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.

  • Why Forex Trading Is Hard For Some Of You?

    Why Forex Trading Is Hard For Some Of You?

    Why Forex Trading Is Hard For Some Of You?
    Experienced traders admit that the greatest problem in the Forex market is not the trading approach but discipline. 

    Many beginners in the Forex market are faced with some difficulties and usually give up and ask around why forex trading is hard. Yes, for some traders it is hard but doesn’t have to be. Once you obtain more experience you’ll see how easy it can be and you’ll never ask again why forex trading is hard because it isn’t. Don’t believe what others are telling you. Forex trading is simple. But it’s really important to learn some basics before you enter this market. It is just like riding a horse. Once you learn it, it’s impossible to forget. And as in riding a horse, you have to know and follow some rules. Yes, you can push on your horse, as you can force your trades, but what will happen? Your horse might refuse to obey. 

    You have to be in line with a horse, calm and considerate, you must have the mental strength to deal with difficulties and stay cool. You must understand your horse and predict how it will act on your commands and have patience.

    Almost the same comes to Forex trading. When we hear someone asking why forex trading is hard for most of the traders, we know such has lost its temper. 

    The other reason why forex trading is hard could be that forex traders rarely like to follow the rules. They tend to ignore them. Maybe we should ask them why. Sticking to the rules may not be so exciting but it is beneficial. Don’t listen to the scammers that offer instant solutions to great gains, strategies that are successful 100%, that work in any Forex market’s condition. Put the logic to work! It is impossible! How one single strategy can be the best for all types of traders, all circumstances, for different market conditions, personal risk tolerances? No way! Avoid such artists, Youtube is full of them.

    When you learn forex trading in a proper way and follow some rules, you’ll never ask such a question of why is forex trading hard. 

    Let’s see why Forex trading is hard for some of you? 

    We already mentioned scammers. We’re pretty sure you noticed that many websites where you can just buy a trading strategy or attend some webinar over the weekend. “Become a supreme forex trader in a few hours,” “All you need is my system-pro to become a millionaire in trading forex,” or “You don’t need to learn, just follow my most profitable strategy of all times.” We really found this on the internet.

    They are in most cases, scammers. Even if you try to watch some video on YouTube you’ll be confused in 20 seconds. Honestly, some of these so-called gurus can burn your brain in a few seconds. Their explanations have nothing with successful trading. They don’t even know what they are talking about. They are totally messed up! 

    Our two cents – If a trading guru wants to sell a fancy strategy, you shouldn’t have losses by copying it. Of course, if you strictly follow the instructions and if you have full access to his/her strategy. Well, elite traders are honest, they will tell you, they will teach you. That’s the main difference. The scammers will sell you, often it isn’t a lot of money luckily, something that isn’t working or not works for you. So that could be the reason and answer the question of why forex trading is hard. Because you got a rotten apple actually.  

    Forex trading can be difficult

    Our brain is designed to run on the principle of causality. We are all trained to understand that everything we do has a particular consequence. Action will cause a reaction. Science also teaches us the same. For example, if we went out without an umbrella on a rainy day, we can expect to get wet. Or if we jump in shallow muddy water, we can expect to get hurt. 

    Right? Yes, in real-life (even if we know some people that are not aware of causal relationships, especially in the case of shallow water), but not in forex trading. In trading, you don’t have a direct balance between the time you spent in learning and the profits you obtain. To explain this. Many beginners expect if they spent weeks and months studying to trade, they could be successful automatically. That’s not how trading is. There is more.

    Forex market is immune to control

    Can you decide if the EUR/USD will fall? How can you know if the USD/CAD will go up or down from the last price? Most people are not able even to guess it. In everyday life, there are things we don’t need to think twice. For example, 1 + 1 = 2. That’s it. Moreover, nothing can change it. But in the markets, every minute is different. So while trading forex you have to change the strategy, method, approach, decisions. Don’t try to implement the trading patterns taken in the past. Basically, it isn’t mistaken, but the fact is that historical performance has surely no relationship to current market performance. 

    The forex market creates incredibly different circumstances where we have zero chances to be sure where or when the market is going to change. Maybe that is the reason why forex trading is hard. 

    So what to do? Anything but never try to put the market under your control. You can spend nights and days watching charts, monitoring your trades but you cannot control the market. One experienced forex trader once said that one of the most important lessons he learned is to accept the randomness in the forex market.

    That isn’t the reason to avoid forex trading, that’s the reason to be ready for any possible scenario of your trades. You’ll be prepared even if your trade setup fails. Read books, learn a lot, practice a lot. That’s the key.

    Why forex trading is hard – your subconsciousness could be the reason

    The main duty of the subconsciousness in forex trading is to protect our wealth. But sometimes it operates in a strange way. In essence, trading should be simple since we have only two options: to sell and to buy. So, theoretically, we have 50 percent chances to be right. Yes, but the other 50% is against us. OMG, I’m losing my mind! That’s the first thought, right? Here is our subconsciousness in play. Let’s see what could happen in trading.

