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  • Index Trading What is It and How It Works?

    Index Trading What is It and How It Works?

    Index Trading What is It and How It Works?
    In index trading, you are betting on the movement of the stock market as a whole.

    In the stock markets, you don’t need to trade individual stock only,  instead, you can choose index trading. Index trading is actually very popular in stock trading. 

    Let’s make clear what an index is. In short, it is a mix of tradable assets. The most popular indexes are the S&P 500, NASDAQ, Dow Jones Industrial Average (DJIA), etc. They are so-called benchmark indices. In the stock market, these indexes include the shares of individual companies. 

    Besides the opportunity to use the index as an indicator of the market condition, you can use it for real trading. But there is some characteristic of the index that you have to be aware of. An index doesn’t have real value, it is just a measure of the value of a part of the stock market. 

    How is possible index trading?

    We know that trading, in most people’s minds means buying and selling a single stock, currency pair, or some other asset. Well, trading isn’t just buying or selling securities, you can trade indexes also. Yes, an index is a financial instrument that consists of numerous assets with their average value.  As for the index meaning, they are a financial instrument that combines individual assets and represents their average value. 

    Index trading means speculating on price changes in a stock index benchmark, for example, the S&P 500, FTSE 100, the Dow Jones, etc. 

    In index trading, perhaps the most beneficial part is that you don’t need a huge capital. You don’t need to buy the whole index, meaning you don’t need to pay it at full price, you can pay, for example, 20% of its value. How is this possible? If you want to buy stocks you have to pay 100% of the value. Well, index trading is a derivative vehicle. The main difference between stocks and index trading is that you can hold stocks for years but in index trading, you don’t have such a possibility. Actually, you have but only if you enter the same position every month, for example. This means you can hold indexes for a specified period. 

    The other characteristic is that you are actually trading indexes options. Further, index options are settled in cash. It is common for index traders to use index options to hedge stock portfolios. Index options are also excellent when it comes to speculating the market. Index trading is basically the traders’ attempt to profit from the price changes of indices.

    The examples of index trading

    There are many indexes available that you can trade. Index traders can either focus on a single index or trade various indexes as a component of a more extensive strategy.
    For example, stock indexes are the most attractive because they mix some of the most important companies. If the companies are strong with permanent growth, the index value will increase. 

    The stock indexes are the most popular types of index trading. A stock index is a collection of stocks that presents, let’s say, a summary of how a particular section of the stock market is doing. For example, a biotech stock index will track biotech stocks.
    Index trading occurs when you don’t want to buy individual stocks Because you would like to have exposure to a whole section of the market. 

    There are numerous indexes, for example, FTSE100 (London), S&P/ASX 200 (Australia),  AEX index (Amsterdam), CAC 40 (France), DAX (Germany), besides already mentioned above.

    Why index trading?

    Index trading is a comparatively protected form of trading with combined risk management. The risks of index trading are lower than the risks of trading individual stocks.

    An index isn’t a manipulative financial instrument or it is at least. The price of an index will change along with the price changes of the constituent stock that make up a particular index.

    The other reason is that you have an embedded money management system. Index trading simply means you don’t “put all your eggs into one basket.”  Also, the risk is lower in this type of trading. It’s true that indexes can be volatile due to political events, economic predictions, or similar. But when an index is getting or losing 15% in value, the headlines will be full of that, trust us.

    By index trading, you’ll be protected against the risk of bankruptcy. An index can not go insolvent. If an index’s part goes bankrupt, it will be replaced by the next company on the list. That is great protection of your capital because if you own a stock of the same company you could lose everything you invested in it. Also, you’ll benefit from the global financial condition. By index trading, you benefit from the index’s possibility of permanent rise.

    For example, you invest $10.000 for a period of 2 months. At the end of that time, your gains will be 10% of the initial investment, or $1.000. Similarly, index trading permits you to profit from any kind of stock market changes. It doesn’t matter if the market grows or drops in value during these 2 months. Basically, you can profit in any market conditions.

    How to trade indexes?

    Position trading and trading with the trends are very effective strategies in index trading. A powerful approach could be to open the position and hold as long as possible. That is, in short, position trading. Major indexes have almost the same problems, reactions, so this could be a good approach.

    Also, one of the strategies in this type of trading could be trading with the trends. It is suggested to use long-term charts with other technical tools. For example, pattern analysis or indicators are useful to develop your position trading strategy.

    This kind of trading isn’t without risks. It is with the lower risks but still, some quantity of volatility is present. This is particularly true if you trade the stock indexes. So, you’ll need some risk management strategy. You can use some of the very powerful tools like stop-loss orders, trailing stop orders, or limit orders. Basically, in index trading, if you want to lock in profit, you’ll need everything possible that may help you to manage the trade according to your risk tolerance.

    Bottom line

    Traders know the names of the main global stock indexes. These indexes can also be traded through stock index CFDs. In fact, you can also buy and sell them in an alike way to how you trade stocks. Everything is almost the same, except the risk is much lower.

  • Why Read a Balance Sheet Before Investing

    Why Read a Balance Sheet Before Investing

    Read a Balance Sheet Before Investing
    The balance sheet, used with income and cash flow statements, is an important tool for every investor and has to be read before investing.

    By Guy Avtalyon

    Every single investor must know how to read a balance sheet before investing in some company. It is one of the three most important reports that can tell you some valuable information about a company’s condition. The other two sources of such important information are the income statements and cash flow. If you know how to read a balance sheet, income statements, and cash flow reports, you’ll be able to make a proper investment decision.

    While you read a balance sheet you’ll find out almost everything about the company’s financial status for a particular period. The balance sheet reveals what assets the company owns, what are its liabilities, how much in debts. Also, you’ll figure out how big is the owners’ capital, how many shareholders there are, etc.

    The basic balance sheet calculation is:

    Total Liabilities + Shareholder Equity = Total Assets 

    When you read a balance sheet of the company, you’ll notice that it consists of two parts as it is shown in the equitation above. This means the total assets of the company have to be equal to the sum of total liabilities and shareholder equity. In other words, the assets are balanced to the obligations at a particular point in time. 

    What info you can read in a balance sheet?

    For example, information about the company’s financial condition at the end of the year. You have to evaluate a company and read a balance sheet before investing in a company. The balance sheet shows which are the company’s sources, debts, owners’ interests, etc. By examining the balance sheet and with the help of a few calculations, you can improve your odds of getting in a good investment.

    For example, in the assets section, you’ll find the value of stocks the company owns, what are the company’s investments. Also does the company own real estate, how advanced is its equipment. You’ll find much other important info. But always keep in mind that you have to compare the amount of the cash and equivalents balance of the company. It is better if the company has a large amount of cash. That will provide a room to grow the business, and also, to pay dividends. 

    Read the balance sheet liabilities to estimate how much debt the company has. The lower is better, of course. Every investor should know if the company has some loans or deferred wages to its employees. This info might cause the investor to get into investment or stay away.

    Also, you’ll figure out the amount of shareholders’ equity, the higher is better. But also, in this section, you can find how much money the company got from investors from the preferred and common stocks. The balance sheet shows the earnings the company has but has not been paid as dividends from the start-day to the particular period you are examining.

