Tag: stock market

All stock market related articles are found here. Educative, informative and written clearly.

What is Alpha in Trading?
What Exactly Is Alpha?

The ability of an investment strategy to beat the market, or its “edge,” is referred to as alpha (α). As a result, alpha is also known as “excess return” or “abnormal rate of return,” which alludes to the assumption that markets are efficient and that there is no way to systematically achieve returns that are higher than the overall market. Alpha is frequently used in conjunction with beta (the Greek letter), which quantifies the overall volatility or risk of the market as a whole, also known as systematic market risk.
- Excess returns earned on an investment over the benchmark return are referred to as alpha.
- Diversification is meant to eliminate unsystematic risk, and active portfolio managers strive to produce alpha in diverse portfolios.
- Because alpha measures a portfolio’s performance against a benchmark, it’s commonly thought of as the value that a portfolio manager adds to or subtracts from a fund’s return.
To put it another way, alpha is the return on an investment that is not influenced by broader market movements. As a result, an alpha of zero means that the portfolio or fund is perfectly mirroring the benchmark index and that the manager has contributed or lost no additional value over the general market.

Advantages of Alpha

Fund managers can use alpha to get a sense of how their portfolios are doing in comparison to the rest of the market. Alpha can be a useful tool in trading and investing for determining market entry and exit opportunities.

The disadvantages of alpha

The drawbacks of using alpha as a way to measure returns include that it can’t be used to compare different investment portfolios or asset kinds because it’s limited to stock market investments.

Beta vs. Alpha

To compare and analyze portfolio results, alpha and beta are utilized together. While alpha is a measure of a portfolio’s performance, beta is a measure of its historical volatility – or risk – in comparison to the overall market. For example, a beta of 1.2 indicates that the stock is 20% more volatile than the market.

Conclusion

Alpha is a technical analysis ratio that shows how a stock has performed or given outcomes when compared to a benchmark or market index. The alpha percentage, which is commonly expressed in simple numbers like alpha 4 or 5, or alpha -1, is the amount by which a stock or portfolio has excelled or underperformed its benchmark. A high alpha indicates a strong stock, while a low alpha indicates a bad stock.
2nd September 2021
Is Trading Stocks A Zero-Sum game?

Trading stocks is not a zero-sum game and both sides can be winners.

By Guy Avtalyon

Is trading stocks a zero-sum game is sometimes more rhetorical question than it is related to trading. But shouldn’t be. In stock trading, we have two different sides. One is represented by winners, the other includes losers. On any transaction in the stock market, the chances of winning and losing are near even. So, who are the winners and losers of this zero-sum game?

Winners have better portfolios, they are usually long-term traders, they can sustain seldom losses because their investment horizon is larger. On the other hand, traders that frequently place trades, have losses more often. So, the profits and losses of all traders should sum to zero if trading stocks is a zero-sum game, right?

Trading stocks is mathematically a zero-sum game is a logical conclusion. However, it is more complicated.

Who wins and who loses when trading stocks?

Trading is a zero-sum game only when you measure gains and losses relative to the market average. In the zero-sum game, there is always one winner and one loser. The amount that one trader profit has to be equal to the amount the other loses. That would mean the winners can profit only the amount that losers are ready to lose.

This is true, but we come to something known as market capitalization. That’s the number of company’s shares outstanding and times by its market price per share. The volume of transactions is comparably small related to shares outstanding. The stock price could appreciate or depreciate only if traded below or above the market price. When traders hold their positions no one could lose or win. But when traders choose to exit their positions, some will be winners while the other will be losers. Yes, to this point everything is clear but trading isn’t a poker game where the winner takes it all. It is the opposite a bit.

Is trading stocks a zero-sum game?

The stock market is an open system. The presumption that trading stocks is a zero-sum game comes from another presumption that the stock market is established by a constant and non-changeable number of securities traded. That would mean no stocks or other assets enter, no exit. As we know the reality is different. Publicly traded companies can issue more stocks and also they can buy back their shares to increase the price while diminishing the number. Also, some companies declare bankruptcy and become not publicly traded or bought by other companies. So, the stock market is a kinda living being. It isn’t constant or fixed.

