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.

American option pricing and early exercise

3 min read

American option pricing is the binomial options pricing model that provides a generalizable numerical method for the valuation of options.

American options are contracts that may be exercised early, prior to expiry.

These options are contrasted with European options for which exercise is only permitted at expiry. Most traded stock and futures options are ‘American style’, while most index options are European.

The exercise style of listed options is American by default. Except for options on equity market indexes such as the S&P 500 index.

Options on futures are typically American as well.

The Black-Scholes pricing formulas are not applicable to American option pricing.

Being an algorithm, binomial option pricing models, nevertheless, can be modified to take care of the added complication in the American option.

Let’s see the differences between these two styles: European vs American options

European-style

The seller sells the (call) option to allow the buyer to buy the underlying at the price of K on the expiration date only.

American-style

The seller sells the (call) option to allow the buyer to buy the underlying at the price of K and another option to buy at any time no later than the expiration date.

In these graphs, you can see the main difference.

The key difference between American and European options relates to when the options can be exercised: A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time. An American option, on the other hand, may be exercised at any time before the expiration date.

American options can be exercised early

Unlike a European option, the holder of an American option can exercise the option before the expiry date. Because of this additional benefit, an American option is always more expensive than a European option.

However, is this benefit of any real use? Is there a situation where the option holder will get a better payoff by exercising the option early?

The answer is NO.

You should never early exercise an American option, especially if it’s a non-dividend paying stock. Let’s look at the reasoning behind this.

The option has intrinsic value and time value. The intrinsic value of the option is always greater than 0.
Along with that, the cash has time value. So, you would rather delay paying the strike price by exercising it. As late as possible.
You could use that money to earn interest.

So, a positive intrinsic value plus time value implies that you are better off selling the option rather than exercising it early. This is true for a non-dividend paying stock.

However, for a dividend paying stock, the only time it may pay to exercise a call option is the day before the stock goes ex-dividend. And only if the dividend minus the cost of carry is less than the corresponding Put.

By exercising, the option holder may forego the time value.

But don’t worry, it will make up from the dividend received.

We use the word ‘may’ because the dividend may not be high enough to justify the early exercise.

Here is the model for American options pricing. Here we take into account a put as an example.

Let
V = V (S, t)

be the option value.

At expiry, we still have
V (S, T)=(X − S) +

The early exercise feature gives the constraint
V (S, t) ≥ X − S

As before, we construct a portfolio of one long American option position and a short position in some quantity ∆, of the underlying.

Π = V − ∆S
With the choice ∆ = ∂V/∂S, the value of this portfolio changes by the amount

The advantage of the American style

The principal advantage of the American style of an option contract is the flexibility it offers to its holder as it can be exercised anytime before the expiration date T. Majority derivative contracts traded in financial markets are of the American style. In mathematical modeling of American options, unlike European style options, there is the possibility of early exercising the contract at some time t* ∈ [0, T) prior to the maturity time T.

It is well-known that pricing an American call option on an underlying stock paying continuous dividend yield q > 0 leads to a free boundary problem. In addition to a function V (t, S), we need to find the early exercise boundary function Sf (t), t ∈ [0, T].

The function Sf (t) has the following properties:

If Sf (t) > S for t ∈ [0, T] then V (t, S) > (S − E)+
If Sf (t) ≤ S for t ∈ [0, T] then V (t, S) = (S − E)+

The free boundary problem for pricing an American call option consists in finding a function V (t, S) and the early exercise boundary function Sf such that V solves the Black-Scholes PDE on a time depending domain:

{(t, S), 0 < S < Sf (t)} and V (t, Sf (t)) = Sf (t) − E, and ∂SV (t, Sf (t)) = 1

In a stylized financial market, the price of a European style option can be computed from a solution to the well-known Black–Scholes linear parabolic equation derived by Black and Scholes.

Recall that a European call option gives its owner the right but not the obligation to purchase an underlying asset at the expiration price E at the expiration time T.

But, let’s make American option pricing simpler

The value and pricing of stocks are fairly simple for most investors to understand. Basically, the value of a stock at any given time should reflect all known information about the company and the market.

However, increased volatility in option value occurs when the expiration date draws close or when it is already “in-the-money.” A call option is “in-the-money” when the present price of the underlying stock is higher than the strike price. A put option is considered to be “in-the-money” when the market price is lower than the strike price. When options are “in-the-money” or close to their expiration date, their value will change at a different rate than the underlying stock. However, the Black Scholes formula is a mathematical equation that can be used to approximate the value of an option relative to its market price.

Delta (Δ) in the Black Scholes formula is equal to the amount that the value of the option is expected to move for every 1 point of movement in the price of the underlying stock. Thus, if delta is 0.5 for stock A, then the value of the option for that stock will increase or decrease by 0.5 for every 1 point of fluctuation in the stock price.

In addition to being affected by proximity to the expiration date and being “in” or “out” of the money, the value of delta may change due to the overall volatility of the underlying stock itself.

There are times, however, when the Black Scholes formula fails to predict the value of the option.

The bottom line

The overall value of an option is actually determined by six factors: strike price, the current market price of an underlying stock, dividend yield, prime interest rate, proximity to the expiration date, and the volatility of the stock prices over the course of the option.

Because these six variables combine in different ways to affect the value of an option, it is possible for the price of the underlying stock to increase while the value of the option falls. The Black Scholes formula may fail when other factors are affecting the value of the option more than the current stock price.

American option pricing uses a “discrete-time” model of the varying price over time of the underlying financial instrument.

risk disclosure

6th February 2019
A European Call option – What is it?
There are many differences between European and American styles in trading call options. Here are all.

By Guy Avtalyon

A European call option means an option for the right to buy a stock or an index at a certain price on a certain date. Notice the expression “on a certain date.” This “European style call option” is different from the “American style call option” that can be exercised at any time “BY a certain date.”

A European call option provides the investor with the right to purchase an asset, while a put option provides the investor with a right to sell it.

In other words, unlike an American option, the European option has no flexibility in the timing of exercise.

Formula

In theory, a European option has a lower value than an otherwise equivalent American option. It is because a European option does not enjoy the convenience that arises from the flexibility in the timing of exercise.

Value of a European Call Option = max (0, Asset Price − Exercise Price)
Value of a European Put Option = max (0, Exercise Price − Asset Price)

Asset price is the price of the underlying financial asset at the exercise date.

The exercise price is the price at which the option entitles its holder to sell or purchase the underlying financial asset.
Some examples

European call option

To differentiate between a European call option and an equivalent American call option we have to compare them here.
Let’s say, a trader bought 100 American call options stock. The option has an exercise price of $42 and an expiry date of 27 July 2018. The trader believes that stock price on 24th, 25th, and 26th of July is expected to be $43.5, $44.5, and $43.

Assuming a trader is very confident in owns projections, what is the maximum can gain on the options and when should exercise them?