    How to calculate the company’s debt-to-equity ratio?

    To calculate the company’s debt-to-equity ratio you’ll have to divide the company’s total liabilities by its total shareholders’ equity.

    Debt-to-equity ratio = total liabilities/total shareholders’ equity

    If this ratio is below 1 that would mean the company has more equity than debts. So, you can easily conclude that investing in such a company carries less risk. Hence, if the debt-to-equity ratio is above 1 you can be sure the company has less equity than debts. That is in connection to financial problems that could push the company to a business crisis.

    For instance, the company has $200.000 in total liabilities and $400.000 in shareholders’ equity. When we divide $200.000 by $400.000 to count a debt-to-equity ratio we will find it is  0.50. It isn’t the best but still quite acceptable debt level.

    How to check if the company is able to meet short-term obligations

    To calculate this current quick ratio you’ll need to divide its current assets by its current liabilities. Experts suggest, and we agree with them, the better is if this ratio is above 1.5. 

    For example, the company will be able to pay short-term debts if it has $50.000 in assets and $25.000 in liabilities.

    $50.000/$25.000=2

    This is a great ratio. But if the company with $50.000 in current assets has $35.000 in current liabilities, the outlook would be quite different.

    $50.000/$25.000=1,42

    This isn’t a good ratio because it shows the company doesn’t have enough short-term assets to pay its bills.

    Also, if you read a balance sheet, you must read fine-prints. You didn’t pay attention? Well, you should. It can reveal some financial obligations that are not visible at first glance and that are not displayed in a balance sheet. 

    Read a balance sheet before investing

    When you read a balance sheet, you’ll notice that the “current assets” are posted first. Because these are liquid assets, they are placed by order of liquidity. The criteria behind is which one can be turned into cash soon. For instance over the current year. The liquid assets are cash and its equivalents, inventory, accounts receivables, and 

    The next part of a balance sheet is “total assets.” These are holdings that can’t be quickly turned into cash in the current year. This includes land, equipment, marketable securities, prepaid expenses, intellectual capital, etc.

    Likewise, current liabilities are shown first in the section of asset listing. For example, all debts in order of date dues, financial obligations expected within the current year. That could be outstanding interests, rent, salaries, and dividends. This list is followed by a list of total liabilities that incorporates pensions. Also, interest on bonds, the principal on bonds, etc.

    The following is a total equity list also known as shareholder equity or net assets. This list incorporates saved or retained earnings, common and preferred stock, and extra paid-in funds.

    What are the current assets?

    Current assets have a duration of less than one year. In other words, they are accessible to turn into cash. Cash and cash equivalents such as checks and non-restricted bank accounts are the most important among current assets. Cash equivalents represent safe assets and can be easily turned into cash. Accounts receivables represent the short-term obligations that customers owe to the company. For example, when a company sells its product on credit, it will be in the list of current assets until the customers pay them off.

    The inventory is also the current asset owned by the company. It can be everything that the company produces, raw materials, or other goods necessary in production.

    What are non-current assets?

    They present assets that couldn’t turn into cash within the one-year time frame. They could be tangible assets, for example, machines, computers, factories, land, etc. But, non-current assets can be intangible assets also. For example,  licenses, patents, brand name, or copyright. 

    Why reading a balance sheet is important

    The balance sheet is a valuable piece of information for investors but has some limitations. The first comes from its inability to give full insight into the company’s business history since it shows only a part of it. You’ll need to know more to have a full understanding of the company. For example, income and cash flow statements.

    Anyway, read a balance sheet before investing in some company because it can give you a more clear picture of the company’s operations. If you read a balance sheet, you’ll understand what the company owes and owns. Its financial status will be clear to you. It is very important for investors to read a balance sheet, how to use it, how to analyze it. Reading a balance sheet will support your decision to invest or not in some companies.

  • Online Lenders Frauds – How To Recognize Them

    Online Lenders Frauds – How To Recognize Them

    Online Lenders Frauds - How To Recognize Them
    One-third of American adults have been faced an attempted fraud in recent years

    By Guy Avtalyon


    Any business that involves considerable amounts of money     quickly exchanging hands is a fertile ground for scams and frauds and the same comes to online lenders frauds. Scammers always look for a chance to quickly make a buck with the least possible effort. And the lending industry is rife with scammers who fraudulently take out the loans. But such does not present an overt danger for people looking for loans. Big banks and financial institutions employ artificial intelligence and machine learning to fight against these types of frauds. But, a common consumer of the lending industry’s products has to be aware of a potential scam coming from the other side, fraudulent lenders.

    How widespread are scams?

    Seemingly with every day, a new type of financial product comes to market. And each of them presents a scammer with an opportunity for at least a couple of different scams. And you can be certain that there are some very creative fraudsters out there. In the lending industry, just due to the wealth of different products there is a wealth of different scams.

    Many studies and reports indicate that about one-third of American adults have faced an attempted fraud in recent years. While scammers do not practice ageism, millennials do seem to be the hardest hit of all age groups. The FTC’s study conducted in 2017 based on the filed consumer complaints show that almost 40% of millennials have suffered financial losses due to fraud. While these findings are based only on people who filed a fraud complaint, it is quite higher than 18% among people of 70 or more years of age. While this study doesn’t give any definitive conclusions, it does paint a picture of people in their 20’s not being fully cognizant of the potential dangers on the financial markets.

    How to avoid online lenders frauds

    Fraudsters always prey on vulnerable people, and in the loans industry, it is people who desperately need money. The best way to protect yourself from a scam is to arm yourself with knowledge. Especially on how scammers will try to defraud you. While searching for an online lender that offers a product that suits your needs, you have rather slim chances to stumble upon a scammer. But, as in any other area of life knowledge is power and there is no safety in ignorance. Scammers will come hunting actively for their victims. And the only sure way to protect yourself is by knowing how to recognize a scam.

    How to recognize an online lenders scam

    In the majority of scams involving loans consumers are not targets for direct financial gains, but online lenders and similar financial institutions. Consumers are more often just a tool in the scammers’ arsenal. First and foremost as a source of a legitimate identity for fraudulently obtaining a loan. And that is the first precaution a person must have on their mind, how to protect their own personal information from identity theft. Scammers often try to obtain genuine personal information, personal documents, addresses, and social security numbers; and then use them for applying for personal loans from online lenders. 

    By stealing the identity of a person they can fraudulently obtain a loan, which then often a victim of the identity theft will have to repay. Such identity thefts are often done by simple phishing methods. Usually by sending forged emails with requests to resubmit your documents to your bank or such. 

    Who has the right to ask you?

    While banks and many other institutions have a legitimate right to ask you to provide such information, they will not ask you by email to resubmit them. Most certainly not because “the fire in the office building in Delaware has destroyed your personal file” as claimed by an email in my Spam folder I got from [email protected]. And that’s another way how they mislead victims into giving them sensitive personal information. They send mass emails from slightly misspelled domains. And they don’t know whether you have an account at some bank or not. They will just send you the email because they have found your address among many they have purchased someplace. And you need to be very careful when reading these kinds of emails. 

