Tag: stocks

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

How to Calculate the Fair Value of Your Stock

Fair value points to the genuine value of a stock or other security that is agreed between the two parties, the seller and the buyer. It can be calculated for the assets that are traded, but not for the products that are being liquidated. It can be a challenge to calculate the fair value if there are no obviously visible market prices. The point of this is to define the price or value that is fair for both sides, the seller will not be on the losing side, and the buyer will end with a satisfying price.

For example, a trader Anna sells its stocks to the trader John at $50 per share. The trader John believes he could sell it at $70 per share once he gets them. So, John buys 1,000 shares at the price Anna is setting. It is a fair value because both sides agreed the price and the trade is beneficial for each of them.

How to calculate fair value?

You can do it with comparable information, for example.

Use respectable financial news and find the last closing price for the stock you want to buy. Say, you want to buy 100 shares of some company and the last closing price of their stocks was $30. The fair value of 100 shares would be 100 x 30 = $3,000.

Also, you can calculate the fair value using the discounted cash flows.

For example, you want to examine investment that offers a range of cash flows. And you can’t find anything comparable. So, how to calculate the fair value of the investment?

Let’s say it is an investment of $10,000 and it generates $2,500 cash flow per year. What you have to do is to write down the cash flows for, let’s say, 5 years.

$10,000

1 – $2,500
2 – $2,500
3 – $2,500
4 – $2,500
5 – $2,500

Assume that the rate of return is 6%, and first calculate the discount factor so that you could calculate the discounted cash flows for each year.

For calculation purposes, the percentages need to be transformed into whole numbers. It is done by adding 100 to the number of percents and then dividing that sum by 100, i.e. (100+6)/100=1.06. Now you can calculate the discount factor for each year by rising to power of that year this number, i.e. to the power of 1 for 1st, to power of 2 for 2nd, and so on.

That should look like this:

1.06^1 = 1.06
1.06^2 = 1.12
1.06^3 = 1.19
1.06^4 = 1.26
1.06^5 = 1.34

The next step is to divide every $2,500 cash flow by the discount factor for each of these five years.

$2,500 / 1,06 = $2,359
$2,500 / 1,12 = $2,232
$2,500 / 1.18 = $2,100
$2,500 / 1.26 = $1,984
$2,500 / 1.34 = $1,866

This produces five discounted cash flows of: $2,359, $2,232, $2,119, $1,984, and $1,866.
Add these five numbers to -10,000. That was the initial investment, do you remember? Let’s see the result. The result is 541. This means that using a 6% rate of interest, the fair value of this particular stocks is $541.

Also, you can calculate the fair value for a stock is by using the P/E (price to earnings) ratio.

The formula to calculate the P/E ratio is

the current stock price per share / current earnings per share

What you have to do is to compare P/E ratios among companies from the same industry. For example, if you want to find the fair value for a utility, you have to compare the P/E ratio to other P/E ratios in that industry.

If the company has a high P/E ratio it usually means the company is overvalued. On the other hand, a low P/E ratio shows the company is undervalued. For example, if you hold a stake of shares in a company with a P/E ratio of 4 and the average P/E ratio for other companies in the same industry is 2, you can be sure that your stock is expensive or, in other words, overvalued.

The next thing to do is to modify the stock price to the average P/E ratio. Let’s say the average P/E ratio is 2, and the P/E ratio on your stock is 4. This means the current price is $8 and earnings per share is $2. We know that by following the P/E ratio formula.

Use the P/E calculation to find what the stock price needs to have a P/E ratio of 2.

The equation is

New P/E ratio x Earnings per share

And the answer is 2 x $2 or $4. The fair value for this stock is $4, not $8.

Bottom line

The puzzle of what security is really worth is one of the basic questions in investing. By calculating fair value, you will find the answer, maybe not exactly but you will be very close to it. Although, fair value calculations are essential to any investor’s stock.

Ways to fair value can classify value investors and growth investors.

