Category: Traders’ Secrets

Traders’ Secrets is something that everyone would like to know, right?
How is it possible that some traders are successful all the time while others fail to make a profit all the time?
That is exactly what Traders’ Secrets will show you.
Traders-Paradise’s team reveal all trading and investing secrets to you, our visitors.

What will you find here?

How to find, buy, trade stocks, currencies, cryptos. You’ll find here what are the best strategies you can use, all with full explanation and examples.
Traders-Paradise gives you, our readers, this unique chance to uncover and fully understand everything and anything about trading and investing. The material presented here is originated from the experience of many executed trades, many mistakes made by traders and investors but written on the way that teaches you how to avoid these mistakes.

Moreover, here you’ll find some rare techniques and strategies that are successful forever, for any market condition. Also, how to trade with a little money and gain consistent returns. By following these posts you’ll e able to trade with greater success. You’ll increase your profits and your wealth, of course.

The main secret of Traders’ Secrets is that there shouldn’t be any secret for traders and investors. Rise up your trade by reading these posts, articles, and analyses!

You’ll enjoy every word written here. Moreover, after all, your trading and investing knowledge will be more extensive and effective.

Traders’ Secrets will arm you with those skills, so you’ll never have a losing trade again.

P/E Ratio An Quick Method to Value a Stock

Investors use the P/E ratio to unveil the relative value of a company’s stock. Also, the P/E ratio can be used to compare a company’s historical data or to compare markets as a whole over time.

By Guy Avtalyon

The P/E ratio or price to earnings ratio calculates the market value of a stock in relation to its earnings and do it by comparing the market price per share by the earnings per share. To put this simple, the P/E ratio indicates how much the market wants to pay for a particular stock based on its current earnings.

Investors often use the P/E ratio to assess a stock’s fair market value by predicting future earnings per share.

It is one of the most broadly used methods for determining a stock value. It can show if a company’s stock price is overvalued or undervalued. But the P/E ratio can reveal a stock’s value in comparison with other stocks from the same industry. This ratio is also called a “multiple” because it shows how much an investor is willing to pay for one dollar of earnings

That is why the P/E ratio is also called a price multiple or earnings multiple. Investors use this ratio to determine how many times earnings they are willing to pay.

Calculate the P/E ratio

The formula is simple. Just divide the market value price per share by the company’s earnings per share.

P/E ratio = share price/earnings per share

Earnings per share or EPS is the volume of a company’s profit for each outstanding share of a company’s common stock. It is a kind of indicator of financial health. Earnings per share present the part of a company’s net income that would be gained per share if all the profits is paid out to its shareholders. If traders and investors want to discover the financial health of a company they use EPS.
In P/E calculation, the amount of “earnings” or “E” is provided by EPS.

P/E = EPS/Saher Price

Where the symbols show:

P/E = Price-to-earnings ratio
Share Price = Market value per share
EPS = Earnings per share

For example, at the end of the year, ABC company reported basic or diluted earnings per share of $3 and the stock is selling for $30 per share. Let’s find the P/E ratio:

EPS = $4
Share Price = $30

This ABC company P/E ratio was:

P/E = $30/$4 = $7.50

So, the company was trading at ten times earnings. So what? This indicator isn’t helpful without comparison to something. As we said, this figure has to be compared to the historical P/E scale of this company stock, or to peers from the same industry.

For example, this P/E ratio was lower than the S&P 500 (the S&P 500 average is about 15 times earnings) but we can compare this P/E ratio to peers. And we noticed that the company XYZ had the P/E ratio of 11 at the end of the same year. What can we conclude? Well, ABC’s stock is undervalued. It is lower than, for example, the S&P 500 and for the same period, had lower P/E than its peers.

You can calculate this ratio for each quarter also but it is common to calculate it at the end of the year.

Use the P/E ratio to calculate earnings yield

This is particularly useful. The formula is actually inverted P/E ratio and looks like this:

Stock’s Earnings Yield = (EPS / Share Price) x 100

or in our ABC company case:

earnings yield = (4/30) x 100 = 13.33

Can you see, to calculate the stock’s earnings yield you have to divide EPS by share price and multiply by 100 to turn it into percentages.

The earnings yield of a stock is the percentage of each dollar invested in company stocky. It is calculated by dividing earnings per share of the company to its share price.

And as you can see, our ABC company has a low P/E ratio but high earnings yield. That will always be like this, the stock with a lower P/E ratio has a higher earnings yield, and the stock with a higher P/E ratio has a lower earnings yield.

This lets you easily compare the return you are earning from the underlying company’s business to other investments. Also, this will provide you to avoid to get in bubbles, panics, and fears. It gives you an insight into the stock market and directs on the underlying economic facts.

Of course, you don’t need to perform all these math even if it is totally simple. This is especially important for beginners in the market.

The majority of stock market sites will automatically figure the P/E ratio and you can see it immediately. With help of this number, you can understand the difference between a stock that is selling at a high price because it suddenly became an analysts’ darling and a stable company that is out of analysts’ kindness and investors are selling it for a part of what it truly deserves.

The two types of EPS metrics

Forward P/E ratio

The most common types of P/E ratios are the forward (also known as leading) P/E and the trailing P/E.
The forward P/E uses expected earnings guidance instead of trailing figures. It is useful when you want to compare the current earnings to the future.
While it is helpful it also can lead you to some confusion. The main problem is that companies often underestimate earnings. The reason behind this is they want to beat the estimated P/E when they announce the next quarterly earnings. Also, some companies will declare too strong and enthusiastic the estimation but later adapt it in the next earnings report. Of course, there are always analysts to provide estimates but can confuse too.

Trailing P/E ratio

The trailing P/E the most popular P/E metric. It takes into account past performances. To calculate the trailing P/E you have to divide the current share price by the EPS earnings for the last 12 months. Investors mostly like trailing P/E because it is more objective.
But this ratio also has weaknesses since the past performances don’t guarantee future performances. It is always better to invest money based on future earnings chances.

The other problem is the EPS figure is constant. You know the stock price is changing. If some company event pushes the stock price higher or lower, the trailing P/E will not reflective of those changes in full. The trailing P/E will alter as the price of a company’s stock moves because earnings are published each quarter. On the other side, stocks trade every day. That’s why investors favor forward P/E. When the forward P/E ratio is lower than the trailing P/E, you can be sure the analysts are expecting earnings to increase. And vice versa.

What are the limitations of P/E?

The P/E ratio has some limitations. When it is low you may think the stock is good but the stock isn’t good just because it is cheap. You have to know the growth rate, free cash flow yield, dividend yield, and many other metrics also, to make a qualified decision when buying a stock.

Build a diversified portfolio that not only holds assets that were handsome but also reduces risk.

14th February 2020
Adjusted Closing Price – Find a Stock Return By Using It

A basic mistake is considering the closing prices of stocks for analysis instead of Adjusted closing price.

If you’re a beginner in investing, you probably already noticed the expression like “closing price” or “adjusted closing price.” These two phrases refer to different ways of valuing stocks. While with the term “closing price” everything is clear when it comes to the term “adjusted closing price” things are more complex.

When we say closing price it refers to the stock price at the close of the trading day. But to understand the adjusted closing price you will need to take the closing price as a starting but you’ll have to take into account some other factors too to determine the value of the stock. Factors like stock split, dividends, stock offerings can change the closing price. So we can say that the adjusted closing price gives us more exact the value of the stock.