    When I got the said email, I spent hours wondering why I got it when I’m not a Bank of America customer, before I’ve noticed that I’ve got an email from the Bank af Omerica. A friend of mine got an email from the Bank of Ameirca around the same time.

    This is how scammers will try to dupe an Average Joe to provide them the ability to scam online lenders. And they do have tools in their arsenal they will use to try to defraud you personally by offering you fake loans. And here is a list of common red flags that some loan offers might be a scam.

    Unsolicited loan offer

    Whether by phone, email, or social networks a potential scammer might try to contact you and present you with a loan offer. This could be a legitimate offer. But, the legitimate offer will contain a way to contact back the company which is making the offer, a phone number, or website address. A scammer will continue to communicate with you in the same manner. Legitimate offers are always automated and replying to them will have no results. While scammers will be actively waiting for your reply. Just ask yourself, have you ever met a person who called some customer service and got a living person in less than 15-20 minutes? Scammers reply after 15-20 seconds. With such quick and polite responsiveness they aim to build up your confidence in them and provide them with personal information or money.

    No interest in your payments history/credit score

    While many legitimate online lenders offer bad credit loans, no reputable lender will neglect to do a proper check of your ability to pay back the loan. The payment history or credit score is just two of the factors they might take into account. The difference is that they will not take into account just them. Legitimate online lenders might ask you to provide the employment/income information, education, and such which they use to calculate the risk of offering you a loan. Scammers will never, as they don’t need it.

    Online lenders are not registered in your state

    Per the Federal Trade Commission’s regulations loan brokers and lenders must be registered in states in which they offer services to residents. And you must check the lender’s website for the list of the eligible states. You can also find the lists of registered lenders on the web pages of your state’s Department of Financial Regulations or Banking. And this is the easiest way to recognize fraud. Scammers cannot be found in the official registration databases.

    Their website is not secure

    Online lenders do care about the potential frauds and scammers who impersonate them. The simplest way they protect their own cyberspace identity is by employing SSL certificates for their domains. While these are first and foremost used for securing safe communication with their websites, they incidentally provide proof of authenticity of their websites. Such SSL certificate protected internet domains are easy to recognize, they start with https:// and on many internet browsers there will be a padlock before the address. When you see both of these two you can be certain that it is a web page of a legitimate company. The absence is not proof that it is a scammer, but the presence is proof it is not a scammer.

    No physical address

    Even purely online lenders do have physical addresses. They might conduct their operations only in cyberspace, but their employees still need to sit in some offices. Scammers don’t need them. Sometimes they do provide them, but a quick search of such will lead you to some empty land or a shabby looking shed in the middle of nowhere. Sometimes they will advertise with a P.O. box, which shouldn’t fill you with confidence about their legitimacy.

    The pressure to act quickly

    Scammers will always push you to accept their offer today, this very moment. They are in the hurry to close the deal before you realize what is going on. Legitimate online lenders have time to wait. Even if they impose some time limit for accepting their offer it could be a few weeks, not days or hours. Only scammers will try to push you into quickly accepting their offer.

    Payments before approval

    This is one of the tricks a scammer might try to employ which is similar to the Nigerian Prince fraud. Scammers, in this situation, are only interested in collecting such “fees”. While it might be some small amounts of $15-20, no legitimate lender will ask you for something like this. Online lenders or brick and mortar banks, it doesn’t matter, all of them, if they are legitimate companies, will deduct the fees from your loaned amount or include them in monthly payments.

    How to protect yourself from online lenders scam

    Getting a loan from an online lender is like crossing a street at a crossing. It is generally safe but has certain dangers if you are not looking both ways. There are just three things you should do to fully protect yourself from fraud. And two of them are things you should be doing already anyway, as a way to safeguard yourself from any type of fraud or dishonest business.
    Never resubmit sensitive personal information, unless you can independently establish that it is a legitimate request for confirming your identity.
    You should never pay fees in advance.
    Finally, never accept loan offers for which you have less than a week to decide.

  • The Settlement Period For Stocks – What is T+1, T+2, and T+3 Timeline?

    The Settlement Period For Stocks – What is T+1, T+2, and T+3 Timeline?

    The Settlement Period For Stocks - What is T+1, T+2, and T+3 Timeline?
    When trading stocks, the settlement refers to the approved, an official shift from the buyers’ account to the sellers’ accounts. This never happens quickly, it will take a few days.

    By Guy Avtalyon

    The settlement period for stocks means that the trade became official at the end of one, two, or three days. For example, you aren’t an official owner of the stock on the day you bought it, you have to wait for 3 business days while your purchase becomes official, meaning to settle. The settlement period for the stocks refers to a period after the trade date. Terms T+1, T+2, T+3, are broadly used to indicate the settlement period is one, two, or three days after the trade of any type of security is executed.

    Today, when almost all trades are done electronically, these terms are used to show that the stock you bought doesn’t yours officially until the third-day from the purchasing day. So, technology does not influence this, it is an exchange rule. To be honest, this is an important rule because it could happen that you bought or sold by mistake or you made some errors, so you’ll need some time to fix that. 

    Without a doubt, some people buy stocks accidentally, random. Later they would like to cancel their purchases when they notice a mistake or change their mind. In case the trade is a real mistake, both participants are agreed to correct the problem. And they would like to do that at the less cost possible.

    Also, there is another group of people in the stock market that don’t want to pay stocks with some weird idea that their buying will be characterized as a mistake if they prolong the time to settle them. In short, they are expecting to obtain these stocks for free. Hence, the settlement period for the stocks is an important period for the sellers or exchanges to clear up such a trade.

    The basics of the trade

    There are three phases of any trade. First is the execution which is an agreement between buyers and sellers to buy or sell a stock for a specified price. When the buyers and sellers are agreed, the exchange registers the trade on its ticker tape. 

    The next step or phase is clearing. It is an accounting process. When you bought your stock, meaning the trade is executed, the exchange should send the detailed report to the National Securities Clearing Corporation to verify the accuracy.

    The last step is the settlement. On the settlement date, the buyers execute payment for the stock and the sellers deliver it to the buyer. Typically, the settlement period for the stocks happens three days after execution.

    Purpose of settlement period for the stocks

    The settlement period for the stocks provides both sides of the trade to fulfill their side of the settlement. For example, the buyer will get more time for payment to do, also the seller might need time to fix something, like to deliver the stock certificate. Even today when the whole trading process is done digitally, the trade is official only after the number of days assigned by trade settlement rules. When the last day of the settlement period comes, the buyer becomes the true owner of the stock and registered as that.

    What are T+1, T+2, and T+3?

    Every time you buy or sell a stock, or some other asset, you’ll have two dates to keep in mind: the date of the transaction and the settlement date. This T refers to the date of the transaction. The figures T+1, T+2, and T+3 point the settlement dates of stock transactions that happen on a day of the transaction plus one, two, or three days

    The day of the transaction or the transaction date is the day when you traded a particular stock, no matter if you bought or sold it. For example, you sold your stock on May, 29. That date is the transaction date. and nothing will change it.