The growth investors will estimate earnings that can be unstable. On the other hand, value investors will buy stocks at a discount to their fair value. They will wait for the fair value of their investments to rise. But both kinds of investors have to know that their companies can stumble. Also, the company may get significantly bigger which will cause keeping historical growth rates difficult.

The point is to buy stocks that will rise to meet the fair value of the company.

You might find these interesting too:

>>> The Average Daily Trading Volume How to Calculate

>>> Calculate Portfolio Performance

>>> Short Selling For Profit

>>> Lot size in forex – What is it and How to calculate it?

3rd October 2019
Stock Investing – The Pros and Drawbacks

5 min read

by G. Gligorijevic

Stock investing isn’t just buy and sell stocks. It is the whole philosophy and math. Well, you have to learn more about the logic behind the stock market.

When you want to buy a stock, that means someone else has to sell it. Be aware, that someone has worked on the numbers and concluded that the wise move is to get out of the position right now. Do you know why that one decided like that? How to be sure you are doing a good job if you pick that stock?

Stock picking is a struggle against other investors.

Maybe they know just like you, maybe more, maybe less.

The basic formula is easy: Pay a value that’s smaller than the long-term, per-share price of the underlying business. The philosophy of investing is in understanding how to determine that value.

Maybe you prefer to be a “growth” investor. So, your focus should be on the analysis of a company’s potential for future profits. You should choose the one growing fastest. As a growth investor, you are interested in great earnings. The P/E or price-to-earnings ratio is a popular metric for valuing stocks. Growth investors often are willing to pay P/Es of 20 or more.

Value investors usually buy stocks with lower P/E ratios. This appears more traditionally. But buying cheap has some risks. Very often when some stock is cheap it is a sign that the company has some problems. Is this true? No! Simply NOT! There is no easy way or formula that helps you to pick a fabulous stock to deal with. You have to research and make a decision.

But maybe you should invest in funds than individual stocks.

Stock investing demands time and intense analysis. It also needs notable cash to create a fully diversified portfolio. A choice is a mutual fund. That will spread your bets between hundreds of stocks.

Stock investing is attractive and enjoyable for a lot of people. If you want to enter the market on your own, you can use funds as the essence of your portfolio. Later, just set aside a small account for your selection of the individual stocks.

One of the main benefits of investing in the stock market is the chance to grow your money. Over time, the stock market performs a rise in value. Yes, the prices of individual stocks rise and fall daily. But, investments in solid companies that are able to grow, tend to make profits for investors. Moreover, investing in many different stocks will boost your wealth by leveraging growth in different areas of the economy. It will bring you a profit even if some of your individual stocks lose value.

Stock investing gives a lot of benefits to investors.

Owning stocks means to take advantage of a growing economy.
How does it come?
That is a kind of chain of good fortune. Everything is connected and logical.
Assume you want to buy a stock you’ve been examining for some time. And finally, they announce a surprise bit of good news and the price rallies sharply higher and so you jump in.
Let’s say, you have a sudden profit on your hands but, the stock reverses. It has retracted back to your entry price. Actually, it has gone beyond your entry price and you are a loser! You may think that it’s just market games and “shaking out weak hands”. So, you decided to hold on, knowing that patience is a trading power. Finally, you’re down further than you expected to be in the stock.
If you were ultra convinced of the upside potential, you may see this as an opportunity to buy more shares at a better price. On the other hand, you may panic and sell as you continue to watch the price trend further against you.

What happened?

Experts developed the “Efficient Market Hypothesis” which states that stock prices instantly diminish all news. So, there’s no possible way for a trader to profit from news releases. That experts feel that strongly.

Here is one example.

Maybe two years ago, Samsung announced it is expecting profits to hit record levels in the third quarter. And almost three times as much as the same period the year before.
Following the announcement, their share price dropped.
That might seem counter-intuitive. But there are other factors at play. At the same time as announcing this expected profit win, Samsung’s CEO quit. He told that the company was going through an “unprecedented crisis” and that “a new spirit and young leadership” was needed to respond to the challenges. In this case, the decline in stock price can be understood. You know, if the CEO is worried, perhaps investors should be too.