    For example, you entered the stressful position. Everything looked good but suddenly the market turned against you. That’s the stress and your subconsciousness tries to relieve you out of that situation. What are you possibly doing? Exit the position. Why? Your subconsciousness pushed you to exit prematurely. The consequence is that you lost the trade or at least, you missed the main profit.

    Let’s suppose you traded for a while and you decided to set your stop-loss target not too close as always. What happened, for God’s sake? Are you shaking? Sweating? Are you nervous? Of course, you are! Your subconsciousness is warning you’re making a mistake by this deviation from your standard trade. In prior trades by a setting stop-loss order at a particular level, you had the winning trades. So, your subconsciousness doesn’t like changes because, as we said, its primary job is to protect your gains. 

    So, why are you in conflict with your subconsciousness when you both want the same? Yes, that’s true, but you both have different ways to achieve that. To make a profit. When you want to enter a riskier position or to change the previous performances, your guts will try to stop you. And it might cause you to make emotional decisions. You might be frightened to change anything. Your subconsciousness will rather accept small gains than to allow you to take risks and make great profits. That’s why forex trading is hard sometimes. It is a constant struggle with yourself. 

    How to become a better Forex trader?

    Do you remember when you went to school, you used some tools for the lessons? The same is in forex trading. You’ll need tools to become a better trader. In Forex, trading tools are known as technical indicators. You’ll have to know how to use them when trading. Also, you’ll need to use the fundamental analysis to be able to understand the markets. And, a lot of practice. Yes, we know it is the hardest part since many would like shortcuts. Unfortunately, there is no shortcut. In forex trading, it is essential to have realistic expectations. But also, you must have a bit of courage only once you learn how to trade and what may happen after you make some move. 

    If you think you know everything after a few weeks of practicing, you’re in big trouble. That is the perfect way to lose everything you have. And to do it quickly. So, what is the proper amount of time to learn trading forex? No one can tell you that because it is different from person to person. But if you keep in mind all these things mentioned above, the odds to become a successful trader could be bigger. Be patient, learn how to profit from trades consistently. That’s the way! If you do so you’ll never ask again why forex trading is hard. It will not be for you.

    Bottom line

    Why Forex trading is hard is the question for those who want to give up, to quit, and go to sleep. Forex trading isn’t hard, it is a fantastic opportunity to increase your well-being. Don’t expect to be a great trader from the first trade. You’ll make mistakes, you’ll lose money, but you’ll learn. Sooner you accept that the sooner you’ll learn. No one became a great trader by birth. Everyone had to learn how to trade and how to adopt the whole process. It isn’t hard unless you make it hard. 

    In forex trading, as it is in trading in general, you’ll have a lot of enemies. But remember one thing, the most dangerous enemy for your success is you. Risking too much, betting, trading too often, just pick one or all of these to make losses. The forex market is tricky to read, but you have the trading rules to be able to do that. Rules will protect you from making decisions driven by emotions. Let’s go, play the market! But do it smartly.

  • Goal-based investing – How Does It Work?

    Goal-based investing – How Does It Work?

    Goal-based investing - How Does It Work?
    By focusing on investment goals, investors can easily define investments’ purpose and intent

    In goal-based investing the point is to give your investments a specific goal. It isn’t the same as traditional investing where you can easily allocate the assets in your portfolio and address each of them with a specific goal. Goal-based investing means to have separated portfolios for each of your investment goals. Each of them will carry different risks, investment time horizons. So, you’ll have to adjust all these portfolios toward a particular goal. Here is one example of goal-based investing.

    For example, you would like to save for retirement, but at the same time, you want to fund the investment in your life dream vacation. Are these two goals competing? They are coming with different time horizons, also the importance is different. Hence, acceptable risks are different. Investing for a dream vacation will require less time, for example, 1 or 2 years could be quite enough. But, on the other side, investing for retirement will take at least 10 years, for instance. What do we have here? One short-term investment and the other with a longer time horizon. 

    Using a traditional asset allocation

    If we use a traditional asset allocation portfolio to achieve these goals, the short-term investment could influence the risk of the whole portfolio. Moreover, it could be ruling for the entire portfolio. So, to meet your long-term goals could be potentially difficult. And here is one of the advantages of goal-based investing. In conventional investing, investor’s gains and failures are measured against some benchmark index but in goal-based investing your real-life situation is what balances your portfolio. Since you can be focused on one investment goal, you could avoid market noise. What is more important, if the markets are volatile, it is easier to handle these kinds of portfolios.

    What is goal-based investing? 