    The settlement period for the stocks is important for investors interested in companies that are paying dividends. The settlement date can decide which party will receive the dividends. If you are a buyer of the stock, keep in mind to settle the trade before the date of the dividend payment to get the right to receive the dividend.

    The end in the settlement period for the stocks, the last day, is the day when the new owner is assigned and the ownership is transferred. The transaction date and settlement date will not occur on the same day. It depends on the type of security.

    Consequences during the settlement period for stocks

    You have to understand what the two-day settlement period for stocks means. Let’s say you are selling the stock and expect money immediately. That is not going to happen. Yes, you’ll see that money in your brokerage account but it will not be available until the trade settles. Only after the T+3 period, you can withdraw your money.

    What could happen if you are the buyer and the stock price dropped during the settlement period? Or you don’t pay in the three days? That will not get you out of the trade and the consequences are serious. 

    If you do not pay for the stock during the three days, the broker will sell it at any price. So you’ll have to pay for losses and penalties.

    Also, selling stock through the 3 days to profit and not paying for the stock is outlawed. It’s a so-called freeriding and refers to cash accounts. It’s better to use a margin account if you trade frequently.

    Stockholder of record and dividends

    When you buy stocks, you are not the stockholder of record until settlement completes. The investor who purchases stock, for example, two days before a dividend record date will not get the dividend. So you have to buy a stock at least three business days before the record date. In investors’ lingo, such a stock goes “ex-dividend”. 

    To decide which investor is qualified to get a dividend, the record date is part of a dividend announcement. The amount of the dividend and the payment date are included also. You must own the stock on the record date. Meaning the settlement date must be before or on the record date. The dividend payment date will occur a few days (sometimes a few weeks) after the previous date, the record date.

    For example, a company declared a $0.50 dividend payable to stockholders of record as of Jun 4, 2020. To have the right to the dividend, you should buy stock on or before Jun 1, 2020. That is three business days earlier. The following day, Jun 2, is recognized as the ex-dividend date. It will be the first day when the stock will trade without that dividend attributed.

    Why the settlement period for stocks is important?

    There are several reasons. This rule is important to limit the probability of errors, even today in this digital world. Also, it keeps the markets in order. For example, if the market is in a downturn too long settlement times might cause your failure to pay for your trade. When we have a limited time for the settlement period for stocks, the risk of financial difficulties and losing money is reduced.

  • Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing - Why Should We Do That?
    Even if you’re a less aggressive investor, you should rebalance your portfolio at least once a year.

    By Guy Avtalyon

    You invested your hard-earned money for the long term, you added your lovely stocks, bonds, whatever, and thought everything is done and suddenly somebody told you’ll need investment portfolio rebalancing. What? Should you find an accountant? What you have to do? How to perform that investment portfolio rebalancing? What does it mean, at all?

    That is the main key, the fundamentals of investing. You have to do two main things: building it and investment portfolio rebalancing. 

    The investment portfolio is a collection of your investments. You hold stocks, bonds, mutual funds, commodities. The allocation of the assets you own has to be done based on your risk tolerance and your financial goals. But nothing is finished with the moment you bought your lovely assets. It is just a beginning. After a few years or sooner you’ll notice that different assets generate different returns and losses as well. Some stocks may have nice and high returns, so they become a large part of your portfolio. Much bigger than you wanted. 

    Assume you built up a 60/40 portfolio where 60% were in stocks. But after some time, you found that the value of those stocks represents over 80% of your portfolio’s overall value. What you have to do? Honestly, it is the right time for investment portfolio rebalancing.

    Investment portfolio rebalancing means that you have to adjust your investments, you have to change the asset allocation of the portfolio to obtain your desired portfolio outlook.

    Why is investment portfolio rebalancing important?

    It will help you to keep your desired target asset allocation. In other words, to keep the percentage of assets you want to hold adjusted to your risk tolerance and to earn the returns you need to reach your investment goals. If you hold more in stocks, you’re taking on more risks since your portfolio will be more volatile. That might have a bad influence on your portfolio because the value will change with changes in the market. 

    But stocks look like a better investment than bonds due to their ability to outperform bonds as a long-term investment. That is the reason to hold more stocks than bonds in your portfolio but as a reasonable portion to avoid additional risk.

    In periods when the stock market performs well, the portfolio’s money value that’s come from stocks will grow along with stock price rise. We already mentioned this possible scenario when your 60% of holdings in stocks rise to over 80%. This means your portfolio can become riskier. So, you’ll need investment portfolio rebalancing. How to do that? Simply sell stocks until you manage them to represent 60% of your portfolio. For the money received from that selling, you can buy some less volatile assets such as bonds, for example. 

    The drawbacks of investment portfolio rebalancing

    However, there are some problems if you rebalance your portfolio during the time when the markets are doing well. Even more, it can be hard to sell stocks that are doing well, they are your winners and their prices might go even higher. What if you miss huge returns?

    But consider this. What if they drop and you lose an important amount of money? Are you okay with that? 

    Remember, every time you sell any asset that is an excellent player, you are actually locking in gains. That’s real money and you can use it to obtain some stocks that are not such a good player but you’ll buy them at a bargain. Do you understand what you actually did? You sold high and bought low. You’re every single investor’s dream. You made it happen! 

    The real-life example 

    Our example of rising to 80% is rather drastically than a realistic one. Investment portfolio rebalancing ordinarily means selling 5% to 10% of your portfolio. We are pretty sure you are able to choose 5% of your winners and to buy some current losers but in the long run also winners. Investors usually buy bonds instead of stocks when rebalancing their portfolios. 

    Investment portfolio rebalancing is important because it provides you balanced asset allocation and, what is also important, in this way you’ll avoid additional volatility of your portfolio. If you’re the risk-averse type of investor this added risk might produce bad investment decisions. For example, you might sell stocks at a loss.

    Investment portfolio rebalancing is the best way to follow your financial plan and obtain the best returns adjusted to your risk tolerance. Anyway, you don’t need to be overweight in stocks because the markets are cyclical, and it could be a matter of time when the next reverse will come.

    Why rebalancing your investment portfolio?

    Let us ask you. Are you having a car? Do you change the oil or broken parts from time to time? The same is with your investment portfolio even if it is the best created. As we said, the markets are cyclical and some parts of your portfolio might not play well in every circumstance. Why should you want to hold a stock that isn’t able to meet your investing goals or you bought it by mistake?
    It isn’t hard to rebalance your portfolio, at least once per year. In short, that is investment portfolio rebalancing. If you think your investment portfolio is well-diversified among asset classes, just think again. Maybe it is diversified among asset classes but is it diversified within each asset class?

    For example, why would you like to hold only Swiss biotech stocks? There is no reason. Moreover, it can be dangerous. It can hurt your investment portfolio a lot. It is better and safer if you hold a mix of different stocks, domestic and foreign from different sectors.

    What if some of the investments grow in value while others decline? 

    In the short term, it is good. In the long run, it can be a disaster. That is the reason to rebalance your portfolio promptly and properly. Otherwise, your portfolio will be hurt as well as your overall returns.