Trading stocks is a zero-sum game if one trader gains only what the other loses, both expressed in money. When both buyer and seller strive for the same thing, we can say it is a zero-sum game. But trading stocks is connected with liquidity, risk management, etc. It isn’t just about money. There is something in the character and outlook of the participants. If they are similar the aims will be similar too, and the trading could become a zero-sum game.

Trading stocks is zero-sum only when the competition is excellent, only when it is perfect. That would mean the traders on both sides, buyers and sellers, have the same information and make decisions that lead in the same direction to the same conclusion. For example, the ABC company’s stock price is going to drop. Buyers and sellers both have that information and buyers would like to buy that stock at a lower price while the sellers would like to sell it at a higher price. When their particular interests match each other the trade occurs. Only then, we can talk about trading stocks as a zero-sum game.

Is day trading a zero-sum game?

Day trading could be a zero-sum game. Here we can find an equal number of winners and losers. The most popular markets among day traders are options and futures markets which are zero-sum markets. How does this work?

Let’s say you\re the one who holds the option that makes a profit. On the other side is the trader who wrote the option. The second trader, the seller of that option will lose the same amount.

Who are the winners and who are the losers in a zero-sum market?

You may think that all depends on luck. But you’re wrong. The real winners are traders with discipline. The winners have a trading plan, they know where and when to set limits, and never trade based on emotions. Instead, they use accurate data. So, the futures and options markets are zero-sum game markets.

But when we come to the stock market it could be real nonsense to claim it is a zero-sum game.

Where is the difference?

Let’s say, for example, if the economy is growing, companies’ profits rise, what is going to happen? How could this condition influence the stock price? Of course, the stock price will increase. In such circumstances, we will have more winners than losers among traders. Especially among long-term participants. Of course, some days it is possible to see more losers. That is the reason why some people understand the stock market as a zero-sum game.

Trading stocks isn’t a zero-sum game

All trades in the stock market are based on future expectations. Every single trader has different risk tolerances. The market always counts on it. If part of traders are selling their stocks that does not necessarily mean they are losers. Every trader has a particular and different goal when trading. For example, one can decide to hold the position until making a particular profit. So, what does a trader have to do when reaching it? Such a trader will exit the position to book profit, it’s so natural. The trader who is buying that stock may end in losses since there is no guarantee he/she will profit also. But what if the second trader proceeds profiting? Can you see, both sides, seller and buyer are winners.

Bottom line

So, trading a stock market is a more win-win situation than a zero-sum game. When trading stocks always keep in mind that some stocks pay dividends. That is an important factor when discussing stock trading as a zero-sum game. It isn’t rare for investors to get more money from dividends, even more than their initial investment was. The stock trading isn’t just a relation among sellers and buyers, it is more. That’s why we can’t say stock trading is a zero-sum game.

7th July 2020
How to Identify Trend Reversal?

Some strategies can help you to identify trend changes even before they happen.

If you want to know how to identify trend reversal ahead of time, we’re sorry but it doesn’t exist. There is no trading system or methodology capable of doing that. The only thing you can do is to learn how to read the price action and identify potential zones where the market could reverse.

So, how to identify trend reversal? It appears when the direction of stock changes and goes back in the opposite direction. The examples of reversal are uptrends that reverse into downtrends and vice versa. What trend reversal tells us? First of all, the sentiment in the stock is changing. For example, an uptrend that reverses into a downtrend tells us that traders are taking profit from the overbought price of the stock.

On the other hand, when downtrend reverses into the uptrend shows the sentiment is changing to bullish. That means the buyers are boosting bids to reverse back into the bullish trend. Let’s examine several indicators that might help us to understand how to identify trend reversal.

Why is it important to know how to identify trend reversal?

The main importance lies in the fact that if you recognize the trend reversal on time, you’ll be able to exit the position in profit or at least, to protect your trade from extended losses. But the trend reversal also gives you a chance to profit if you trade in the opposite direction.