Since trader bought American options, he/she can exercise them at any time before 27th. Based on the projections:

Value on 24th = max [0, $43.5 – $42] = $1.5
Value on 25th = max [0, $44.5 – $42] = $2.5
Value on 26th = max [0, $43 – $42] = $1

The trader should exercise the options on 25th and gain $2.5 per option.

But, the trader bought European options, and he/she would have been able to exercise them only on 26th July 2018 for a gain of $1 per option.

Assume that traders used European options instead of American options.

Solution

Since trader purchased European options which she can exercise only on the exercise date i.e. 26th July 2018 and not before, trader’s gain per option will be only $1 (i.e. option value at the exercise date = price of underlying asset ($43) minus exercise price ($42).

If the trader had bought American options, he/she could have exercised them on 25th July 2018 (the day it offered maximum gain) for per option gain of $2 (= $44.5 − $42).

Like their American Option counterparts, a European option is traded on an exchange. The contract will specify at least four variables.
- Underlying Asset: stock indexes, foreign currencies, as well as derivatives.
- Premium: the price paid when an option is purchased or sold.
- Strike Price: identifies the price at which the holder of the contract has a right to sell (put option) or buy (call option) the underlying asset.
- Maturity Date: also referred to as the expiry date; the option no longer has any value if not exercised on this date.
As is the American Options, European-style options also come in two basic forms:

Call Options: also named calls. This contract gives the holder the right to purchase the asset at the strike price on the maturity date.

Put Option: also named puts. The contract gives the holder the right to sell the asset at the strike price on the maturity date.

Most stock or equity options in the U.S. are American Styles, whereas most index options traded in the U.S. are European style. Since you can’t actually “exercise an index option” and by the index, index options are cash-settled. Cash-settled means that your broker simply deposits the “in the money” amount at expiration.

What does the European style option mean for the trader?

It means that you are concerned ONLY with the price of the stock or index at its expiration. European style options tend to be cheaper than American style options because if a stock spike prior to expiration. An American style call option trader can profit on that increase in value. The European style option trader has to hope the price increase holds until expiration.

When to buy a European Call Option

If you think a stock price or index is going to go up, then you should buy a call option. Unluckily, you don’t get to select if you want to buy a European style option or an American style option. That decision is already made by the exchange that the option trades on. Most index options in the U.S are European style. Take a look at the chart below:

Example of a European Call Option

If you bought an S&P500 Index option, it would be a European style option. That means that you can only exercise the option on the expiration date. Of course, it is still an option, which means that you have the right but not the obligation to exercise it.

Obviously, if you have a call option and the Index closes below the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly. Likewise, if you have a put option on the Index and the Index closes above the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly, too.
Notice in the chart above that the S&P500 Index (SPX) is a European style while the S&P100 (OEX) is American style.

In the U.S., most equity and index options contracts expire on the 3rd Friday of the month. Also, note that in the U.S. most contracts allow you to exercise your option at any time prior to the expiration date. In contrast, most European options only allow you to exercise the option on the expiration date.
5th February 2019
Stop loss hunting – What to do?
3 min read

The truth is, there are players in the market that are hunting your stop loss.

Stop loss orders are designed to limit the amount of money that can be lost on a single trade, by exiting the trade when a specific price is reached.

For example, a trader might buy a stock at $50 expecting it to rise. Trader place a stop loss order at $47. But the price goes against the trader’s expectations and reaches $47. In that case, the stop loss order will be executed, limiting the loss to $3 per share.

All new traders should use a stop loss. The stop loss order is placed when the trader enters a position.

Why is that so important?

Markets are moving very quickly. A stop-loss is employed to limit the possibility of a loss. It also gives the possibility to trader having to get out of the trade if the price goes against him.

Stop loss is a must.

Stop loss position is very important and you should be able to distinguish where to set it. A too tight stop loss can be easily triggered even when you take the right position. And a too wide stop loss is like having no stop loss at all.

Where is the best place to set the stop loss?

You should place the stop loss at the level that will be triggered when your position is totally wrong.

We are referring to stop orders going forward, plain vanilla stop order, opposed to a stop limit order.

For example, the price is going up. You are waiting for some reversal signal. But, the price changes its direction and makes a reversal trade setup. And then starts going down. You take a short position. So the last high that the price has made before it goes down is a resistance level.

But what if you realized that taking a short position has been a wrong decision and the price will keep on going up again?

If the price goes up and breaks above the resistance level, it means you were wrong and the uptrend was not reversed. Therefore, you have to be out. That is why professional traders say: You are either right, or you should be out.
So where should you place the stop loss in this example?

image source: tradingwithrayner.com

A few pips above the last high (resistance level) plus the spread.

When price moves to your preferred direction and you are making the profit, you can move the stop loss further to lock some part of the profit you have made. At least, you can move the stop loss to breakeven, entry price, when you are in a reasonable profit. So, if the market turns around, you will get out with zero loss.

First of all, what is stop loss hunting?

Do you know that forex brokers make money when you take a position? Yes. They charge you some pips when you buy a currency pair. This number of pips that brokers charge when you buy currency pairs is called spread. Brokers offer different spreads for different currency pairs.

But, the spread is not the only way that forex brokers make money. It is one of the ways. They also make money through the swap. Market brokers make money through commission as well. However, the commission is the only legal way of making money for the true ECN/STP brokers. They can make money through other ways, but they are not allowed to.

Short note: STP refers to Straight Through Processing and it is just a name given to dealing desk brokers that have automated the dealing process. Traditionally in the spot forex market, when you place a trade, you are being filled by your forex broker is also known as an RFED.

ECN refers to Electronic Communication Network. ECN can best be described as a bridge linking smaller market participants with its liquidity providers through a FOREX ECN Broker.

However, whatever you pay as the spread goes to the market maker broker pocket. Also, the money you lose is the market maker broker profit. Say that, when you trade Forex through a market maker broker, in fact, you are trading with the broker, not the real currency market.

So it makes sense that the market maker brokers like you to lose.

Your loss is their profit. Similar, it is expected they don’t want you to win because your profit is their loss. Market make brokers make a lot of money. The statistic shows that 99% of the trader lose on their own and nobody needs to push them to lose. However, some market maker brokers get greedier and want to make more money faster.

YOU WOULD LIKE TO READ Automatic Trading – What Is It

Stop loss hunting is one of the ways they use to do that. They have some special robots or train some employees who monitor the clients’ trades.

How does it work?

The trader takes a short position and sets a stop loss. The market goes against the position and becomes so close to the stop loss. And the robot or the stop loss hunter employee increases the spread manually to help the price hit the stop loss earlier.

But, most regulated brokers are not hunting your stop loss because it’s not worth the risk.

The word gets out that some broker hunts their client stops loss. What? It’s a matter of time before clients pull out of their account and join a new broker.

Would you want to risk doing that over a few tiny pips?

