Category: Stocks

Stocks are maybe the best way to build wealth. Holding them means that someone owns a share in the company that issued the stock. Exactly this Traders-Paradise wants to explain to its visitors.
The majority of traders trade them, ordinary people are investing in them and they are building their future based on stock quality. If the stock is good, it will increase your capital.
In this category, Traders-Paradise explains what are stocks and why people should invest in them. Our experts’ team explains how to effectively buy an ownership share in the company. You can read what is beneficial, how much you can earn by trading them, and how much by holding them in the long run. Also, Traders-Paradise provides readers a full insight into stocks’ nature, how volatile they can be, why stocks are the best way to build and grow the wealth.
Here we explain what is the primary reason that investors own stock. Just to mention, the returns are potentially great.
Also, we explain how stocks work.
Readers will also find is it better and wise to buy stock in just one company or that could have a negative influence on their investment portfolios. Also, we explain how to structure your stock portfolio when you hold shares of companies from various industries and geographies.

How stocks differ?
Most investors hold common stock, but there are many kinds of them, for example, preferred stocks. Traders-Paradise explains all the benefits from any kind of them, how to profit by trading them. So, here you’ll find trading and investing strategies, all calculations, and methods to evaluate the value of your holdings.

  • Gain of 15 percent Yearly When Trading – Is it Possible?

    Gain of 15 percent Yearly When Trading – Is it Possible?

    Gain of 15 percent Yearly When Trading - Is it Possible?
    One of the journalistic truths is that if an article is titled with a question, most often the answer is “no”. But in this case, it is “it depends”.

    By Gorica Gligorijevic

    Making money is the aim of markets, and the gain of 15 percent yearly is often a goal of individual investors. In the colloquial speech “beating the market” means having the return on investment higher than the S&P 500. Since this index was established in 1926, it has posted on average just a bit over 12% gain annually. Which makes striving for 15 percent yearly gains an appealing target to aim for. But the gain of 15 percent yearly is possible. Especially in this world of relatively frequent market corrections and downturns?

    One of the primary characteristics many famous traders are looking for in potential stocks for investment is having an average yearly growth over a number of years of 15 percent or more. The fact that big and successful traders do make investments in stocks says more than anything that such gains are out there waiting to be earned. But there are two schools of thought on this subject matter. One is saying that it is impossible and other, that it is possible to achieve a gain of 15 percent yearly or even more profits per year on the market.

    Why is the gain of 15 percent yearly not possible?

     

    One of the most common arguments among the members of this school of thought is the historic data, particularly for the past 20 years. One of the most cited sources is the J.P.Morgan Asset Management’s data which paints a bleak picture of annualized returns. The absolute bottom of all investment classes in their study is taken by the average investors with just 1.9% returns. The top of the pack is the real estate investment trusts with just 9.9% annualized gains in this period.

    And when you look at those numbers it does look impossible to reach a gain of 15 percent yearly. 

    But among them are also those that point out that this number is by itself a misleading measure. And the math does back them. Because simply put, an average is calculated by adding up all numbers and dividing the sum with how many numbers you have. And it doesn’t reflect how much money you end up with after a certain number of years. 

    For example, if you invest $1,000 and in the first year you have 100% gains but in the second 50% losses, your average return is

    (100-50)/2=25%. 

    But in reality, you have no gains at all. After the first year and 100% increase, you have $2,000. But after losing half of that in the second year, you are back where you have started. With $1,000.

    The influence of CAGR

    Often, they would point out that the compound annual growth rate (CAGR) is a more precise metric, especially for a long term investment. The point is that it captures the compound effect of gains. In other words, average gains show only the average of percentile changes over some period of time. The CAGR shows at which rate your investment actually grew.

    Another argument is that the long term averages, either the arithmetic mean or CAGR, are a misleading measure due to fundamental changes in the markets in recent times. Market corrections happen more often and are caused for different reasons than back in the old days of the 20th century. Thus, over the long-term decreasing the annualized gains even more.

    The third and most common argument is that only the best of investors have ever beaten the market. People like Warren Buffett, Seth Klarman, Benjamin Graham, and so on. Long term value investors, who have gained fame and fortune by extraordinary means. That the average Joe at best can hope to equalize the track record of indices in the long run.

    Why is the gain of 15 percent yearly possible?

    To understand why it might be possible to have a gain of 15 percent yearly when trading you first need to understand that most of the arguments against such possibility are concerning the long-term investments. The buy and hold strategy. And that they are painting the generalities, while precise and correct, fail to present a more granular image of markets.

    Many will point out that the paradigm of the markets has changed. That the real profits are in the “buy and protect” strategy. While it can be costly, smart protection of your profits can yield considerable annual gains.

    Another group of proponents points out the fact that in the 21st-century markets are marked by considerable short-term swings. So that profits are in the swing trading, buying low and selling high while holding stocks just several days or few weeks. This type of trading can bring high and fast profits, but also high and fast losses. Thus, they warn that you should arm yourself with knowledge if you want to achieve a gain of 15 percent yearly.