But there is a problem to recognize the start of the trend. We can spot the new trend only when it is already formed. It is visible after the new direction starts. The other problem is that you don’t see just one trend. Let’s say that the time frame you’re trading may have a trend that differs from the other on the lower or higher chart.

Use Moving averages to identify trend reversal

Traders broadly use moving averages to identify trend reversal and as alert of the “potential” start of a new trend direction.

Let’s say the price passes a moving average and goes above it, that could be a sign that an uptrend has just started. Hence, when the price goes below the MA indicator, the downtrend is starting.

For example, in forex trading, use two MAs, one slower and one faster. When the faster MA crosses the slower MA, it is a confirmation that the new trend is developing. But you have to be careful because technical indicators can lag prices. So, you will be late for any trend change. In the best scenario, you’ll recognize a new trend, not at the start, but very close to. Still, moving averages, particularly the 200 periods moving average, are helpful indicators that may show a trend reversal.

How to identify a trend ending?

Trends aren’t highways. You cannot just start the engine and drive from point A to point B. What we can do about trend reversals is to estimate its probability to happen.

For example, while you are trading in an uptrend direction, you can notice on your chart that something may show the market has a high possibility of reversing.

Bullish and Bearish – how to identify trend reversal?

An uptrend is bullish price development that proceeds to make constant higher highs and higher lows. A bullish reversal appears when the stock stops making higher highs and begins to make lower highs and lower lows. In other words, it reverses the direction from up to down.

A bearish trend reversal develops the same formations but inversely. In a bearish downtrend, the price action creates lower highs and lower lows. When the price ends forming lower lows and establishes a higher low and remains to rise with higher highs and higher lows, it is a bearish trend reversal.

Different time frames

How to identify trend reversal on different time frames?

The high and lows can differ depending on the time frame chart you use. Let’s explain this. For example, you use the 60-minute and 5-minute charts. In the 60-minute chart, you can see a range of lower high and lower low in a downtrend. But, your 5-minute chart can show the uptrend where higher highs and higher low candlestick closes.

This means, your 60-minute chart shows the overall constant trends but your 5-minute chart can show a different tendency. It shows moves back to the longer time frame resistance. Here are two possible scenarios. The price will return back down is one possible scenario. The other scenario could be, the price may continue to bounce and reveal the early trend reversal attempt. The time frame you are trading is very important. It has to be aligned with a more extended time frame trend.

How to trade trend reversal

You can trade trend reversal at different points during the reversal process.

The first important thing that you must keep in mind is to regularly maintain trailing stops. It is important in case the reversal turns out to be a fake. Usually, trend reversal starts as a move that fails to bounce but finally succeeds in reversing the trend. The point of reversal is a break: breakout or breakdown. It is followed by the opposing trend direction. The uptrend will ultimately top.

As the price tries to bounce again, it is faced with greater selling pressure. So, it starts to produce lower highs and lower lows to finally break support and forms the downtrend.

Of course, this trend reversal has to be confirmed. If you enter the position in anticipation of a reversal without confirmation, that may expose your trade to a risk of getting a fake signal. Also, your stop-loss will be triggered and you’ll exit the trade without profit.

If you enter the trade based on the confirmation, your entry point can be too far, so you’ll profit a little. Also, you could get stopped low on the reversion.

How to have a proper execution?

After you get the confirmation, wait for the first attempt and enter the trade close to the reversal support zone. You’ll have enough time to enter the trade if you use some of the popular methods to confirm the trend reversal.

For example, you can use trend lines. They are a simple method of visually recognizing trends and reversals. You’ll need to draw the trend lines ahead of time and to actively monitor. It’s simple to draw the trend line. Just connect the highest high and the lowest high to make the upper trend line. To draw the lower trend line, connect the lowest low and the highest low.

