Category: How to Start Trading – Beginners

Microcap Stocks – Recognize The Risks And Get The Rewards

The main difference between a microcap stock and other stocks is the amount of reliable publicly-available data about the company but potential growth can be great in the long run.

The microcap stocks can be riskier, sometimes significantly than other assets. A lot of them are traded over the counter. They are not in the investors’ focus so, due to the lower demand, the prices of microcap stocks are cheaper. Since they are OTC traded they do not have to match the listing standards created to protect investors. Microcap stocks are relatively anonymous and whoever wants to invest in them has to follow very closely.

Microcap stocks are viewed as risky investments for a reason. They often belong to the corpus of new companies in the beginning stage, so it can be difficult to gauge how successful they can be in the market. Firstly due to the fact they don’t have historical data for investors to examine. Moreover, this lack of data may increase the risk of fraud.

But the favorite Wall Street maxim is: “The higher the risk, the greater the reward.”

That is true, especially for the microcap stocks. Because these companies are small and their stock prices are low, they can be a great potential for growth and great returns.

The risks of investing in microcap stocks

Investing in microcap stocks is connected to numerous difficulties. Finding some to research is the last in the list of many challenges. First of all, there is a lack of historical data and you have to be prepared for more hands-on methods and additional work. For large and midcap stocks you can find a lot of valuable data, even for the smallcap stocks. Well, investing in microcap stocks requires deeper digging. But if you do your homework well you can expect a handsome reward.

The additional risks come with a lack of liquidity.

How to deal with it when buying the stock?

Let’s examine the following situation.

For microcap stocks, the price is low, the volume is small. So, when most of the sellers sold their microcap holdings, liquidity will dry up. So, the interest of buyers becomes smaller. But this is the right time to buy them.

Management of microcap companies often meets tremendous challenges in bringing liquidity to the company’s stock.
Generally, microcap stocks have a liquidity problem.

And everyone in the company would like trading volumes to increase. The question is how to reach the investors and increase liquidity. Maybe the main problem for those companies is that Wall Street isn’t interested in them. Let’s be honest. Microcap companies are under their radar.
This could be one of the reasons why most investors don’t invest in microcap stocks. Well, when you invest in stocks with high liquidity you expect they are highly efficient. Your transactions will be executed in seconds and your returns will be at best average.

That’s the problem, where is the possibility?

Microcap stocks are companies whose market value is usually between $50 million to $300 million. If you are looking for additional long-term investment they could be the right choice. Even if you are building your wealth by investing in large-cap stocks microcap stocks could provide you a good mix in your portfolios.

Microcap stocks are less followed but offer benefits. They offer higher returns over the long run. Microcap stocks have the high-returning quality combined with greater alpha potential.

Let’s say, small companies tend to outperform large companies over the long-term. For example, in the past several decades, from the 1970s, they have outperformed large-cap stocks by more than 1% annually. Speaking about higher alpha, you must know that less investor attention leads to greater chances to recognize quality, growing companies before they have been identified by the market.

Microcap stocks can have powerful roles in asset allocation.

They offer many of the benefits such as access to early-stage, high-growth companies. Moreover, they do that with higher liquidity and transparency than private equity, for instance. Also, microcaps don’t have a problem with valuations and a lack of deal flow.

Furthermore, a microcap can be a complete strategy that fills out the rest of an investor’s equity allocation.

In comparison with larger companies, microcap stocks have a better spot when it comes to growth. Hey, you are investing in microcap stocks because of a chance to get in the market before a company bounces and skyrockets. The only way to go with them is up. We suppose you will pick a successful company, though. When the company you invested in growing, you will profit.

Diversification is important because it provides to spread out the risk. A diversified portfolio will give you some protection from market volatility. Never miss out on the chance to invest in different kinds of assets. By investing in microcap stocks, you can create balance in your investment portfolio.

Benefits of microcap stocks investing

If you are seeking market outperformance you will have it by investing in microcap stocks.

First of all, they may give unlimited growth potential. Well, some of the famous companies, started as microcaps. And, honestly, that is the pure beauty of investing. Finding a small company and watch how it is growing over time. That is the privilege. Your stocks were almost worthless when you bought them but look at them now! You were smart enough to recognize the potential. Great! Small companies have more space to grow. Find the one like this and you will have great returns.

Further, follow the example of Warren Buffett. As a young investor (everyone knows this story) he was buying by the market undervalued stocks. If you are familiar with the efficient market hypothesis, you may think that stocks are fairly valued by the market. Well, they are, theoretically.

But this is not the case in micro-cap investing. Because micro-cap companies are almost unknown and generally below the radar of big investors, you can buy them at a discount. What do you think about this advantage against other investors?

The additional advantage appears here with investing in microcap stocks. Micro-cap companies are very often (when they are successful) acquisition targets. The truth is, the majority of small companies never become corporations because some big sharks bought them. For investors, it is a jackpot.

On the other hand, micro-cap companies are really focused on their long-term outlooks. Their businesses are efficient and sustainable with great growth potential. This feature can serve as a winning acquisition target.

Bottom line

The downside of holding microcap stocks is their selling.