We guess not.

Most brokers don’t hunt your stops as the risk is greater than the reward.

But, your broker widens the spread and stops you out of your trade.

There is a reason for this.

A broker widens their spreads during major news release. The market has low liquidity during this period.

YOU WOULD LIKE TO READ Stop Loss Order and How to Use It

Take a look at the depth of the market. The bids and offers are low just before the major news release. The participants in the market are pulling out their orders ahead of the news release.

The liquidity during such period is thin and that results in a wider spread.

Because of this, the spreads in forex is widener. If it isn’t, there will be opportunities for arbitrage.

So, you can see that widening is not there for fun their spread for fun. Your broker is doing it to protect themselves.
Most brokers don’t hunt your stop loss because it’s bad for business.

How to avoid stop loss hunting by setting a proper stop loss

Let’s say, you find such broker.

You can still protect yourself and beat the sharks who are hunting your stops.

What can you do?

Here are 3 techniques you can use:
- Don’t place your stop loss just below Support (or above Resistance)
image source: bpcdn.co
- Don’t place your stop loss at an arbitrary level
- Set your stop loss at a level where it invalidates your trading setup
The bottom line

The one way to stay away from the stop loss hunting is trading through a bank account.

Trading the longer time frames is another way of staying away from stop loss hunting. Well, nothing can 100% prevent a scam broker from cheating the clients. But trading the longer time frames is a good way to lower the risk. On that way, you will have wide stop loss orders that are harder to get hunt unless the broker increases the spread for hundreds of pips.

In general, you will finally have to close your account and leave when you trade with a scam broker that hunts your stop losses and cheats because nothing that fully stops them from cheating you.

Therefore, you’d better choose a good broker from the first day or trade through a bank account.

risk disclosure
4th February 2019
Twitter CEO Jack Dorsey thinks Bitcoin will be the Currency of the Internet

Twitter’s Jack Dorsey believes that BTC will be the common currency of the Interner

By Gorica Gligorijevic

Twitter CEO, also CEO of Square says there will be a native currency for the internet. Jack Dorsey, CEO of Twitter and the mastermind behind the popular money transfer application “Cash App,” shared his confidence about Bitcoin.

Appearing on the Joe Rogan Experience podcast, he stated that the Internet will eventually have a currency, which he thinks will likely be Bitcoin.

Jack Dorsey explained that he still feels that BTC meets all the conditions to become the common currency of the internet in the future.

For Twitter and Square chief, Bitcoin, the top-ranked cryptocurrency seems best-suited to that role.

No plans, just personal view

Jack Dorsey said that he has no plans for that at the moment, however, he expressed his personal view towards cryptocurrency and the internet.

“I believe the Internet will have a native currency and I don’t know if it’s Bitcoin. I think it will be given all the tests it has been through and the principles behind it, how it was created. It was something that was born on the Internet, was developed on the Internet, was tested on the Internet, it is on the Internet.”

Jack Dorsey believes that the internet will have its native currency one day, although he doesn’t know what that would be.

Bitcoin could be the currency of the internet

But when he elaborates his opinion further, he says that it could be Bitcoin. His opinion is based on the tests Bitcoin has been through all this time, the principle behind its creation. And all of that happened on the internet.

Twitter CEO has no plans to create his own currency, but he wants to participate in the growing technology, which he said to have done through the CashApp project.

YOU WOULD LIKE TO READ Forget Everything You Knew About The Money! The New Era Has Started!

Twitter CEO claimed that his company is the first publicly-traded company that offers crypto (Bitcoin) purchasing as a service.
Dorsey has made similar observations, commenting in May 2018 that Bitcoin should be the native currency of the Internet.

Thus, Dorsey says Square’s focus is solely on BTC with no present plans to offer support for other cryptocurrencies on the Square Cash App.

Speaking about Square’s decision to offer support for the largest cryptocurrency, Dorsey said it gave the company the ability to serve more people across the world far better than was possible using mainstream channels.

“We’d love to see something become the global currency. It enables more access, it allows us to serve more people and allows us to move faster around the world.”

Twitter CEO: The Internet is like one nation

Dorsey compared the Internet to a single nation that exists digitally. Hence, it only makes sense that it would have its own universally accepted currency.

Present-day fiat money is usually subject to nationalistic policies that might not appeal to different places across the globe. Bitcoin, however, is based purely on mathematical algorithms providing a certain sense of neutrality and universality devoid of any geographical or political bias.

Jack Dorsey thinks the internet will eventually have its own currency and BTC is out in front in the race to be the chosen crypto. Twitter CEO doesn’t necessarily think mass adoption is near, but that worldwide cryptocurrency use will take hold soon.

Banks don’t like Bitcoin’s disruption

As the first and still biggest cryptocurrency, it’s not a bad bet. Bitcoin processed an incredible $9 billion in the past 24 hours, dwarfing any other blockchain by miles.

Bitcoin, moreover, is the most integrated crypto. It remains still the only one to have regulated futures, its logo stands for the blockchain and it has a brand.

Dorsey also mentioned the attitude of banks towards Bitcoin. Unsurprisingly, banks and many other financial institutions aren’t fans of Bitcoin’s disruptive tendencies, the Twitter CEO said.

YOU WOULD LIKE TO READ: Two of the richest men in the world call Bitcoin “rat poison”

JPMorgan analysts released, in January, a report claiming that BTC’s value could only exist in a dystopian economy. In 2018, Warren Buffet called Bitcoin “rat poison squared.”

“People treating BTC like virtual gold,” said Twitter CEO

“We notice that people are treating it (Bitcoin) as an asset, like virtual gold. We want to make it easy, just the simplest way to buy and sell Bitcoin. But we also knew that it had to come with a lot of educations, a lot of constraints,” said Dorsey.

Reminding what happened 3 years ago, when people had the “unhealthy way” of purchasing Bitcoin by using their life savings, Dorsey decided to put a very “simple” restriction and constraint on his app.

“You can’t buy Bitcoin on CashApp with a credit card. It has to be the money you actually have in it. We look for day trading which we discouraged and shut down, that’s not what we’re trying to build, that’s not what we’re trying to optimize.”

When the master of industry like Jack Dorsey speaks about the efficiency of cryptocurrency tends to lead to ecstatic investors. However, Dorsey has warned against wild speculation and hopes to push the public towards using digital currency rather than the narrow mentality of “hodl” and wait for riches.

3rd February 2019
Personal finance – How to Manage?
Traders Paradise will walk you through some suggestions on how to manage money in your 20s

By Guy Avtalyon

Update on Feb 12, 2019

We received an email from our visitor Christopher Trum, Content Manager LendingTree Brands, that asked us:
”I was reading a recent article on Traders Paradise (traders-paradise.com/magazine/2019/01/personal-finance) and wanted to thank you for including data from our research study!”
With his permission, here is the link with full access to the original source
https://www.lendingtree.com/finance/places-millennials-carry-the-most-debt/

Personal finance is something that has to be well managed no matter how old is someone.