    Goals-based investing is a strategy that helps investors to meet their personal goals. No matter what they may be. This investing strategy works in an easy and uncomplicated way. Goal-based investing may look like a simple concept, but it is a deviation from the standard risk-tolerance structure. In traditional investing, we can recognize investors based on their risk tolerance as conservative, or aggressive. These differences have important meanings for investment strategy and for risk management.

    Well, the risk isn’t just about the volatility of some asset or market. Traditionally, the risk represents the annual volatility or the standard deviation of monthly returns over one year. For example, small-caps have the highest volatility so they are riskier investments. When it comes to a goal-based investor, for some beginners in the market, small-caps might look less risky. Hence, for older investors that are seeking the highest level of sustainable spending, large-caps could be less attractive for this kind of investor.

    So, what is riskier is determined by investment and goals.

    Based on return expectations, goal-based investing allocates assets to reach financial goals. So, the risk is simply explained without complicated calculations. The risk appears when assets are lacking to meet your goals. For example, retirement investment risk is when investors have to withdraw and sell their investments for everyday life.
    Efficient goal-based investing needs a deep understanding of your real financial goals. 

    The value of goal-based investing

    Goal-based investing should cover three practical purposes.

    If you choose this strategy you should observe risk not just as volatility, but instead as the possibility of setting your goals. Risk tolerance isn’t abstract. It is linked to your goals, time horizon, and life plane. Based on the risk tolerance you’ll choose the investment approach. For example, an investment portfolio for retirement should consist of investments that are different than for an investor living in retirement.

    Ultimately, goal-based investing could improve what has become the traditional strategy for asset allocation. Traditional investing is based on the premise that a portfolio’s value is essentially driven by asset allocation. But some recently done analysis shows that out of the portfolio’s overall return, about half of return is due to asset allocation, and the rest of returns is from goal-based investments.

    Is it possible to build an ideal goal-based portfolio?

    Modern Portfolio Theory claims that it’s possible. An ideal portfolio should provide you maximum returns by taking on a moderate amount of risk, mainly through diversification. 

    Goal-based investing isn’t something unknown. It’s actually an advanced version of the way how you manage your family finances. The same as you put money in different envelopes or accounts, you should allocate your investments. For example, if your goal is to save for retirement you’ll probably separate your money in proportion 50:50, half will be for spending, the other half for goal-based investing. But if you are investing for the purpose of a dream vacation, the better choice is to spread your money in proportion, for example, 70:30 where 70% of your money will be used for all your expenses and 30% for your current goal-based investing. It may be trickier if you have several goal-based investments and several portfolios. That would require more work while monitoring each of them. 

    The good news is that you can find support from professionals. But if you have less than five such portfolios maybe you should dedicate some of your spare time to monitor them. When you decide that a goal-based investing is suitable for you, you can then build the risk-adjusted portfolios to meet each individual goal.

    Important to know before investing

    Ask yourself some crucial questions for each goal. For example, what is the purpose of the savings? How long do you want to stay invested? Do you plan to put additional amounts in investments? Can you anticipate any need to withdraw your savings before your goal is reached? Will you spend part or the whole amount of your income from the investments during the investment period, or you plan to reinvest it? When you go through all these and many other questions for each goal, you’ll come up with the assets you will invest in.

    The benefits of goal-based investing

    Maybe the main benefit is that this strategy allows you to know the precise amount that is needed and when is needed to reach your goals. In this way, you’ll be able to determine how much you exactly need to invest. The other benefit is that this kind of investing gives you a better chance to pick the investment product suitable for your goals. You’ll be able to make the proper investment decision without following the crowd. One of the advantages is that you’ll have more investment discipline. The main goal of any investment is to generate returns. When you know how much exactly you invested and compare it with your financial goals, you’re able to get better returns. Maybe you’ll add different assets to meet different goals. This will provide you to diversify your portfolio to reduce the risk. Fewer risks, in this case, means more profits. That may have a great influence on your financial freedom.

    System for this kind of investing

    When you determine your financial goals, you have to make a clear plan on how to reach them inside the set period. You need to determine the amount of money needed to reach your goal. Pick the assets based on your investment horizon and risk and rate-of-return.
    Investing in the right assets is complex and needs in-depth understanding and analytical work. If you want to grow your wealth, you’ll need to hold your investments for a longer period. Never forget the power of compounding. Reinvest your income into the same assets to produce additional returns.

    Bottom line

    Goal-based investing is an easy way for investors with special goals in mind. It enables investors to set risk preferences for goals of different importance and need, gauging progress, or failures against their goals. Your success isn’t related to any market benchmark index but related to real-life events.
    Keep in mind, the circumstances and goals are changing and from time to time you’ll need to revisit them as the markets continue to change, go up and down.