What is Adjusted Closing Price

Adjusted closing price changes a stock’s closing price to correctly reveal that stock’s value after accounting for every action of some company. So, it is recognized as the accurate price of the stock. It is necessary when you want to examine historical returns.

Let’s say this way, the closing price is just the amount of cash paid in the last transaction before the closing bell. But the adjusted closing price will take into account anything that might have an influence on the stock price after the closing bell. When we say anything it is literally anything: demand, supply, company’s actions, dividends distribution, stock splits, etc. So, you will need adjustments to unveil the true value of the stock.

It is particularly helpful when examining historical returns. Let’s do that on an example of dividend adjustment calculation.

The adjusted closing price for dividends

When a stock increases in value, the company may reward stockholders with a dividend. It can be in cash or as an added percentage of shares. Whatever, a dividend will decrease the stock’s value since the company will get rid of the part of its value when paying out the dividends. So, the adjusted closing price is important because it shows the stock’s value after dividends are posted.

Subtract the amount of dividend from the previous day’s price. Divide this result by the same day’s price. Finally, multiply historical prices by this last figure.

For example, the prior trading day was Tuesday and a stock closing price was $50. The day after, on Wednesday, it starts trading at a last price minus dividend, for example, trading ex-dividend based on a $4, so the stock will be trading on Wednesday at $46. If we don’t adjust the last price the data, for example, the charts will show a $4 gap.

What do we have to do?

We have to calculate the adjustment factor,

So, by following already described we have to subtract the $4 dividend from the closing stock price on Tuesday (in our case)

$50 – $4 = $46

Further, we have to divide 46.00 by 50.00 to determine the dividend adjustment in percentages.

46.00 / 50.00 = 0.92

The result is 0.92.

Let’s see how to adjust the historical price.

The next step is to multiply all historical prices preceding the dividend by this factor of 0.80. This will alter the historical prices proportionately and they will stay logically adjusted with current prices.

After stock splits

Stocks split occurs when the price of individual shares is too high. So, the company may decide to split stocks into shares. When the company increases the number of shares, the logical consequence is the value of each share will decrease due to the fact that each share factors a smaller percentage.

In our example, if the company splits each $50 share into two $25 shares, the adjusted closing price from the day prior to the split is $25. The adjustment reveals the stock split, not a 50% decline in the share price.

New Offerings

For example, the company decided to offer extra shares to boost capital. This means the company issues new shares of stock in a rights offering. The right offering means that the shareholders have the chance to buy the new shares at lessened prices.

But what happens when new shares come to the market? The price of the shares, of the same company, that are already on the market will drop. How is that possible? Well, think! The number of shares is increased and each of them now cost less. It’s almost the same with a stock split.

The adjusted closing price values the new offerings and the devaluation of each individual stock.

Find a stock return

A stock’s adjusted closing price provides you all the info you need to watch closely to your stock. You can use some other methods to calculate returns, but adjusted closing prices will spare you time. As we see in the text above, adjusted closing prices are already adjusted. The dividends are posted, the stock’s splits are done, the rights offerings also. So we can make a more realistic return calculation. The adjusted closing prices can be an excellent tool that can help us improve our strategies. Moreover, we can do that in a short time since the adjusted closing price already took into account almost all factors that directly impact the overall return. For example, just compare the adjusted price for a particular stock over some given period and you will find its return.

It’s easy to find historical price data, just download it. Further, mark the column of dates and a matching column for adjusted closing prices and set up in descending order. For example, you want to examine a period from March to October. On the top, you should have data for March and below data for April and so.

Let’s find the return

Firstly, compare the closing price in one month to the closing price from the prior month. To unveil the percentage of return you have to divide the chosen month’s price by the previous month’s price. Subtract the number 1 from that result, then this new result you have to multiply by 100 to turn it from decimal to percentage form.
It should look like this:
In March stock price was $50, in April it was $55, so the return was 10%

((55/50)-1)x100 = 10

Since you have to do this calculation for each month add the column for return if you are working in a spreadsheet.

To calculate the average return for the given period, from March to October, just sum each return for all months you observe and divide the result by the number of months.

Simple as that.

Bottom line

The adjusted closing price is a stock’s closing price on any chosen trading day but altered to cover dividends posted and the company’s actions like split shares and the rights offerings that happened at any time former to the next day’s open.

So, you can see that for serious analysis, the closing price will never reveal the real value of the stock, the stock’s value after considering any company’s actions. So it is always suggested to use the adjusted closing price if you want reliable analysis.

You might also like:

>>> Best Trading Strategy Without Indicators In Forex

>>> How to Use Technical Indicators to Analyze Stocks?

>>> MACD Indicator – Moving Average Convergence Divergence

>>> Indicator Trading And How To Use It

>>> P/E Ratio An Quick Method to Value a Stock

13th February 2020
Stock Market Capitalization Is Important And Here Is Why

Market capitalization represents the valid measure of a company’s value. The calculation is simple and easy but helpful.

By Guy Avtalyon

Stock market capitalization or market cap represents the total value of the company’s outstanding shares on the market. As you can find in our Trading dictionary, this is the market value of a publicly-traded company’s outstanding shares.

It is essential for every investor and whoever enters the stock market should know this. You can often hear or read about stock market capitalization in the news, books, or when financial experts are talking about it. But if you want to enter the stock market or you are already there but without experience, it is so important to understand what the stock market capitalization is.

Why is the stock market cap important? How to use it? Can we calculate it? What does it tell us about a company? Take it easy! We will answer each of these questions and more.
First of all, you can’t find a better measure of a company’s size than the market cap is. If you don’t know the size of the company how can you know what you can expect from its stock?

Luckily, the stock market capitalization is easy to calculate. The whole process is simple and everyone can learn it easily.

Understanding market capitalization

Market cap rates a company’s worth on the stock market where it is publicly traded. But also, it shows the stock market’s opinion of a company’s prospects because it reveals how much investors want to pay for its stock.

Let’s say you want to create an investment strategy. Well, you cannot do that without knowing about the company’s size, risks, returns. Only by having all this data you can create an investment strategy that will help you to achieve your long-term investing goals. Moreover, by knowing the market capitalization of some company you’ll be able to balance and diversify your investment portfolio with a mixture of different market caps.

To repeat, a stock market capitalization notes the total value of all shares of stock of some company. Or simpler, it is how much it can cost you to buy all shares of the stock of a company. Of course, at the current market price.

How to calculate the stock market capitalization?

The formula is very simple and clear. It isn’t like some other market data full of fabrications, twists, frauds. To calculate the stock market cap you’ll need two data. One is the number of shares outstanding and the other is the current stock price.

Once you have all the data, it’s quite simple.

The current shares outstanding x the current stock market price = The stock market capitalization

Simple as that.

But we will give you an almost real example.

Let’s say some company has 5 million shares of stock outstanding and its stock trades at $50 per share. Assume you would like to buy all of them.

5 million x $50 = $250 million

So, you would need $250 to buy every single share of this company. Wall Street would say that the stock market cap of this company is $250 million.

Can you see how simple it is? All you have to do is to gather two figures and multiply them.

Why is this so important concept?

Some would say that this measure has the strengths and weaknesses and such people would be right. And here is why.