Trend lines could be diagonal or horizontal. If both trend lines are moving up or down together diagonally, they are in an uptrend or downtrend. How to identify trend reversal occurs? If the opposite trend line of the trend gets breached and then developed in higher highs and higher lows we have downtrend reversal in a breakout. Hence, the lower highs and lower lows represent an uptrend reversal.

In case both trend lines are horizontal, it is a consolidation that will finally end as a breakout or breakdown.

Bottom line

There is no system that can tell you how to identify trend reversal with total precision. The only chance we have is to watch the price action and identify the potential zone where the market could reverse. So, we have to identify the weakness in the trending move, and strength in the retracement move. The also important signal is a break of support and resistance. Some other indicators could be a break of the long-term trendline, or if the price is coming into the higher-timeframe formation, or goes parabolic. Also, pay attention if the price is overextended.

The more concentrated circumstances there are, the greater the possibility of a trend reversal.

22nd June 2020
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.

12th June 2020
Index Trading What is It and How It Works?

In index trading, you are betting on the movement of the stock market as a whole.

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

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

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

How is possible index trading?

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

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

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

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

The examples of index trading

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

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

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

Why index trading?

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

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

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

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

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

How to trade indexes?

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

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

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

Bottom line

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

2nd June 2020
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.

20th May 2020
Beginner Investment Portfolio- How Should It Look Like?

These tips are kind of a guide to new investors for building a good stock portfolio. Selecting stocks needs analysis, time, and the ability to estimate different parameters for the stock, industry, and overall market.

By Guy Avtalyon

We are going to show you how a beginner investment portfolio should look like. Of course, if you think the stock market is getting crazy, you couldn’t be more right. DJIA is going up, going down, S&P 500 Index also. The graphs are looking like ECG of some very vulnerable hearts. Maybe you don’t believe it, but this is the right time to enter the stock market. A stock market is truly a wealth-building tool. Moreover, entering the stock market is easier than ever. But, as you are new in this field, you would like to know what to buy or, in other words, how a beginner investment portfolio should look like.

There are so many ways to invest the money and can pick the level of risk you’re willing to take. So, it is obvious the first thing you have to decide – the level of risk you can tolerate.

High-risk investments mean greater chances for high rewards. Wait, that also means bigger chances for losses. As a beginner investor, you should avoid high-risk investments if you don’t want your capital to throw through the window. Later, when you become more experienced and earn more cash, you’ll understand how to handle the risk, for now, here are some tips of how a beginner investment portfolio should look like

We know that a lot of beginners think of investing as attempting to get a short-term gain in the stock market. But if you want to build wealth, you have to think about long-term investing.

Beginner investment portfolio in 2020

ETFs

The world of the stock market and investing can be confused for beginners. There are individual stocks, mutual funds, bonds, mutual funds, etc.

Our first suggestion for you is some low-cost ETF. But there is a question: is it worth it? You’ll need time to build an individual stock portfolio.

Exchange-traded funds (ETFs) can be an excellent investment way for small investors. You can trade these funds like stocks. They can give you to expand the diversity of your portfolio and to do that without spending too much time on it.

Here is how an ETF works. A fund provider holds the underlying assets. Such creates a fund to follow the performance of underlying assets. At some point, such a provider decides to sell shares in that fund to other investors. As a shareholder, you’ll own a part of an ETF, but you will not own the underlying assets in the fund.

ETF tracks a stock index. So, as a shareholder of the ETF, you’ll get dividends, which you can reinvest, for the stocks included to the index.

ETFs are a passive approach to investing. Brokers will not charge you trading costs for ETFs. It is zero. Just make an automatic investment each week or month, it’s up to you.

Include the gold

Due to the coronavirus pandemic, the global economy is suffering. In the first quarter, only five main asset classes posted gains. Among them, apart from the US dollar and yen which are currencies, the list includes gold. Gold always was a great way to protect the portfolio and historically it was known as a safe-haven investment. It is the same nowadays. You can add some gold into your portfolio while you are waiting to come into stocks because today they can be too volatile for beginner investors. So, you should grow the exposure to gold. Gold works great when the dollar is flat-to-down. Also, gold can be a great hedge against inflation.