Who is going to take care of your own personal finance so early, for example in the 20s?
You may not think of your 20s as the time to buckle down financially. Between beginner salaries and student loans, many young people at their 20s bearly sustain to live from paycheck to paycheck. I know that. But what I also know is that your 20s are the best time to set the base for your financially secure existence. Yes, it is the right time to take care of your personal finance. Both, now and in the future.

Current status and future

You’ve probably graduated from college, started your first job, and are starting to make decisions on your own. Your adult life has just begun and retirement seems years away. But this is the right time to discuss your personal finance choices, how to manage your money responsibly, and to plan your financial future.

Personal finance exactly that: how you manage your money, your income, expenses, and savings, all of them. The truth is that you have to put an effort into managing your personal finances. In that way, you’ll better understand where your money is going. Also, you’ll better recognize if you have to make changes to meet your future financial goals.
Managing your personal finance better is something that can literally pay off. It can help you stay on top of your bills and save thousands of dollars each year. With that extra savings, you can pay off any debts you might have. Or maybe you would like to put that money towards your pension or spend them on your holiday or new car.

Create a budget to protect your personal finance

I know, for many of you creating a budget is critical. But without a budget, you’ll have difficulties to track your finances. Moreover, how will you identify key savings opportunities? So, if you don’t have one yet, take a time to map out your living costs.
Budgeting is the process of tracking your income, bills, and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for personal financial success as it helps you to live within your means and avoid debt.

You don’t need any advanced tools to create a budget. All you need is to open up a spreadsheet on your laptops or phones and add your all expenses. It’s okay to add the random ones that pop up once a year. Then compare what you’re spending on what you’re earning. If the numbers don’t align, then you’ll need to work on making some changes to ensure that you leave yourself enough space for savings.

When creating a budget, you have to write down:
- Your income: How much are you making per pay period?
- Your expenses and payments: How much you spend on rent/mortgage, utilities, groceries, etc each month?
- Debts owed: How much do you owe for student loans, credit card debt, and similar?
Pay yourself first – Start your emergency savings

The recommendation is to pay yourself first. That means the first bill paid each month should be some paybacks if you have any. The second is to pay for utilities, put aside money for living buyings. And everything left over at the end of the month is your extra money. Open a savings account and put it there. The biggest mistake is the young people make is not saving early enough. They tend to put off savings until their 30s. That is wrong.

Just because you’re on the younger side doesn’t mean you’re immune to financial emergencies. Quite the contrary. Without emergency savings, you may have no choice but to get out costly loans. A better choice is to have an emergency fund. It has to be at least the amount you need for three months’ living expenses. Ideally, more like six months’ worth.

Having emergency savings is very important. In fact, it should trump any other financial aim you may have.
Let’s look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65. This is how much you’ll need to invest each month:

Time is on your side when you’re young. You should save about 20% of your earnings. That should help you maintain your current lifestyle in retirement. If you want to travel more and more entertainment when retire, you should save about 30% of your earnings. That will help you have a lifestyle better than what you currently have.

A little bit of money saved now is going to make a big difference later in your personal finance.

Pay off present debt to secure personal finance

According to a recent study by LendingTree, the average millennial has an average of $24,000 in debt. This can paralyze your financial, and even your physical and mental health.

AVAILABLE FOR US residents ONLY

Large amounts of debt can seem daunting to pay off. Hence, it’s important to make a plan. You have to start paying it off quickly. Just include it in your budget as a monthly payment. But if you have more than one debt, which to pay off first?
You have to consolidate debt to one payment with a lower interest rate when possible.

But you may be more driven to try the debt avalanche or debt snowball methods of repayment.
Never focus on just one expense at a time.

If you owe money to a friend or family member and paying that debt off is a mental relief, pay that as first and then move on to other debts.

It’s important to make a plan to pay off and manage your debt to avoid heavy interest fees.

Get out of credit card debt

Credit cards are the worst enemy in anyone’s personal finance. Anyone who runs out of cash simply turns to credit cards. But can you afford to pay the balance? Combat the urge to use your credit cards for the shopping things you can’t afford.

The U.S. credit card debt increases every year. For example, the average household debt is nearly $16,000. So much!

The essential part of your good account balance is to eliminate the debt from the credit card as soon as possible. Actually, you’re wasting your hard-earned money on interest costs. By doing so you’ll have a double benefit: you’ll get out of debt and you’ll improve your credit score. And that is crucial if you plan to buy a home or lease a car in the near future.

Build credit

Never live above your resources and use credit for money that you don’t have. Never buy things on credit if you don’t have the resources to pay it off in full at the end of the month.

A credit report is a report that shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score is essential for your financial health. In your early 20s, it’s important to build your credit by paying your credit cards and utilities on time but avoiding debt in the process. Instead, use a credit card to build credit. That could be a smart use example. Of course, if you can’t afford to pay it off by the end of the billing statement, you apparently can’t afford it.

It is important to make sure you don’t break the terms of your agreements. So even if you want to pay down added debt, you have to pay at least the minimum on your credit cards.

Investing your savings if you want to take care of your personal finance

When your savings start to grow, you can add more money to your pension. It’s a great way to make sure you’ll be able to live more comfortably later in life. Or you can make an investment plan based on your goals and timeframes.

If your savings goal is more than five years away, putting some of your cash into investments would allow you to earn more from your money and keep up with rising prices. Investments are something where you put your money to get a profit. You can choose from four main types of investment:

Shares – you buy a stake in a company
Cash – the savings you put in a bank or building society account
Property – you invest in a physical building, whether commercial or residential
Fixed interest securities bonds) – you loan your money to a company or government

There are other types of investments available too, including:

Collectibles, such as art and antiques
Commodities like oil, coffee, corn, rubber or gold
Contracts for difference, where you bet on shares gaining or losing value

The different assets owned by an investor are called a portfolio.

As a general rule, spreading money among the different asset classes will lower the risk of your overall portfolio. More on this you can find HERE.

For emergency savings, the best place for your cash is the bank. For long-term savings, investing in stocks is efficient for growing wealth. And you don’t need to take an extreme amount of risk. Sure, the stock market can be volatile, and it’s had its share of ups and downs through the years. But it’s also historically delivered a roughly 9% average annual return, which is about nine times more than what you’ll get from a savings account today.

The good news is, you don’t need to be an expert to enter the stock market. If you’re not comfy investing in a particular company, just put your money into exchange-traded funds or ETFs. These low-cost funds simply seek to track existing indexes, like the S&P 500, and because they offer instant diversification, they’re a less risky prospect than buying up individual companies’ stock.

Protect yourself financially

As you enter maturity, you’ll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at work: health insurance, life insurance, short and long-term disability insurance. You may consider some benefit packages outside of your current work offers.

