively. Still, these ratios are lower than other types of mutual funds.

Defining the Nikkei 225 Stock Index, its Weighting, Modifications and Changes of Components

In the TSE (Tokyo Stock Exchange), the “Nikkei 225” is a market index which is the most important in the Asian stocks. Since 1971, this stock index has been calculated every day by the “Nihon Keizai Shimbun (Nikkei)” newspaper. Moreover, and besides being reviewed once every year, the Nikkei’s unit is the Yen.

After its introduction to the OSE (Osaka Securities Exchange), CME (Chicago Mercantile Exchange, and the SGX (Singapore Exchange, the Nikkei 225 has become an international ingredient in the stock exchange. One of its other major indexes is the “Topix”.

The highest average ever recorded of the Nikkei 225 in the 20th century was in 1989 (reaching 38,957.44 before closing at 38,915.87). In the 21st century, it reached right above 18.300 points.

To weight stock by the Nikkei 225, they are given equal weighting based on 50 yen per share. Such weighting is also influenced by removals, splits and addition of constituents. Since it reflects the overall market, there is no final weighting for the Nikkei 225.Review results of the Nikkei 225 are published every September with changes applied early October. Such changes are usually announced in the Japanese Nikkei newspaper plus appearing on the NNI. Whenever a stock is being replaced, the divisor is, afterwards, changed to make sure that there is a smooth transition of the stock index.

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What are “Futures Contracts”?

Future contracts, also known as futures, are standardized legally binding agreements between a buyer and seller to receive (known as taking a “long” position) or deliver (known as taking a “short” position) a commodity or financial instrument sometime in the future, at a price that has been agreed upon today. These contracts are identified according to the previously agreed maturity date an example can be, an August 2008 Wheat futures contract or a June 2008 S&P 500 stock index futures contract.

Futures are often traded in open-outcry and auction-style trading pits, at designated stock exchanges. Electronic trading systems like, Chicago Mercantile Exchange’s (Globex System are also used, in certain exchanges. Chicago Mercantile Exchange was the first to introduce futures trading. The exchange clearinghouse guarantees the performance and counterparty risk elimination, by substituting itself as the buyer to the seller and as seller to the buyer. The futures trade customers are required to post margin deposits, not against the market value of the commodity in the futures contract but as a performance bond or “good-faith deposit”, with an exchange member firm which, in turn, must deposit margin with the exchange, which ensures the market participants’ ability to honor their financial commitments and cover any obligations which might arise out of their trading activities.

A “long” position is the one in which we buy, i.e. receive a futures contract, and selling, i.e., delivering a futures contract is referred to as taking a “short” position. A long futures position profits when the futures price goes up, and a short futures position profits when the futures price goes down. Maturing futures contracts expire on specific dates, usually during the contract month. The futures trader may also offset or exit his obligation at any time before the contract matures, by selling what was previously bought, or buying what was previously sold. This way, a trader is relieved of any obligation to make or take delivery of the underlying commodity or financial instrument.

Futures contracts have standardized terms and trade on centralized exchanges. Its participants in futures trading can be divided into two broad categories: Hedgers, who actually deal in the underlying commodity or financial instrument and seek to protect themselves against adverse price fluctuations, and Speculators, who seek to profit from price swings.

The vast majority of futures contracts, in fact, are closed out by offsetting market transactions prior to their maturity, rather than through the delivery process.

Futures trading also carry significant risk, since; the futures contracts generally entail high levels of leverage. Due to this they have been at the heart of many market blowups. The most famous of all may well be Long Term Capital Management (LTCM); despite of having the best financial brains on their payroll, LTCM managed to lose so much money so rapidly that the Federal Reserve Bank of the United States was forced to intervene and arrange a bailout to prevent a meltdown of the entire financial system. Enron, Nick Leeson and Barings Bank have also faced the brunt of “futures” mismanagement.

In the United States, futures transactions are regulated by the Commodity Futures Trading Commission.

Stcok Market Trading Tips - How Common Stocks Can Strengthen Your Investment

As might be expected, one of the most “common” types of stocks is also known as the “Common Stock”. Categorized by rate, income and growth, a common stock signifies ownership interest in a corporation. Therefore, a common stock might have an aggressive growth although it is categorized as low-income and vice versa.

Companies that are considered part and parcel of the high-growth stage, are the companies that issue commons stocks and at the same time, do not pay dividends. As an investor, you might have a growing stock (in terms of prices) even though you are getting no dividend income.

On the other hand, some companies might pay dividends of common stock to its shareholders. Such companies are usually old, established entities that have already gone through phases of major growth, hence, their capability to produce a steady flow of dividend income to the shareholders. Such issued stock, whether it is common or preferred, is known as the “blue chip stock”.

Thus, when you decide to invest in stocks, you must identify your investment objective at first, whether it is growth or income. This will help you to choose the right company in which you can invest your dollars.

Successful Forex System Day Trading: Risky Behavior

The term “day trading” refers to the practice of buying and selling stocks, and other immediately available trading assets, in the same day. Originally, day trading was only possible with brokerage houses that have been able to trade electronically with the NASDAQ since technology was introduced in 1971. However, day trading was brought to the masses with the exponentially exploding popularity of the Internet in the late 1990s when world financial markets enabled online trading.