Selling a microcap stock can make you feel like you are doing something illegal. You can meet discrimination and refusals and sometimes it’s so hard for holders to find a buyer.
Microcap stocks, sometimes called penny stocks, trade below $1 per share or in the best scenario up to $5. Their market cap is less than $100 million. But, if you really want to start investing and enter the stock market but don’t have a lot of money, microcap stocks are a great opportunity.
As you can see, microcap stocks offer the potential for a notable upside. It can be a fuel for charging your portfolio. But before you jump in microcap investing, it is important to realize the risks of microcap stock investing.

For the first time, they should be a smaller part of your portfolio due to the risks and volatility.

15th January 2020
The Average Stock Market Return

The stock market average return of 10% is exactly that – an average, while the returns for any particular year may be lower or higher.

The average stock market return was about 10% annual for the past almost 100 years. But when we take a look at any year particularly we could notice that the returns weren’t always average. And that is the truth about the average stock market return, it is average rarely.

Historical data shows the average stock market return is 10% but when you look at year-to-year it can vary. For example, this rate should be reduced by inflation. Inflation can vary too let’s say from 2% to 3% which is a regular rate.

But when we talk about investing and investors we usually think about long-term investments. To be honest, the stock market likes long-term investors. They are keeping their investments five or more years.

Keep in mind: the stock market’s returns aren’t average and could be far from average. For example, over the past 80 years, you could find that the average stock market return was from 8% to 12% only several times. Due to the volatility of the stock markets, most of the time the average stock market return was higher or lower. So, returns can be positive even when the market is volatile but the average stock market return will not rise every year. Sometimes it will be lower sometimes higher.

What is the average stock market return?

The average stock market return actually is about 7%. If we take into account the periods of highs, for example, the 1950s the returns were up to 16%. But we had the negative returns of 3% in the 2000s.

For example, from 1998 to 2018, we had an average stock market return of 6.88%. The lower return came from the enormous loss in the market in 2008.

But, over the last 50 years, the average stock market return was 10.09%.

The stats may help here, the Dow Jones – by May 25, 2018, the average annual return was 5.42%. On January 6, 2012, a 25-year period ended with an average return of 7.55% per year. But if we look at data from the beginning of 20 century, the average stock market return was around 4.3% respectively.

On the other hand, the S&P 500 index had average returns from 1957 through the end of 2018 about 7.96%. But, the average annual return from its inception in 1926 through the end of 2018 was about 10%. Last year, 2019 was great with a return of 30.43%. If we include dividend reinvestment, the S&P 500 return was 33.07%.

How to calculate the average return on stocks?

The average return on your stocks’ portfolio should reveal to you how well your investments have run in a particular period. This can also help you to predict future returns. Remember, this measure isn’t the annual compound growth rate.

So, to calculate the average return on stocks you will need to calculate the return for each period. The next step is to add returns together and divide the result by the number of periods. That’s how you will get the average stock return.

Calculate the average rate of return

Firstly, what is the average rate of return?
It is the percentage rate of return that is expected on an investment but compared to the initial cost.

The formula is quite simple. Divide the average annual net earnings after taxes or return on the investment to get the average annual net earnings and then display in percentage.

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

Here is the explanation of what we did:

Firstly, determine the earnings from stock for a particular period, let’s say 10 years. Now, you have to calculate the average annual return. Do that by dividing the total earnings after 10 years by the number of years.

Further, if you have a one-time investment, find the initial investment in the stock. If you want to calculate for regular stock investments, take the average investment over life.

And finally, divide the average annual return by initial investment in the stock.

Also, you can do all of this and get the same result if you divide the average annual return by average investment in the stock but expressed in percentage.

Let’s take the example of a stock that is likely to generate returns of 10% per year after taxes and for a period of 3 years.

The initial investment $10.000
First-year’s net earnings $1.000
Second-year net earning $2.100
Third-year net earnings $3.310

Use formula

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

After 3 years your initial investment will be increased by 64% or you will have $6.420 more in your account.

What does this mean for investors?

As always, computing dividends is important and you have to account for them. If you reinvested received dividends, even better. That’s compounding on compounding!

The truth be told, those who have stayed invested in stocks have largely been rewarded.

The understanding of the concept of the average rate of return is important because investors make decisions based on the possible amount of return expected from an investment. Based on the average rate of return, you can decide will you enter into an investment or not. Moreover, the return is used for ranking the stocks and ultimately you will choose per the ranking and include them in the portfolio.

In a few words, the higher the return, the better is the stock.

But let’s examine one different case of the average stock market return.

Let’s say your initial investment is also $10.000 but (this isn’t easy to say) in the first year you lost 20% of the initial investment. That’s bad news. But in the second year, you gained 20% of the initial investment. Oh, how nice it is!

Yes, nice but your gain is zero.

(-20+20) = 0

What do you think? Do you still have your $10.000? Things never move in that way.

Here is why.

When you lose 20% of your initial investment you ended up with $8.000. Right? That amount became the amount of your investment. On that amount, you gained 20% or $1.600. So, after two years you have $9.600 in your hands and you are short for $400 compared to your initial investment of $10.000. You lose money and your return isn’t zero. Your return is minus and you will need more gains in bigger percentages to cover that loss.

The stock market average return isn’t misleading. That is how you have to calculate it.