    Educate yourself 

    Looking for patterns with increase and fall, and thus guessing accurately when to buy and when to sell. Also, collect data about the stocks you wish to invest in. patterns emerge and disappear, and the inherent volatility of the markets is an opportunity for making profits. 

    Studying the historical data of a limited number of stocks can give you insight into a very probable future movement of the prices. You should aim to get in the market at the right time and also exit at the opportune moment. And many will suggest you to not throw your net very wide, not to study too many stocks or look for too many different patterns. To concentrate on quality and not quantity. And always, make sure to have set a stop-loss.

    Try day trading

    The most convincing argument comes from day traders. It can be done very easily, but it comes with a risk. Day trading amounts to entering a trade at a certain predetermined point and exiting at a similarly predetermined point. All after just a few minutes or maybe a couple of hours. 

    Achieving the gain of 15 percent yearly when trading is very easy if you look at it in a certain way. That it is a large number of trades with relatively modest gains on average, in a relatively large period of time. Day trading can involve almost any financial vehicle, but the most popular are stocks, futures, and forex. 

    Quick, relatively small trades compared to multi-million investments you can hear about in the news can bring you a tidy sum in profits on a daily level. And if you are not greedy and use a system which can net you a 50% or more success rate, little by little it adds up.

    A portfolio that can yield a 15% gain per year

    One of the journalistic truths is that if an article is titled with a question, most often the answer is “no”. But in this case, it is “it depends”. If you are looking for a long term investment conventional wisdom is that it will be almost impossible to create a portfolio on your own. And such that could have a gain of 15 percent yearly from trading. Your best option is an investment into ETFs of well-known super-traders and established fund managers with a solid track record. That could, in the long run, net you around 10% per year. 

    But, if you decide for short-term trading there is money to be made in the markets. Markets are by nature volatile, and that presents the risk. But even the steepest market downturns are not straight lines but have a lot of small upticks along the way. And these are the opportunities, which if seized can give you a gain of 15 percent yearly when trading. 

  • Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry
    In stock trading, the essential part is to move quickly in and out of the position to profit more.

    Guy Avtalyon

    Everyone who even thinks about trading must understand the importance of stop-loss and why the Traders-Paradise team likes to say stop-loss first. 

    The stop-loss is one of the simplest tools from any trader’s toolkit. This order is connected to the stock’s movement, no matter if the fundamentals for the company have changed. The stop-loss first,  because if you use it you’ll have a greater chance to outperform the market. Let’s explain this. When the price of the stock goes down, the stock becomes more volatile, which means more risk. 

    Correlations between stocks and the market increase more when markets are dropping than when they are growing. So, the portfolio risk rises, and therefore diversification impact reduces. Increased volatility and higher risk, can expose stop-loss order as extremely important in risk exposure control. The gain could be potentially made by reducing the risk and getting a higher risk-adjusted return.
    Using stop-loss strategies you can reduce your emotional reactions while trading, and overcome the volatile market. So, the saying “stop-loss first” covers many situations when it is beneficial and we’ll show you some of them.

    Why stop-loss is the first consideration

    Stop-loss is the primary guarantee for profiting in the stock market. When you set your stop-loss order you’ll avoid risk, protect your principal, and survive the market volatility. It’s like the insurance premium.
    Risk control is the most important. For example, you just learned to ride a motorbike. What you have to know as a must?  You’ll have to know how to control the speed of falling. You’ll be safer.
    But when it comes to stop-loss orders, not every trader is confident where to set this order. Some even avoid thinking about it. Let us explain something. The stock market is a risky one, while you have one winning trade you might have up to ten losing trades. Don’t worry, that’s normal. But you cannot depend on good luck or count on it. What do you need? Skills and capacity to profit consistently. Otherwise, the stock market will dump you out. 

    Why is stop-loss important?

    One of the reasons to use stop-loss is because you trade with limited capital. That’s the rule, no matter if you are the richest trader in the world. Limited capital is required due to the necessity to protect your whole capital from losses. It is possible only if you use a stop-loss order. In other words, you must know what the maximum losses you can take per trade, per day, week, or month. That is trading discipline. You can maintain it only if you set a stop-loss order for each of your trades.

    Moreover, if you consider a stop-loss first, before your entry point, you’ll be able to profit faster and reach your financial goals. In stock trading, you don’t want to hold stock for a long time, and you’ll want to sell them. But if the desired price isn’t reached,  you’ll need to close the losing position as fast as possible and move onto another trade. Of course, you’ll have to compensate for your losing trade elsewhere. That to be said, in stock trading the essential part is to move quickly in and out of the position to profit more. Move your money quickly and with profit, that’s the point. But if you do it randomly you’ll be faced with losses. You have to ensure your trades. How to do that? By using stop-loss first, then you can think about new entries. Also, the bounce backs will be easier in case you have losses. The math can confirm that.

    For example, it is easier for $1000 to fall to $800, but a lot more difficult for $800 to bounce back to $1000. This is a loss of 20%. To compensate for this loss you’ll need about 25% appreciation and come back to the initial capital. But even after a 100% bounce, the stock will be back to its buying price. That’s why you need to use stop-loss orders. If you wait there is a chance for momentum to go more against you.