If you want to compare one company versus others, the stock prices can give you the wrong picture. Stock market cap will never take into account capital structure specifics and that is what may let the share price of one company to be higher than others. On the other hand, it is good because this provides investors to assume the relative sizes of the companies.

For example, an investor would like to compare the company ABC to the company XYZ.

ABC company’s stock price is, for example, $20 with a market cap of $300 million.
XYZ company’s stock price is $200 and its market cap is $150 million.

Which stock to buy? Cheaper or expensive?

And it’s time to explain this dilemma and how to solve it.

Sizing up stocks

There’s a typical misunderstanding that a company’s stock price is more important than its market capitalization. This mistake happens to new investors. Market capitalization is the main factor when you’re deciding a stock. It can tell you about the value of a company.

How is possible the stock with price at $200 worth less than stock with price at $20?

What you have to avoid is a misconception that the per-share price of a stock will give you any perception of the value in comparison to the other stock. It will never do that. It practically gives no insight to investors. The stock price is something very changeable and various companies have a different amount of outstanding shares. So, don’t pay attention to the per-share stock price since it will not give you even a hint about the value of the company. For that, you’ll need to know the market capitalization figure. We already explained how to calculate the stock market cap.

Market cap measures a company’s size, and size will show you what to expect from its stock if you buy them.

The large companies are more stable, they have proven themselves over time. But here is the tricky part, large companies are limited. Frequently, they have no room to develop further.
As a difference, small companies have plenty of room to grow. At the same time, smaller companies are new, its business is riskier and yet have to prove themselves. Their chances of failure are higher.

Stock market capitalization ranges

Companies are ranged in one of three large groups based on their size. So we have large-cap, midcap, and small-cap.

Large-cap: Market value of $10 billion to $200 billion; usually older, famous companies.
Mid-cap: Market value of $2 billion to $10 billion; these are the companies expected to endure fast growth.
Small-cap: Market value of $300 million to $2 billion; these are young companies usually from emerging industries and new technologies.

But also, we can recognize mega-cap with more than $200 billion, on the top of this range and micro-cap of $50 million to $300 million, on the bottom of this range.

The impacts on market cap

Actually, there are several factors. First of all, important changes in the value of the shares since it can change the number of issued shares. No matter if it is up or down. For example, the exercise of warrants on a company’s stock could boost the number of outstanding shares. That can reduce its current value because the exercise of the warrants is performed lesser than the market price of the shares. Hence, it is reasonable to expect an impact on the company’s market cap.

The market cap will not be changed after a stock split or a dividend. Well, the stock price will decrease because the number of shares outstanding increased after a split. For example, the share price can be halved. Despite the fact that the number of shares outstanding and the stock price is altered, the market cap will stay the same. The same comes with a dividend. When the company issues a dividend, the number of shares will increase but the market cap is the same.

Build a portfolio by using market capitalization

You can divide your portfolio by market-cap size. The smaller companies grow faster, but big, well-known companies provide more stability, also pay dividends. If large caps are decreasing in value, small caps or midcaps may increase and help recompense losses. To build a strong portfolio with a decent mix of small-cap, mid-cap, and large-cap stocks, you have to determine your investment goals, time horizon, and risk tolerance. A diversified portfolio that holds different market caps can reduce the risk and help your long-term financial intentions.

12th February 2020
Earnings Per Share The Meaning and Formula

EPS is important when investors look at historical or future EPS numbers for the same company. Or when they want to compare EPS for a few companies in the same industry.

Earnings per share actually mean a measure of how much profit a company has made. It is regularly for companies to announce their earnings per share quarterly or yearly. Earnings per share or EPS is a powerful metric in a company’s earnings estimates since it shows how much of a company’s profit is allocated to each share.

EPS helps to determine the value assigned to each outstanding share of a company.

Earnings per share is a very important part when examining a business’s fundamentals. It is a ratio for profitability or the company’s market prospect. It is always better when this ratio is higher. That indicates the company is profitable and able to distribute more profits to shareholders or to reinvest in the business. In both cases, the shareholders will win.

Despite the fact that this measure is important, a lot of investors never pay attention to the EPS. That could be wrong because the higher EPS can increase the stock price. And that is strange because EPS can cause stock prices to grow and investors are profiting. So, we think that paying attention to EPS is important for making investment decisions.

On the other hand, so many things can influence this ratio, so investors do look at it but don’t let it change their decisions radically.

How to calculate EPS

For example, a company has a net income of $40 million. Preferred stockholders are getting, let’s say, $4 million in dividends. Also, we found that the company has 20 million shares outstanding for the first half of the quarter and also, 24 million for the second half. That would mean the company has an average of 22 million shares.

So, let’s start to calculate earnings per share. We have to count the difference between a company’s net income and dividends paid for the preferred stockholders. The next is to divide that number by the average number of shares outstanding. And here it is:

$40 million – $4 million = $36 million

$36 million / 22 million shares = $1,64/share

So we can conclude this company’s earnings is $1.63 per share.

Diluted EPS

You can see that this basic formula only takes a company’s outstanding common shares into account. But the diluted earnings-per-share calculation takes all convertible securities into consideration. A company might have convertible preferred stocks, warrants or stock options that could theoretically become common stock. If this happens, the result would be a reduction in earnings per share. A company’s diluted earnings per share will always be lower than its basic EPS.

Basic EPS uses net income, deducts preferred dividends, and then divides by the average number of shares of common stock outstanding during the chosen period.

Diluted EPS doesn’t apply the number of shares outstanding. Instead, it takes into account the number of possible shares outstanding. We already mentioned that the companies can issue stock options (for employees, for example), convertible preferred shares, etc. As they theoretically can be turned into shares of stocks, diluted EPS shows us how EPS would look if all convertible securities are converted into stock. The logical consequence is that there will be more shares and diluted EPS is lower than the basic EPS.

Math is important

Imagine you are a stockholder and suddenly the number of stocks rises. Prior, let’s say, you were holding 5% (this a great portion, indeed) of the company but with an increasing number of stocks, your holdings will be smaller and your part in the company’s earnings shrinks. It is just like you have to cut one apple (ouch!) into 8 instead of 6 pieces. You will get a smaller piece.
If our company mentioned above decides to issue for example 8 million convertible preferred shares, the EPS will be lower using the formula we have. Let’s do some math:

$36 million / (22 million + 8 million) = $1.20/share

Diluted EPS is just $1.20 per share. Compare this figure of $1.20 with $1,64 per share.

Where is the point?

Investors have to calculate both EPS and diluted EPS if they want to know when a company is issuing a lot of stock options or other convertible securities. That may have a great impact on shares when the options are exercised. The stock price will fall and shares will dilute.

Of course, it isn’t a sign of weakness if the company is using options to hire experienced employees or to overcome current salary problems, for example. By issuing convertible stock options the company will have more money to support its growth.

It is important to know that when we are calculating EPS for some well-established company the difference between EPS and diluted EPS can be very small or there will be no difference. But smaller companies, for example, some green and growing, may issue a lot of stock options to hire educated staff and experts. So, take it into consideration when estimating the company’s value and making a decision to invest or not.

Weaknesses of earnings per share

As always, even EPS has some drawbacks. It is really good when the company increases its earnings, there is no dilemma. It is a sign that the company is financially stable and it is worth investing in. But if you want to know about the company’s financial health, EPS isn’t the right metric.