Or to calculate CAGR.

Bottom line

This means that investors MUST have a financial plan and investing strategy.
There are no guarantees for big gains in the stock market and never were. The average return of 7% or 10% is great if you are a long-term investor. It is reasonable to expect a good return on the current stock markets if you reduce your enthusiasm when the good times come.
That’s nice, you’re making money. But, when stocks are jumping, remember that not so good time may come. Especially keep this in your mind over the bull market cycle.
You can get the average return only if you buy and hold but not if you trade frequently. Even a few percent per year can produce nice gain over the years.

3rd January 2020
A Good Entry Point, the More Chances of Profit

The entry point is very important and can determine the end of your trade both in losses or in profits.

Having a good entry point is the first round in reaching a prosperous trade.
What is the entry point? It is actually the price investors have to pay to buy/sell a stock. The exit point, on the other hand, represents the price at which investors exit the trade with loss or in profit.

While the entry point has been extensively examined from the divergence/convergence aspect, the exit point has not got full attention.

Why is that? Well, exits may have hidden tendencies.

But let’s stay on a good entry point.

Traders’ successes or failures depend a lot on trade entries. One wrong entry can destroy your trading, for example. Yes, traders are using stop-loss to lessen the risk in case the market makes big moves.
But let’s talk about how the risk-reward potential can be enhanced by a better trade entry.

First of all, never enter the trade when the market is near to extreme highs or lows from the recent position. That fault may ruin your trade.
We already have seen traders that decided to enter the trade when the trend broke the final high with the hope that the stock price will continue running up.
That was the wrong decision because when the price reaches its highs, in most cases the only way it can go further is down. The price will drop into the previous range. So, you will make a loss.
The reason behind this is that markets never move in one direction forever. Especially after the trend reaches extreme highs and lows. If you place the entry point when the trend reaches the highest, it will always result in losses.
But if you like to take more risks in trading you can do that but be sure where you want to set the stop-loss to lower your losses when exiting the trade.
The wrong entry may occur if you are trying to enter the trade at the point where a large move is, but you are not sure what caused this move is. The direction may shift quickly in the opposite direction and your trade will end in losses.

Reversal strategy for a good entry point

Some traders like to set entry using reversal strategy. What does that mean?
In this entry strategy, the traders are taking the trade with the hope that the market will make changes its trends. They are using pivot point levels, so-called Fibonacci levels. This entry is useful only when the market isn’t trending in an obvious, clear direction.
Don’t use this in all trading.

The real role of a good entry point

The role of a good entry point is to allow you to identify high probability trades. You need the confirmation that you have an edge by reducing emotions.
You need a trading strategy that makes sense and where you can execute entry orders with confidence. It is very important and your good entry point should provide you that. Otherwise, it isn’t good.
Eventually, with a good entry point, you are more likely to enter the profit target or stop-loss. And the chance to look for other opportunities is here also.
A good entry will help you to repeat your trades and increase your advantage. But don’t be too focused on your entry point. Overoptimizing is never good.

Bottom line

A good entry point is very important for the success of your trade. But the exit point is what will control your profit. So, you will need to optimize it. To be honest, the best way is backtesting and finding out what works best for you. There are two ways to do that. You can use complicated calculations, charting, etc. or you can use Traders Paradise’s unique and simple app for optimizing your exit strategy. It’s up to you.

Remember, all is important. But as you can see, you can enter the trade in many situations but you can end your trade with only two: profit or loss.

Trading is a game, you have to make the best move at the right moment.

25th December 2019
Dividend Stock Investing – A Source Of Passive Income

If you are looking for an investment that offers steady income, dividend stocks are a good option.
Start with dividend ETFs because they are the easiest entry point.

By Guy Avtalyon

Dividend stock investing may be a good source of passive income. It will not generate a great profit since the average dividend yield is about 3%, but the income will be stable. But even if you don’t have a million dollars to generate significant income, dividend stock investing still can be a good choice.

So, the first reason to invest in dividend stocks is dividends. You’ll receive a steady and expected income and, also, growing capital over time is the other reason for investing in dividend stocks. Your capital will grow and you’ll have dividends. You can reinvest those dividends in some other stocks or spend as you wish.

How dividend stock investing is a good choice?

To put it simply, by investing in dividend-paying stocks you’ll receive the continuous income as long as you are a shareholder.
Dividend investing has a dual benefit in its nature. Firstly, recurring dividend payments and, secondly, the asset appreciation.

For example, you purchased 100 shares of a company ABC for, let’s say $20 each. And you will receive, let’s say, 3% annual dividend. Your capital invested would be $2.000, and your dividend payment $60. And you will receive your payments no matter if the stock price is growing or dropping. As long as the company is able to maintain it, you will receive your dividend payments.

Pay attention to high yields

If you want to invest in dividend-paying stocks you have to be focused on dividend yields.

If there is a high dividend yield you’ll receive large cash income. That often comes from companies that are not growing fast but have a solid cash flow to support dividend payments.

Also, pay attention to the dividend growth rate. For example, you found a company that is fast-growing but paying dividends less than average. Since such a company is fast-growing you may expect to gain more from dividends in, let’s say, 5 years than you might get from the company with high dividend yield.