    What does stop-loss determine 

    In trading, using a stop-loss order is important to overcome the imperfection of indicators. You have to exit a trade if it goes against you. If you’re a buyer, your stop-loss order will be a sell order. Consequently, if you’re a seller your stop-loss order will be a buy order.
    If you’re a buyer, the stop-loss order is a sell order. And vice versa, if you’re a seller, it’s a buy order. For example, if you set your stop-loss order at 3%, you’re actually setting the amount of money you’re prepared to lose per trade.
    Stop-loss relates to indicators, money, or time.  It’s up to you to choose what type of stops you want to use. For instance, you’re buying a stock at $50 because the indicators you use are showing that for this particular stock potential gain could be $100. This means the stock price could reach $150. Your initial stop could be at $25 which is 50% of your initial capital and to get a chance to make $100. Here we come to the risk-reward ratio. In this case, it would be 100:25 which is 4:1. 

    In short, it determines how big a position to take.

    Why to use stop-loss first?

    To avoid the concentration of positions

    As a trader, you’ll run the risk if you extend your exposure excessively. For example, if you keep holding onto positions or average them, then the concentration can occur in your picked stocks.
    For example, you bought a stock at $50 and if it goes down to $45, you might want to average your position. You’ll want that to reduce the cost of holding, for instance. But if the stock price continues to drop, you might be motivated to average your position again. So what could happen? You’ll fall into the loop. You’ll repeat this mistake, and repeat again and again in an attempt to reduce the cost of holding. The better choice would be to use a stop-loss order at the level of the first decline and cut your position. Why would you like to keep a few positions and end up overexposed to their cumulative risks?

    Getting higher leverage  

    In stock, trading leverage is important because it provides you to trade with margin. For example, you put in a margin of $100.000 into your trading account. But you want to trade a stock whose current price is $1.800. So, you could buy about 55 shares. But your broker allows you 4 times more leverage because the company is highly liquid and you now can open positions up to $400.000. Instead of 55 shares, you can buy 220 because it’s the cover order. Let’s assume that the support level for this stock is at $1.750 and you set your stop-loss at $1.700. Let’s calculate your trading risk.

    220 x (1.750 – 1.700) = $11.000

    Since you have a margin of $100.000 in your account, the cover order reduces the risk. Yes, but only if you plan a stop-loss first.

    Advantages of this order

    If you count a stop-loss first, you’ll be able to cut your losses and you’ll be able to protect your trades against bigger losses when the stock price drops sharply. Further, the stop-loss will be automatically triggered if the stock price moves to a certain price. Moreover, you can maintain the risk-reward ratio. For example, you are willing to take a 3% or 5% or 10% risk to get a particular profit. A stop-loss order will help you to achieve that. One of the advantages is that you’ll be able to make trading decisions without emotions and despite the market noise. Also, the stop-loss will help you to execute your trades based on your trading strategy and to stick with it. 

    Disadvantages of using a stop-loss 

    Nothing is 100% sure in the stock trading so even the stop-loss has some drawbacks. For example, you set a limit order and also, you set a stop-loss order, to buy a stock on a particular date. What if your stock opens at a lower price (gap-down) during the pre-opening session? Well, your stop loss will never be triggered. You will end up with losses. Here is a possible scenario. You set a stop-loss at $25, but the stock opens on a gap-down at $23. The stock price didn’t reach your stop-loss so your sell order will not be achieved. 

    Also, a stop-loss can be triggered by short-term fluctuations. For example, the stock price first fell to $24 but then bounced and Increased to $35. But you set the stop-loss at $25 and your holdings will be traded automatically as that price is reached.
    When you calculate where to place a stop-loss order examine what was the range of the historical fluctuation for that stock. For example, you will not place a stop-loss at 3% for the stock with a daily fluctuation of 6%.

    If you want to be a profitable trader, you’ll need to plan every single action. Just like you know the buying price, you must know where to set a stop-loss first and take a profit level. If you don’t do this well, the whole process might end up in big losses. Also, poor stop-loss orders can cause them. The stock trading history is full of both great and ugly stories, so many ups and downs, winning trades and failures.
    Learn stop-loss first, then consider your entry! That’s the whole wisdom.

  • 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.

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

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

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

    By Guy Avtalyon

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

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

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

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

    The basics of the trade

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

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

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

    Purpose of settlement period for the stocks

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

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

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

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

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

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

    Consequences during the settlement period for stocks

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

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

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

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

    Stockholder of record and dividends

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

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

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

    Why the settlement period for stocks is important?

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

  • Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing – Why Should We Do That?

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

    By Guy Avtalyon

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

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

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

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

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

    Why is investment portfolio rebalancing important?

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

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

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

    The drawbacks of investment portfolio rebalancing

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

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

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

    The real-life example 

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

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

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

    Why rebalancing your investment portfolio?

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

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

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

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

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

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

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

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

    How often should you do that?

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

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

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

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

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

    What are cyclical stocks?

    Cyclical stocks have a straight correlation to the economy. 

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

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

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

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

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

    What are non-cyclical stocks?

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

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

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

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

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

    Investment strategy with a mix of stocks

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

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

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

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

    Where to find cyclical stocks?