Moreover, it performs best when investors are worried about low growth on other assets. Basically, if we take a look at its historical performances, we’ll notice that gold played best and rose fastest when other economic measures were falling quickly. We have such a situation today.

We have negative interest rates, bond yields are almost zero, so gold could be a very good opportunity to hold it. Add it as very good protection to your portfolios.

A beginner investment portfolio should include mutual funds

Mutual funds are still amazingly popular. Especially target-date mutual funds in retirement plans, so add them in your beginner investment portfolio. Mutual funds are basically a basket of investments. When you buy a share in some mutual fund you are actually investing in all holdings included to the fund with just one step.

A target-date mutual fund usually is a mix of stocks and bonds.

How to invest in target-date mutual funds?

For example, you plan to retire in 20 years and everything you have to do is to pick the fund with 2045 in the name. But you have to know, so don’t be surprised, the fund you choose will hold stocks essentially. How is that possible? Your retirement is far away, and stocks have higher returns in the long run, higher than any other asset. As time goes by, the fund manager will shift part of your investment toward bonds because they are less risky. You wouldn’t like to take too much risk while you are approaching the date of your retirement.

Add Index funds to the beginner investment portfolio

If you don’t want to employ a manager to create and manage your beginner investment portfolio, index funds are a good choice for you since they track a market index. What is the market index? It is a collection of different investments that represent a part of the market. For example the S&P 500 Index. It is a market index that covers the stocks of about 500 biggest companies in the US. So, an S&P 500 index fund will reflect the performance of the S&P 500, by purchasing the stocks in that index.

Index funds represent another passive approach to invest just like ETFs. They carry lower fees charged based on the sum you have invested. The advantage of these funds is that some brokerages offer a range of index funds without an established minimum. So you can start investing in some index fund at $100 or less.

Help to create the portfolio

For example a robo-advisor. Let’s assume you would like to invest but you’re not the DIY type. Well, we have some good news for you. You have a lot of robo-advisors out there. They will handle your investment by using very complex algorithms. But don’t be worried. It will cost you less than a human advisor, usually, it will be from 0.25% to 0.50% of your account per year. Also, robo-advisers will let you open an account without the minimum required.

Robo-advisors are an excellent way for beginners to get started investing. Look, you are a beginner and you don’t have good knowledge about investing yet. So, robo-advisors will do all that hard work for you and you’ll need a little money for them. All you have to do is to check your portfolio from time to time. So to say, it’s your money invested. Also, they will give you a chance to learn more about investing since they’ll provide you tools and educational material.

Investment apps are also extremely helpful. You can easily find some aimed at beginners.

Traders-Paradise recommends

For example, M1 Finance is excellent if you want to build a free portfolio for long-term investments. This app offers commission-free investing, automated deposit, buying fractional shares, and has many other features like free maintenance of a portfolio, diversified portfolio, etc.

Fidelity is another great app that offers full service at zero trade prices. It allows you to invest for free, a variety of ETFs that it offers can help you to build a well-balanced portfolio, stocks, or options trades and all for free.

TD Ameritrade offers free options trading. If you want to become a trader rather than an investor, it’s a really good pick for you. We already wrote about this app but we would like to point again how excellent it is. For example, its platform “Thinkorswim” is one of the best. It will not charge you a commission for trading stocks, options or ETFs.

After deeper investigation, you might choose to invest in the companies that offer the chance for growth. Just keep in mind, your portfolio has to be diversified. Never expect that each stock can generate great returns. That is the reason for diversification. It appears especially when we are talking about a beginner investment portfolio. But that doesn’t mean you’ll need a large collection of investments. You’ll need just a few stocks but they have to run together in your favor.

Today’s volatile stock market offers discounts on great stocks. So, this is a great time to start investing and create your beginner investment portfolio that will generate you amazing gains in the future.

13th April 2020
Time To Buy Stocks Is Right Now!

The advantage of buying stocks right now is that you can get more for your money. If you are young, the more you do with your money now, the more it will be able to grow throughout your lifetime.