The companies in the development or start-up stage, usually have a high price-to-earnings ratio and dividend yield can’t be big. But, when such a company expands, for example, opens new stores or similar, the per-share dividends may increase quickly because the profit rises higher.
That could be great for buy and hold investors.

Investing through ETFs

Dividend ETFs give an easy option to start investing in stocks that pay a dividend.

Since dividend ETF holds hundreds of dividend stocks that provide good diversification of your investment portfolio. As a consequence, you will have safer payouts. In case that some of the companies lower their dividends, you will still have enough, likely you will not even notice that in your total income. ETFs are a really good option for newbies because you will want safe payouts in the beginning.

Individual dividend stock investing

You will need time for this because it is more complex than investing through a dividend ETF. But the good thing is that when you buy dividend stocks it is possible to pick those with higher dividends than those you can find them in an ETF.

What you have to do is to research the company, estimate the safety of the dividend, and finally, decide how much to buy.
You can find dividend-paying stocks on different financial sites, including the online broker’s site.

When you analyze the company, pay attention to how healthy it is, meaning, is it able to maintain the dividend payments for a long time, for example, 5 or 10 years. It requires time but you have to do that.

You have to figure out the payout ratio. Remember, the low payout ratio means the dividend is safer and can grow faster over time. If the payout ratio is over 50%, simply don’t buy that stock.

Also, you will need to diversify your dividend stock investment portfolio. You have to define how many stocks you want to buy. If the stock is riskier you should hold a smaller part of your portfolio on it.

The first concern must be the safety of the stock’s dividend. Don’t focus simply on the greatest dividend yields. There is one thing you have to know, if the yield is high that means the investors have some doubts about the company’s ability to pay high dividends regularly. As a consequence, the stock price may go down and you can lose your invested capital. And the dividend will also fall.

You can buy individual dividend stocks if you like the challenge of picking out the winning stocks. But you must be really good to be able to develop a portfolio of dividend stocks that gives a higher yield. Higher than you could find in a dividend ETF.

Is dividend stock investing an opportunity?

For a long-term investor, dividend stock investing is a great way for passive income. The dividends you get can be reinvested and you will have more income.

When you notice that dividend yield is more than 4% you have to examine it very carefully. If the yield is over 10% the stock is risky.

When dividend yield is too high it indicates the payout is not sustainable, or maybe the investors are selling the stock. The share price will be lower in that case and the dividend yield will increase. In the short term, it may be good but for a long-term investment, it is bad for sure.

Also, if you notice that the company is giving a large percentage of its income as dividends payments, for example, more than 80%, stay away. This isn’t good because it is a sign that the company doesn’t know where to reinvest and assure its future growth. Also, when the payout ratio is too high you can be certain the dividend is unstable and the company has problems sustaining it.

16th December 2019
Real Return On Investment

Return on Investment or ROI, measures the profitability of an investment, for every amount you put in, what profit can you expect.

Return on investment is a measure practiced to estimate the efficiency of your investment. Also, you can use it to compare the efficiency of different investments. ROI seeks to measure the volume of return on investment in comparison to the costs. So, to calculate ROI, you have to divide the return of your investment by the cost. The result will be displayed in a percentage or a ratio.

How to Calculate Return On Investment

ROI formula is:

ROI = (Current value of investment – the cost of investment)/cost of investment

Compounding interest sounds like alchemy for many new investors, but ROI is true magic. Particularly when your money rises each year.
Let’s say you invest $2,000 at 5% interest. You’ll have $3,500 in interest after 15 years. Your initial capital would be grown by $1,500 of interest. But if you invest at a 5% annual compound interest, you will have about $4,158.

But where is the magic?
The magic comes now. What if you can earn a higher rate of return?

What if you invest at 8% or 10%? This can be really important because it is your money and you would like to watch it grow.

True magic lies in math.

Let’s say you have an investment goal and also, you know how long you want to hold your investment. For example, you would like to sell some of your stocks after 2 years. Assume you invested $2,000 in the stock. And you did that. You sold your stock for, let’s say, $3,000. Great! You made $1,000 in profit. That is 50% of return which is amazing if you want to calculate it quick and dirty, and incorrectly. But, you need to factor in your liabilities and annual inflation rate to calculate the real return on investment. Okay, you have to pay a capital gain taxes, for example, it is $150, so you ended at $2,850 which is still good. Yes, your return will not be 50% it is 42.5% after you pay capital gain taxes. Oh, wait! Where is the inflation? Yes, you have to calculate the inflation over those two years. Let’s say the inflation rate is 2.5%.

$2,850/(1.025×1.025) = $2,713

Your real value return will be 35.65%. It is less than 50% of return what you may be expected but it’s still good.
It was a bit complicated but correct, which is the most important. And it is for two years. Do your own math for longer periods.

Several things you have to keep in mind.

A good return on stocks has to surpass inflation, taxes, and fees. Only in that way, you’ll be able to build your wealth.
Use ROI to compare investments even if they’re not related. It isn’t the same if you are buying blue-chip stock or small-cap. In short, everything is different. But, if you compare only ROI may provide you a clear insight into where you want to direct.