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

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

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

    Where to find non-cyclical stocks?

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

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

    Strategies to choose the stocks

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

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

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

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

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

    Bottom line

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

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

  • What Is a Good Rate of Return?

    What Is a Good Rate of Return?

    What Is a Good Rate of Return?
    The rate of return measures the profit or loss of an investment over a particular time. A good rate of return shows how smart an investor you are.

    By Guy Avtalyon

    What is a good Rate of Return is the question that many people continually asked, but it is almost impossible to get an answer until we explain what the Rate of Return is. So we have to make this clear before we answer what is a good Rate of Return. 

    A Rate of Return represents both gains and losses of your investments during a particular period. To know what is the Rate of Return on the investment we have to compare these gains or losses to the cost of our initial investment. RoR is shown in percentages of the initial investment. If the Return of investment is positive, meaning over the zero, we call it the gain. But if it is negative, in the minus area, below the zero, it represents our losses on the investment.

    In essence, RoR represents the net gain or loss and can be calculated. When we do that, we are actually looking for the percentage of which the investment was changed from the beginning until the end of a particular period of investing. 

    To know what is a good Rate of Return let’s see the formula: The formula to calculate the rate of return (RoR) is:

    Rate of Return = ((Current investment value – Initial investment value)/Initial investment value)) x 100

    Deduct the initial investment value from the current investment value, divide the result by initial value, and multiply by 100. 

    For stocks and bonds, some dividends should be added. You have to calculate the RoR for stocks a bit differently.  Suppose you bought a stock for $100 and hold them, let’s say, 5 years. After 5 years you sold them at $140. Your per share gain would be $40, but you also received dividends for that stock and it was $20 per share. So, your total gain is $60.
    The RoR for this stock is $60 per share divided by the initial cost per share which was $100 and multiplied by 100. So, the rate of return on this stock is 60%.

    What is a good Rate of Return?

    First of all, you must have a realistic expectation of return on your investment, to understand how compounding works, how to calculate it, etc. That is to say, every single percentage that increases in profit can boost your wealth every year. It is all about geometric growth.

    So, you know how to calculate the rate of return on investment, but how could you know what is a good rate of return? 

    There is one interesting rule in investing, everyone who has guts to take more risks will have higher returns. 

    Stocks are maybe the riskiest investments because you will never have guarantee the company will proceed to work or exist. It could fail quickly in an uncertain environment and leave investors with empty hands. So, as being an investor you have to protect your investments and to reduce the risks. And the best way to do so is to invest in different sectors and different asset classes. In other words, you have to diversify your portfolio. And do it over a longer period, at least five years. That will not provide you the best returns of, for example, 30% but can save you from market crashes. 

    Keep in mind, the answer to what is the good RoR depends on the market condition. What was good in one period could be a complete disaster during some other. Market standards can change and what was “good” easily can turn into “very bad.”

    For example, the S&P 500 has a 7% annual rate of return, if your investment has a 9% rate of return, it is doing better and outperforming the market. Okay, RoR of 9% maybe isn’t what you wanted but still, your head isn’t under the water.

    Remember, the rate of return can be negative also. 

    What a good RoR has to beat?

    However, if you are a more aggressive investor you would like the higher RoR. So, let’s see what is a good RoR for more aggressive investors. Let’s find the answer to this eternal question. Don’t be surprised if it is quite simple.

    A good rate of return has to beat the market, must beat inflation, taxes, and fees. But, as always, there is another point of view. What is a good rate of return depends on the investment you choose. It isn’t the same for stocks, bonds, or some other asset. Generally speaking, a good rate of return has to beat inflation at least.

    We know that the average inflation rate was about 2% per year over the past 10 years. This means that you had to earn 2% or more on your investment to keep your purchasing power and to keep the real value of your investment.
    But if you invested in bonds that have 4% annual interest, your RoR will be 2%. Can you see, you have to decrease this annual interest, and for the rate of inflation and you will not have 4%, instead you’ll earn 2% of your initial investment.

    What is a good Rate of Return for aggressive investors?

    So we come up to value investing which is the best way to make money. It is a simple “buy and sell” strategy. So, you buy a good stock at an excellent price and sell it at a profit. Simple as that. The only thing you should take care of is to figure out what is the right price of a stock, in both situations, when you buy it and when you sell it.

    Figuring out the right price for a stock requires you to know how much you want to earn when you sell it. In other words, you have to know how much you would like to earn. For example, an excellent rate of return is 15% per year. It might look like an aggressive approach, but we are talking about more active investors, right? 

    How can you achieve this?

    You’ll have to look for bargains. That will take some time until you find a good stock at a bargain, but it isn’t impossible. Let’s assume you found a stock that produces the rate of return of 15% annually. After taxes and inflation, it will be about 12%. At that rate, you’ll be able to double your purchasing power after a few years and beat the market. That’s the point, that’s your intention, of course. If we know that the lowest rate of return for the stock market is about 7%, this is a really good return.