But sometimes share prices drop on good news and it is really hard to understand why.

Market expectations are always priced into the market price. Say, for example, a company has a forecasted earning per share of $1. They’ve never missed an earnings target. So investors expect the firm will actually earn $1.10 per share. They think it’s currently undervalued. The firm then announces an earnings report of $1.05 per share.

Good news, right? They beat their forecast.

But, crucially, because investors thought the firm should earn more than this $1.05 per share, the stock’s price was bid upwards to a price that reflected earnings expectations. Because the real earnings are less than the current market price, the stock price drops as investors sell off their shares.
This effect can be intensified by investors who completely copy what everyone else is doing. In this case, selling off their shares. Every investor must have the bigger picture. That’s the point.

What you have to do?

If the stock is basically strong, hold the stock despite the stock price going down. It won’t matter much in the long term if the company. Most of the great companies focus on their long-term goals. This means that a few times, they might miss the short-term expectations.
But, short-term interests shouldn’t be ignored completely by the company or investors. Nevertheless, if the company is overall performing good in the long run, then there’s no point of worry. In any business, there will be few difficulties in the short run.
Additionally, do not get connected to short-term expectations. Analysts will keep on making expectations every quarter. It’s their job and this is what they are paid for. If a company keeps on working for the short-term goals, it might never be able to focus on long-term growth.
Overall, if the temporary setbacks are not going to affect the long-term profitability of the company, then ignore the short-term fluctuations and hold your stock.

2nd October 2019
Preferred Stock Advantages Explained

Take advantage of owning these stocks, they are paying guaranteed dividends, but the owner doesn’t have the voting rights

By Guy Avtalyon

Preferred stock signifies an ownership stake in some companies. It is like a share of common stock but less volatile.
But there are more advantages to hold preferred stocks. For example, they are prioritized when it comes to dividends or bankruptcy. But by owning this stock you will not have the same voting rights as owner of common stock. Actually, you will not have them.

Preferred stock is similar to bonds. See, with preferred shares, you will have a fixed dividend in continuity. And you can easily calculate the dividend yield. All you have to do is to divide an amount of dividend in the currency by the current price of the stock. Yield is the effective interest rate you earn when you buy a share of the preferred stock.

Let’s do some math.

Assume a preferred stock has an annual dividend of $6 per share and is trading at $120 per share. So, the yield is $6 divided by $120 which is 0.05. Multiply by 100 to turn to the percentage. The yield is 5%.

6/120 = 0.05

0.05 x 100 = 5

This is regularly based on the standard value ere a preferred stock is sold. It’s generally determined as a percentage of the current market price after the trade starts. This is a difference from a common stock. Common stock has variable dividends that are published by the board of directors and it is never guaranteed. Moreover, a lot of companies don’t pay out to common stocks.

The added difference is that this kind of stock has a par value. It is in correlation with the interest rate. If the interest rate increases, the value of preferred stock drops. Also, when the interest rate decreases, the value of this stock will grow. You will not find a similar situation with common stock since its value is determined by supply and demand in the market.

Why buy preferred stock?

Investors frequently buy preferred stock for the income the dividends give. The dividends for them are higher than those issued for common stock. And the other benefit is notable. If the company has to miss out on a dividend it collects, it still must pay preferred stock dividends before any common stock dividends come to the schedule. That is why they carry less risk than common stock. Preferred stock owners must be paid before common stockholders if the company failed or in case of bankruptcy.

When evaluating the investment potential of preferred stock, it is most important to compare the dividend yield to the yields of the company’s bonds. You will find that preferred stocks often work similarly to bonds.
Preferred stock is a good choice for investors who don’t want to take a big risk. Moreover, it is less volatile than common stock and provides a better flow of dividends.

How to buy preferred stock?

