Free Stock Market Investing Tips

“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.

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.

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 20^th century was in 1989 (reaching 38,957.44 before closing at 38,915.87). In the 21^st 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.

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.