    For example, you own 50% in stocks and 50% in bonds. Sometime later, your stocks performed unsuccessfully and their value is lower now, but bonds performed outstandingly. So, what do we have here? Bad performers – stocks at lower value and bonds as excellent players at a higher value. Would you think to change the proportion in your portfolio? Of course, you would. So, what do you need to achieve that? 

    Let’s examine a different mix. For example, you may rebalance your portfolio and now it will be 40% in stocks and 60% in bonds. But what is the consequence if you don’t rebalance your portfolio and stay with your initial mix? You will not have enough capital invested in stocks to profit when stocks come growing back. Your returns will be below expected.

    What if stocks were growing in value while bonds did unsuccessfully? Or, what if your portfolio turned into a collection of 60% stocks and 40% bonds, and quickly the stock market dropped? You’ll have greater losses, much bigger than it is possible with rebalanced the 50/50 mix. In short, you had more money in stocks. Your long-term gains are in danger.

    To make a long story short, when rebalancing, you have to cut the over-performing stocks and buy more underperforming assets. The point is to sell overvalued stocks and buy less expensive but with good prospects. Do you understand this? We came up again to the winning recipe: buy low, sell high.

    How often should you do that?

    The answer is short, once or twice per 12 months mostly. Markets are cyclical and unpredictable. However, if you rebalance at an uncertain period of the year you’ll put your money at risk. Never avoid rebalancing your portfolio after significant market moves. Follow a 5-percent rule. Your investments should be within 5% of where they were when you build your portfolio. For example, if your initial portfolio was with 60% in stocks (you were smart to buy good players) and after several months they changed to 65% or over, it’s time to rebalance. In case you weren’t so smart and you bought poor performers and they changed to 55% or below, it is also time to rebalance. You have to prevent your portfolio from fluctuating more than 5%.
    That’s the whole wisdom.

  • Trading Bonds – How to Start Making Money

    Trading Bonds – How to Start Making Money

    Trading Bonds - How to Start Making Money
    A bond is a loan that the bondholder gives to the bond issuer. Governments, corporations, and municipalities issue bonds when they need cash.

    Trading bonds may seem unusual and difficult. But it isn’t. Actually, the whole process can be quite simple. Anyone interested in trading bonds shouldn’t have a problem getting started. You can find plenty of opportunities in trading bonds and the bond markets. But some things are special for trading bonds and bond markets. If you are not familiar with them, trading bonds might be very confusing. Honestly, it is important to trade bonds so let’s see how to do that.

    First of all, bond markets are much bigger than, for example, stock markets. One of the most important differences between bonds and stocks is that there is no exchange for trading bonds; it is done on the “over-the-counter” market but some kinds of bonds can be traded on exchanges. For example, convertible bonds are possible to trade on exchanges. Actually, trading bonds can happen anywhere where the buyers and sellers can make a deal.

    Trading Bonds: The participants in trading 

    There are two types of participants in trading bonds: bond dealers and bond traders.

    Traders can trade bonds among themselves, but trading is customarily done through bond dealers. Well, to be more precise, these places where you can trade bonds are dealers’ bond trading desks. Bond dealers are kind of intersection points. They have all types of connections available. Phones, computers are on their desks. But also, they are connected with some traders whose job is to gather all information about bonds, they are quoting prices for buying or selling bonds. To make the story short, these traders are responsible for creating the market for bonds.   

    Dealers and traders

    Dealers’ job is to provide liquidity for bond traders and make it easier to buy and sell bonds with a limited concession on the price. But they have some other possibilities to take part in trading bonds. Dealers can also trade bonds between each other. Sometimes they do so through bond brokers, meaning anonymously. Dealers make money from the spread between the bonds buying and selling price. This also the way how they can lose money.

    Bond trading can be very lucrative. That’s the reason why pension and mutual funds, financial organizations, and also governments are involved in trading bonds. When you have such powerful players in the market, it isn’t surprising that $1 million worth of bonds is small initial capital. The bond markets don’t have any size limit, trades may worth over $1 billion but also $100 million. That isn’t the rule for the institutional markets, there are no size limits for individual traders, also. Their trades are ordinarily below $1 million.

    Trading bonds strategies

    Trading bonds can be passive or active. Both approaches are legit and can produce you the gains.

    You can make money from bonds in two ways. You can invest in them and hold and receive interest payments after the maturity date. It is usually twice per year. That is a passive way of trading bonds.

    The other way to make money from bonds is by trading them. You can sell your bonds at a higher price than you bought them. For instance, you bought bonds at a nominal value of $20.000. After some time, their market value increases by 20% and you can sell them at $24.000. You’ll earn $4.000.

    Bond laddering is also one of the more active strategies and very convenient to start trading if you hold bonds with different maturity dates. You can use the profit from bonds with shorter maturity dates to buy bonds with longer maturity dates. This is named “income stream” and you don’t need a lot of money to use this strategy. It is pretty much economical and cheap. 

    Bond swapping is another active approach to trading bonds and very attractive for skilled traders. Where is the catch? Let’s say one of your bonds isn’t a good player and it is more likely a losing one, it’s not going to recover. Traders usually are selling these bonds to get a tax write-off for the loss. The money gained from the selling bond they reinvest in high-yielding bonds. That helps them to build a firm portfolio.

    The differences between the trading bonds and investing

    In trading bonds you are actually speculating on the price changes during a short period in time. You are buying bonds only when you believe they will increase in price. And vice versa, you are selling them only when you believe their prices will drop. So, your profit is coming from the bonds’ price movements. Trading bonds is also when you use the advantage of leverage. To be honest, that might magnify your profits but also, you may be faced with great losses. 

    Investing in bonds means that you are holding bonds for a long time. You decided to hold them whatever is happening and you are taking the risk to lose your money if bonds prices decrease. When investing in bonds the profit will come from interest payments. Further, on the maturity date, you will put down the total value of your position. 

    Should you trade stocks or bonds?

    Bonds and stocks are the most traded assets but in different separated markets. When trading stocks, you are actually buying ownership in some companies. When the company or companies are doing well, the value of your shares will grow.
    When trade bonds, you are actually lending money to the issuer of the bonds for a fixed period of time. For that you’ll charge interest. Bonds are often seen as safer than stocks. People use them as saving for retirement, for example.
    So, trading bonds is an investment strategy. You can use them as we mentioned above, but also, bonds are very useful if you want to diversify your portfolio.

    What to look out 

    Buying bonds can be a difficult path when you aren’t purchasing them right from the underwriter or you are buying used bonds. What to look out, how to know you’re making a good deal?
    Look out for the credit rating. It is important to know if the company can pay its bond. Standard and Poor’s and Fitch use a rating system that ranks bonds, the best quality is marked as AAA and the worst as D. Between these two marks you’ll find, in range of quality from good to less good, AA, A, BBB, BB, B, CCC, CC, C bonds.