  • Self-directed Investing – Advantages and Disadvantages

    Self-directed Investing – Advantages and Disadvantages

    (Updated Oct. 21)

    Self-directed Investing - Advantages and Disadvantages
    You’ll pay lower fees if you choose some online broker but you have to do everything yourself

    Self-directed investing also known as do-it-yourself investing is when you as an investor build and manage your own investment portfolios. That means you manage your investment strategy on your own. You are the one who decides which investments you want to buy or sell, and when. Self-directed investor ordinarily uses some online trading platform to make the trade. These investors prefer to forego the advice of an investment adviser since they are do-it-yourself types of investors. If you are a DIY type, here some things you have to take into consideration. Also, you’ll need to follow some principles. 

    Famous investor, Warren Buffet said: “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” 

    This is particularly true if you know that self-directed investing is very simple. To be honest it isn’t the easiest one but also, it isn’t a terrifying type of investing. 

    Anyone who has done simple but serious research with due diligence can count to outperform the stock market. By self-directed investing, you could do that over a long period if you know how to create an investment portfolio capable of beating the market.

    Advantages of self-directed investing

    First of all, you’ll pay lower fees if you choose some online broker. That will allow you to trade with lower commissions and fees. This comes from the fact that in self-directed investing you don’t need any advice or advisor since you choose to be a DIY type of investor. Further, you can make your own research, and, based on it, you’ll make an investment decision. You’ll have control over your investment. As we said above, self-directed investors use online trading platforms, from websites or apps. That is a very convenient strategy because the provider will often offer you researching tools, stock quotes, interactive charts, and other important trading data. For example, you’ll have an opportunity to look at how your investment is performing in real-time. 

    Disadvantages of self-directed investing

    But there are some disadvantages also. The first one is that you have to do everything yourself. In self-directed investing the whole process is done by yourself. Research, picking the stock you want to buy or sell, you have to monitor your portfolio in person, to decide when to buy or sell. To aid this process, self-directed investors diversify investments. It is a good strategy that allows them to follow investments especially when the markets are volatile. 

    The additional drawback of self-directed investing is the possibility of overtrading. Online trading offers you to trade easy and quick, but it is a double-edged sword. If you’re not disciplined enough you may take too much risk and it will cost you additional fees. Additional fees could and will reduce your returns. Also, you can make some unexpected mistakes due to the fact that trading platforms operate so quickly. You’ll need to understand the platform you’re trading with, in detail. This is necessary to avoid buying and selling stocks at prices you didn’t want, particularly when the prices are changing fast and markets are extremely volatile.

    How to become a successful DIY investor?

    Set the orders

    There are some tricks of the trade very helpful in self-directed investing. Keep in mind you can set more than one type of order. When you want to enter your stock order it is a smart decision to set the limit orders. Meaning, you’ll have to establish the minimum stock price at which you want to sell and the maximum stock price at which you’re willing to pay when buying a stock. Also, set a market order. That will provide you to get the best price no matter if you want to sell or buy the stock, but the best price possible at the moment the market receives your order. For example, if you trade while the market is closed, you’ll receive the market price on the first following trading day. However, you have to be careful with market orders. That price could be lower, at least it can vary, from the closing price on the prior trading day. Nevertheless, market orders are the fastest way to execute your order while limit orders will provide you more control over your stock’s price.

    Cyber awareness

    Self-directed investing is commonly done through trading platforms as we mentioned. Hence, look at these trades as any other online transaction. You must have cyber awareness since safety is the main thing to think about in investing. Never place your trade by using some public wi-fi, keep your sensitive data, such as banking data, secure. Here are some tips on how to have safe clicking.

    Having a strong password is MUST, never use the same one for different sites. You know what an address bar is, right? Keep attention if it hasn’t a lock symbol. Well, it’s better to avoid such websites. Find a trading platform provider that will never ask to disclose your personal information or credentials in an email. The trusty provider will allow you to send inquiries through a secure message from your account’s homepage for self-directed investing.

    Choose your stocks without emotions

    If you want to put your money into companies and investments you “love” keep in mind it is so easy getting caught up in the hype of the cool investments that could generate great returns. Yes, we know that some of you did exactly that. It’s so easy to make a mistake if you put your money into companies that are currently popular and favored.  Avoid investing in such “frenzy” companies. Hot stocks are so seductive but they could last as long as a shooting star, for a few seconds before disappearing! Think twice if it is a good choice for you.

    Recognize your goals in investing

    Goals are an extremely important part of investing. You have to analyze them and come back to them from time to time and see if you stick to them. We all are going through different stages during our lives. Some major life changes might influence our investing goals. Since we are talking about self-directed investing you’re a lonely rider. There is no advisor to tell you what to do. So, it’s very important to reconsider investing goals from time to time. Your investment portfolio has to be aligned with your goals no matter what kind of investment horizon you have, short- term or long-term. Also, examine your risk tolerance, again and again. As times go by it might be changed so adjust your investment portfolio according to new risk tolerance. Maybe you should be less in stock, more in bonds, or vice versa. That’s up to you. Maybe you would like one of the lazy portfolios now, who knows?