ROI can be used in combination with the rate of return, which takes into account the time frame, which we did. You can use a net present value or NPV, which we did to calculate the real rate of return.
The usual return on investment for the majority of investors is about 2-3%. It isn’t great. But if you keep your money in a bank account you will have a negative return, after you factor and pay all taxes and inflation.

A good return on investment is 10-12% per year

You can beat the market. That is everyone’s goal, right?
But if you expect to earn 15% or 20% – it’s not going to happen. Or it will happen very rare. Don’t believe in false promises, they are counting on your lack of experience. If you build your financial security on bad premises you will end in a risky field. You may lose all your capital. If you have a more conservative approach to investments you will have a less stressful experience. Investing should give you certainty.

Bottom line

ROI is a popular measure due to its simplicity and versatility. Typically, use ROI as a simple measure of your investment’s profitability. Use the ROI on a stock investment. The calculation isn’t difficult. It is easy to understand. If your investment’s ROI is net positive, it is good. Avoid negative ROI, it is a signal of a net loss.

29th October 2019
When to Sell Option Call?

If the trade is going in your favor or for the trade that is going against you – don’t wait until expiration to see what happens. Sell before.

Fresh traders, particularly those with a little amount on the account, like to buy options. But do they understand all the rules? The vast of them somehow skip selling prior to the expiration date. The truth is that the call option could be sold at any time. Call options give you the right to buy some assets, you already know that. To know when to sell the option call, pay attention to several situations.

Let’s say you own calls and you decide to let them expire worthlessly. That’s okay. Your decision. But if you forgot and the stock closes on the expiration date the options will automatically be exercised whenever it is “in-the-money” when the market closes.

And it will be a problem when the next day comes. The next day, the day after the expiration date, the margin call will come. Where is the problem? When you buy an option call, you are buying the right to buy a stock. Did you know that? If you are new in the options trading it is likely you didn’t. And what happens? When margin call comes you have to pay for shares and you’ll be forced to sell your call options. So, it is better for you to sell your options calls before the expiration date.

So, you have to close your trade before the expiration date.

When you opened your position your aim was to make a profit, right? So, don’t wait for options to get too close to the expiration date because they will lose the value. As the expiry date is closer, the value is going down. To make a profit it is better to sell your options and close the trade. Of course, you may take a loss too but if you wait longer and as you are approaching the expiration date, the chances to avoid loss are almost zero.

Avoid margin call

Lett’s say you bought one call option. How to know when to sell option call? Don’t forget that one option controls 100 shares of stock. And let’s say the strike price is $30. If the stock closes at $30,03 your options will be automatically exercised and you’ll be the owner of 100 shares of stock. Further, your broker will send you a margin call if you don’t have a sufficient amount on your account to pay that stock. And what you have to do? You will be forced to sell the stock to close out your trade. More often, you will sell it below the exercise price. But it isn’t necessary to be your case. You can avoid this unpleasant situation. Just close out your open position before the expiration day. Before the market closes, of course.

For a strike price, you can calculate the cost to buy a call option and the cost to use it. You can find plenty of websites with options quotes. All you have to do is to type a stock’s ticker symbol and get a quote. You will see a column with months arranged and with the options expiring that particular month. Remember, you can trade the option until the third Friday of the expiration month.

Calculate options for a strike price

Find your wanted strike price in the “strike” column. Strike prices are ordered from cheaper than the stock price to higher than the stock price. Suppose the stock’s price is $50 and the strike prices ranging from $20 to $70 in a $2 increase. And you want to calculate an option with a $60 strike price. And suppose you want to buy a call option with a $2 “ask” price.

To calculate the whole price to buy one option contract you have to multiply the ask price by 100. In our example, it is $2 x 100 which is $200. No, it doesn’t amount to buying the stock, this amount of money you have to pay for the right to buy the stock.

Let’s go further. The next thing to do is to multiply the strike price by 100. That is an added amount you have to pay to use the option.

$60 x 100 = $6,000

This means you can buy 100 shares of stock for $6,000 before the expiration date.

Use volatility forecast

In general, volatility is extremely important when buying or selling options. Since “returning towards the mean” is especially noticeable on volatility, you can somehow easily forecast the volatility as it goes above a certain point or less than a certain point – it will, most likely, return towards the average volatility.

You can check the VIX to measure market volatility. Learn here how to do it.

Bottom line

Don’t buy call options with the aim to own the stock when the options expire. Your goal has to be to buy a call option and profit when the stock price grows. If call options expire in the money, you will end up paying a bigger amount to buy the stock. Much bigger than what you would have paid if you had bought the stock. If you want to hold the stock, buy it. Don’t play games with options.

And finally, one important note when it comes to questioning when to sell option call.

The European-style options expire on the third Thursday of the month. The American options expire on the third Friday. Don’t forget about this time difference. This could result in huge financial losses for you.

Forecast volatility, that’s a key ingredient in profiting from option trading.

27th October 2019
Getting Started Investing is the Hardest Part

Getting started investing can be very easy and smooth since you need a little money to start. Investing is better than savings accounts because it can shorten the period of earning.

By Gorica Gligorijevic

Getting started investing isn’t a big deal, it shouldn’t fright you. Honestly, it’s so easy.