    Further, you’ll need to know the bond duration. That is an indicator of how unstable the bond can be in terms of changes in interest rates. If the duration is longer, that means a higher fluctuation when interest rates shift. The problem is in the nature of the bonds. If interest rates increase, the price of a bond decreases. Also, be careful when buying bonds through the brokerages. They will charge you the fees. Check it before any bond-buying. Use publicly available data on the pricing of bonds, or bonds with equal maturities, interest rates, and credit ratings.

    Why trade bonds?

    Trading bonds can boost the yield on your portfolio. The yield represents the total return you’ll receive if you keep a bond to its maturity, but you’ll want to maximize it. The point is to sell bonds with lower yield and buying bonds with better. You are selling bonds with low yield and buying another to earn from the spread. For example, you hold a bond that yields 4,75% and you noticed a similar bond but it yields 5,25%. That is 0,50% more. So, you can sell your bond and buy this better yielding one and you’ll have a spread gain – yield pickup of 0.50%.

    Credit-upgrade trade is used when a trader assumes that a particular debt problem will be upgraded soon. When an upgrade happens on a bond issuer, the price of the bond will rise and the yield will decline. A credit-upgrade means that the company is marked as less risky. Traders want to catch this expected price increase and buy the bond before the credit upgrade. For this type of trade you’ll need some skills for credit analysis. 

    You might like to take credit-defense trade.

    It is very popular. When uncertainty in the economy and the markets increase, some sectors are weaker to fulfill their debt obligations. If you hold this kind of bond, just take a more defensive position. Pull your money out of that sector, don’t hesitate to get out.

    Also, you can trade your bonds to adjust a yield curve and change the duration of the bond portfolio you are holding. In this way, you’ll get an increase or decrease in sensitivity to interest rates, whatever you prefer. Keep in mind that the price of the bond is inversely correlated to the interest rate.

    The reason for trade bonds might be the sector-rotation. For example, you want to reallocate your capital to bonds from the sector that is supposed to outperform the industry or some other sector. If you are trading bonds in the same sector, one strategy could be to switch bonds form cyclical to the non-cyclical sector or vice versa.

    Bottom line

    To trade bonds, you’ll need an account. Choose your bond, when trading bonds, you can buy or sell assets from all over the world.
    Now, decide when you would like to open the position. Timing the opening and closing of trades plays the greatest role in how you are successful in the markets.
    Open your position by using some online trading platform. Determine how much you want to put on the position and do you want to go short or long. Add stops and limits orders.
    If your trade isn’t closed automatically by stops or limits, close it yourself to take profits or cut the losses. To calculate your profit or loss, subtract the opening price of your position from the closing price. 

    Simple as that.

  • Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks - Where To Invest During A Recession
    When we ask ourselves what is a better choice during a recession, cyclical or non-cyclical stocks we have to know, as first, the differences between them.

    A recession is not the time to make an experiment with risks on your investments, so why dilemma cyclical or non-cyclical stocks? Well, it isn’t a dilemma for most people. The crucial aspect of an investment strategy during the recession should be to play it safe. This means no one should take the big risks at uncertain times but should find the companies with stable cash flow and low debt. The terms cyclical or non-cyclical show how much a share price is related to the changes in the economy. You, as an investor, cannot control the cycles of the economy, but you can adjust your investment strategy but you first have to understand how the whole economy is connected to your investments.

    What are cyclical stocks?

    Cyclical stocks have a straight correlation to the economy. 

    Cyclical stocks represent companies that are very favorable during the times when the economy is doing well. For example, carmakers, restaurants, branded wear makers, travel, construction are that kind of companies. But when times are difficult almost everyone will cut spendings on these products and services. When people stop buying these products, the companies’ revenues will fall for sure. Also, their stock price will fall. If there is a long downturn in the economy, the company will bankrupt or go out of the business.

    Having this in mind, you should avoid cyclical stocks when the uncertainty is present in the market or in the economy. For example, during uncertain times such as a recession, you shouldn’t invest in companies that are extremely leveraged or unsafe.

    Cyclical goods are not essential things. You are spending money on them less frequently. Your spendings are maybe determined by the season of the year, the current financial situation, and many other factors that can determine when and why you would buy these products and services. They are in the first place on your stop-to-buy list. 

    The cyclical stock’s prices are affected by economic cycles, for example, recession and recovery. Hence, they will grow and drop depending on shifts in the economic cycle. Very often you can predict these changes and as a responsible investor you will sell or buy the cyclical stock. For instance, furniture manufactures. In periods when the economy is doing well, everyone would like to remodel the house and change the furniture. But when a downturn is in the economy, who will care about buying the new furniture? The buying will drop, hence the stock price will drop along with lower demand.

    To know what stock to choose, cyclical or non-cyclical stocks, we also have to know how the non-cyclical stocks perform.

    What are non-cyclical stocks?

    Non-cyclical stocks generally outperform the market when economic growth decreases. They are profitable no matter what are the trends in the economy. These companies are producing services and goods that we’ll always need. For example, utilities: water, electricity, gas. That is something we will need in any economic condition. These stocks are also called defensive stocks. The reason behind – they can be used to defend the investment portfolio against the consequences of economic downturns. It is always good to invest in these stocks when bad days come. In case of a recession they are safe-haven investments. 

    For example, toothpaste, shampoo, soap, and detergent. How can we reduce them? There is no way. Who can wait a year or two to wash the dishes? 

    We already mentioned utilities. These companies are a great example of non-cyclical stocks. We need energy, electricity, water for us and our families. Because of that utility companies increase and do not slip dramatically in any economic circumstances. 

    The disadvantage of these stocks is that they will never produce huge returns even when the economy is expanding and growing. They are safe investments but their price will never skyrocket or it could happen but rare.

    Investing in non-cyclical stocks is a good strategy to avoid losses during the recession. So, cyclical or non-cyclical stocks, where to invest during a recession?

    Investment strategy with a mix of stocks

    You have several ways to add both cyclical or non-cyclical stocks to your investment portfolio. That can be a mix of bonds, cash, and stocks, but also the mix of growth stocks and value stocks. Another strategy is to add cyclical and non-cyclical stocks to offset changing business cycles. 

    When the cyclical stock drops in value you’ll have a great defense in non-cyclical stocks. During a downturn economy, cyclical stocks are less valuable and their price starts to move very fast. The truth is that it is moving up and down almost at the same speed and dramatically, within the economic cycle. Non-cyclical stocks never move that fast and radical. We described the fundamental differences but to repeat, non-cyclical stocks are practically immune to economic changes. That is their great advantage. Returns are something else. They are not huge, but these stocks will keep your nose above the water during the recession.  

    When the markets are growing, a good investment strategy could be to buy cyclical stocks at the beginning of the economic increase. But when you have some assumptions or signals that the recession is possible to come, sell them just before it happens. Sadly, trying to predict a future recession is a lost battle. That is the reason to hold a mix of cyclical and non-cyclical stocks in your portfolio. Why should we even ask or have a dilemma with cyclical or non-cyclical stocks when we should hold them both in our portfolios.

    That way,  we can provide a well-position to benefit when the economy is expanding. But, at the same time, we will have a shield when the economy takes a turn for the worse.

    Where to find cyclical stocks?