Knowing basic and diluted EPS isn’t always simple. We pointed just two examples but some factors may make it more complicated.

For example, the company may issue additional stock shares or buy back some of its own shares or all of them. Also, it can increase its EPS by reducing the number of shares outstanding. In this case, the net income will not increase. So, we can say that companies can direct investors to believe that they are in better shape than they are in reality. The other drawback is that EPS never takes into account a company’s outstanding debt. Also, data about earnings per share doesn’t provide you info about the capital needed to produce the earnings. To put it simply, you are estimating two companies with the same earnings per share and the same income. One operates with less money to reach those earnings. The other company uses more capital. What do you think? Which one is worth investing in? One company is managing its resources better, it is obvious. But you cannot see that in their earnings per share. That’s the problem.

Bottom line

EPS data is a measure of a company’s profits over some time. You have to compare that data to the previous period’s data and if you notice a positive development, meaning increasing earnings, it is a good indicator. Contrary, you will need additional information and explanation to decide what to do with that stock.
Well, there is always a measure against third-party expectations and it can be very useful since it is transparent.
EPS is good when a company’s profits outperform similar companies in the same sector. But even when EPS is good investors sell stocks. The sell-off is caused by something called the “whisper number.” That is the investors’ consensus, based on beliefs about a stock’s future performance. Anyway, EPS and diluted EPS are important measures that every investor should know to calculate and pay attention to.

11th February 2020
The 60/40 Portfolio is Dead – How to Replace It

Bonds and stocks have only interacted negatively in the past 20 years. Their average correlation throughout the previous 65 years was positive. When this correlation isn’t negative, the 60/40 portfolio is weak in protecting your investment.

We all had believed, for a long time, that the ideal is a 60/40 portfolio, which consists of 60% in equities and 40% in bonds. That excellent combination provided greater exposure to stock returns. At the same time, this mix gave a good possibility of diversification and lower risk of fixed-income investments.

But the world is turning around and markets are changing too.

Experts recently noticed that this 60/40 portfolio isn’t good enough. Portfolio strategists claim that the role of bonds in our portfolios should be examined. They argue we need to allocate a bigger part toward equities.

Strategists report

Bank of America Securities (a.k.a. Merrill Lynch) published research last year named “The End of 60/40”. The strategists Jared Woodard and Derek Harris wrote:

“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies.”

That note by Merrill Lynch caused great turbulence among investors. The point is that your conventional sense of investing 60% of your portfolio in stocks and 40% in bonds is no longer so smart.
Merrill Lynch strategists explained that there are grounds as to why the 60/40 portfolio will not outperform portfolios with more stocks versus bonds in it. Therefore, investors have to allocate a bigger percentage of equities to their portfolios instead of bonds.
This is the opposite scale compared to what investors used for many years. They were investing in equities for price rallies and buying bonds for current income.

How did the 60/40 portfolio die?

For the last 20 years, the golden rule was a portfolio of 60% stock and a 40% bond. Everything was good with that: investors had the bonds in portfolios, a 60/40 portfolio provided them the upside of equities, their investments were protected from downturns. But they gave evidence to investors as to why this ratio should be changed and why they have to add more equities than bonds.

Here are some. Data is for the markets globally. During the last year, $339 billion were in inflows to bond funds but almost $208 billion were in outflows from equity funds. So, we now have a tricky situation. Bond yields had fallen. The consequence is that we have about 1.100 global stocks that pay dividends higher than the average yield of global government bonds.

The global economy slows

We must have in mind that the global economy lags due to the aging society and there were rallies in bonds almost all over the world. It was like a bubble. Hence, the investors who manage a traditional 60/40 portfolio are in a situation that threatens to hinder returns.

“The challenge for investors today is that both of those benefits from bonds, diversification and risk reduction, seem to be weakening, and this is happening at a time when positioning in many fixed-income sectors is incredibly crowded, making bonds more vulnerable to sharp, sudden selloffs when active managers rebalance,” said strategists from Merrill Lynch.

The 60/40 portfolio canceled

The popular rule of thumb: investment portfolios 60% in stocks and 40% in bonds, is smashed. The finance industry did it. Moreover, financial advisors urging investors to hold riskier options since, as they claimed, bonds no longer offer diversification. Hence, bonds will be more volatile over the long run. Further, the 60/40 portfolio has sense in the market conditions when stocks and bonds are negatively correlated. The stock price falls – bonds returns rise both serving as a great hedge, bonds against falling stock prices, and stocks as a hedge against inflation. According to strategists, no more.

This will completely change the portfolio management.

The benefits from bonds, diversification and risk limitation, seem to be missing. The bonds are more vulnerable to unexpected selloffs. The mentioned rule of thumb was accurate for 20 years but not for the past 65. Also, it is noticed that this period of negative correlation between bonds and stocks is coming to an end.

Also, Morgan Stanley warns that returns on a portfolio with 60% stocks and 40% bonds could drop by half in comparison to the last 20 years. Earlier, the analysts and strategists from Guggenheim Investments, The Leuthold Group, Yale University, also prognosticate distinctly lower returns.

How to replace the 60/40 portfolio?

The 60-40 portfolio is dead and it is a reality.

Be prepared, you have to replace it. Some experts suggest keeping 60% in stocks but to hold a position shorter, as a better approach.

But you have to hedge your portfolio. Experts suggest single-inverse ETFs and options for that purpose.

The others think the best way is to replace the 60/40 portfolio with some hedged equity portfolio. This actually means you should have more than 60% in stocks since the stock market is more liquid in comparison to the bond market. For this to implement, it is necessary to have tools. Also, the knowledge on how to use them. From our point of view, it seems that time to forget the 60/40 portfolio is here. All we have to do is to change the mindset and stop thinking about the mix of stocks and bonds. Instead, it looks like it is time to think about changing the net equity exposure.

Maybe it is the right time to hold more cash, which can be a tactical defense. For example, cash can be a part of your 60% holdings when you are not fully invested in stocks. Or you can hold cash in the percentage that previously was in bonds. Also, you can combine it. You MUST build a hedged portfolio to avoid the 60/40 portfolio hurricane that is likely coming.
For example, build a portfolio of, let’s say 75% stocks and 25% your hedge combination. This range can be tighter also.

Honestly, it is so hard nowadays to fit the excellence of the 60/40 portfolio.

Bottom line

The 60/40 portfolio was really good but it had a wild side too. The stock portion was down over 25 years of its 91-year existence. Over those 25 years, the average loss was above 13%. But there were bonds with a gain of above 5%, which reduced some of the losses. This portfolio was stable and reliable and you could use it for a long-time.

The other problem with the disappearance of the 60/40 portfolio is diversification. Is it dead too?

Peter L. Bernstein said, “Diversification is the only rational deployment of our ignorance.” Investors have to figure out different access if stocks and bonds no longer balance one another. This great portfolio will miss everyone. Maybe, one day, we will meet again. But some conditions have to be fulfilled. The interest rates should be 6% again, the stock market valuations shouldn’t go over 15x the previous 10 years’ worth of average earnings. That is hard to achieve now.
R.I.P. the 60/40 portfolio.

10th February 2020
Stock Market Bubble How to Recognize It

What is a stock market bubble? How a stock market bubble is created? What is the definition?