You know what, when I was just a little girl (my grandma used to sing this) my parents gave a lot of effort to teach me how to save money. Grandparents would like to give me money for some holidays with advice to keep it for rainy days. I had my savings account. From time to time, they would put some money there but most of the time they insisted I have to put. And I did it. Not frequently, I have to admit, but still. With time that habit got strong roots. Every month I’d put 10% of my earnings on my savings account. I am still doing the same. That first savings account is my 10%-account.

No matter how big or small portion is. 10% would every time end there.

I can only speak from personal experience but I am sure that other people could easily find themselves in the same situation.

I am not going to give you advice because I know that is almost impossible to put anything on your savings when you are living paycheck to paycheck. Yes, the amount of money that the majority have available to spend every month is insufficient to put something aside. Despite the old saying about money: If you save me today, I’ll save you tomorrow.

But we all know how important is to have something aside. And it is possible. Let me show you how.

How getting started investing

Okay, do you know the rule “pay yourself first”? Yes, starting this is hard. But do you understand the meaning of this rule? Of course, you do but why not tell it again. This means you have to put on your savings every month some amount of money. It doesn’t matter how much it is. A few dollars, or other currency you have. Just when you get your salary, put aside several coins. Every month. And you will see, that amount will grow with time. Try this. I am not going to tell you how should you spend this money. You may have enough for exotic travel, or to buy a car, or after some time you may have enough for house buying deposit. Just start.

No, I will never tell you to live below your means.

Sacrificing isn’t a good way to save anything except life. If you try this method, living below your means, you will be unhappy and you will always have the feeling that something was taken from you. It can be a trigger for something more serious. But, anyway, try not to purchase the famous brands, too expensive things. Do it occasionally if it makes you happy. But don’t let it be your goal. Life is a lot more than brands.

Create a budget

What you can do is to make a budget frame. It is a smart idea to write down the amount of money you have every month. You can do that in some excel spreadsheet, or just in some memo. Also, there is a lot of money management apps you can use. OK, that’s the first step. The next is to subtract all the costs you have, for example, taxes, debts, loans if you have (don’t worry, we all have), etc. What you have in your hands after these deductions is your net income. This is the amount you have to use as a base for creating your budget. So, track your spending to be able to make some adjustments if it is necessary and possible, of course. You should review your budget from time to time to be sure you are on a good track.

Getting started investing

Do you know that your money can work for you? Yes. Let’s assume that after one year of saving you have enough for exotic travel. Why do you need to make it right now? Go somewhere else and save e.g. $1.000 on your trip. That amount is more than enough for getting started off investing. You can do that with less money, here you will find how. You can choose to invest in some mutual funds (it is probably the best for starting), or stocks, or real estate. By investing you will generate a greater return than your money sleeping in your savings account. If you invest in something you will let your money work for you. The whole process may be done with your banker’s help. Your bank has financial advisors, investment advisors, they will tell you where to invest. Or you can engage some brokers.

What are the advantages of investing

One of the main advantages of investment is that you can have your money work for you to earn more. Let’s say this way. You don’t need to work more to earn more. Your investment will that for you. Investing could bring you a higher living standard, for example.

Further, you can apply investment plans for saving and growing money. The best part of investing is that you can be a long-term investor and money earned from investments can be spent to cover future expenses, for example, for your retirement, or buying a house, new car, your children’s higher education costs, or just you want to have more.

It is important for you to understand that investing isn’t gambling.

You can make a profit on investment due to research and careful choice of a suitable investment vehicle. It isn’t betting. The truth is that you can make losses in the market. That’s the reason to make less risky investments. Never mind if they have lower returns. Stay on them until you find yourselves capable to play riskier. That time may never come. You can stay in safe investments for your whole life. It is OK.

In that way, you will protect your property in the long run.

So, you can see that getting started investing isn’t always the hardest part. It can be very easy and smooth. You just need a little money to start. At least if you have some targeted amount you have to save in some period, investing will short that period. You’ll be able to gain it sooner. Sounds good, don’t you think?

10th October 2019
Bull Market – What Everyone Should Know?

A stock bull market means that investment’s price rises over a long period. Investors’ faith in stock prices lead the prices themselves in a self-fulfilling prediction. A bull market means profits for investors who own stocks.

What exactly is a bull market? If you are like me several years ago, you are confused with all these terms, conditions, maths, evaluations, or estimations of the stock market.

May I be honest with you?

The truth is that I know nothing about the stock market when I entered. I was foolish, I know. But my desire to earn, to be investor was something I never have had before. It was like this…

A personal story

A friend of mine had a grandfather. Extremely interesting figure. He came from Italy to the US as a kid. OMG, he was just 12 when he bought a ticket and came with nothing except dreams about fortune. To shorten this story, after several years of struggling he made his first success. He became a clerk in the office of some broker. Step by step, that wonderful man became very rich. People, listen. Very rich!

I wanted the same. ASAP! I asked him for the recipe. Oh, how I would like I never did such a thing! The first lesson was: You know nothing, have to learn a lot. C’mon, man! Give me something else to start. I thought I know everything. I have just finished university. With a diploma in the hands, I thought I know everything possible about anything. Of course, I was wrong.