    Since it isn’t possible to name every cyclical industry (there is not enough room here) we can give you some clues where to look at.

    For example, hotels, restaurants, carmakers, airlines, banks. They all have something in common. In periods of strong economies, they are all expanding. People are traveling, need a place for vacations, they want to stay at the hotels, they would like to buy a new car, or rather want to eat in restaurants than at their homes. Also, some high-tech stocks can be cyclical. People really want them in prosperous times. Companies tend to invest money in developing new technology, new products. Startups are growing, also. 

    Not to forget banks. They are also a good example of cyclical stocks during the growing economy.

    Where to find non-cyclical stocks?

    These defensive stocks can be found among retailers, utilities. Consumer staples stocks are one of them, also. These stocks have modest growth but they are considered safe investments, that provide stable profits, and are defensive, and dividend-paying stocks. The most important role is that they can outperform the down markets.

    These non-cycling companies work in a strong sector,  their products are always in demand. We cannot cut our needs for them. They are able to survive great challenges and economic cycles. That’s why they are so much attractive especially during the recession if you add them as defensive stocks to your portfolio.

    Strategies to choose the stocks

    It is the same as any investing strategy. You have two ways: the top-down or the bottom-up strategy.

    The top-down strategy means to observe the economy as a mass and select stocks that will perform well during specific economic conditions. When applying this strategy you must be sure you are well informed about the macroeconomy, that you understand different sectors. You have to recognize how a particular industry will perform during the various business cycles, also when the stock price will rise when it will drop.

    For both cyclical or non-cyclical stocks, this top-down strategy is the most suitable.

    The bottom-up strategy means you have to look at the stock alone and to decide what stock to buy or sell.

    This strategy is a good one when choosing cyclical or non-cyclical stocks only when they are in correlation, meaning the stocks are moving synchronized. For example, the jewelry manufacturer will have a decline in the value during the recession. People will stop buying jewelry. But at the same time, the stock of the electricity provider will perform well. So, keep in mind that you have to have both in your portfolio. 

    Bottom line

    There is no need to ask yourselves what stocks to add to your portfolio, cyclical or non-cyclical stocks. You must hold both of them if you want huge returns and protection during market downturns. 

    During economic growth cyclical stocks will increase more. Hence, during recessions, people will decrease their spending and will squeeze the budgets. They will continue to buy and spend money only on the goods they really need. So, the companies that have these products will bloom.

  • The Benefits of Online Borrowing

    The Benefits of Online Borrowing

    The Benefits of Online Borrowing
    When examining for online loans, you’ll find lots of offers for loans that are basically payday loans. Avoid them.

    By Guy Avtalyon

    Online banking is broadly used and more and more people are accepting online loans as safe and convenient with the understanding that the benefits of online borrowing are numerous. Some lenders are quite good and trusty. The procedure is similar to getting a loan wherever but more comfortable. The whole process will take just a few minutes after you provide all the info that the lender may ask. Usually, it is your address and social security number. Some lenders may ask for more information about you, for example, what is your job, position, expenses, income. You can find a lot of online lenders out there and you can easily pick some the most suitable for you since online loans are safe and convenient. 

    The benefits of online borrowing 

    The last generation of online lenders is dedicated to making borrowing easy and fast. One of the benefits of online borrowing is that you can avoid the whole long-lasting process with traditional lenders and banks. In several minutes you’ll get the information about whether you get approved or not for the loan. That’s a very important feature when you are in an urge to get cash quickly. 

    Also, one of the benefits of online borrowing is that the lender will tell you how much exactly you can borrow, everything about your payments, etc. That is something that most traditional banks can’t do even if you apply online. 

    Banks will need time to give you the answer, that has to pass several reviews and some internal procedures. So if you are in a hurry to get the cash they might not be so suitable for everyone. Also, one of the very important things, but we rarely think about it when we are in a rush – the interest rates. Online lenders will offer lower interest rates but also, smaller fees if there is any. That’s because online lenders don’t have some expenses that traditional banks have.

    Better approval chances

    What are the additional benefits of online borrowing, also? For example, if you have bad credit and traditional lenders will pay more attention to it. If so, you’ll have better approval chances with online lenders. They will approve a loan even if your credit score is lower because they’ll take into consideration some other criteria when deciding to give you a loan. For instance, how regularly you are paying utilities, what is the ratio of debt to income, etc. 

    As it is with most of the personal loans, online loans are unsecured. That can be one of the most important benefits of online borrowing. Let’s say you fail to repay this kind of loan, it may happen due to many reasons and not always intentionally. In such a case your credit score will fall for sure, but any of your assets won’t be taken from you and you’ll not experience the foreclosure.

    The internet makes it easier

    Well, applying for getting an online loan isn’t quite the same as you are ordering food online. Some risks are higher when you apply for an online loan. When applying for it, they will ask you for sensitive personal information. The problem is that you have to provide them to someone you don’t know and can’t see but you have to talk about a nearly large amount of money. Anyway, a large amount for your criteria. Yes, the internet makes it easier and the benefits of online borrowing are obvious for you but still you have to know who you’re dealing with. So you have to be sure you’re dealing with a legitimate lender. 

    The risks when borrowing money online

    The first is that you might have contact with the fake lenders and you could lose your money without getting a loan. We are pretty sure you have been reading about these scammers that leave people without money. Also, some of them will take from you more in fees and interest even if they promised it will be less.

    Maybe one of the most dangerous risks is identity theft. It can happen that you’re dealing with a website that doesn’t protect your personal info properly. Maybe they don’t want to steal your identity but your personal information may be available to the third party who can misuse your security number, address, or similar.

    How to pick the right lender with the benefits of online borrowing

    By picking a legitimate and trustworthy lender you’ll avoid a lot of problems. You should research lenders. Read both positive and negative analyses. The internet is great but at the same time a strange thing. Not all the truth is out there, so you’ll have to make the selection to whom to trust. The best source is a recommendation from someone you can trust. Never base your opinion on reviews written by employees. They are paid to write the best or some of them lost the job there and now are pissed-off. So, their reviews can’t be honest. Avoid that. 

    Always check for complaints with the U.S. Consumer Financial Protection Bureau (CFPB). CFPB holds a database of complaints and responses from the lenders. The better your source, the less likely you are to find yourself in a problem and you’ll be able to enjoy the benefits of online borrowing.

    Online lenders are rising

    About a month ago we read an article in The Guardian. Excellent as always and very dedicated to this pandemic situation and the role of online lenders. We fully recommend reading it HERE.

    But in short, the article is about online lending and how online lenders plan to satisfy customers’ requirements during and after the newest COVID-19 pandemic. This is an important issue especially after big banks “have dropped the ball.”

    The characteristics of online lenders

    Online lenders are non-traditional and unconventional. They will rarely have some other financial products except loans. So we can say they are focused on one or two types of loans. Online lenders will not offer credit cards, savings accounts, or checking. 

    In their early days, lenders were peer-to-peer services. Their business models were alike to online shopping. Everyone could apply for a loan and anybody could offer to give a loan. The lenders would choose the interest rate that they expected to get. The competition was great so the loans were given at the lowest interest rates. 