We are talking about a stock market bubble when the prices of stocks rise fast and a lot over the short period and suddenly start to drop also quickly. Usually, they are falling below the fair value.

A stock market bubble influences the market as a whole or a particular sector. A bubble happens when investors overvalue stocks. Investors can overestimate the value of the companies or trade without reasonable estimation of the value.

How does this thing work?

Let’s say investors are massively buying some particular stock. They become overly eager to buy. How does that affect the stock price? The stock price is going up. The traders notice the growing potential and believe that the stock price will rise more and they are also buying that stock with an aim to sell it at a higher price.

This trading cycle has nothing with the usual criteria related to trade. When this cycle lasts long enough it can extremely overvalue the stock or some other asset, generating a stock market bubble that will burst.

Because a stock market bubble is a cycle defined as speedy increase, followed by a decrease.

We would like to explain this in more detail. When more and more traders enter the market, believing that they also can profit and perhaps go on the double, but we have a limited supply of some stock, it isn’t unlimited. So, on one side we have an enormous number of traders willing to buy a stock, and on the other side is a limited number of particular stock they are interested in. The consequence is that the stock price will rocket. That sky-high price isn’t supported by the underlying value of the company or stock.

Finally, some traders realize that the growing trend is unsustainable and start selling off. Other investors start to follow that and catch on and start draining their stocks, in hopes to recover their investments. And here we come to the main point.

The declining market isn’t investors’ darling. The stock prices are dropping, traders who enter the market too late have losses, the stock market bubble bursts or in a better scenario, deflates.

Actually, we can easily say that behind the stock market bubbles lies a sort of herd mentality. Everyone wants a piece of high returns, it’s logical, right? Well, it continues with a downward run.

What causes it?

When eager investors are pushing the value of the stock, much over its proper value, we can say that we have a bubble. For example, the stock proper value is, let’s say $50 but investors boost it at $150. You can be sure the price will go back to its proper value, soon and extremely fast. The bubble will pop.

A good example is the dot-com bubble of 1999/2000. The markets were cut from reality. Investors accumulated dot-com stocks so wildly. How was it possible when they knew that a lot of these companies were worthless? They didn’t care.

That pushed the NASDAQ to over 5.000 points in a short period. That was the bubble and everything got apart very fast and painful.

One of the most famous market bubbles took place in the Netherlands (former Holland) during the early 1600s. It is the Dutch tulip bulb market bubble or ‘tulipmania’.

What happened?

The speculators pushed the value of tulip bulbs sky-high. The rarest tulip bulbs were worth six times more than the average yearly salary. Today, tulipmania is in use as a synonym for the traps due to extreme greed.

That can happen when someone follows some investor and notices how good it is and suddenly that one decides to do the same. But such copycats are not single individuals in the stock market. There are millions doing exactly the same thing. In a short time, everyone is plunging the money and the market reacts respectively by inflating prices. And eventually, the bubble will burst.

A stock market bubble as positive and negative feedback loops

Whatever has begun to shift stock prices up to become self-sustaining is a positive feedback loop. For example, investors hunting higher growth. When prices increase, investors are selling stocks. The others are buying them to profit on the growth. Someone will ask what is wrong with that. Well, new purchasings are driving the prices up higher and more investors are seeking those profits. The cycle is starting. And it is good but only when this positive feedback loop, as economists call this, comes as a reflection of reality. But when the feedback loop is based on fake data or questionable ideas it can be very dangerous. A great example is the Stock Market Crash of 1929. That was a time of blooming speculators in the markets. Speculators are trading stocks with borrowed money. The loan is paid from profit. When speculators have good trades they can make a fortune. In a different scenario, when they try to limit losses on debt, they can lose the shirt.

The stock prices will go down, the other investors will quickly sell with the same hopes to mitigate losses. The prices will go down further and create a “negative feedback loop” and poor market conditions will bloom. This is exactly what happens when the stock market bubble bursts. The stock prices are going down further as investors try to sell their stocks to cut losses.

Bottom line

As you can see, a stock market bubble happens when investors are buying stocks neglecting the value of the underlying asset. It is caused by a kind of optimism, almost irrationally, despite the rule of thumb: avoid impulsive trading.

The crucial nature of a stock market bubble is that trading can go in a direction that is not in your favor. Optimism can fade. Investors seeking higher profits easily can see their own disaster when the growth starts to slip. Why should they stay in positions any longer? They will not, of course. It is opposite, the selling off will start and the stock market bubble bursts. And it can do it for random reasons. Be careful, you can recognize a stock market bubble when everything is done. Only rare investors are able to anticipate it is coming. Well, that’s why they are successful and rich.

7th February 2020
How to Choose an Online Broker?

Online brokers will not add more pain to your trade. Contrary, they will help you to enter an order and place a trade to buy stocks.

By Guy Avtalyon

Technology has entered a new epoch in the investing world. We are trading stocks from our room, in real-time. Most of the online brokers take zero commissions. But how to choose an online broker in 2020? How to find the best one? Well, we can give you some hints and suggestions but most of that job is up to you. Choosing an online broker depends on various factors but most important is that your choice fits your goals.

Different brokers will offer you basically the same services, tools, features, and almost the same fees. Well, that’s the competition.

The answer to the question “How to choose an online broker” depends on what type of trading you want.

Some brokerages have a more comprehensive offer in investment strategies. Others will offer only one niche, for example, options trading. So, there is almost no need to ask how to choose an online broker, right? Of course, this is a completely wrong answer. Among numerous excellent brokers, you can find scammers too, so keep your eyes open.

Our aim at Traders-Paradise is to provide true and comprehensive data for online brokers we tracked and examined. So let’s see how to choose an online broker in 2020, what criteria to use, how to determine if some is better than the others. Also, you can visit our Wall of Fame or Wall of Shame to check your picks.

How to choose an online broker?

For a long time, investors need advice and human advisors. They are still valuable, but who has sufficient time to have long chats with advisors? Modern investors use online brokers because of their simplicity. They have all investing tools that may assure your trade, can teach you how to identify your options, how to enhance your trading skills.

Everyone would like to grow wealth and to do so with minimum risks. By using some of the online trading services you are on a good path. No matter if you have an individual trading account or a trading account related to your retirement plans.

Using the tools accessible through an online broker offers you can control your investments. Don’t you think it is a clever way?

Let’s say as an example, the market turns quickly, and you have to act quickly. But, you have to call your advisor and make an appointment. It can take days, weeks until that happens because you are not the only client. But you are in a big hurry, your investment may be ruined, you can lose all your money. You need that help immediately! With human advisors, you will never or rarely have that kind of assistance.

They are expensive too. They will charge you fees, a percentage of your portfolio. As a trader, you have bad and good years. How much these fees can drain your portfolio over the bad years when you have smaller gains? A lot. The online broker will charge you a fee for sure, don’t worry. They will charge you per trade which is beneficial for traders that don’t trade frequently.

Define your goals before choosing an online broker

This is very important. You MUST know your priorities before picking an online broker. If you are an investor with a long-term horizon and have a portfolio with only a few stocks you are not interested in saving a few dollars per trade. You will seek a good research tool to find a stock with the best potential for your long-term goals. In other words, you would prefer an online broker that offers large data.

But, if you trade very often and read financial news through different media and sources, your priority can be the cost per trade.