Fight for a higher salary if you want to take care of your personal finance.

Your 20s are a time to pay your dues but that doesn’t mean you shouldn’t fight for more money along the way. In fact, the more money you receive at your current job, the more you’ll probably get at your new job. So, boosting your salary won’t just put more money in your wallet now, but also throughout your working years.

Knowing how to manage your money and where start with financial planning can be terrifying and difficult. Especially when you’re in your 20s. Finances can be complicated, but it’s crucial to find out what is available to you. So, it’smart to start working on financial matters earlier rather than later in life.
31st January 2019
Leverage Trading Stocks – The More Leveraged the Better

3 min read

Leverage trading stocks is a concept that can enable you to multiply your exposure to a financial market without committing extra investment capital.

However, you need to understand leverage trading to help fully immerse yourself in the stock market.
The idea behind leverage trading stocks is to increase your potential payout on a play. However, it doesn’t always work out the way you want, and it can prove dangerous for your portfolio and trading account, especially when you’re new to the stock market.

Leverage is the ability to trade a large position with only a small amount of trading capital. We are sure you already find the articles that suggest that trading using leverage is risky. Also, you can find that new trader should only trade cash-based markets, like individual stock markets, and avoid trading highly leveraged markets.
Well, we disagree with this in full. Trading using leverage is no riskier than non-leveraged trading. Also, for certain types of trading, the more leverage that is used, there is the lower the risk.

What Is Leverage Trading Stocks?

In the stock market, leverage trading stocks are using borrowed shares from your broker to increase your position size in a play. So you can potentially make more money on the other side. Options trading, futures contracts, and buying on margin are all examples of leverage trading. But buying on margin is maybe the riskiest.

When you buy on margin, you’re essentially financing your position in the stock.

Actually, it’s just like buying new furniture. For example: Say you want a new kitchen and you talk the salesperson down to $25,000. You don’t have $25K in cash, so you put $2,000 down and finance $23,000 over five years. Every month, you pay the lender your furniture note. That includes the principal, which is the amount financed, and the interest, which is money paid to the lender in exchange for financing you.

People do this every day with i.g. cars and other physical kinds of stuff.

Well, it doesn’t sound so dangerous.

But even a furniture purchase can leave you in financial trouble.

Let’s say you put $2,000 down on your new kitchen and drive it off the lot. A few days later, you lost it in a fire accident. The insurance company pays the kitchen’s market value, which has already depreciated below what you paid for it. In other words, you have to keep paying off your kitchen note even though you don’t have a kitchen.
That’s what usually goes wrong with leverage trading.

How Does Leverage Trading Stocks Work?

Leverage trading stocks work by allowing you to borrow shares in stock from your broker.

For one example:

Let’s say you have $2,000 to invest. This amount could be invested in 20 shares of Microsoft stock. But in order to increase leverage, you could invest the $2,000 in five options contracts. You would have 1000 shares instead of just 20.

Instead of investing in options contracts, you can buy a certain number of shares. Leverage is always expressed as a ratio, such as 2:1. In that case, you could double your position size by borrowing twice what you actually buy.

When you exit your position, you’re responsible for paying back the broker for the shares you borrowed. Whatever you have left is your profit, minus your own initial investment in the shares.

2:1 leverage example

2:1 leverage means you can borrow twice the amount of your investment from your broker.

For example, you want to invest $50,000 in stock, but you only have $25,000 in your trading account. Using leverage, you could buy on margin at 2:1, giving you $50,000 to invest.

It doesn’t come free, of course. You have to make an initial deposit or down payment to your broker for the privilege of buying on margin.

But what happens to your investment?

Let’s say you bought $50,000 worth of stock at $50 per share. The stock climbs to $55, and you sell.

At that point, you have to return the borrowed shares or money to your broker. The brokerage firm extended $25,000, so you owe that back, plus any interest required. The rest you keep as profit.

If the stock price drops, though, you’ll still have to pay back your broker. Plus, you’ll have to cover any losses your broker incurred during the trade. And your own, too.

The Leverage is Incorrectly Considered Risky

Leverage can be highly risky because it can boost the potential profit. But also the loss that trade can make. For example, you make a trade with $1,000 of trading capital but has the potential to lose $10,000 of trading capital.

This is based on the theory that if a trader has $1,000 of trading capital, they should not be able to lose more than $1,000. Therefore should only be able to trade $1,000. Leverage allows the same $1,000 of trading capital to trade perhaps $5,000 worth of stock, which would all be at risk.

Well, this is theoretically correct. But it is the way that an inexperienced trader looks at leverage, and it is, therefore, the wrong way.

Leverage Is a High-Risk Strategy

There are no secrets, investing risk increases with reward. The higher the potential payout, the higher your risk for great losses. This is especially true when you’re trading with leverage because you’re playing with the house’s money.

Brokerage firms require margin account holders to maintain a certain minimum balance. Your cash and owned securities serve as collateral for whatever you’ve borrowed. It reduces the risk for the broker. Though, it increases your risk, because if you borrow too much on a losing position, your account can get wiped out instantly.

The Real Truth About Leverage Trading Stocks

Leverage is actually a very efficient use of trading capital. The professional traders value it because it allows them to trade large positions. Such as more contracts, or shares, etc. And with less trading capital. Leverage does not modify the potential profit or loss that trade can make. Contrary, it reduces the amount of trading capital that must be used, thereby releasing trading capital for other trades.

For example, you want to buy 1000 shares of stock at $20 per share. That would require maybe $5,000 of trading capital. So, the rest of your initial leaving the remaining $15,000 available for other trades.

This is the way that a professional trader looks at leverage. Therefore, this is the correct way.

The bottom line

Leverage trading can be a slippery slope.

On the other hand, the more leverage the better. Professional traders will choose highly leveraged markets over non-leveraged markets every time. Telling new traders to avoid trading using leverage is essentially telling them to trade like an amateur instead of a professional. Every time that pros trade a stock, they always use the highest leverage they can. They would never trade a stock without using leverage.

The next time that you are making a stock trade, consider using a leveraged market instead.

risk disclosure

29th January 2019
PENNY STOCKS – How much does it cost to invest in

3 min read

Penny stocks sound cheap, don’t you think?

Yes, because they are. They are also called micro-cap stocks

Penny stocks describe shares of a company that trades for low amounts. It is usually between $0.01 to $2.00. But some institutions count a penny stock is anything that trades for less than $5.00 per share.

They’re not expensive, so what’s the catch?

So why trade penny stocks?

Everyone who entered the stock market knows that penny stocks equal a bigger risk than regular stocks.

The reason for inflated risk is simple. The companies that hold penny stock typically have no profits and minimal operations.

Many of these companies are speculative because they are thinly traded, usually over the counter instead of on major exchanges like the New York Stock Exchange.