    And as we said before, if you want a higher rate of return you must be ready to take a bigger risk. But we think that repeating average returns over a long period is a better choice. Yes, it’s possible to have the great winnings from time to time, but if you take a look at historical data and your trading journal, you’ll notice that it is followed by poor performances. And it is more likely you’ll have losses than you’ll have profits in the final balance sheet.

    Maybe a better way to understand what is a good return is to recognize what the bad RoR is. We explained that a good rate of return is when it beats inflation or it is equal to it. Also, we know that a good RoR of stocks is when it outperforms the benchmark index, for example, the S&P 500 index.

    A bad rate of return is when investment returns are under the rate of inflation, or underperforms the benchmark index. No matter if the investment has a positive return, in case it is as described it is recognized as an investment with a bad rate of return. The negative rate of return is useless to talk about. This word ” negative” explains everything.

  • How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?
    There are many ways of making money by trading stocks and numerous methods to find potential investments that match your trading strategy.

    It is almost normal wishing to make a lot of money in several months but do you know how to make money by trading stocks? Yes, it is possible. Everything you have to do is to make several high-risk trades buying stocks that are paying dividends. Simple as that. But it isn’t going to happen to all of us. 

    Someone can make fortune trading stocks in a short time. Some people can do that. But it is too risky. Honestly, when we talk about them we are actually talking about people who know how to make money by trading stocks. Others prefer other approaches. Many of them are less risky and safer ways to participate in the stock market. But still, it is possible to make a lot of money. That’s true. 

    Also, the truth is that some traders and investors got lucky but it isn’t a common story. Actually, it is the opposite. Most traders fail to make money on the market. So if you want to know how to make money by trading stocks you have to understand the nature of the stock market. We are not going to tell you the sad stories but what you have to know is that the stock market is a zero-sum game. Meaning, if someone doesn’t lose, you’ll never earn. Is that all? Of course not. There are more so, let’s see how to make money by trading stocks. 

    Can you make money by trading stocks?

    Why not? Thousands of people already did it and still do. Some are trading stocks every day or month but the others are more buy-and-hold types. They are sitting in the stocks for decades and today they are counting their millions. For example, risk-averse types will do that. They will choose some reputable company or the company with a promising outlook, good business plan, and stick it out for the long run.

    Also, there are some other approaches. You’ll find plenty of outstanding traders capable of making money through several quick but risky trades. Frankly, they are a minority. Great success in trading will come if you pick a day trading or short selling the stocks but it is connected to the extremely high risks. You’ll have to trade in the high-risk and volatile market. But it is one of the most important and usual features of the stock markets: they are volatile, they are risky no matter how strong or experienced you are. Let’s call statistics as help, only 20%, or even less, of traders, are successful when trading the stock market. The others constantly fail to make money.

    But this article is about how to make money by trading stocks. So, let’s go!

    As we mentioned above, one way is to adopt a strategy to hold stocks for a long time. At least five years, for example. If the stock pays dividends, it’s better.

    Quick ways to make money by trading stocks

    Making money by trading stocks, especially with a small amount, is challenging, and honestly, riskier. Of course, if you don’t know what you’re doing. But let’s try to be more creative.

    Certainly, it is ideal if you have more money to trade. But it’s not mandatory. The mandatory is to have the right strategy that works for you, to have a trading plan and trading journal. If you are a beginner in trading stocks, start modestly. Try with small amounts, test different approaches, and methods. After you did it, monitor, and examine the result you got. Don’t think about obtaining the fortune overnight. That’s not going to happen. 

    The smartest thing you can do is follow some of the rules and methods on how to make money by trading stocks and place a small amount, and over time raise it until you become ready to trade with larger sums.

    Let’s go! Play the market and earn money!

    Day trading is for traders with courage and heart. It demands to understand various forces at play in the stock market. For day trading you’ll need more experience. Well, if you are a good student and learn a lot, day trading will give you a chance to make a lot of money in several hours. The point is that you don’t need to invest a large sum, you can do it with a relatively small amount.
    But be careful, you’ll need to hedge your bet. What does it mean? You have to set stop-loss limits to cut potential losses. The advanced traders know that market makers push stocks to provoke our fear of failures or our greed. They want the stock to run for their profit, not ours.

    So you have to be very careful, to understand what you are doing, and to examine the market trends to be able to make important gains. For example, moving averages. Pay attention to them. If some stock breaks through the 200-day moving average that is the sign that potential upside or downside change in price is coming.

    Can you make money quickly by trading stocks?

    Yes, it’s quite possible. Just find companies in very volatile sectors. The other possibility is to find high-value or low-value stock with high risk but with the potential for an enormous reward. Also, you’ll have to be a short-term trader for that. That is the only way to make money quickly by trading stocks.
    For example, you’ll have to look for a high-value company that stock recently fell but you must have some clue that the stock price will rebound soon. When it happens, you’ll sell them for a higher price.

    Also, one of the possibilities is to buy a stock of some startup with the potential to produce tremendous returns. This is risky, also but can generate a great reward. The point is to hold it shortly, wait for a significant increase in price, and sell quickly. The risk here is that startups, in general, could be risky investments. A very small number of them succeed to survive a few years. They are like comets, light the sky for a while, and boom – disappear. But while they are here, in the markets, they are a great opportunity for traders to make money by trading their stocks.