What to look at when choosing an online broker?

As we mentioned, depending on your knowledge and how frequently you trade, you might seek for something different than others when choosing a broker. Basically, it is personal. But several things are common for all of us. You must be sure that your broker has valuable tools and accessible news, updated in real-time that you can freely research. The number of securities and funds available is also important because you wouldn’t like restriction in any sense. For new investors that enter the stock market for the first time, it is very important their broker will not require a great initial investment. So, you have to seek for minimum investments. Fees are a big issue too. You can easily find a broker with minimum fees. But be careful, sometimes it is better to pay more for better service. In the long term, it can benefit you.

The Internet has made it more accessible and less costly to buy anything online, so stockbrokers must make it less costly for investors to purchase stocks or funds or bonds. But one feature is what makes investing so great today. It is automatic investing. Find a broker that offers this. It’s a wonderful thing thanks to the internet that you can complete your trade from your home or office or from any place on the globe since there are plenty of brokers that will offer you a chance to trade from your self phone.

And read, not only books (that is MUST), read reviews. Other people’s experiences sometimes are a cornerstone of our decisions. Watch out! If you notice a red flag stay away.

Investment minimums

Some brokers require a minimum investment amount. Investment minimums can be an issue if you don’t have enough money. Also, that can limit you if you plan to size your investments gradually rather than invest huge capital in the beginning. Read the fine print on your broker’s website because maybe it isn’t visible at first glance that charges fees if your balance falls below a specified amount.

Also, you must know everything about maintenance or inactivity fees.

It can be frustrating if you didn’t know that you have to pay in such cases. You would like to have an online broker that gives you access to the premium features. Remember, while one broker keeps them locked the other will give you full access without additional fees for the same premium features. Of course, you have to be reasonable and not demand some expensive features like some special charting or something similar. It is time to say something about margin fees. You must understand that trading on margin is costly and carries potential risks. Always check how high the margin fees are. Don’t be surprised.

How to choose an online broker can be a tricky part of your investing.

If you want to use some brokerage’s service for trading you have to know that price isn’t everything. By the way, everyone likes to find a broker with zero fees for trades. Of course, it is impossible if you want a respectable and trustworthy broker. You’ll have to pay something if you want to earn, right? Well, most online brokers will not charge you commissions, so you have to take care of the quality of the features they are offering. The available research, tools that will help you to learn to trade are valuable assets for beginners but for elite traders too. Just keep that in mind when deciding how to choose an online broker. They will help you to buy stocks.

6th February 2020
Robo advisor Portfolio – Start Investing Without Fears

Robo-advisors are becoming mainstream, which is good news for investors who are looking for low-cost advice. Investors may find offers for socially responsible investment portfolios, fully digital financial planning tools.

Basically, the robo advisor portfolio is created by professionals using advanced investment algorithms. These programs enable them to pick investments’ selection that will meet your goals, level of returns you want, risk you are willing to take, etc.

In other words, robo-advisor is an algorithm that manages your portfolio. The benefit is that your money is invested efficiently. That means you have help to minimize your risk and taxes, hence, your rewards will be maximizing.

Robo-advisor can be a great alternative for all of you aren’t DIY types and prefer to rely on an experienced professional. The process is quite simple, all you have to do is to deposit your money into the robo-account. Some will allow you to start at just $500 or less. Based on your answers in questionnaires, for example, investing goals, risk tolerance, when will you need the money, your robo-advisor portfolio will be built. It will pick the assets, usually some low-cost ETFs, and create a suitable portfolio for you.

The robo-advisor portfolio is very popular these days, and it will be even more in the next few years.

Who makes the investment decisions for the robo-advisor portfolio?

Honestly, it is maybe the best way for Millennials that are terrified of the stock market, to start investing. With the robo-advisor portfolio, technology gave the opportunity. By using some robo-advisors you’ll be able to pick your stocks or funds on your own, that is one solution. The other is to allow professionals to build your investment portfolio.

The robo-advisor portfolio is handled by investment experts.

They make investment decisions for you. They can add or remove investment from your portfolio, or adjust exposure to a special asset class. Besides, you will have an automatic rebalancing to keep your portfolio from straying too far away from the allocation targets that are established. Your robo-advisor portfolio will be built to invest in the markets that give the greatest value.

How does a robo-advisor work?

Let’s say it is a service that uses algorithms, invest your money into suitable investments, make adjustments as your circumstances and the market development. And it will be done cheaper than any human professional investment advisor. The truth is that you may choose any asset class to invest in, but the majority of robo-advisors primarily invest in ETFs. Nevermind, it is easy to find one that is good for you in case you would like to invest in something different. Investing through robo-advisors provides you to take hold of your finances without learning about all outs or ins of bonds, stocks, ETFs.

Moreover, your robo-advisor portfolio is built for your personal goals, based on your personal expectations, so suitable only for you.

Robo-advisor helps you handle your investment without the need to ask a financial advisor or self-manage your portfolio. Everything needed is to open a robo-managed account and then add essential information about your investment goals. Robo advisors then use the data to provide asset allocation and build a diversified portfolio.

After that, it makes the changes to the investments required to adjust your portfolio to a target allocation. Some robo advisors are able to sell some assets at a loss to balance gains in other assets.

It is a low-cost software product that provides you to put your portfolio control on autopilot. But you must be well informed to decide whether it is best for your investing strategy.

Advantages of robo-advisors

Making a robo-advisor portfolio can be a great answer for beginners or young investors. Since they lack the financial knowledge it could be easy handling their portfolio online with limited or no human assistance. But it is also suitable for professionals who don’t have sufficient time to manage their investment and rather put their portfolio on “autopilot.”

Robo-advisors are helpful for investors who have a traditional asset allocation with 60% stock and 40% bonds, for example, to rebalance their accounts.

We would like to highlight the main advantages. The lower fees is one of them. For example, you want to invest $10.000. A professional advisor will charge you 1% or $100 every year no matter if your portfolio is going up or down. Moreover, if such recommends you mutual funds, which are costly, and stock trading, well it’s more likely you’ll end up in losses. By having a robo-advisor portfolio you will pay (with the same investment of $10.000) less than 0.50% or a lot below $50 which is a fee for ETFs, for example.

Maybe the main advantage of having a robo-advisor portfolio is that robo-advisors almost never demand a minimum balance. That gives anyone over the age of 18 possibilities to invest. Also, you will get a free automatic portfolio rebalancing. Just count how much you have to pay to some professional investment advisors.

Robo-advisors are accessible 24/7.

Disadvantages

A robo-advisor portfolio isn’t suitable for every investor. For example, some prefer humans. But some robo advisors will offer you live assistance at a higher cost, of course. But that kind of support is completely online, through the web. There is no live person to chat with you. So, if that is what you want, the robo-advisor isn’t for you. Also, investors who need advice on how much to save or how to allocate investments in other accounts would never use robo advisors.

Benefits of robo-advisor portfolio

It provides you to avoid investing errors, for example, emotional trading. That is one of the biggest causes of investors to get poor outcomes. Investors are trading led by emotions. The software will never do such a stupid mistake. The other benefit is that you can automate the whole investment process. Do you have to make changes to your portfolio? Is it time to invest less or more in some sectors? Is the right time to set trades? There is no need to worry about that. The robo-advisor will do all of these for you.

