Tag: gains

  • Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment - How To Know Where To Invest?
    The long-term returns seem attractive, and it is easy to start investing. But you must have realistic expectations.

    By Guy Avtalyon

    Good returns on investment is what every single investor wants. But some have unreasonable expectations. Especially beginners. They are hunting stupid high returns on investments and lose money. No matter what asset class is, they are looking for high rates of return. Nothing is wrong with that, but a dose of reality is necessary for investing. Dreaming is okay, of course since it can motivate us to reach our goals but if our dreams are unrealistic it can deliver us the stress when we unveil that reality isn’t like our dreams. 

    So, everyone including beginners in the stock market must understand what are good returns on investment. We would all like to become rich overnight, that is a legit dream but the real-life is something different. One of the main problems is that beginners don’t understand the effect of compounding nor how it works. Most of them don’t know what good returns on investment means, how much it is.

    First of all, temper your expectations. 

    Over almost the last 100 years, the stock market’s average return is about 10% per year. But returns are infrequently average. So, if you are one of the new investors you have to know several things about what good returns on investment is. 

    What are good returns on investment?

    You have to know that historical data shows that the average stock market return is 10%. Are you surprised? What did you expect? Oh, we know! You heard the stocks are among the riskiest investments and the high risk may provide you a high potential reward, right? That’s true but it will not happen overnight. Let’s go back to average stock returns. 

    The S&P 500 Index is the benchmark measure for annual returns. When we said the average annual return is 10% it wasn’t quite true. The truth is that you have to reduce this 10% by inflation. For example, if you start to invest now you can expect to lose buying power of 2-3% per year which is caused by inflation.

    The stock market is directed on long-term investments. That means you can invest your extra or saved money you will not need for the next five years or longer. If you don’t like this you may prefer a shorter investing period, for example, a year or two. Well, then the stock market isn’t for you. Choose one of the lower-risk alternatives. For instance, a savings account. Yes, you will have the lower returns, but you’ll be protected from stock’s volatility.

    As we mentioned above, the average return per year is 10%, but it is actually far away from average. There were periods when it was dramatically lower but also the periods when the returns were much, much higher. That’s due to the stock’s volatility. We have to say and this may sound illogical for beginners, but even during the volatile market’s years, returns can be good.

    Your expectations must be fair

    Honestly, you have to learn this. Especially if you’re a new investor. You may think you can earn 25% on your stock investments over several decades. We have to tell you, your expectations are extremely big. It’s not going to happen. Maybe this is rude to say, but that’s insane. Yes, we know you found someone out there who promised you that high returns, but you have to understand cush lied to you. Such is counting on your lack of experience, and on your greed. Are you greedy? Go to the casino! Start gambling! Stock investing is a serious job, hard work, also connected with a lot of pleasure and passion with one single most important goal – to have good returns on investment and over time, to provide financial security for yourself. Well, and maybe, just maybe you’ll become rich. 

    So, your financial foundation should never be based on dangerous opinions and actions. Don’t be irresponsible. What you really need is your investment to provide you a nice retirement, you wouldn’t like to end up with less money than you expected.

    The meaning of good returns on investment can be confusing for someone, particularly young investors because when you enter the stock market you might know only about a 10% annual return rate. But keep in mind, you don’t have guarantees that they are going to repeat themselves. The returns on investments never were a smooth or upward path. remember, markets are volatile and you may suffer great losses over time. But what is important and everyone should know that that’s the nature of the free-market. Over a long-time period, you’ll beat the market if you follow some rules.

    How to calculate the rate of return

    Let’s say you already have determined your investing goals. You clearly know what your target is. Also, you have to identify the amount of capital and time you have to invest. All information you need is in front of you. So, let’s see the magic of compounding.

    For example, you have $2.000 to invest. Assume that the annual rate of return is 10%. After one year you’ll have $2.200, right? But what if you want to sell your whole investment after 2 years, for example, for $3.000. Super done! Your profit is $1.000 which is a 50% return. Amazing! Oh, wait! You have to pay capital gains taxes. Take away 15% from your gain. Well, your profit isn’t $1.000, it is $850. You’re left with $2.850. Well, you still have good returns on your investment after two years. It is 42,50% now. Did we have inflation? Of course, we did. So, you have to count inflation of 4% for 2 years. 