    Trading stocks for a living

    People are trading stocks for a living which means they are making enough money for everyday life and over. Trading stocks can be a full-time job but also, a part-time job. What you choose depends on you. You have to find out how to make money by trading stocks from your home. Also, you may try day trading as a regular job.

    How much money you’ll make depends on your trading strategy, your skills, knowledge, etc. But not all is in your hands. You’ll have to know how the markets are doing and be familiar with many other things. Professional traders can make above $5,000 per month but that varies depending on the amount of money you put in play.
    For example, beginner traders can make several hundred or a few thousand monthly. Once, when you become more experienced with developed skills, your gain will be much higher.

    Buy low, sell high to profit from your trades 

    This approach is easy to master. It is a tested and proven formula for making a profit as a trader. But you don’t want to jump in the trade always when a stock price rises or falls. Sometimes you’ll need to stay aside and wait for your moment. It’s incredibly important not to panic when a stock falls below the price you paid. That’s the point with stock prices, they may rebound and if you exit the position too early you might miss the greater profit.
    When deciding whether the stock price is high or low enough to guarantee a trade, you should examine just a few things: the company’s earnings per share, do employees buy its stock, take a look at the company’s profit history, strength in different circumstances.

    The point is to buy low, that’s true. However, it is important to recognize the company that is able to recover and its stock will rise in price. That is exactly what would you like and as fast as possible, best right after you bought the stock. 

    The same is with the second part of the saying – sell high.

    When selling stock to reinvest the profit, you would like to ride the trend of the stock price rising as long as possible. The keywords “as long as possible.” That’s why you’ll have to learn how to recognize when the price stagnates and in which direction will go after that. In other words, you’ll have to know how to track the trends.

    In day trading or short selling, buying low, and selling high is essential to your profits. In these kinds of trading, you are dealing with highly volatile markets. The stock prices will fluctuate frequently and literally any change in stock price could end in a profitable trade. Yes, there are lots of risks but rewards might be magnificent.

    Diversification is important

    You must have a good trading plan and a diversified portfolio but not over diversified. 

    Diversifying will protect you against unpredictable changes. For example, all your stocks were in biotech, but new products have a bad influence on your stock’s prices. So, your whole portfolio could be crashed. If you have a well-diversified portfolio the influence will be protected against such trends. Also, this strategy is proper for balancing high-risk and conventional investments.  

    We have one suggestion if you really want to know how to make money by trading stocks – never walk away from trading after you made a profit. If your goal is to trade in a long time, it is smart to reinvest part of your profits or all of them.

    Bottom line

    Trading isn’t easy but practicing will help you a lot. At first glance, it may look so easy and simple. What you have to do? Just to pick a good stock and trade it. We all would like it to be that simple. The truth is that traders are carrying their knowledge to the market every single day. They can make a difference between good trades from bad trades, they are able to catch the trends, they know when to enter the position and, which is more important when to exit. Moreover, they know how long they should stick to their rules but also when it is time to break them and profit.

    Some do get lucky in the stock trading, that’s true. But it is very rare. Behind any successful trade lies great knowledge. Armed with that, you’ll make money in the stock market.

  • How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?
    Trading indicators are a component of every technical trading strategy. They help traders to get full insight into price trends.

    After you learn the basics of technical analysis, it’s time to learn how to use technical indicators to analyze stocks. This will be something very concrete because we’ll discuss their real implementation. After we debunk all myths about technical analysis it’s time to go forward. Everyone who wants to trade stocks should know how to use technical indicators to analyze stocks. 

    Traders use technical analysis to examine past market data in the hope to determine future price movements. They use indicators, charts, and other tools to recognize price patterns and trends for that purpose. Future performance of the stock price is maybe the biggest mystery in the stock market, and there is no such a trader or investor that wouldn’t like to unveil where the price will go. By using tools, the chances are bigger, without them we are just guessing, and instead of trading, we are simply betting. So it is very important to know how to use technical indicators to analyze stocks.

    Technical analysis is based on the belief that price movement would repeat, so the patterns can be recognized and used to determine a market’s trend.

    Technical analysis of stocks

    To put it simply, when analyzing stocks you have to look for patterns that appear in the chart. Patterns could be similar or exact as some previous one and based on this similarity you might have some clues of how the stock’s price will act in the future. But to have a clear picture of that you’ll need to use qualitative and quantitative techniques commonly named as technical indicators. Both techniques or types of indicators have their specific purposes. You’ll use qualitative indicators to find support and resistance levels, changes in polarity, or chart patterns but quantitative indicators will tell you if the stock is in an upward or downward trend. Quantitative indicators which are market trends, moving averages, and momentum indicators will show you the pattern in stock price actions. Based on this info you’ll decide if you will buy the stock. 

    Let’s break down each of these techniques separately.

    How to use qualitative indicators

    Important qualitative indicators are 

    Support and Resistance

    The technical analysis method assumes that stock charts will show you the bottom and top levels. In most cases, the stock price is moving between these two levels. We said “in most cases” because when there is a breakout the price could break one of these levels.