In fact, advisory companies require a tremendous amount to initially invest and you can be faced with a recommendation that isn’t in your best interest. Robo advisors will never do such a thing.

Bottom line

It is more likely that your robo-advisor portfolio will consist of mutual funds rather than stocks since it follows a passive investment strategy based on modern portfolio theory. You know that theory, we wrote about it already, it is about the importance of asset allocation to stocks or bonds.

Robo-advisors will rebalance your investments automatically. That is a nice feature if the balances of your investment change from your initial pick. The software will buy and sell shares to rebalance the robo-advisor portfolio to your favored allocation. For example, you started with a 60% stock and 40% bond asset allocation.

But stocks increased the value and your portfolio percentages grow to 80% stocks and 20% bonds. The software will sell some stocks and buy more bond funds to rebalance your portfolio. You will have your portfolio with a 60% stock and 40% bonds.

Moreover, robo-advisors will sell losing investments and replace them with some others, to offset gains and lessen your tax bill. This strategy for taxable investment accounts is known as tax-loss harvesting. If you are seeking low-cost managing for your investments and alternative to a traditional high fee financial advisor, a robo-advisor can be the right choice for you. Even if you’re a DIY type of investor.

4th February 2020
Asset Allocation: A Method To Use

Before you start with asset allocation you have to choose what kind of investor you want to be. How do you see yourselves, like conservative, moderate or even aggressive investors?

For any investor, filling the investment portfolio with a proper mix of stocks, bonds, cash, real estate, and other investments is critical to financial well-being. This mix is known as “asset allocation.” The tricky part is that you cannot find a unique one that could suit all. Every investor must find own based on risk tolerance, timeline, and financial goals.

But even if you already defined what assets you want in your portfolio, it is still easy to get lost. Well, you want to optimize your portfolios, but you are gathering news every minute. And you are changing your decisions based on them. So, the consequence is that is more likely you have some “confused” portfolio, an assemblage of everything instead of a well-diversified portfolio.

Your portfolio has to be built with the goal of delivering income.

The asset management landscape is changing

First of all, In 2020 we can expect a huge rise in assets. It is predictable that economies in, let’s say, Asia, Middle East or Africa will grow faster than in areas with developed economies.

Extension in assets will be driven by several trends. One of them is the increase of wealthy individuals in those areas. So, we can expect the asset management landscape in 2020 will be changed. What investors have to do? Investors have to adjust their portfolios to new circumstances.

The investors should consider what caused an unusual change of growth and returns last year. Will the same conditions continue into this year? Will global economic growth returning to the trend? What about trade tensions? Is it over? All of this must influence investors’ decisions when building the investment portfolio and asset allocation.

The effect of asset allocation

The purpose of diversification is to avoid extremes. Asset allocation has to provide investors to score high returns, reduce volatility, protect them to have significantly lost capital.

You can accomplish this by asset allocation. All you have to do is to divide your investments into different classes of assets. Spread it into stocks, bonds, real estate, and cash. They will act separately from each other and your investment will be protected. Of course, you can spread your investment into cryptocurrencies, gold, commodities, or something else. Asset classes can be further divided into several sub-sectors.

Asset allocation is extremely important. Some studies reveal that asset allocation has a tremendous contribution to a portfolio’s overall returns. Even bigger than individual stock pick. Economists Paul Kaplan and Roger Ibbotson wrote that more than 90% of a portfolio’s long-term returns were generated by asset allocation. So, asset allocation has an important role in long-term returns.

How to start?

The first important step is to determine the target return. The issue is simply – by how much your portfolio has to grow to match your financial goals. But think about another issue too – what is your risk tolerance. How much risk are you able to take to gain a higher return?

You have to do all of this before choosing the investment strategy. If you are a buy-and-hold type you’ll be able to allow a higher level of risk. You will have periods with lower returns but they will be substituted with periods of higher-than-expected returns. So, it’s easy when you are an investor with a long horizon. But if you are not, if your time horizon is shorter, you’ll favor a lower risk portfolio.

Conservative Investing

Conservative investors tend to hold bonds. Their portfolios consist of 60%-80% in bonds of different maturity dates, different issuers. Well, bonds are not without risk, to be honest. Over the past few years, interest rates are rising and it causes bond prices to fall. The bond market can crash as well as the stock market. Do you remember 1979/1980? By some calculations, investors had losses more than $400 billion in total.

For example, baby boomers. They are inclining to conservative asset allocation. Their portfolios consist of over 70% in bonds. They control about 65% of all bond assets, by the way.

Modern asset allocation

There is something named modern portfolio theory and consequently, modern methods of asset allocation. This means a huge range of asset classes and sub-asset classes into portfolios.

At its core, modern portfolio theory is all about diversifying your asset allocation.

Modern portfolio theory is assumed to help reduce return risk by diversifying into many assets. But the first assumption of this theory is that asset classes are not in correlation. The point is to look at your investment as component parts of a whole. To be more clear, if one asset drops, the other will jump. It is just like a permanent zig-zag. Each investment is a moving gear. According to this theory, investors should balance a potential risk and returns but in the manner on how they might influence the risk and returns of the overall portfolio.

Start investing

Yes, you can do that, you can turn plans into dollars.

Just create portfolios to maximize the anticipated return based on an acceptable level of risk.

Don’t time the market. You have to look at your investment in the long term since the time in the market is very important. Do not let violent fluctuations or volatility disturb you. You are investing with your goal in mind.

Yes, you are more satisfied with less risk and nervous with grown risk. Moreover, you prefer the portfolio with the least risk, but one with the highest return possible and with the lowest risk.

Modern portfolio theory asserts that the risk for individual stock returns has two components: systematic and unsystematic risk. Systematic risk is the market risk and you cannot avoid it. For example, recessions, interest rates, wars are that kind of risk. The unsystematic risk is specific to individual stocks. Management changes, lessening the company’s operations, and similar, are unsystematic risks. You can lower this type of risk if you have a well-diversified portfolio and good asset allocation.

Proper portfolio building is difficult. It isn’t easy.

Asset allocation is portfolio diversification

The goal of asset allocation is to maximize the returns of a portfolio and reduce the risks.

Stocks will give you strong returns over a long time but they are volatile and inclined to periods ups and downs. But the combination of national and foreign stocks is healthy because sometimes one country is overvalued while another country is undervalued.

There are two main approaches to asset allocation.
Strategic Asset Allocation
Tactical Asset Allocation

Strategic asset allocation indicates holding a passive diversified portfolio. Meaning, you will not change your asset allocations based on market conditions. You will hold, add money and re-balance.

If you choose this strategy, you have to build a diversified portfolio of index funds or ETFs. From time to time you’ll re balance it. For example, when one asset class is increasing and another is decreasing in price. All you have to do in order to maintain the same weighting is to sell the increasing one and buy the underperformed assets.

Tactical asset allocation is complex and relates to almost permanent adjusting your weightings to different asset classes. You have to recognize where good risk/reward ratios are in the market.

The benefit is that you can really reduce volatility and increase returns. Though it’s more tending to individual failure, and if you do it badly you will decrease your returns.

Bottom line

Everyone would ask what’s the best asset allocation for a certain age? Here is one simple way to calculate it.

Subtract your age from 100 – that’s the percentage you should keep in stocks. For example, if you’re 40, you should hold 60% of your portfolio in stocks. If you’re 80, you should hold 40% of your portfolio in stocks.