That blessed man told me I had to learn. How to, where to go? I spoke with some friends. No help. So, I decided to start. I found a broker, put some money (not a lot) on my trading account, and started to find a stock. That was a nightmare! My first trade was totally a disaster! I placed another trade. The result was the same. In two trades I lost everything.

Ok, at least I tried. Then I went back to my friend’s grandfather and asked him to teach me.

“You get your first lesson, my son.”

OK, I understand. I have to go for basic. And I started to learn. You must learn to have a chance to earn.

The bull market was the point where I started. I can’t explain why, but I felt I needed to know what it is.

The term “bull market” indicates a stock market is rising. Of course, every single investor supposes the market to rise. Better say, has a hope it will rise. But having only hope means to stand in the mud. You can slide in a moment and fall. Having my previous experience in the mind, I needed more facts.

Nice from this zoological term

So, I learned that the bull market occurs when the prices rise for 20% or more.

Further, I learned that a bull market systematically produces higher highs and higher lows. A stock bull market happens in a strong economy. Nice again, thanks bulls. But what can drive a stock bull market, that I wanted to know?

And I found (with a little help from my friend) that great revenue, profit, and P/E ratio are the most important.

The revenue should be in line with the economy, meaning revenue should grow by the speed of economic growth. Here is some interesting part. As consumers spend more on goods and services rise the economy will rise. Super!

And I came to the companies profit.

The revenue must generate profit.

But some knowledge defeated me. I thought that great profit is a wonderful thing and it is good when the company can generate more profit from the same revenue money. But it is not so simple.

And the P/E ratio! The stock price is just the amount of money it will cost to buy a share of a company. But stock prices can vary. If the demand for the stock rise, its price will rise too. The P/E ratio estimates the relationship between a stock price and its earnings per share.

I was confused just as you are now, I believe.

In a bull market

In a bull market, you’ll notice powerful demand and limited supply for securities. This means that more investors want to buy securities and less want to sell. What will happen? The stock price will rise, right. Let’s go further! Let’s observe investors’ psychology.

In the stock bull market condition, investors have the hope of earning a profit. They are positive and optimistic. Oh, how I wanted to have that experience. Instead, I was scared to death. I needed more knowledge to sure what I am doing. My first trade was so stressful and, by the way, I wanted to show my older friend that I can learn.

In the periods of the bull market, people have more money.

And they are spending. In turn, it stimulates the economy to grow. My old friend told me something important and let me share that with you.

When it is the bull market, you should buy stocks in the early stage, while they are not too expensive. As the price goes up, just wait for its peaks and sell your stocks. And don’t worry if there are some losses in price. It is temporary. Just invest in more stocks with a higher chance of getting a bigger return.
I am grateful to him for this lesson. But there was one piece of advice that sounded the most important to me: “Play the market like toreador plays his wonderful performance in the arena. Peaceful, with confidence, elegant. Tickling the bull. You have to know where the limits are, don’t get surprised.”

I’ll not. Thank you, my dear mentor.

9th October 2019
Stock Investing – The Pros and Drawbacks

5 min read

by G. Gligorijevic

Stock investing isn’t just buy and sell stocks. It is the whole philosophy and math. Well, you have to learn more about the logic behind the stock market.

When you want to buy a stock, that means someone else has to sell it. Be aware, that someone has worked on the numbers and concluded that the wise move is to get out of the position right now. Do you know why that one decided like that? How to be sure you are doing a good job if you pick that stock?

Stock picking is a struggle against other investors.

Maybe they know just like you, maybe more, maybe less.

The basic formula is easy: Pay a value that’s smaller than the long-term, per-share price of the underlying business. The philosophy of investing is in understanding how to determine that value.

Maybe you prefer to be a “growth” investor. So, your focus should be on the analysis of a company’s potential for future profits. You should choose the one growing fastest. As a growth investor, you are interested in great earnings. The P/E or price-to-earnings ratio is a popular metric for valuing stocks. Growth investors often are willing to pay P/Es of 20 or more.

Value investors usually buy stocks with lower P/E ratios. This appears more traditionally. But buying cheap has some risks. Very often when some stock is cheap it is a sign that the company has some problems. Is this true? No! Simply NOT! There is no easy way or formula that helps you to pick a fabulous stock to deal with. You have to research and make a decision.

But maybe you should invest in funds than individual stocks.

Stock investing demands time and intense analysis. It also needs notable cash to create a fully diversified portfolio. A choice is a mutual fund. That will spread your bets between hundreds of stocks.

Stock investing is attractive and enjoyable for a lot of people. If you want to enter the market on your own, you can use funds as the essence of your portfolio. Later, just set aside a small account for your selection of the individual stocks.

One of the main benefits of investing in the stock market is the chance to grow your money. Over time, the stock market performs a rise in value. Yes, the prices of individual stocks rise and fall daily. But, investments in solid companies that are able to grow, tend to make profits for investors. Moreover, investing in many different stocks will boost your wealth by leveraging growth in different areas of the economy. It will bring you a profit even if some of your individual stocks lose value.

Stock investing gives a lot of benefits to investors.