    The resistance level is also seen as a ceiling. When this level is reached the stock will not rise further, and you should consider selling the stock you own and to do so as soon as possible. You will not get a better price for it. So, that is the highest price, and you’ll profit.

    The support level represents the lowest price. To explain this, when the stock price is going down, demand for the stock will increase and form the support line below which the stock price will not fall. This means the stock will bounce back and rise in price after this level is reached. That is a great time to buy a stock at that lower price.

    This is how to use technical indicators when you want to buy or sell the stock you own. To tell that briefly, buy the stock when it is near to its support level and sell when it is nearing its resistance level.

    But there is one thing you have to keep in mind. 

    These levels are not fixed. 

    They are changing during the long term. These levels can be higher or lower. That depends on how investors look at the stock. If they think the stock is a great player they will massively buy it but if they think the stock isn’t good they’ll start to sell it. 

    You should find support and resistance levels in the stock chart. Also, an important point is where prices have paused or reversed after rising or falling. That might show you what will happen in the future, once when these price points are touched.

    When a zone of support or resistance is known, use those levels as potential entry or exit points. That could be a smart decision. When the price hits one of those levels it has only two possibilities – to bounce back from the levels or to break the levels and proceed in its direction. If that direction isn’t in your favor you can close your position with a minimum loss, of course, if you do it immediately.

    Change in the polarity principle

    So, what happens when the price breaks support and resistance? Investors are very active at these levels. But a break indicates that they are not interested in buying and selling stock further. That causes the price to move violently to find new support and resistance levels. 

    When the support level is broken, the stock could enter a freefall area and form new support. It is the same when the resistance level is broken, the stock will increase in price and find a new resistance level.

    The polarity principle means that whenever the stock price breaks through the support level that point becomes new resistance.

    Hence, the resistance is broken, it becomes a support level. 

    It is very important to know how to use technical indicators and notice when the price is near support or resistance levels. That will give you a chance to react in your favor to protect your investment.

    How to use patterns as technical indicators?

    You have to watch out the other relevant chart patterns that show where the stock price will go next. These chart patterns are grouped as reversal and continuation patterns. Reversal patterns show that a trend that was leading the stock price has expired. The stock will run in the opposite direction. This means if the stock was greatly valued, it would drop. If the stocks were undervalued, they would rise in price.

    Major reversal patterns are head and shoulders, inverse head and shoulders and, double bottoms and double tops.

    Continuation patterns represent confirmation that the current trend will stay. So, the suggestion is to hold your stock if the price is rising, or to sell it if the price is dropping.

    Significant continuation patterns are rectangle pattern and flags, triangle pattern, and pennants.

    How to use quantitative indicators

    Quantitative indicators are used in combination with other indicators for predicting the stock price movements. They can be trend-following indicators, for example, moving average will give you an insight into the current trend by smoothing out price movement.

    The other quantitative indicator is the oscillator as a momentum indicator. It measures the speed of how the stock price is changing. The oscillator will signal you when the stock is overbought or oversold. Overbought stock means that the stock price is probably dropping, and oversold means that the stock price is low. 

    How to use technical indicators – Moving averages

    Moving averages are a popular indicator, especially simple moving average or SMA and exponential moving average or EMA. Calculating SMA is quite simple but the calculation is more complicated. If you draft a 50-day SMA and a 50-day EMA on the same chart, you’ll see that the EMA acts promptly to price changes than the SMA does. But there is no need to calculate them manually since you can find charting software or trading platforms that can do that for you.

    How to use technical indicators – Oscillators

    Oscillators are extremely helpful when the stock is overbought or oversold.

    When using oscillators you can see when the stock is going upside. That is the level at which the stock turns into the overbought status. This indicates that the buying volume has been decreasing and traders will begin to sell their stocks. And vice versa, when the stock is oversold that means a great number of traders are selling their stocks consistently.

    Use oscillators when your charts are not displaying a clear trend no matter in which direction.

    Bottom line

    The way of how to use technical indicators to analyze stocks and predict market trends could determine how successful an investor you are. Technical indicators will help you to decide when is the right time to buy or sell the stocks you hold. Some will aid traders to identify and confirm a trend direction. For example, trend lines are helpful to predict support and resistance levels. Oscillators will measure the strength and speed of a price movement and help you to recognize overbought or oversold zones, potential entry, and exit points. 

    By knowing how to use technical indicators you’ll be able to make more profits and reduce your losses.

  • Concentrated Stock Positions Are Risky

    Concentrated Stock Positions Are Risky

    Concentrated Stock Positions Are Risky
    The worst-case scenario of holding a concentrated stock position is that the chosen company can bankrupt and the stock value drops to zero.

    Concentrated stock positions occur when you as an investor own shares of one stock in a big percentage of your portfolio. So your capital is concentrated in a single position. How big is that percentage? It depends on the size of your portfolio and the volatility of the stock. But concentrated stock positions commonly occur when that stock represents 10% or more of your overall portfolio. 

    The modern theory says that it can be any position size that may hurt your investment plan. So, we won’t be wrong if we say that concentrated stock positions are any portion in one single stock in your portfolio that have a major influence on your overall portfolio no matter if it is 5% or 55%. Generally, it is a position size that can destroy your financial goals.