They usually trade on the pink sheets or on FINRA’s over-the-counter bulletin board (OTCBB) and are not required to file with the Securities and Exchange Commission (SEC).

These stocks have low liquidity due to a lack of buyers and sellers. Hence, orders may not be filled right away or even at all. Moreover, volatility tends to be high among OTC (Over-the-counter) stocks, and bid-ask spreads are frequently large.

Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

Plus, penny stocks are notorious for being part of so-called pump-and-dump schemes. The scammers buy up shares and then promote it as the next hot stock on blogs, message boards, and e-mails. Once the stock price is unnaturally pumped up by all the gossips, the scammers sell their stake. The investors stay with big losses.

But…

Where penny stocks have the advantage is the low cost.

Also because of the simple math of penny stocks. If you buy shares for $0.40, and if the stock goes up by $0.20, then your profit is at 50 percent. That’s the pie-in-the-sky scenario.

However, it’s just as easy for your $0.40 share to go down by $0.20 and lose 50%, instead.

So, a $1,000 investment could lose value pretty quickly.

Of course, not everything is so dark.

Several years ago, CNN published a story about a young man who made his first million dollars from trading penny stocks.

He decided to begin with his life savings of $1,500. And 3 years later his portfolio was worth more than $1 million.
See how worth it was.

So, how to trade penny stocks?

We warned you but, yet you still want to trade penny stocks.

It is possible to trade penny stocks successfully.

If you trade penny stocks successfully, they really can offer the greatest risk-reward ratio of any investment type. But take care, the odds are not in your favor if you don’t understand what you’re doing. The must is, you have to learn. You must have the knowledge, education, in order to understand the market to successfully trade penny stocks.

And you must stay far away from scammers. Read the fine print on any email or ad you see on social media and in emails. If you find a disclaimer at the bottom of a social media post or an email, be cautious.

That means that someone’s getting paid to post an ad.

YOU WOULD LIKE TO READ The awesome thing is that you can invest in stocks online for free. See HOW!

It’s possible to profit when you understand the game, but the odds are against you when you don’t. And worse: manipulators and scammers often run the penny stock game.

For investors who can’t afford shares of Apple, for example, the potential gains from trades like this are too good to pass up.

So penny stock trading prospers. With a relatively small investment, you can make a nice return if the trade works out.

So, if you spot an advertisement that promises dollars from your pennies just remember these several rules:

Never trust the sweet stories

You must not believe the penny stock stories that are touted in emails and on social media websites.

And you have to say no. Let’s say, you can’t invest in penny stocks as if they were lotto tickets.

Unfortunately, that’s what most people do, and they lose over and over. Think of penny stocks as people that you can’t trust.

Instead, focus on the profitable penny stocks with solid earnings growth and which are making 52-week highs.

Read the disclaimers

Penny stocks are sold more than bought. They come as tips in emails and newsletters.

Remember, the free penny stock newsletters are not giving you tips out of the goodness of their heart. Read the disclaimers at the bottom of the newsletters. And you will see. They are getting paid to pitch a stock because their investors want a presentation for the company. There is nothing wrong with that, but almost all penny newsletters make false promises.

YOU WOULD LIKE TO READ Online stock brokers make investing easier than ever

You have to know something. There is a difference between stocks making a 52-week high based on an earnings breakout and stocks making a 52-week high because three newsletters picked it. The disclaimers at the bottom of the email or newsletter, which the SEC requires, reveals very often a conflict of interest.
They are being paid to pump up the stock, but they rarely tell you when to sell. Usually, it’s far too late.

Sell your penny stock quickly

The charm of penny stocks is you can make 20% or 30% in a few days. If you make that kind of return, sell quickly.
Never get greedy, aiming for a 1,000% return. The penny stock is getting pumped up, take any profits. And move further.

Never trust company management

Don’t believe what you hear from companies in this penny stock’s world.

The companies are trying to get their stock up so they can raise money and stay in business. That’s okay, but there is no reliable business model or accurate data. So, most penny stocks are scams that are created to enrich insiders.

There are large circles of the same people run promotions using different press releases and companies.

Never sell short

Don’t do it.

Penny stocks are too volatile. If you’re on the wrong side of the trade, you could lose 50% or more on a short squeeze. Another problem is that it’s difficult to find shares of the penny stock to short. Leave shorting penny stocks to the pros.

Focus on penny stocks with high volume

Stay with stocks that trade at least 100,000 shares a day. It could be difficult to get out of your position if you trade stocks with low volume.

Traders Paradise suggests that you trade penny stocks that are priced at more than 50 cents a share. Penny stocks that are trading less than 100,000 shares a day and are under 50 cents a share are not liquid enough to be in play.

Don’t trade large positions

You really need to be careful with position sizing. Never learn the hard way not to trade big. Famous traders rule is not to trade more than 10% of the stock’s daily volume.

The limitation of position size will provide you to get out of the stock faster.

The bottom line

If you want to invest in penny stocks you have to learn.

By the way, learn from Timothy Sykes, who is famous for turning his Bar Mitzvah gift money of about $12,000 into millions by day-trading penny stocks while in college. For the past years, Sykes has been teaching his strategies through the sale of instructional newsletters and video lessons. You can find his lessons very easy.

28th January 2019
Online stock brokers for beginners

2 min read

It is easier than ever to find good online stock brokers. The benefits are numerous. You can learn and invest in the comfort of your own home. The research team at Traders Paradise made some research. We tried to find the options on the market that are good for you. So, we wanted to find the best online stock brokers for beginners and super investors alike. We had to deep into the financial world with stock experts.

And we hope that this research will help anyone get started.

The popularity of index fund investing and robo-advisors is rising. It may seem the trading of individual stocks is lost. But, it isn’t the truth.

Millions of investors continue to trade individual stocks and other securities. Because online stock trading sites make investing easier it’s important to do so using the best online stock trading sites.

Investors should know the best online stock brokers to trade with. They have the right to know. Some online stock brokers are known for their award-winning customer service. But the others are known for low-priced stock trades or powerful trading tools. Traders Paradise-Finance wants to highlight some of the best brokers available today. Actually, we want to give you some tips for choosing a broker.

Criteria for the best online stock brokers

The best online stock brokers offer low fees, great customer service, and smart research tools.

Discount brokers charge as little as $4.95 for online trades. Compare that to the $100+ that many full-service brokers charge. It seems like a no-brainer choice to choose the discount broker. But, you must know how to pick the right one.

Trading online is a self-directed practice, and you need the right broker backing you up.

But it is a stormy time for online stock brokers.

Between significant cuts in commissions and a few major acquisitions, the competition is fierce.

YOU SHOULD READ Stocks Online for Free – How to Invest

So, let’s like this, there is no one best online stock broker. But each one has different strengths and weaknesses. Our aim is to spotlight them and help you find the best one for your investing style.