    What investment vehicle is best for self-directed investing?

    First of all, there is no such thing as “the best investment vehicle” for self-directed investing. That depends on you as an investor and your goals. You can choose stocks, bonds, ETFs, mutual funds, whatever you like, and trade in the markets.

    But, selecting the right investment must be made carefully. Ask yourself what is your goal with this particular investment. Further, how it will influence your other investments in the portfolio. Be careful, you are managing your investments on your own. But relax, in online investing, you have many tools available. At your disposal are many advanced tools that may help you to select the best investment for your goals. 

    Does it matter in which sector you invest?

    This is a more serious question and you’ll need more work and researching. Some sectors may be more sensitive to specific economic circumstances or have poor performances, but others can be fantastic over certain periods. Guess! In online investing, self-directed investing, you have tools that will help you to decide which sector to choose. It is the same as picking the stock. That’s the beauty of online investing. Actually, you’re not alone but all decisions you make are done on your own.

    Use margin account smart  

    Every single investor or trader will request a margin account at some point to enhance chances to increase returns. If your investment is leveraged you’re able to buy more shares. Leverage is the process of borrowing money from a broker, against the investments in your account. When the market is going in your direction you’ll generate larger returns. Remember, you’ll have to pay back the money borrowed, plus interest but the rest is your profit if any. Yes, that’s the problem. If your investment pays not, you still have the obligation to pay back the borrowed money with interest. Hence, using leverage or margin accounts could increase returns, but also could enlarge the losses.

    Bottom line

    The success of self-directed investing heavily depends on your strategy. Your strategy is your best friend in investing. A friend that will give you a hand and lead you to reach your investing goals. You can choose among many strategies or create your own if you find that one strategy may not work for you. Investing is individual, so you have to trust your strategy. It must help you reach your investing goals. Which other purposes does it have? 

    You’ll decide if self-directed investing is suitable for you. No one else. And you’ll do it based on your risk tolerance and investing goals. We are here to point some other essential principles that can help keep you on track. Nothing else.

  • Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing
    Pure play method represents an approach practiced to estimate the beta coefficient of a company whose stock is not publicly traded. 

    What is a Pure Play method in investing? Have you ever heard about this? How do you estimate the companies when you want to invest your money in different stocks? What tools do you use? Do you make your investment decisions by looking at cash flow, dividends, the strength of the company? What are your criteria? Maybe it is easier for you to estimate the company that produces only one single product. If you do the latter mentioned, you already know what is a Pure Play method in investing. But do you know all Pure Play’s performances and risks?

    Before we explain them to you we’ll explain what is a Pure Play method.

    What is a Pure Play method?

    Investors use this method when estimating the beta coefficient of the company whose stock isn’t publicly traded.  

    A Pure Play company is focused on one type of product. It is different from the companies that are conglomerates, offering many products. Pure Plays are easier for investors to analyze. When investing in Pure Plays you’ll have maximum exposure to a distinct market part.  For example, if you want exposure to car makers stocks you might prefer buying Tesla stock. As compared to Yamaha Motor Co.which is engaged not only in making cars but also in many other industries. This company is producing motorcycles, boats, guitars, outboard motors, etc.

    A Pure Play method is a procedure that investors use to estimate the beta of such a company. But the Pure Play method is also a way to discover the cost of capital for a product or project that is different from the company’s principal business. 

    Many companies are pure plays. They are selling or producing one singular kind of product. So, you can understand that this kind of investing can be very risky because if interest in this particular product or service declines even a bit, such a company will be affected negatively. A Pure Play method is helpful to estimate a project’s beta or the risk of a project. For example, a Pure Play company could use this method to identify publically traded companies that are involved in projects similar to the one they want to develop. 

    Use it to estimate the cost of equity capital of a private company

    This involves examining the beta coefficient.

    When evaluating a private company’s equity beta coefficient, you’ll need a beta coefficient of a public company. The latter you can calculate when regressing the return on public company’s stock on the appropriate stock index. The resulting calculation is then applied to return the beta coefficient of a private company. Here is how to do that. Let’s mark the private company as P and public company as PB.

    In our equitation, we’ll mark debt to equity ratios as DEB and DEPB for the private and public company respectively.

    Unlevered Beta of PB = Equity Beta of PB / (1 + DEPB × (1 − Tax RatePB))

    Equity Beta P = Unlevered Beta of PB × (1 + DEP × (1 − Tax rate))

    Advantages and disadvantages of the Pure Play method 

    The stock of Pure play company is different than stocks of diversified ones. They are popular among investors who want to make a particular trade on particular products. In short, they are not interested in investing in a company that has different business lines. They found reasons to invest in Pure Play stocks and we’ll try to explain them. Firstly, these stocks are easier to analyze. Also, when you have to analyze a company with diversified businesses and several sources of income, you might have a problem evaluating the strength of the company. Its income is generated from many products, with different profit margins, and could be exposed to different growth benchmarks. 