    Let’s do it.

    $2,850×0.96×0.96=$2,626.56 

    That is 31.32% real return of your investment. This $2.626 amount still isn’t bad but it’s far away from your $3.000 and 50% where we started this calculation.

    Look, the annual rate represents the profit you earn on your investment per year, or how much will you get in return for each dollar invested every year.

    There is a simpler calculation. Just find a simple percentage. For example, you invested $1.000 and your gain is $300. What will your return be? 

    (300/1000)x100 = 0,3×100 = 30%

    This approximative value. But if you want to know the exact you’ll need the first calculation we showed you. That is a well-known ROI, return on investment.

    Can the stock market give you good returns on investment?

    The stock market is unstable and unpredictable, so you’ll never have any guarantees there. But if you consider this 10% average return you’ll understand that investing in stocks may provide you financial security in the long run.

    What are the good returns on investment today?

    Well, the answer is pretty complex but to make it simpler, use this rule of thumb: If the recent returns were higher than average, the future returns will be lower. 

    That’s why it is much better to calculate, for example, 6% or 7% of the average annual of return when estimating your returns over time. Because, as you can see, this average return is rare. It is higher or lower. Also, there is some psychological effect, if you expect too high returns you’ll be disappointed if your investment never gives you that. Also, you’ll be glad if your investments beat your expectations.

    The best approach in the stock market, if you want to make real money, is to buy stocks at good prices and sell them at a profit.  What is a good price? To figure it out you’ll have to know how much money you want to get when you sell it.

    Good returns on investment for an active investor is 15% per year. For this to reach you’ll need to be aggressive in looking for bargains. It isn’t hard to achieve. For example, your buying power can be doubled every 6 years if you have average annual returns of 12% after you pay all taxes, also, count the inflation for each year. This is one way to beat the stock market. The other is to become a trader but a smart one. The coronavirus is causing people from almost all parts of the globe to halt their activities. People are urged to stay home, schools are moving to online learning. Take this as an advantage and learn something useful, why not?

  • Microcap Stocks – Recognize The Risks And Get The Rewards

    Microcap Stocks – Recognize The Risks And Get The Rewards

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

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

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

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

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

    The risks of investing in microcap stocks

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

    The additional risks come with a lack of liquidity.

    How to deal with it when buying the stock?

    Let’s examine the following situation.

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

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

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

    That’s the problem, where is the possibility?

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

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

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

    Microcap stocks can have powerful roles in asset allocation.

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

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

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

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

    Benefits of microcap stocks investing

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

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

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

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

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

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

    Bottom line

    The downside of holding microcap stocks is their selling.

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

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

  • Stocks Reached New Records in the First Five Days This Year

    Stocks Reached New Records in the First Five Days This Year

    Stocks Reached New Records in the First Five Days - January Effect
    Stocks rose in the first five trading days in January. There is an old tale of the January Effect but is that true or myth?

    Stocks reached new records in the first five days of this year. And when stocks play well in the first several sessions in some years like it is in this one, investors like to recall the “first five days” rule. The point is that this rule is, therefore, able to predict the market is often up at year-end. But is this true?

    Stock Trader’s Almanac, which analyzes the market phenomenon since 1950, discovered that if the first five days have a good track record it is a good prediction for the whole year meaning it will be well in the stock market.

    Actually, it is an old Wall Street “first five days in January” indicator and as we know the brokers are superstitious. They believe if the stock market during the first 5 days of the year reaches record, that represents the potential for the strong performance in the given year.
    So, stocks are sending a bullish signal for this year, according to that old indicator. Well, it is a good way of pumping stocks. Bulls in the market do that.

    Will the whole year be like this?

    But is this a reasonable way to make predictions for the whole year? We think it is an absurd way to estimate valuations.
    Yes, stocks reached new records but if you take a serious look at the indicator you will find some drawbacks. Frankly, stocks are overvalued more than ever.

    The stocks reached new records

    Yes, in the first five days in 2020 but few days will last forever and maybe it’s time to consult the historical data just to compare what could happen next.