Day-trading probably experienced its height of popularity during the tech-boom of the late 1990s when stock prices for tech stocks soared, often without any financial foundation. These unfounded high stock prices and bloated market capitalizations were realized after the enormous tech-bubble burst in 2000 and 2001.

For this reason, day-trading is a very risky practice that should be left to professionals. However, there is no licensing required so the practice still enjoys tremendous popularity. Day trading requires special research about the trends of the market during the immediate time period. These traders will search for news releases, hoping to find trends that will come to play that trading day. Often, day traders will join together in groups, sharing tips with each other. To have a chance of becoming a successful day trader, the investor must have the necessary time available to do proper research. Day trading is a full time job.

Another asset commonly focused on by day traders is the marginable stock. Marginable stock is simple stock approved for buying on margin. Buying on margin is purchasing on borrowed money from an established margin account at a brokerage. The SEC established new rules in marginable stock in 2001 by requiring that $25,000 must be maintained in an account solely for the purpose of margins trading. The SEC, in fact, advises strongly against day trading. A notice on their site reads, “Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status.” Obviously, this is a risky investment but day traders seem to thrive on the ultimate investment thrills.

What Is The Rule of 72 Investing and How to Double Your Investment

If you ever want to double your money according to a certain interest rate, then you should follow the “Rule of 72”. It is the rule at which money will double every 7.2 years at 10%.

Just divide your yearly interest into 72. Let us take an example: if your interest for an investment is a constant 6%, then your money will double in 12 years (72 divided by 6). You can use the same rule the other way round, for example, you can calculate your interest rate based on the knowledge of how many years are required to double your money. Thus, to double your money in 2 years, you will need 36% rate (72 divided by 2).

Of course, and like any rule of thumb, these are approximate results, for to calculate the exact result in the case of a 10% rate, we have to follow the following equation, where “P” is the given principal, “r” is the interest rate in percent per year, “n” is the number of years:

P * (1 + r/100) ^ n = 2P

Please notice that the symbol ‘^’ is used to denote exponentiation (2 ^ 3 = 8).

Since r = 10%, therefore:

P * (1 + 10/100) ^ n = 2P

We cancel the P’s to get: (1 + r/100) ^ n = 2

Continuing:

(1 + 10/100) ^ n = 2
1.1 ^ n = 2

Since in calculus the natural logarithm (”ln”) has the following property:

ln (a ^ b) = b * ln ( a )

 

Thus:

n * ln(1.1) = ln(2)
n * (0.09531) = 0.693147

Finally:

n = 7.2725527

Which means that at 10%, your money will double in nearly 7.3 years, and that is extremely close to the 72% rule.

Penny Stock Advisor - Advantages & Risks of Day Trading, Buying & Selling in Penny Stocks Investment

Penny stocks are the normal stocks which a share can be traded for for less than $5. In the US financial markets, moreover, “penny stocks” are traded outside NYSE, NASDAQ or AMEX and are sometimes looked down upon, hence, considered pejorative.

Nevertheless, SEC defines “penny stock” as the stock that has a low price and a speculative security that matches a small company whether it works through exchanges like NYSE or NASDAQ or the OTCBB and PINK SHEETS (two forms of “over the counter” listing services). “Penny Stocks” are also sometimes referred to as “nano caps”, “microcap stocks” and “small caps” although penny stocks are mostly determined by share price and not listing service or market capitalization.

On the other hand, in the UK, penny stocks- or shares- mean the shares in small cap bodies that have a market capitalization of less than £100 million or whose share price is £1 and whose bid spread more than 10%. The British penny stocks, moreover, are issued with the FSA (Financial Services Authority) warning. In France, the same term refers to risky stocks whose price is lower than 1 Euro.

Having market caps that are less than $500M, penny stocks (especially those trading on low volumes over the counter) are usually considered very speculative. They, moreover, are sometimes difficult to sell due to the fact that it is not always easy to find quotations for certain kinds of them. In other words, if you are thinking of investing in penny stocks, be prepared for the possibility of losing all your investment.

 

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Shareholder Equity Definition & Statement of Shareholder Equity

Shareholders’ equity is the value of owned stock within a company. It is equal to the firm’s total assets minus its total liabilities. The value of shareholders’ equity is also equal to share capital plus retained earnings less treasury shares. The value of shareholders’ equity is essential when determining the valuation of a publicly traded company.

Different types of shareholder equity include common stock, preferred stock, capital surplus, stock options, retained earnings, and treasury stock. Common stock is the shares normally traded on a public exchange. Preferred stock owners are guaranteed dividend payments before any are paid to common stock holders and also take precedence in case of liquidation. A capital surplus occurs when equity cannot be classified otherwise. It represents a stock issued at a premium over par value (think highly-anticipated IPOs). Stock options are rights by a company’s employees to engage in future transactions for company stock ata historical price. Retained earnings (or losses) are the portion of a firm’s net income (or loss) that is retained by the company rather than distributed to its owners. Finally, treasury stock is company stock that is repurchased by the firm. All of these are reflected within the total shareholder equity on the balance sheet.

The value of shareholders’ equity can fluctuate depending on the firm’s internal policies. Stock repurchases (treasury stock) put a limit on the number of shares available to the public and take some of the value from the shareholders’ hands and return it to the firm’s assets. This is an often-used tactic by firms who feel their stock is undervalued. Shareholder equity can also be radically affected by new accounting rules. This happened most recently in December, 2006 when pension funding and other post-retirement benefits had to be included on corporate balance sheets.