The process is the same as you buy any stock. You can use a broker’s service, doesn’t really matter if it is a discount broker or full-service broker. The main point is that the company has to be publicly-traded, of course. But before you start finding a preferred stock to buy, you must know why should you do that. Why don’t you buy that company’s common stock?
When buying common stock, you’re actually buying a part of ownership in the company. You’ll have voting right as one of the co-owners. On the other hand, if you buy a preferred stock you’ll almost never get voting right.

They have regular dividends payments

When you buy preferred stock, you’ll get regular dividends payments. That is opposite from the owner of common stock that doesn’t have guaranteed dividends. Even a case that the company stops to pay dividends, your unpaid dividends are still yours and once, when the company decides to continue these payments, you’ll receive them.
The other advantage of buying preferred stocks is that your investment will be repaid in full even if the company goes bankrupt.
The owner of common stocks will get nothing instead.

One thing more is present here.

Those stocks give more options to investors. Let’s explain this. Numerous preferred shares are callable. This means the issuer can purchase them at any time. Investors have a true chance for these shares to be called back at a redemption rate. It can be a notable bonus over their purchase price. The market for preferred shares usually assumes callbacks and prices may be bid up respectively.

And we must point out one disadvantage again. Its shareholders regularly do not have voting rights as the owners of common stock. It may be a problem for some investors.

30th September 2019
Negative Balance Protection

4 min read

by G. Gligorijevic

Negative balance protection signifies that you will not lose more than your deposited money. Or to put it simply, you won’t owe money to your broker. Sounds great, indeed. You will not end up with a cash debt on your account.

At first glance, this looks like a great thing. For example in spread betting, that lets traders take leveraged short-term bets on stocks could end in tremendous losses.

Here is one example.

Assume you put $10,000 to your account and want to buy stock. Let’s say the leverage is 5:1 which would provide you a position of $50,000. But, the market is really volatile those days and the price of your stock drops, for example, 8%. Remember, your leverage is 5:1, so this drop would make you a loss of 40%. It is $20,000 of lost. This lost would destroy your deposit of $10,000 and you have to pay back to your broker what you owe. Yes, this is an unpleasant situation but if you are trading with a broker who lets you negative balance protection, your loss would be exactly the amount you deposited, $10,000. Nothing more, nothing less.

It is a great thing for traders.

Negative balance protection is a proposal that brokers practice in order to protect their customers. This method guarantees that traders will not lose more than their deposit is if their account moves into negative as a result of their trading activity. This is a great reason to choose the broker that provides it. You will not owe the money to your broker if you made the wrong trading choice.

Yes, the brokers always have a margin call to protect. The truth is that this option isn’t the best choice when the market’s shift quickly and the stock prices are in high-speed movements. If the price moves too fast and moves beyond your margin call out level you may lose more than it is expected.

Negative balance protection in Forex

It protects your account balance never to falls under zero. How is possible for your Forex trading account to go under zero?

Don”t be worried. Your broker has protection, in the first place it is margin call. But, the same occurs as it is with stocks. When some incredible drastic move happens in the currency markets, your broker may not be able to close your trade immediately. Also, your stop-loss order will not be executed due to the high speed of the market movement.

Therefore, the price may run beyond your stop loss or margin call close out level. That may cause a larger loss that exceeds the size of your account balance. So, you would have a negative balance.

This is where negative balance protection comes to the scene. The broker can overlook or forgive your negative balance and lets your account to begin from zero again.

Why traders need this?

Forex and CFD markets are volatile. That makes traders unprotected in sudden price movements and gaps. When extreme price movements happen in open trade, this may have an important influence on the value of your open positions. It is particularly dangerous when your position is highly leveraged.

If you hold a leveraged long position, you would lose more than your initial deposit. And as I said before, this would put you in a position where you would have to pay your debt back to your broker.

Negative balance protection resets your account balances to zero.

Is there anything bad?