    According to Dow Jones, historical data shows that the S&P 500 index has completed the year in the same trend as it started it in 82% of presidential-election years. It occurred from 1950 to today every time. In the first 5 days of 2020, the S&P 500 rose 0.7% and if the mentioned historical pattern is correct that should suggest that this year will finish with higher gains.

    But be serious. We will need a deeper look at this indicator and on what it shows. Otherwise, you can easily read your horoscope (pay attention to the “sex” section better than “finance”) it will make more sense.

    The ‘first five days of January’ indicator

    January in the stock market has a strong influence on predicting the trend of the stock market for the rest of the year. The January Effect occurs when investors’ selling off their losing positions at the end of the prior year to realize the tax losses. Usually, these stocks are at a discount during January. And what we have there? Bargain hunters! They step in with their buying pressure in the market.

    Statistics show when the S&P 500 rise in the first five trading days, there is around 86% possibility that the stock market will rise in that year. But this indicator isn’t very reliable due to the fact that we cannot find what happens when the gains in the first 5 days in January are below expected or in comparison to previous January or whatever. All we have is data for periods when the January Effect is triggered. But markets exist even without the January Effect. Even more, the markets exist even beyond January. 

    With a little help of stats, we can see that this effect had good predictions in 31 out of the past 36 years. Stocks reached new records in the first five days of 5 exceptions, 4 were war years and one was a flat market.

    So, this was a confirmation of the January Effect.

    Statistical answer as confirmation of something different

    Let’s use more current data and divide the past 34 years into two sections separated, from 1984 to 2000 and from 2001 to 2017. 

    Let’s observe the period from 2001 to 2017. Data shows that, for example, the December effect produced an average return of 2.62% or a return of 36.5% during the observed years. But if you take a look at January for the same period, you will find poorer results. The average returns in that month were at 2.48% or 34% pre the whole year.

    This seems to be a strong approval for the January effect. Nevertheless, whoever tried to use the January effect, and bought an S&P 500 index fund on January 1 and sold it on January 31, and kept cash for the rest of the year and did it in the next years to the end of 2017 made losses of 0.84% per year.

    Stocks reached new records but ignore the January effect.

    The using the January effect can be dangerous. This phenomenon is based on limited data and adjustments for confirmation. So, you shouldn’t believe that every time when the stocks reached new records in the first five days of the year were great gains in the market.

    The conclusion about the January Effect came from small samples. So, it has low statistical reliability if it has at all. You cannot make a conclusion based on limited data. Yes, some financial press reports will try to assure you how these “five days effect” is important and you will find a lot of catchy titles but it’s fishing and fake news also.

    Even the month of January was great for the stocks, what about the other months? If it is the only one-month effect what are you going to do with your investment over the rest of 11 months? Would you make decisions based on superstitions? Cash-out? We don’t think it is a smart investment strategy. 

    Common sense tells us something different. This isn’t a hypothetical situation, this is reality. Try to figure out why this phenomenon isn’t part of any extremely advanced computer software? Some software, and even not so sophisticated, will be able to identify the phenomenon and profit on it. 

    The reason is obvious. There is no unusual market’s phenomenons, that’s nonsense. If there is any phenomenon that is simple to be explained to the inexperienced trader or investor you can be sure it isn’t real. It is superstition.

    Bottom line

    This was another old tale to neglect, just like many others. Who can really believe that the first 5 trading days in January could predict the stock market’s direction for the full year? Yes, this old “indicator” gets much attention every year. As we said, the bulls are trumpeting it right now.

    But nothing is that easy, especially the stock market.

    If you have a problem to accept all of this, examine what did happen over the last 40 years. You will find that this pattern was a reversal. The fact is, since the 1970s every time when the Dow was down during that mythical period of 5 days in January, the whole year had higher gains. 

    To be said, any investor who admits the extraordinary influence of this superstition has a lack of knowledge and self-confidence. On the other hand, newspapers and financial reports enjoy cheating people when insisting on this.

    We would like to point one thing at the end. The words written above doesn’t mean the stock market will not rise this year. It can do it very well and produce great gains, but what does it have with “First Five Days of January”?

    Nothing!

Traders-Paradise