By Guy Avtalyon

Yes, this is time to buy stocks. That would be a short answer but here is why this is a time to buy stocks.

Stock prices are changing violently because of the economic slowdown caused by a new coronavirus outbreak. So, the volatility makes it especially challenging to answer this question because it may vary on a daily basis. Maybe the most critical part of any investment decision is the stock valuation on which we base our decisions, should we buy or sell the stock. Moreover, that can tell us a lot about other investors’ feelings toward some particular stock. So, you need an explanation of our observation that this is time to buy stocks.

Here are some real examples but we have to go back in the old days.

The historical overview

It was the year 1974.

In the period of 1973-1974 bear market ultimately bottomed. It marked a 43% decline for the Dow Jones in a time frame of two years or even less. This bear market ended December 6, 1974, when the Dow Jones hit 577.60. The large sell-off caused a lot of damage to the U.S. market and it took approximately 20 years to entirely recover. But, at the same time, every investor who had guts to buy stocks then, had great returns later.

The second occasion was in 1982.

The Bear Market of 1982. The market had been falling for almost one year and two months, actually exactly 451 days. In just one day, it was February 22, the S&P 500 Index was down for almost 21%. Inflation in the US was at 13.58% but also, it was a rough year for the rest of the world. But some investors were smart and made their life-time investment by buying stocks.

The next was the stock market crash of 1987.

This market crash originally came from the US but had a great impact on the global economy. In October that year, DJIA fell by 22,6%. It was a well-known Black Monday. Until then, Dow Jones never had such a drop in one day. And as in previous cases, some investors made smart choices, and bought stocks rather than sell them and it was a very profitable decision for them.

Horrible 2008/09

The most recent event, before 2020, happened in 2008 and 2009. This bear market actually lasted from October 9, 2007, to March 9, 2009.

The S&P 500 Index lost about 50% of its value, and the DJIA fell 777.68 points in intraday trading. It was the largest drop point fall until this year’s market crash. Also, some were smarter than others and they bought the stocks instead of selling them. In other words, during the market’s crashes during history, the most successful investors were buying.

What do these events have in common?

They were all connected to some kind of crisis. And each market situation was characterized by capitulation.

The stock market capitulation means giving up. It is the point when investors are giving up on attempting to recover lost gains caused by falling stock prices. For example, a stock you own has dropped by 20%. You have two alternatives: to wait it out with hope the stock starts to appreciate again, and the other solution is to compensate for your loss by selling the stock. When most of the investors choose to wait it out, the stock price will probably continue almost stable. But if most of the investors choose to give up on the stock, the stock price will decrease further and sharply. When this event is relevant to the entire market, it is a market capitulation.

What else is in common for these market crashes? The most profitable investors were buying stocks. It looks like selling wasn’t the right option for them.

So, we can easily conclude that time to buy stocks is right now. This is an amazing chance to buy stocks because they are cheap now.

When is the right time to buy stocks?

The truth is that almost all investors are scared. The possibility of losing all capital is enormous and some of them are starting to get out of the market. Everyday volatility, stock prices changes in milliseconds, have a great influence on investors’ emotions.

The markets’ crashes, we mentioned above, weren’t quite severe as this one is. This bear market marked a 20% drop from the recent market highs. So, despite the fact that this drop is so sharp, it could be a good time to buy stocks.

Yes, we know that investing in this time may sound strange and nonsense for someone. But, at the same time, if you are seeking long-term investment it could be the best time. For example, you can buy some blue-chips at a very favorable price. Such are, for instance, Walt Disney, or Coca-Cola. Just follow the KIS rule and look at the most prominent. These companies and similar survived through previous market crashes and came out stronger providing great returns.

You can create real wealth in stocks now. Just don’t watch from the sideline. React and do it now.

Is this time good to buy stocks?

Stop dreaming and guessing. Listen to good advice only. Have an investing plan.
Start investing with an edge, that will give you an advantage over other investors. Buy the stocks that were the best players last year.