In short, yes.
When you enter the market you are dealing with some unresponsible people who don’t pay attention to the risk involved because their goal is to beat the market. Sic!
When you set negative balance protection heaven isn’t the limit. This safety net wouldn’t let you take additional risks just because you have the belief that you can make easy money. Stay in the safe zone, it is smarter and better for your trading account.
Also, if you put negative balance protection, you have to pay increased margin rates.

The history of negative balance protection

It grew more prominent after the Swiss franc crisis in 2011. That was when the Swiss National Bank (SNB) closed holding its currency against the EUR at a fixed currency rate. The Swiss franc rapidly soared against the EUR. The consequence was that numerous traders shorting the franc ended up with enormous negative balances losing more than they had deposited on their account.
The Swiss market had great losses and many traders ended up with the fear that their brokers would ask to get paid to cover their losses.
The brokers that provide the leverage are obliged to apply for negative balance protection on a per-account basis, thanks to ESMA regulation for the EU.

24th September 2019
How Often to Check The Investments?

2 min read

by Guy Avtalyon

Your investments should certainly be periodically checked but not every day. Even though it is your money invested. You have a bigger chance to lose money if you check your investments every single day.

How?

Well, you know that the price changes occur very frequently due to the stock market volatility. The stock price can rise and drops hourly. Watching that, you may feel a bit more nervous about your investments and provoke you to sell instead to hold and wait for the price to increase. Also, you have to know that daily fluctuation in stock prices does not influence your investments. The most important is how your stocks perform in a bigger time frame.

If you check your investment too frequently, you will end up acting irrationally to market movements and sell your stock at a low price.

Yes, I know, our investments may give us the impression that we will never end up with sufficient money. You have to know how often to check your investments so that you don’t destroy them.

For new investors, quick gains can cause investing to look impressive. It is normal to check your investment every night. I can understand that. I know some investors are checking several times a day. If you need to be worried about your investment it is a sign you made the wrong choice.

If your portfolio loses just a bit in a few days or weeks there is no reason to panic. The statistic shows that fresh investors usually put money in mutual funds or ETFs because they are afraid to invest in more volatile stocks and they avoid them. The truth is that holding stocks requires more attention, time to track them, and knowledge.

But you can’t have only mutual funds or ETFs in your portfolio and check them once a year. You would like to have stocks as well. And a lot of things will be changed.

So, how often to check the investments?

With stocks, things are pretty different. You have to check them at least once a week to notice if something, some event, for example, influences your investment.

If you are holding or trading individual stocks, try to check them quarterly. OK, maybe monthly if you are so nervous. It is reasonable to check your investments from time to time. But too much checking can make you panic and sell at a lower price. And you will start that chain. That frequently checking will cause trading, fast trading will cause over-selling, over-selling will produce more fees and costs. Also, if you have too much trades you will have low returns.

It is smart to pick a good investment strategy and stay with it. Check the progress of your investment quarterly and check the price, for example, monthly.

With mutual funds and ETFs, you have wide diversification, so once a year is enough.

With stocks, check it out by online approval or in the paper version. Most of the financial websites such as Yahoo Finance and some others offer stock research data. Also, your broker has quotes available.

How often to check your investments? Less is better. You are investor, investing is a marathon, it is for a long run. Make a reasonable plan, according to your risk tolerance, be patient. Rebalance your investments once a year and let your money work for you.

23rd September 2019
Stocks Under 5 Dollars Per Share to Buy Right Now

Stocks under $5 can be a good opportunity, they are low-cost but can generate a large percentage gains

By Guy Avtalyon

Why should anyone invest in stocks under 5 dollars per share? Just read this post to the end. There is no excuse for not investing. You can do it with just $5 per share. Traders-Paradise presents you three stocks under 5 dollars per share with pretty great potential. There is a great risk involved too since they are really volatile. Be aware, all stocks under $5 are volatile. Because of their nature, these stocks may provide you great returns but large losses too.

So, these are our tips on stocks to buy right now and make a profit.