Every trader should care about cost. A few of the fees we analyzed include:

Cost per transaction:

Commissions are typically an investor’s biggest cost base. For example, in 2016, a usually unassisted transaction fee averaged about $8. But early 2017 brokers decrease their commission. Fidelity, E*Trade, and TD Ameritrade, also did that. Now, you can trade for as low as $4.95. No matter what the price, though, for us, transparency is key. We wanted to see affordable pricing structures.

Account minimums:

Seeing your wealth shrink due to a tough market or bad strategy isn’t fun. It’s worse if you’re also getting dinged by your broker’s minimum account balance requirement.

Charges for data and tools:

The best online stock trading sites have quality market data like real-time quotes, educational resources, and stock-screening tools built right into their platforms. But some, we have to say, like Fidelity and TD Ameritrade, stand out for also providing top-shelf resources. And it is totally free of charge.

Extra costs:

Executing a trade over the phone, for example, can increase an $8 commission fee to $25 or more. Some platforms offer free education on sophisticated strategies but require an upgraded platform with an annual fee. Besides cost, we valued educational material, reports and tools, and the usability of the platform itself.

After Traders Paradise conducted this research, the following to be our top picks:

The best for cheap trading is Ally Invest. But beginners would like E*Trade. Speaking about the platform the best has TD Ameritrade. Best research and tools have Fidelity.

Why use a discount broker

A discount broker costs you much less money per trade. You won’t have the steep commissions that full-service brokers charge. What this means is more cash in your pocket and the opportunity to make more trades.

The main reason is cost.
But here we will break down who would do better with a full-service broker and who could get by with a discount broker.
Because cheaper isn’t always better.

Let’s see in this way.

Do you have a large number of large investments?
Or you not have the desire nor the know-how to handle your portfolio?
Can you afford high commission fees?
Maybe you not have time to manage your portfolio effectively?

If your answers are “yes” to each of these questions, a full-service broker might be the best option for you.
But, if you want to save money on each trade made or like to be in control of your investments, the discount broker will suites you better.

Because you don’t want to be pressured to take other investments and you want to make frequent trades.
The other things to consider when you have to choose your online stock brokers are:

Minimum deposit/balance:

Some brokers require a minimum deposit to open the account. Others don’t have a minimum. Yet others require a minimum average balance over the life of the account. Determine what you can afford to keep in the account if choosing accounts with a minimum requirement higher than $0.

Customer service:

Take a trial run on any broker’s website that you are considering. Check out the support they have readily available on their website. But you should also email and call them with questions. See how long it takes to get an answer.
A discount stock broker can save you a lot of money and save your portfolio. But they aren’t for everyone. Here are a couple of other choices you may want to consider:

Robo-Advisors: If you are familiar with a completely “hands-off” approach, robo-advisors can save you even more money. The automated system uses an algorithm to invest your money for you. After you input your risk thresholds and investment goals, the computer does the rest.

YOU SHOULD READ Automatic Trading – What Is It

Peer Lending: This is those who want to stay away from stocks and bonds for now. If you are one of them, consider peer-to-peer lending. You decide how much money you want to invest and what type of risk you want to take. The minimum investment is often about $25. You can break your investment up into as many loans as you want. This helps diversify your portfolio.

Full-Service stockbroker: If you have a lot of money to invest or need that in-person advice, a full-service stockbroker is for you. You’ll find them at your larger brokerage houses, but keep in mind that their commissions are higher than discount brokers. In the most common situations, you will have to pay $100 – $200 per trade versus $4 – $7 per trade.

The bottom line

Using a discount broker is a great way to trade and keep your profits. Choose your broker wisely by paying attention to hidden fees and understanding account minimums. A discount broker is a great way for beginning and experienced investors alike to invest in their future.

To find which online brokers suits you the best, you should read Traders Paradise’s WALL OF FAME.

Risk Disclosure (read carefully!)

25th January 2019
Stocks Online for Free – How to Invest
Why invest in stocks online for free, where to find broker, is it really free? Read this post to the end.

By Guy Avtalyon

Technology is making it easier than ever to invest in stocks online for free. However, some places still are charging outrageous fees and commissions to buy stocks and ETFs online when it’s possible to invest in stocks online for free.

Some of the firms that advertise “get started with just $5” can charge you huge fees as a percentage of what you invest. Truth is, we saw some really dishonest financial advisors charging thousands!

We can offer this: everything held equal, the less you pay in fees, the better your returns.

Where to find stocks online for free

Gratefully, we live in the 21st century, and there’s never been a better time to be a small investor.

For 95% of people, that’s fine. For those who want to buy individual stocks, there are still places that allow you to buy stocks online for free.

You have only a few ways to buy stocks online for free.
Thanks to developing technology investing is cheaper. More and more companies are lowering their fees and commissions.
It is possible that they will continue with costs reducing in the coming years due to competition. So, it’s reasonable to expect the cost will drop more.

Fees don’t have to stop you from making wise and lucrative investments.

And now, in today’s mobile world, investing is becoming easier and cheaper than ever. Buying and selling stock investments is not as easy as watching TV series but don’t worry it is not rocket science either.

Today you can enter your stock trades from stockbrokers websites for stock trading apps. It’s very convenient. Just read reviews of the best trading apps and you can find the best selection for you.

Some of them you can find on Traders Paradise’s Wall of fame, like E-trade, TD Ameritrade or Fidelity.

We can suggest you these 3 the best stock trading apps for beginners.
- TD Ameritrade
It is the best for ETF trades. You’ve probably discovered Exchange Traded Funds (ETFs) and you want to cut fees, but you want to maintain a well-diversified portfolio.

ETFs maintain a tax-advantaged structure. They usually offer lower fees than comparable mutual funds. But, most brokerages charge you to buy and sell ETFs. Well, this broker, TD Ameritrade, don’t do so.

TD Ameritrade offers over 100 commission-free ETFs from industry giants iShares, Vanguard, and even more. Because of the diversity of no-load ETF funds, TD Ameritrade is, in Traders Paradise’s opinion, top broker for the people who want to consider tax-loss harvesting on their own.

Moreover, TD Ameritrade also has no minimum and no maintenance fee IRAs.

TD Ameritrade’s mobile app also offers research, information, and portfolio analysis that makes free investing that easier. But we have to say, TD Ameritrade charges for some ETFs, mutual funds, and equity trades. Our suggestion is, filter for no-load ETFs before you buy.

TD Ameritrade has about 4,120 no-fee funds.
- E-trade
This broker offers thousands of mutual funds with no transaction costs.

Mutual funds are the old-school ETF similar principle from the diversification angle. Like ETFs, they hold many individual investments. Hence, investors get some level of diversification in a single fund.

Unlike ETFs, they are priced, they aren’t traded with a commission but with a transaction fee charged by the broker. That’s because they are bought and sold at the end of each trading day.

That fee can be pretty big, sometimes almost $50. But many brokers have a list of no-transaction-fee funds.