Watch what the world’s billionaires do, the path they made. Allow them to show you what stock to buy. They are strong enough to fight for their investments, but at the same time, they will increase the value of yours.

It isn’t time yet to estimate the accurate impact the coronavirus pandemic will have on the companies. The results will differ by company. Some will manage better than others, but that’s how things go. What we can do is to find the company built to last. Take a look at their revenues for the past several years or at least for the last one. Some did great. So buy its stock at a discount.

You have to know that this pandemic will have influence over the next several years. Just don’t panic. This is not the time for that. This is a time to buy stocks if you have some extra money that you’ll not need in the coming years. Just invest it in brands. This lesson came from history.

Investing is more available than ever. That means you don’t have to rely on some difficult strategy to start earning money. You can buy options, you have help from free trading platforms, apps to create an investment plan that matches your goals, and risk tolerance. You are investing for the long haul. Ignore the panic and understand why it is the right time to buy stocks. Set clear goals, and recognize your limits. Keep in mind, investing in stocks is one of the easiest ways to put your money to work.

12th April 2020
Day Trading Stocks – Most Profitable Type Of Trading

For day trading stocks you need volume, volatility, and a trend or range tendency. When using a stock screener, enter your rules into the relevant fields to narrow the surplus of stocks down to a few.

Maybe it is too difficult to explicitly say that one type of trading stocks is more profitable than the others but Day trading stocks is the choice of active traders because of its profitability. Why did we say it is difficult to point to the special one? Because it depends on what kind of trader someone is and, maybe much more, on which strategy the trader chooses to use. Also, it isn’t the same which market you trade and what assets you are trading.

The individual traders can make a few trades per day since it isn’t hard to enter and exit several trades daily. Of course, big investors would prefer long-term opportunities.

One is sure, getting into day trading stocks is a decision that no one should make in a hurry. You should take time to examine all difficulties, to learn them since day trading stocks requires very careful planning. Only in that way, you’ll be able to earn your life-time capital in just a few hours. Yes, it is possible because day trading stock is one of the most profitable types of trading.

Before we jump into the day trading stocks we have to explain what day trading is.

What is Day trading stocks?

Day trading stocks means the trader is opening and closing the position during one trading day. When a trader opens a trade at 10 PM and closes it before 2 PM we are talking about day trading. You can find the traders who trade day only, some will perform it depending on the situation and opportunities, but also, so many traders never implement day trading stocks.

How does a day trader pick the stock?

Of course, a day trader is very careful and never just picks a stock no matter which one. Day traders always estimate the reasons to trade a particular stock. And as the reasons are different, traders have different criteria and strategies.

Since there are thousands of stocks in the market to choose from, the main question is how to do that? What is the best criterion, measure, method? It differs too. And if we try to figure it out, we can get confused. Look, some traders can find a new stock every single day. They are seeking stocks that are breaking out of patterns. Some are looking for the most volatile stock or the stocks that breakout of support or resistance levels. Also, some traders have the favorite stock or two and trade them every day for months or years. This isn’t without a good reason behind. If you know the particular stock very well, you’ll need less research on it. Since you already have the chosen one, you don’t need to search further for new stocks and breakouts or volatility.

How to find a stock for day trading?

If you want to become a day trader, you have to pay attention to several things.

Volume

For a day trader, a stock volume is important to enter and exit trades. To explain this more. When the volume of the stock is high it is much easier to enter and exit the position and to do without slippage or with very little. Why is it important to avoid slippage or to lessen it? Slippage happens almost all times but generally during periods of high volatility when traders use the market orders.

It happens when a trader gets a different price than expected, no matter if such a trader is on an entry or exit from a trade. Slippage occurs when the market order or your stop-loss point shifts somewhere between the time of your entry and the time of the execution. This is especially noticeable during periods of higher volatility when orders are bigger than the usual amount of shares on the bid or offer.