    Further, despite the fact that investing in Pure Plays can be riskier, they can be a great opportunity for very high rewards when doing well. Should we mention Tesla? But wait! Pure Play method in investing has its disadvantages too. These companies are not diversified. What will happen if difficult times appear? When the company is focused on just one product and that one isn’t able to generate revenue, the stock price of such a company will drop, sometimes sharply. These companies don’t have other products to balance the poor production. That’s a great problem for investors.

    The risk of Pure Play method in investing

    First of all, the risk comes from some conditions that may affect the company badly. However, that isn’t the only reason. The additional risk might come from the type of investing style. Here is one example. Let’s assume the growth investors favor some Pure Play company. In periods of the bull market the company will perform well. Even more, its stock could easily outperform the market. But what will happen when the bear market appears? Well, we know that during the bear markets the value investing is a more successful strategy. The consequence is that the Pure Play method will have poor results if growth investors stick with it. 

    These companies depend on one product or one investing strategy. So they are often followed by higher risk. They are completely the opposite of diversified. However, the higher risk gives greater potential for higher profits. When circumstances are in their favor, Pure Play stocks can grow tremendously since the company is focused on a sole product with full strength. 

    Reasons to use it in investing

    We’ve been writing so many times about the importance of diversification in investing. Also, we pointed out that investing in a single company isn’t always the smartest idea. But when it comes to the Pure Play method in investing, things are a bit different. 

    There are really a few good reasons to invest in pure plays. Pure Play company is considerably easier to analyze. You have, as an investor, only one type of product or business line to analyze. Moreover, it is easier to understand the cash flow and revenue of one company than it is a case with several. Further, you can with a better result predict how it will perform in the future. 

    Pure play can be a very attractive investment. These companies work a strictly defined niche market. They are specialized for a particular one. That is a quality per se and could be extremely beneficial for investors. 

    Bottom line

    Pure play is a method used in stock trading and investing. It is all about companies with a focus on a specialized and particular product or service. The “Pure Play method” is also helpful when estimating a project’s beta, or the risk of a project.

  • Online Tools for Stock Trading and Investing

    Online Tools for Stock Trading and Investing

    Online Tools for Stock Trading and Investing
    If you are risk-averse but want to become a successful trader and investor choose online tools for trading as an aid to reach your goals.

    Online tools for stock trading and investing must tell you the information needed to make a successful trade and provide you advanced research to boost your profit. By using online tools for trading and investing in the stock market, or any other market can streamline the whole process, from choosing a stock to exit with profit. For example, when the ups and downs, even small changes, in the market are present you’ll need a tool to time them. Some of these online tools for stock trading can be very useful, valuable, and profitable for beginners. 

    What online tools for stock trading to add to your trading toolbox?

    The most powerful tool is your knowledge of technical and fundamental analysis, that’s the truth. But some advanced technology can aid your trading. These online tools for stock trading are extremely important in your decision-making process, in buying and selling stocks. The technical analysis will show you the price trends of stock. So, you’ll need it to know to recognize trends for the particular stock to be able to decide will you buy it or not. But technical analysis isn’t enough. You’ll need more tools for stock trading.

    You’ll need fundamental analysis. This tool will help you to evaluate the company’s strength to grow further. This information is also very important before you make any decision on whether to buy or sell the stock.

    The importance of online tools for stock trading

    In fundamental analysis, tools for stock screening are a good starting point. When you pick the stocks and add them to your investment portfolio, you’ll need tools to track them and manage your portfolio.

    Tools for stock screening 

    Stock screening tools can identify companies according to your investment goals. They can provide you information about the company, industry, market capitalization. Stock screeners allow you a fast search for a stock based on the rules you’ve set. Almost all trading platforms have screeners. But you would like some with in-depth screening capacities that will help you to really recognize all trade opportunities. Also, you’ll need charts, market maps, and quotes. Moreover, by using them you’ll be able to examine revenue growth, valuation ratio, and many other ratios. 

    Portfolio tools

    For example, portfolio tools. They will allow you to maintain the balance in your portfolio. Let’s say, the small-capitalization stock has a strong run. What is the role of the portfolio tool here? It will allow you to cut that stock and allocate your funds to other assets.
    For technical analysis, the most important is to use interactive and advanced charting tools. If you use charts as one of the online tools for stock trading you can easily set trendlines and moving averages to determine the wanted pricing pattern. 