Owning stocks means to take advantage of a growing economy.
How does it come?
That is a kind of chain of good fortune. Everything is connected and logical.
Assume you want to buy a stock you’ve been examining for some time. And finally, they announce a surprise bit of good news and the price rallies sharply higher and so you jump in.
Let’s say, you have a sudden profit on your hands but, the stock reverses. It has retracted back to your entry price. Actually, it has gone beyond your entry price and you are a loser! You may think that it’s just market games and “shaking out weak hands”. So, you decided to hold on, knowing that patience is a trading power. Finally, you’re down further than you expected to be in the stock.
If you were ultra convinced of the upside potential, you may see this as an opportunity to buy more shares at a better price. On the other hand, you may panic and sell as you continue to watch the price trend further against you.

What happened?

Experts developed the “Efficient Market Hypothesis” which states that stock prices instantly diminish all news. So, there’s no possible way for a trader to profit from news releases. That experts feel that strongly.

Here is one example.

Maybe two years ago, Samsung announced it is expecting profits to hit record levels in the third quarter. And almost three times as much as the same period the year before.
Following the announcement, their share price dropped.
That might seem counter-intuitive. But there are other factors at play. At the same time as announcing this expected profit win, Samsung’s CEO quit. He told that the company was going through an “unprecedented crisis” and that “a new spirit and young leadership” was needed to respond to the challenges. In this case, the decline in stock price can be understood. You know, if the CEO is worried, perhaps investors should be too.

But sometimes share prices drop on good news and it is really hard to understand why.

Market expectations are always priced into the market price. Say, for example, a company has a forecasted earning per share of $1. They’ve never missed an earnings target. So investors expect the firm will actually earn $1.10 per share. They think it’s currently undervalued. The firm then announces an earnings report of $1.05 per share.

Good news, right? They beat their forecast.

But, crucially, because investors thought the firm should earn more than this $1.05 per share, the stock’s price was bid upwards to a price that reflected earnings expectations. Because the real earnings are less than the current market price, the stock price drops as investors sell off their shares.
This effect can be intensified by investors who completely copy what everyone else is doing. In this case, selling off their shares. Every investor must have the bigger picture. That’s the point.

What you have to do?

If the stock is basically strong, hold the stock despite the stock price going down. It won’t matter much in the long term if the company. Most of the great companies focus on their long-term goals. This means that a few times, they might miss the short-term expectations.
But, short-term interests shouldn’t be ignored completely by the company or investors. Nevertheless, if the company is overall performing good in the long run, then there’s no point of worry. In any business, there will be few difficulties in the short run.
Additionally, do not get connected to short-term expectations. Analysts will keep on making expectations every quarter. It’s their job and this is what they are paid for. If a company keeps on working for the short-term goals, it might never be able to focus on long-term growth.
Overall, if the temporary setbacks are not going to affect the long-term profitability of the company, then ignore the short-term fluctuations and hold your stock.

2nd October 2019
How Often to Check The Investments?

2 min read

by Guy Avtalyon

Your investments should certainly be periodically checked but not every day. Even though it is your money invested. You have a bigger chance to lose money if you check your investments every single day.

How?

Well, you know that the price changes occur very frequently due to the stock market volatility. The stock price can rise and drops hourly. Watching that, you may feel a bit more nervous about your investments and provoke you to sell instead to hold and wait for the price to increase. Also, you have to know that daily fluctuation in stock prices does not influence your investments. The most important is how your stocks perform in a bigger time frame.

If you check your investment too frequently, you will end up acting irrationally to market movements and sell your stock at a low price.

Yes, I know, our investments may give us the impression that we will never end up with sufficient money. You have to know how often to check your investments so that you don’t destroy them.

For new investors, quick gains can cause investing to look impressive. It is normal to check your investment every night. I can understand that. I know some investors are checking several times a day. If you need to be worried about your investment it is a sign you made the wrong choice.

If your portfolio loses just a bit in a few days or weeks there is no reason to panic. The statistic shows that fresh investors usually put money in mutual funds or ETFs because they are afraid to invest in more volatile stocks and they avoid them. The truth is that holding stocks requires more attention, time to track them, and knowledge.

But you can’t have only mutual funds or ETFs in your portfolio and check them once a year. You would like to have stocks as well. And a lot of things will be changed.

So, how often to check the investments?

With stocks, things are pretty different. You have to check them at least once a week to notice if something, some event, for example, influences your investment.

If you are holding or trading individual stocks, try to check them quarterly. OK, maybe monthly if you are so nervous. It is reasonable to check your investments from time to time. But too much checking can make you panic and sell at a lower price. And you will start that chain. That frequently checking will cause trading, fast trading will cause over-selling, over-selling will produce more fees and costs. Also, if you have too much trades you will have low returns.

It is smart to pick a good investment strategy and stay with it. Check the progress of your investment quarterly and check the price, for example, monthly.

With mutual funds and ETFs, you have wide diversification, so once a year is enough.

With stocks, check it out by online approval or in the paper version. Most of the financial websites such as Yahoo Finance and some others offer stock research data. Also, your broker has quotes available.

How often to check your investments? Less is better. You are investor, investing is a marathon, it is for a long run. Make a reasonable plan, according to your risk tolerance, be patient. Rebalance your investments once a year and let your money work for you.

23rd September 2019