While choices vary, but many day traders will trade stocks with a daily volume of several million, some have over 90 million. That is a big number and it is hard to manage that. So day traders usually narrow the number of stocks down by using a stock screener. If they still have too many stocks to observe, the traders commonly reduce it to stocks with a volume of 3 of 4 million on a daily average.

Volatility

Volatility is important too because day traders need stocks with strong change during the day. The stocks have different volatility. Some will move 0.5% daily but others will move 5% or more per day. Picking the stock may depend on many factors, for example, reflexes, a trading style, your temper, etc. For the majority of traders, the stocks that shift 0.5% to 2% daily are the best choice since they can handle that volatility. Volatility over 5% daily is hard to handle. Only the most experienced traders trade these stocks.

Trend and range

These two components are important in day trading stocks. Traders differ by what they are trading, so we have trend traders, range traders and some that use both excellently. As you know, the trend is the direction of stock’s price, while the range is the difference between low and high prices over a particular trading time. The stock price is moving all the time. It can go down or up showing a downtrend or uptrend. A stock screener is very helpful here and will separate stocks with trend or range depending on your setups for the strategy you chose.

How to learn day trading stocks?

There are many ideas and methods to maximize profits from day trading. Nevertheless, managing the risks connected to day trading is most important.

First, trade only the amount you can afford to lose. You must have aside some amount of money for day trading. Don’t rent money for day trading because it’s possible to lose it. Start with a small amount and keep strong control over losses until you get some knowledge and experience. Don’t think you can quit your day job immediately. Day trading is seductive, we know that. But you need to test your strategy when the markets get rocky, for example, during the recession. If you are profitable, you can easily shift to day trading.

When to buy?

Day traders try to make money by using small price movements in assets. They have to leverage vast amounts of money to do so. They are focused on liquidity. That allows them to enter and exit a stock at a favorable price. Further, they keep an eye on volatility, higher volatility leads to greater profits or losses. Trading volume is another thing that they are considering. High volume means there are a lot of people interested in the particular stock. When the volume is increasing that is a sign that the price will drop or go up. After you choose a stock you want to trade you have to learn how to recognize the entry point. Some tools can help you. For example, some news services, but it has to be a real-time service because the stock prices can be influenced by news.

Quotes are important too. Electronic communication networks, for example, display the best open bid and ask quotes from various market players and can automatically pair and execute orders.

Intraday candlestick charts are useful but provide a rough analysis of price action.

Your entry point has to be defined very accurately, you have to know the exact point when you are going to enter the position. For example “during the downtrend” isn’t precisely defined. You have to define more specifically and test it too and find if there is a chance for that to be generated each day or more often.

Also, the direction has to be tested. You would like the price to go in your expected direction. After you check and test everything you may have a potential entry for your strategy.

After finding an entry point you’ll need to judge how to exit, or sell, your trades.

When to sell?

There are many ways to exit a winning position. For example, trailing stop and profit target. The profit target is the most popular. The other well-known price target strategies are scalping, fading, daily pivots, momentum. The best time to exit is when the interest in the stock is decreasing. The volume will show that. Your profit target should provide you more profit on winning trade than you would have a loss in a bad trade. For example, if your stop-loss is 2% away from your entry price, your take profit level should be more than 2% away. You have to know your exit before you even enter the trade. The exit level has to be precise.

Bottom line

Day trading means to take advantage of small price changes. It can be a profitable game if you play it carefully. Hence it can be a risky game for new and inexperienced traders who don’t have a strong trading strategy. This type of trading is connected to the high volume of trades. So you have to respect some general principles if you want to become a day trader.

You may have profitable trades by following the patterns. More about it learn from the “Two Fold Formula” book, we recommend. But we also recommend to test it by using our preferred trading platform firstly.

You might find these interesting too:

>>> Is Day Trading Like Gambling?

>>> Swing Trading and Day Trading – The Difference

>>> The pattern day trader rule

>>> Day Trading the Best Methods – Day Trading for Beginners

>>> Day trading stocks – How to find best trading platform

>>> What is the best day trading strategy?

>>> Money Required to Start the Day Trading

10th April 2020
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?

7th April 2020