    Charting is essential for traders that use technical analysis. It gives them a possibility to evaluate past movements and to predict future performance by recognizing the patterns. When you can dig deep into the history of some stock, you’ll be able to understand when and why the stock was volatile, what forces them to move in a particular way. Some online brokers offer charting. When you do so you’ll be able to decide to buy or sell stock in an easy and trustworthy way.

    Take advantage of stock trading technology

    If you don’t use them, you are missing out maybe the best trade in your entire life. Everyone would like to boost returns. Some strong trading platforms could help you. Find a broker with a robust platform. Well, there can be some disadvantages. For example, brokers with superior trading platforms will charge you higher trading commissions. Maybe they will limit the number of trades, or demand the minimum number of your trades. Even more, some will require a minimum account balance to give you access to the platform.

    Traders-Paradise fully recommends TD Ameritrade. Read more HERE.

    Tools for idea generation

    You might have different ways to come up with trade ideas. But you can also subscribe to some online services. In this way, you’ll have market updates in real-time, which is extremely important. This kind of service will provide you previews to initial public offerings, reports about rising growth stocks, stock trends.

    Online tools for stock trading cover financial statements, company news, and reports that are written by experts. When you use them, you ‘ll have a precise idea of how the company is doing. Maybe you get some new trading ideas. The more analysis is available, the better.

    The other online tools for stock trading

    Choosing the right online tools for stock trading isn’t an easy task. You have to know what you want to get. Also, an important point is to recognize what you are not scared to lose. 

    But remember, not one tool will help you make an investment decision. Some online tools you should use to analyze your investments. For example, if you want to evaluate stock use assets valuation, discounted cash flow, P/E ratio, or EV/EBITDA (enterprise multiple) to determine the value of the company. Also, debt to equity, current ratios, and quick ratio are important tools. The next group of online tools for stock trading could be sales turnover, returns on equity and on capital, and assets turnover. All of them you can find also online. 

    Bottom line

    These are some of the online tools for stock trading used for estimating the position of the company. But there are some tricky parts. Even if the company shows great results in all criteria you apply, you still don’t have to invest in it. You’ll need more, let’s say, tools. That’s your ability, your sense, your guts, feelings. Someone said that trading is more an art, not a science. If you aren’t an artist in the trading, you’ll end up with the poor results from your trades. Relying on online tools only can be wrong, almost the same if you never use them. 

    We don’t want to say you’ll need an esoteric, spiritual knowledge, but you have to feel the spirit of trading. You must have it in your bones to be really successful. Otherwise, you’ll be one in a crowd. But you would like to be exceptional. Remember, trading or investing doesn’t lie in an Excel sheet or trading platform. It lies in your heart, lives in your mindset, survives in your mind. Don’t get us wrong, results, numbers, all that math, algos are important. But you must feel trading. You have to live it.

  • Difference Between CUSIP And ISIN Codes

    Difference Between CUSIP And ISIN Codes

    Difference Between CUSIP And ISIN Codes
    While the company’s reports may not all be true, nothing can be hidden if you use CUSIP for the US companies and ISIN for international trading.

    CUSIP and ISIN codes are some of the most well-known securities identification numbers that are used to trade.

    If we have in mind that both are codes used for securities to help settlement and clearing in trading, what is the difference between CUSIP and ISIN?
    ISIN stands for International Securities Identification Number, while CUSIP stands for Committee on Uniform Security Identification Purposes. Both are displayed as codes Let’s look at the difference between CUSIP and ISIN.
    We already explained in the previous post what CUSIP is, let’s explain what ISIN is to understand the difference between them.  

    What is ISIN?

    It is a security code that consists of 12 alphanumeric characters. ISIN is used almost all over the world, but it is particularly known and used in Europe. So, we said it consists of 12 characters where the first two are the country code. It is followed by 9 alphanumeric characters which are the national security identifier, and we have one more digit, the 12th. 

    Difference between CUSIP and ISIN

    Well, where is the difference between CUSIP and ISIN if both serve to help settlement and clearing in trading securities?

    The first difference is that CUSIP, mostly used in the US, North America actually, consists of 9 alphanumeric digits. The first 6 letters outline the issuer, the next two digits represent the issue, the last figure is the check digit.

    Both have the same purpose to uniform the identification of securities which are settled and traded.

    ISIN is accepted for shares, futures trading, options, derivatives, and debt security that are traded and settled. This code looks something like this: two letters to identify the country, for example, Germany, so they would be GE. The next we have a national security identifier formed of nine digits, for example, “275946739” and as the last but not the least one check digit.

    The country code is provided by the International Organization for Standardization or shorter ISO. The National Numbering Agency (NNA) provides the national security identifier for every country in particular.

    What is the check digit? 

    The check digit is received by using the Modulus 10 Double Add Double system. This system converts the letters to numbers by adding their place in the alphabet to nine. 