    But nothing is so bad as it looks at first glance. Many people created their wealth by holding a single stock. So many families built a fortune in this way. The value of that stock grew heavily over time and the members of such a family inherit these concentrated stock positions, a large one that consists of just one stock.

    Don’t matter how the concentrated stock positions are earned, they always represent an unbalanced allocation of investments. Since the holder of such a portfolio needs to reduce risk, it is essential to understand it and maintain it properly. There are several strategies very suitable for handling concentrated stock positions.

    Strategies for handling concentrated stock positions 

    Have you ever heard a saying: “Concentrated wealth makes people wealthy, but diversified wealth keeps them wealthy.” It’s kind of credo among investors. Concentrated stock positions are challenging for managing. They have great risk potential included. So for that to be done, the investor needs a proper strategy.

    One of the most common strategies is selling the part of these concentrated stock positions or the whole holding on it. To be honest, that is the simplest way to reduce the concentration on the stock. 

    But there are some that may occur, for example, the capital gains tax is connected with selling. In order to decrease the tax, you don’t need to sell the whole position. Sell it in the parts. For instance, you can define an amount and sell one by one quarterly. Of course, you can choose a different time frame but the goal will stay the same, to reduce the concentrated stock position since you would like to reduce the exposure also. Depending on the position’s value it may take a few years unless the whole process is done. Some experts claim that 3 to 5 years is the optimal time frame for that.

    So you have two choices with this strategy: to sell the stock immediately or in portions over time.

    Hedge the position – a strategy for handling concentrated stock positions

    Those are actually two strategies but we’ll put them in one because they are connected. This is a bit of a complicated strategy but an effective one. Everyone wants to protect the owned stock against drops. You can do it by using options. So, think about the buying of put options as a kind of insurance against the potential losses in your stock. When you buy a protective put option, you’ll have the right to sell your stock, the whole or part of it, at a predetermined price. Don’t be worried if the stock price increases above the predetermined price. Your option will expire worthlessly and you’ll still hold your stock.

    This strategy is quite good if you need short-term protection, so think twice are you willing to use it because over the long run this strategy may cost you a lot.

    Also, you may sell covered call options. The strike price should be above the current market price. That will give you an extra income but the smallest protection against total loss if the stock price decreases significantly. Moreover, you’ll not benefit from price appreciation if you use covered call options as a strategy to handle concentrated stock positions. 

    Maybe you can use covered call options as a part of a well-organized selling process based on the market movements. Meanwhile, you get paid the premium.

    Diversifying

    It doesn’t mean you’ll make some small adjustments to your portfolios. Your main goal is to reduce the volatility that a concentrated position generates. And you cannot do that randomly, this diversification has to be exact.

    As we said, you can sell this large position at once but there are some problems that may arise. The most important is that you can reduce the value of your overall portfolio by doing so. For example, if you sell the whole position at once that could cause the stock price to drop in value. 

    Sometimes such a decision can be emotionally difficult. So, a staged sale can be a way to avoid emotional reactions when selling a large position. You can do this if you determine the number of shares of the stock you want to sell by a particular date.

    For example, you want to sell 21,000 shares of the stock over the next 21 months. And you decide to sell shares every quarter. There will be seven sales during this period, right? At the end of each quarter, you are selling 3,000 shares. This will not disturb you a lot, you have a schedule, your emotions will be under control, you don’t even have to think about the market fluctuation.

    Use the exchange fund 

    This method is useful when you find other investors in the same situation with concentrated stock positions and who want to diversify as you do. What investors have to do? What are their options? They can join their shares into a partnership where each investor gets a proportional share of that exchange fund. Since the stocks are not the same, each shareholder will have a portfolio of different stocks. That will provide diversification. The additional advantage of this method is that it provides the deferral of taxes. 

    The straightforward approach to diversify the concentrated stock positions

    It is rebalancing with a completion fund. We describe it above. It is simply selling smaller parts of your position over time. You can use the money you got to buy some other asset and have a more diversified portfolio. That’s how a completion fund operates. But as a difference from exchange funds, you are in control of your stock.

    For example, you own $10 million worth stock, and you want to reduce the exposure to this stock. But you would rather sell part of your position because if you sell $10 million in one transaction the taxes you have to pay would be expensive. So, you prefer to sell  20% of the position every 6 months, and use that money to diversify into other assets. Over time you’ll have a fully diversified portfolio adjusted to your risk tolerance. 

    Bottom line

    Some wealth transfer strategies could benefit you. For example, family gifting strategies, and charity gifting strategies such as direct gifts, foundation, or trusts.

    The most important is to have peace of mind. Holding such a great but only one stock that generated money for many generations is a great responsibility. But that kind of portfolio is very volatile and risky. So you have to be smart and find the concentrated stock positions exit strategy suitable for your circumstances and goals. Your chosen strategy has to increase your overall wealth. 

    These strategies can reduce risks, reduce the tax of reducing the position. They are worth seeking. If you still are not sure which strategy to choose, find a professional financial advisor.

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