Reebonz Holding Limited

Ticker – RBZ
Market cap – $16.053M

Reebonz is an online platform with a focus on buying and selling luxury products. Headquarter is in Singapore. The company was founded in 2009, today it is the leading online platform for buying and selling luxury products in the Asia Pacific region. It has offices in Singapore, Thailand, Hong Kong, Korea, Taiwan, Japan, China, Australia, the United States, and many other countries.

On Friday it stated that will release its unaudited business results for the first half of 2019, before the opening of U.S. markets on September 23. So, we will see.

Until then, let’s see what do we know about this company.

This platform operates as an eco-system of B2C e-tail and B2C marketplace covering more than 1,000 brands. It is supported by C2C which provides private members to sell luxury products. Shopping is very easy since the company’s UI is user-friendly. Reebonz sources collections of many brands from luxury boutiques from all over the world.

The current price per share is $2.58. The analysts estimated the RBZ stock will be one year from now at $11. Our suggestion is to buy its shares.

ReneSola Ltd

Ticker – SOL
Market cap – $71.59M

ReneSola Ltd was founded in 2005. ReneSola Ltd is headquartered in Shanghai, China. The company is listed on the New York Stock Exchange in 2008. It is an international technology provider of green energy products.

It is a Chinese producer of the range one solar panel with a 10-year product and 25-year performance warranties. Their panels are corrosion resistant, and that fact makes them very convenient for installation by the sea. Renesola has offices in Sydney and Melbourne too.

The company produces string inverters, microinverters, and LED lighting too. It provides the highest quality green energy products and services for EPC, installers, and green energy projects all over the world.

The current price per share is $1,88. So, our suggestion is to purchase since the shares are undervalued for no reason. These shares are good. They already beat analysts’ expectations.

Trevi Therapeutics Inc.

Ticker TRVI
Market cap $82,930,751

Trevi Therapeutics was founded in 2011. Its headquarter is in New Haven, the U.S. state of Connecticut. They are developing nalbuphine ER, treatment for uremic pruritus, improving “the quality of life of patients suffering from the serious symptoms associated with chronic neurologically mediated conditions” as they stated on the official website.

The Trevi Therapeutics’ team is highly engaged and experienced in life science clinical development, successful commercialization, and building companies of exceptional value.

Since launching, Trevi has raised $92.2 million in the financing, according to the filing for its IPO this May.

Trevi Therapeutics, Inc. is focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions. The company’s nalbuphine ER is in a clinical trial. The purpose is for the treatment of chronic pruritus, chronic cough in patients with idiopathic pulmonary fibrosis, and levodopa-induced dyskinesia in patients with Parkinson’s disease.

The current price per share is $4,5 but analysts predict that easily can be over $16 in the next 12 months

These are only three stocks under 5 dollars worth to buy right now. There are more, of course. The price per share is low, the growth potential is reasonably good. But remember, the low-cost stocks are extremely volatile. The high potential risk is involved but the reward can be great also. Everything is up to you when it comes to stocks under $5. This is just a suggestion. But I would like to give more info on trading so-called penny stocks.

Why trade penny stocks?

As I just gave you a suggestion of stocks under $5 I would like you to know that these are so-called penny stocks. So, penny stocks represent the companies whose stocks are valued under $5. You can find that definition can vary but, in essence, this is the right explanation. At least, it isn’t wrong. So, let’s put aside the definition. You may ask yourself why should you trade penny stocks.
Trading penny stocks has one reasonable goal: to turn a little money into the big money. Traders’ profit comes from small changes in stock price but from large percentage gains. They trade with large leverage. That’s the point. Also, that’s the way how you can trade with a little money and earn very nice. Once I said don’t be shy to buy cheap stocks, stocks under 5 dollars. This is especially valuable for the penny and undervalued stocks.

At the end of the day what really matters is your profit. Happy investing!

22nd September 2019
How Long To Hold Stock?

Patience is golden, but even being a golden rule of stock investing, it isn’t enough, there is more.