    To calculate the check-digit, use the first 11 digits, and start at the last number and go from right to left. Each second digit you should multiply by 2. Letters are converted to numbers. You’ll have a string of digits as a result. All numbers over 9 separate into 2 digits. Add them up. The next step is to subtract from 10 and you’ll have the ISIN check digit.

    For example, when the final result is 0, that means the check digit is 0.

    Alphabetical letters are transferred to a numeric value. The letter A is 10 and the others are as following:

    A = 10; B = 11; C = 12; D = 13; E = 14; F = 15; G = 16; H = 17, etc where  Y = 34.

    To summarize,  convert letters to numbers by using the model above but start from the right last digit, every other digit multiply by 2. Subtract the result from the smallest number ending with 0 to get the check digit.

    The check digit for CUSIP is calculated by converting letters to numbers by using their position in the alphabet. Every second digit multiplies by 2 to get the CUSIP check digit.

    The importance of these codes to investors

    ISIN codes are important for companies that have investors or want to raise the capital. The main purpose of the ISIN code is to clear and settle trades. 

    Both the ISIN number and the CUSIP number are an official code that is required today. The numbers will help you to identify the security. They are kind of a personal social security number for the companies. 

    For example, the ISIN number is necessary for cross border trading. Moreover, ISIN code has many purposes.

    An ISIN or CUSIP number isn’t a ticker symbol that spots stock at the market. For example, the company may have several ticker symbols. That depends on trading platforms but its securities will have the same ISIN number. ISIN code is required but companies cannot create the ISIN code themselves. When a company wants to have an ISIN number it has to contact the numbering agency, for example, the Association of National Numbering Agencies (ANNA).

    How to convert CUSIP to ISIN?

    The CUSIP number is entirely included in the ISIN number. The ISIN is a larger code with 2 prefixed letters, for example, the “US” for the United States of America. CUSIP number doesn’t have this prefix because it is entirely a North American identifier.

    For example, ISIN US0328974369 is extended from CUSIP 032897436. Keep in mind that this is an imaginary example, and as such not a real example. Let’s go further! You can notice that country code is added on the front of this numeric phrase, and the check digit is at the end. So. we can easily recognize that the issuer is from the US. 

    Let’s determine the digit at the end. Just a bit of math more.

    Let’s convert letters to numbers.

    U = 30, S = 28. 

    So we have 

    US0328974369 as 30280328974369

    The next is to collect odd and even numbers.

    30280328974369 = (3, 2, 0, 2, 9, 4, 6); (0, 8, 3, 8, 7, 3, 9)

    Now we have to multiply the group containing the rightmost numbers (meaning the FIRST group) by 2:

    3×2 + 2×2 + 0x2 + 2×2 + 9×2 + 4×2 + 6×2

    which is 

    6 + 4 + 0 + 4 + (1+8) + 8 + (1+2) 

    Now, add up the individual digits

    6 + 4 + 0 + 4 + (1+8) + 8 + (1+2) + (0 + 8 + 3 + 8 + 7 + 3 + 9)  = 72

    Then use the 10s modulus of the sum.

    Bottom line

    The CUSIP number is important to help the settlement and the trading securities. The CUSIP consists of nine characters, with letters and numbers. It is assigned to securities that are traded in the United States and Canada. CUSIP numbers are publicly available. 

    ISIN Numbers are expanded CUSIP numbers and represent the International Securities Identification Number system.

    This is how the international system for the clearance of securities is established. The difference between CUSIP and ISIN is in 3 digits and we showed you what they are and how to calculate them. Both can simplify trading, selling, or buying securities, especially in international investing.

  • Index Trading What is It and How It Works?

    Index Trading What is It and How It Works?

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

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

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

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

    How is possible index trading?

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

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

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

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

    The examples of index trading

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

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

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

    Why index trading?

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

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

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

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

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

    How to trade indexes?

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

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

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

    Bottom line

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

  • Why Read a Balance Sheet Before Investing

    Why Read a Balance Sheet Before Investing

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

    By Guy Avtalyon

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

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

    The basic balance sheet calculation is:

    Total Liabilities + Shareholder Equity = Total Assets 

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

    What info you can read in a balance sheet?

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

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

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

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

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

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

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

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

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

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

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

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

    $50.000/$25.000=2

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

    $50.000/$25.000=1,42

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

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

    Read a balance sheet before investing

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

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

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

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

    What are the current assets?

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

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

    What are non-current assets?

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

    Why reading a balance sheet is important

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

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

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

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

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

    By Guy Avtalyon

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

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

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

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

    The basics of the trade

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

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

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

    Purpose of settlement period for the stocks

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

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

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

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

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

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

    Consequences during the settlement period for stocks

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

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

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

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

    Stockholder of record and dividends

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

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

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

    Why the settlement period for stocks is important?

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