    Today, the system has changed and become more complicated. If you really want to avoid banks, check deeply because some of the biggest sharks stand behind leading lenders.

    Bottom line

    The benefits of online borrowing are various. You’ll need less time to apply, you can overcome a bad credit score, the loan will be approved in a few minutes. The additional benefits of online borrowing are that you don’t need to go anywhere. You may apply from your home, your phone walking on the street or sitting in the restaurant. But, if you want to pick the best for your needs, you’ll need to shop around and search for the most suitable. While doing so, avoid scammers even if you think they have the best offer and cannot steal your personal data, be careful. Also, avoid payday loans. If you are not sure which online lender to choose maybe you should try with some bank. You will not get the best option but the safest for sure.

  • Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery How to Recognize them?
    Recession and recovery come in different shapes, some are severe, but some are easier to survive. The examples below aren’t about the current economic situation, they are an explanation of forms in the financial charts.

    By Gorica Gligorijevic

    What are the shapes of the recession and recovery? Since no one can predict when and how the recession will occur it is important to know what can indicate it is coming. Economists have various metrics to conclude whether a recession is expected soon or it is already here. So, we can say there are several indicators that, when they happen together, might indicate that recession is possible. The same comes to the recovery since these graphs and charts can illustrate both the recession and the recovery. That is normal because each recession is followed by the recovery.

    For example, some indicators such as unemployment rates can confirm changes. Also, drops in the stock markets, fewer house sellings, or a drop in GDP may indicate that recession is going to appear.

    But, what are the shapes of the recession and recovery? To explain this. Shapes of the recession and recovery are a concept that economists use to define different kinds of recessions and recovery. The most common shapes are U-shape, V-shape, W-shape, and L-shape.

    Let’s explain each of them.

    What are the V-Shapes of recession and recovery?

    V-shapes of recession and recovery are one of the forms a recession and recovery graph could take. These graphs are economic metrics that measure the strength of the economy, meaning employment rates, GDP, and industrial production.

    When we notice these V-shapes in the graphs we know that the economy has a sharp decline, but the good news is detected too. Analysts know that after that sharp decline a sharp and quick recovery will come. Moreover, when this kind of shape occurs, the recovery will be strong. The consumers’ demand will increase, people will spend more, so the overall economy will be driven by those shifts.

    Let’s examine one example. It was 1953 in the US. The time of recession occurred after great progress in the early 1950s. But economists expected inflation and the Federal Reserve boosted interest rates. This action turned the economy into a recession. In the 3rd quarter of 1953 growth started to slow but one year later it was back at a speed a lot above the trend.
    Hence, the chart for this type of recession and recovery represents a V-shape.

    U-shape of the recession and recovery

    U shapes of the recession and recovery mean that a recession starts with a gradual drop but then rests at that seat for a long time before bounces and moves higher again. This type of economic recession mirrors a U shape in the graphs. A U-shaped recession and recovery express the shape of the graph of the same financial measures, as we mentioned above, for example, employment, GDP, and industrial production. 

    The U shapes of recession and recovery are similar to V shapes but the economy doesn’t have a sharp rebounding. When the economy has a decline in all metrics and spends more time seating at the bottom it is recognized as a U-shaped recession and recovery. Hence, in U-shaped, the economy will experience stagnation. When the economy enters this kind of recession the sides are glazed and slipping is possible. The bottom is like a wet bathtub and the economy could stay in that bathtub for a long time.

    For example, the recession from 1971 to 1978, during the seven years, with a deep bottom from 1973 to 1975, unemployment and inflation were high, growth was very low. The economy started to climb back in 1975 and it took 2 years until it was fully recovered. That is a U-shaped recession.

    W-shaped recession and recovery

    A W-shape of recession and recovery points to an economic cycle of both that mirrors the letter W in charts. All metrics we already mentioned are covered in the charts.
    This kind of shape means a sharp decline in all these metrics after which the sharp rise occurs, and a sharp decline again ending with rising. In the middle of the chart, the central part of the W letter, the bear market rally may occur. Also, recovery can happen but it could last short and might be choked by the further financial crisis. This W-shaped recession is also called a double-dip recession.

    It is characterized by falling into a recession, short recovery with some modest growth for a short time, followed by another fall and eventually recovering. This pattern matches the letter W. The early 1980s recession in the US is a great example of a W-shaped recession. In January 1980 the US economy fell into a recession that persisted to November 1982. In less than two years there were 2 declines and 2 recoveries before the US economy entered the decade of robust growth. 

    The other good example of W-shape is the European debt crisis from 2011 to 2013. Uniting several uncertain circumstances caused this recession, for example, the global economy was very weak after the Great Recession ended two years earlier. The prices of energy were high, investments low, interest rates were high, consumer spending was also low. This recession hit the majority of Eurozone countries.

    L-shaped recession  

    L-shapes of recession and recovery are recognized by a slow rate of recovery. It occurs when we have a sharp decline in the economy but without recovering with the same strength. The economic growth is stagnating, unemployment is rising. When looking at the charts, all indicators form the shape of the letter L.

    In an L-shaped period of economy, there is an abrupt decline made by falling economic growth. In the chart, this represents the line with a sharp decline without the visible possibility of a return to the trend line growth. It is accompanied by a shallow upward incline which means that a long period of stagnation in economic growth is present. In such a situation the recovery can take several years to reach a higher level. 

    The main problem with these kinds of shapes of recession and recovery is that no one can know when the economy will rebound, if ever. Economists consider this shape of recession as the most severe since during these periods the overall underperformance is present. The collapse of the economy,  lack of progress back to full employment after a recession, are the main characteristics of this period. Workers might stay unemployed for a long time or forever, the economy is unable to recover and provide them new jobs, the whole industry could be inactive or underused for a long time. 

    What shape of the recession will be due to the Coronavirus pandemic? 

    Interestingly, almost all economists predict a recession to come. And it is possible to happen because millions of people lost their jobs, markets have been down, factories all over the world have closed. But how long will it last? The answer to this question we can get from the charts but not yet. We can complete the charts only after the end of the economic changes. Will it be bad? No one knows how bad it could be. This pandemic caused a lot of problems, from healthcare and the economy at the whole to the kindergartens. 

    The true answer lies in one of these four letters: V, U, W, and L. Which one will appear to the charts no one knows, it’s too early to say because there is no clear shape yet. For now, all we have is a declining line in the graphs. There are several possible scenarios of how it will end. But there is no dilemma will the recession happens. It is obvious even for the most optimistic people.
    We aim to show you those four letters and what they could mean in case of an economic recovery with hope that we’ll never see a letter L.

    As we can see, the shapes of the recession and recovery could appear in four forms in the charts. What isn’t visible in them are our lives, our feelings, fears, and worries. But it’s individual and each of us has to find an individual way to fight with this uncertainty. Also, that is not the subject of this article.
    The main purpose of this article is to introduce the shapes of recession and recovery and how you can find them in the charts. And, keep in mind, every single recession is followed by the recovery. That’s good to know.