But some advisors would recommend you to subtract your age from 110 or even 120 since people are living longer and longer.

When you choose what kind of investor you want to be whether conservative, moderate or even aggressive, it is time to focus on the asset allocation method. Spread it into allocations over particular investment categories: large, mid, small, and foreign stocks.

Balanced asset allocation in your portfolio is the right way to become a successful investor.

3rd February 2020
UGAZ Stock and DGAZ Stock The Differences and Relations

The principal objective of UGAZ is to increase the daily performance of UNG by 3 times. The main objective of DGAZ is to produce profits from the losses in the UNG fund.

For everyone who wants to trade UGAZ stock and DGAZ stock the essential part is understanding the nature of them.

First of all, there is no dilemma should you invest in or trade UGAZ stock and DGAZ stock. There is no such thing as investing in UGAZ stock or DGAZ stock. Forget them if you are an investor, they are not for a long haul. The expense ratio is 1.65% so it is more likely that you will have zero chances to be profitable if you try to invest in them. Let’s say this way, according to historical data, over a period of one year they had a negative return of almost 56% and the negativity is increasing as times go by. For three years, for example, you can lose around 90% of your investment.

So, to summarize, UGAZ stock and DGAZ stock is for short-term trading.

Catch the trends

Trading UGAZ stock and DGAZ stock can turn into a profitable project since you can efficiently track the supply and demand. So, it isn’t hard to catch the trends and make a fortune. Maybe not quite a fortune but a lot of money for sure.

Remember one extremely important thing linked to UGAZ stock and DGAZ stock trading: there is an extremely high risk involved. No one will recommend you trade them but still, there are so many traders doing so.

How to trade UGAZ stock and DGAZ stock?

Okay, let’s look into the Natural Gas Sector. For that, we have to get into UNG, which is the United States Natural Gas Fund. It is an ETF composed to give investors exposure to natural gas and it is a highly volatile fund to trade. If you don’t have a stomach, forget the profit gained from this trading. Modern portfolio theory says that UNG is a fantastic solution for traders who are 100% sure that natural prices are able to rebound. Anyway, traders have to track the prices of natural gas, weather reports (that will give you a view into supply and demand). Don’t be confused!

Cold weather suggests an increased demand for natural gas, hence the rising prices.

Is UGAZ an ETF?

There is a lot to misunderstand energy ETFs and ETNs (exchange-traded notes).

The main energy ETFs are The United States Natural Gas Fund (UNG) and The United States Oil Fund (USO). And there are leveraged energy ETNs that tracking natural gas prices. These cover the VelocityShares 3X Long Natural Gas ETN (UGAZ) and VelocityShares 3X Invest Natural Gas ETN (DGAZ).

Let’s make clear what is an energy ETF. It couples investments in oil, natural gas, and alternative energy. So, it isn’t hard to diversify your energy investment portfolio.

Supply and demand have a great influence on crude and natural gas prices. Their prices tend to fall when the supply is bigger than demand. When we have more supply than demand in the market, the prices will rise.

Politics and crises also can affect these prices. Any uncertainty on the political field such as wars, governmental changes or even tensions will send the crude oil price higher.

We mentioned the weather. The crude oil and natural gas prices will go higher when temperatures could cause a spike in price. But also, when the over the warm periods, when we have an increasing demand for cooling, the price of natural gas can rise.

How to trade UGAZ and DGAZ

Both UGAZ and DGAZ strictly watch UNG stock.

The principal target of UGAZ is to increase the daily performance of UNG by 300% or 3 times. For example, if UNG price raises 1%, UGAZ will manifest a daily gain of 3%. It is better to trade UGAZ when there is bullish sentiment on UNG.

The main objective of DGAZ is to produce profits from the losses in the UNG fund. DGAZ increases the losses by 300% inversely. For example, if UNG price drops by 1%, DGAZ will bring you a profit of 3%. Trade DGAZ when there is a bearish sentiment on the UNG fund.

It is obvious that UGAZ and DGAZ have 3:1 leverage. Great, because that might boost your profit. But, keep in mind, that profit is in direct proportion with the risk.

Trading UGAZ stock and DGAZ stock means to pay attention to the UNG fund. It is the prime ETF that handles UGAZ and DGAZ as leveraged ETFs. That will provide you a view into the direction that this market is going. You have to evaluate should you trade UGAZ or DGAZ because they will give you a profit for opposite moves.

UNG is really a difficult exchange-traded fund.

Firstly, natural gas is a very volatile stock. Further, UNG isn’t directly related to natural gas in the physical sense of it.

Moreover, it doesn’t pay dividends. It uses future contracts and OTC exchanges to detect the natural gas price. Despite the fact that UNG may not be a good investment, UGAZ and DGAZ may be a good fit. How is that? As we said before, UGAZ stock and DGAZ stock are not suitable for long-term investing. And since you will hold your position for a few days or less, you are not interested in dividends and moreover, if the UNG fund has long-term decline, that will not affect the short-term volatility.

How all of this work?

ETNs provide tripled leverage for one trading day. Let’s say the natural gas price increases by 3%, UGAZ will grow by 9% and DGAZ inversely will drop by 9%. That’s why trading UGAZ and DGAZ stock is for short-term traders only. If you plan to invest in them for the long-term, your chances to make a profit are zero.

Think about UGAZ and DGAZ as up-gas and down-gas. When the natural gas price is going up, it will like UGAZ. Hence, when the price is going down, you will profit from trading DGAZ. Simple!

Real-life example

On January 30, DGAZ traded $285.20 which was $18.88 more from the prior trading day. DGAZ stock rose by 6.62%.

It rose from $267.50 to $285.20 and gained 3 days in a row. Will it succeed to continue gaining or take a break for the next few days? We’ll see. Maybe the best example of how this stock is volatile shows the fact that during the trading day the stock oscillated 8.08%. A day low was at $271.09, a day high was at $293.00. In six of the past 10 days, the price up by almost 44%. But volume fell by almost 20.000 shares and it can be a sign that something is going to change in the next days. Falling volume is always a signal of such occasions.

The price of natural gas went lower over the past 3 months, above the 5-year average. Increasing sellings are noticed in the futures market. The current data was not bearish, but the market reacted negatively.

That is how UGAZ stock and DGAZ stock work.

Can you short UGAZ stock?

You can always go short with the leveraged ETF pairs. A popular strategy over the years has been: short both sides of a paired leveraged ETF or ETN, and get the cash. The point is to short the long position on leveraged ETF and short leveraged ETF for the same sum. After that, just watch how volatility can benefit you.

For instance, if we examine imaginary the leveraged ETFs associated with natural gas and we see one is down almost 55% over the last 12 months, while the other has fallen 75%. A trader can short both sides for, let’s say $10,000 each, they easily could find themselves up to $12,900 off the $20,000 total short position. That’s a pretty good gain.

This is true most of the time. But you have to guess the right time frame. Of course, it is always a matter of how fat your account is. Everyone who can stay in the game long enough will be a winner. But it is a big challenge.

Shorting both sides isn’t an easy money way. Shorting makes sense only if you do it with a small part of your portfolio and you have a lot of cash. In any other case, it can be extremely dangerous when shorting both sides of a leveraged ETF.

31st January 2020