Of those that do, E-Trade put up the best showing, with about 4,440 and 4,350, respectively. This is why this broker tops our list of best mutual fund providers. That means you can buy funds on those lists with no charge. Though as with ETFs, investors in these funds will pay expense ratios.
- Fidelity
It is the best for Free ETF Trades & No Minimum IRA. Fidelity allows you to invest for free. This is surprising for most people because most people don’t connect Fidelity with “free”. But, Fidelity offers a range of commission-free ETFs. That allows the majority of investors to build a balanced portfolio.

Fidelity IRAs have no minimum to open, and no account maintenance fees. Let’s say, you could deposit just $5, and invest it for free. That makes this a much better deal compared to some other companies. Furthermore, Fidelity just announced that it now has two 0.00% expense ratio funds. And yes, they are free.

So, you can not only invest commission-free, but these funds don’t charge any management fees. This is truly free investing. But to make it a prime app, it has to have a great app, and Fidelity has it. Fidelity has a great app, so that makes them the top broker.

Fidelity’s app is the easiest to use out of all of the investing apps we’ve tested. All their features work brilliantly together, and they have tones of them. Plus, they are the all-in-one option. With them, you have a full service investing broker. And that is more than just free.

Why invest in stocks online for free

Investing in stocks is supposed to be about building wealth. Well, paying trading commissions can slow your progress..Small fees on stock trades might not seem like a big deal. Most online brokers charge $10 or less for each transaction. But keep in mind that’s per transaction. If you are just starting out as an investor, or if you have only small amounts to invest, even a small fee can take a big bite out of your profits.

But now, you know how you can invest in stocks online for free.
24th January 2019
Blue-Chip Stocks – Investing in them can be a profitable decision

Blue-chip stocks are popular because they can provide a safer position during economic downturns.

By Guy Avtalyon

Investing in blue-chip stocks may have a reputation for being boring and even a bit outdated. But think again, is it an accident that they are preferred by wealthy investors and rock-solid financial institutions?

Anyone would like a part in businesses they understand and that have a demonstrated record of extreme profitability. The blue chips certainly go along with this description. According to generations of investors, blue-chip stocks have brought money for owners. For the one wise enough to hang on them through good times and bad times, inflation and deflation.

And it is well known. The blue chips stocks are always there. They represent companies that are the core of the global business. The firms with the past, with history. Their products and services are present in nearly every part of our lives.

So, why they are almost entirely ignored by smaller, poorer investors? But, at the same time, the blue-chip stocks have been supreme in the investment portfolios of retirees, non-profit foundations. Also in the portfolios of the top 1 percent of the capitalist class.

This puzzle gives the greatest example, a spectacular glance into the problem of investment management.
Even more, it requires some discussion of behavioral economics.

Blue-chip stocks don’t belong exclusively to the world of retirees and insurance companies. Here’s why.

What are blue-chip stocks?

First of all, the blue-chip stock is a nickname. It describes the common stock of a company that has several quantitative and qualitative characteristics. The term “blue-chip stock” originates from the card game, poker. You know that the highest and most valuable playing chip color in poker is blue.

But there is no general agreement on what, precisely, makes up a blue-chip stock. Hence, there are always individual exceptions to one or more rules. Anyway, blue-chip stocks have several common characteristics.

They are not new, they have history and profitability. They have official data of stable earning power over several decades.
Also, they have long data of continuous dividend payments to stockholders.

They reward shareholders by growing the dividend at a rate equal to or substantially more than the rate of inflation. So, the owner’s income is increasing at least every twelve months even if the shareholder never buys another share.

Blue-chip companies

They have high returns on capital. Also, a solid balance sheet and income statement. Especially when measured by the interest coverage ratio and the geographic and product line diversity of the cash flows.That kind of company repurchases stock when the share price is attractive relative to owner earnings.

They are larger than the classic corporation. Measured by both stock market capitalization and enterprise value, they are among the largest concerns in the world.

It is difficult to unseat market share from them. Sometimes, it comes in the form of a cost advantage achieved through economies of scale, or a franchise value in the mind of the consumer, or ownership of strategically important assets such as choice oil fields. That giant companies issue bonds that are considered investment grade with the best of the best being Triple-A rated.

They are included in the component list of the S&P 500 index, speaking about the USA companies. Many of the blue chips are included in the more selective Dow Jones Industrial Average.

Why wealthy investors prefer blue-chip stocks

Well, one of the reasons wealthy investors prefer blue-chip stocks is because they tend to compound at acceptable rates of return. It is typically between 8% and 12% with dividends reinvested. To say that, holding blue-chip stocks isn’t smooth by any means. They may drop by 50% or more during the period of several years. But over time, the profits perform their extraordinary power.

Presuming that the shareholder paid a reasonable price, it shows up in the total return of the shareholder.
Even when they paid high prices for the ”Nifty Fifty”, 30 years later, investors beat the stock market indices despite several of the firms on the list going bankrupt.

By holding the stock directly, the wealthy can pass them to their children using something known as the stepped-up basis loophole. One of the most incredible, traditional benefits available to reward investors is that all of the deferred capital gains taxes that would have been owed are forgiven.

For example, if the investor, your mother or father at the same time, vested $500,000 worth of blue-chip stocks and held on to them.

Can the blue-chip stocks offer a safer position during economic disasters?

It isn’t a pleasant moment, but, just, for example, they died after they had grown in value to $5,000,000. The successor could arrange that estate in a way that the capital gains that would have been owed on the $4,500,000 unrealized gains ($5,000,000 current value – $500,000 purchase price) are forgiven. The successor would have never paid them. Their children will never have to pay them.

Don’t you think it’s better compounding at a lower rate with a holding you can maintain for the decades? Better than trying to flit in and out from position to position, always chasing after a few extra percentage points? Yes, it is.

Another reason blue-chip stocks are popular is that they offer a safer position during economic disasters. The less experienced and poorer investors don’t think about this too much because they’re almost always trying to get rich too quickly.

They are looking for that one thing that will instantly make them rich. It never ends well. Markets can collapse. You will see your holdings drop by substantial amounts no matter what you own.

Are Blue-chips safe investments?

Don’t let the other people deceive you. One of the reasons blue chips are relatively safe is that dividend-paying stocks tend to fall less in bear markets due to yield support.

Moreover, profitable blue chips sometimes benefit over the long-run from economic disasters. They can buy, or drive out, weakened or bankrupt competitors at attractive prices. The blue-chip stock sets the stage for much better results decades down the line whenever there is a market collapse.

As a conclusion, wealthy and successful investors tend to love blue-chip stocks because the stability means that the passive income is hardly ever in danger. Especially if there is broad diversification in the portfolio. If we ever get to the point that premier blue-chips are cutting dividends en masse across the board, then we will have much bigger things to worry about than the stock market. We’re most likely looking at a civilization disaster.

And if it comes, who will care!

21st January 2019