By Guy Avtalyon

Yes, you are asking the right question, because many stock investors ask: “How long to hold stock?” There are some possible answers.
You may hold your stock until it provides you a profit, or break your stop-loss rule, or you may hold your stock forever.

Actually, there’s no general rule that fits all stocks when the holding periods are in the question. So many variables can influence how long to hold stock.

The decision to hold stocks for the long term or the short term is individual. It depends on your poverty, expectations, or advisor. Several factors are involved in your personal decision especially if you have a winner in hand. The right question is: Will the winner be an excellent moneymaker in the future and how long?

How long to hold stock

A lot of factors will influence your decision.

First of all, the time you enter the market is important. If it is during a bull market you have to know two things. First, the usual bull market cycle will last from two to four years and you’ll be able to earn the majority of your profit during the first or second year. In simpler words, you have to wait until your stock rises up to 20 – 25% from buying price, that is the point where the profit can be taken. If your stock increase over 20% in the first 3 weeks or in a shorter period, hold it at least 8 weeks. After that period you have to examine the stock’s charts to check if your stock keeping up well. When you get this confirmation from the charts and the market is increasing too, there are a lot of chances that this trend will continue. You can expect the new breakouts and the value of your stock will rise more.

For genuine market winners, the average time from breakout to top will be from 12 to 18 months.

This looks like a pretty simple answer, but is it the right one?

What if your stock starts a downtrend and you see you can be stuck in a losing trade for a long time? That is why you must have settled rules before you enter a trade.

How to determine how long to hold a stock

The best way to determine how long to hold a stock is to do that based on your trading rules.

Before you purchase any stock you have to define what profit do you want to make. The next will be your ability to forecast how much your stock could decrease. Will your strategy provide you a bigger gain than loss? Is the stock in its downtrend, bottoming, or up-trend? You have to determine the largest possible loss you can afford.

Traders-Paradise has one suggestion for you.

The gain has to be minimum 1,5 to 2 times bigger than loss. There more variables you have to consider. For example, how much will you earn when sell your stock?

The golden rule in stock holding

Let us examine one possible scenario. You have bought the stock and you are 20% in profit after the first week. You predicted the worst scenario as a loss of 10%. In this case, your reward is at 2 to 1.

What you have to do? Should you sell? Well, the brief answer is No.

The right answer is that you should hold a stock for a longer time if you have, for example, a medium-term horizon. You have to hold your stock for several weeks or even months.

Hold the stock as long as you want to make a notable gain from a stock price move. Some traders would advise you to hold a stock something between two and 10 months to get the best reward. You have to be very blessed to develop a great profit overnight.

The average high-profit trade is 30% and the hold time is about 45 days. Also, the average drawdown is -11% to -15%. That is the statistics.

Patience is golden

You must be patient with a stock. Stocks need time to give you the profit you want. Long-term investments have made incredible profits.

Anyway, you must be careful because stocks can drop suddenly. To avoid a catastrophe you have to limit your loss but don’t place your stop-loss order at 5%. Usually, a stock may pull back 10-15%, and very soon after that, a profitable move happens.

12th September 2019
When To Buy Sell or Hold On The Stock

The enter or exit the investment must be in line with your investment plan.

by Guy Avtalyon

Beginners in the stock market are usually enthusiastic, but do they know when to buy, sell, or hold on to stocks to gain maximum growth and limit loss?

There are no guarantees for stock’s price, they can go up or down driven by various circumstances. So how to know when to buy, sell, or hold on stock?

No one can tell you about one specific, the best strategy, good for everyone. But advanced traders follow some “rules of thumb” when they examine their investment movements. They are establishing entry and exit points and evaluating fundamental factors. But they had to learn some universal systems at first and after that, they were able to choose the one or a few that suit them the best.

Examine Entry and Exit Points

An entry point is the price level where the trader buys an investment or “enters the position”. The exit point is a price where you sell or “exit”.

If you want to avoid the wrong decisions and if you want to know when to buy, sell, or hold on the stock you have to define your entry and exit points. That means you must have a clear strategy to lower the risk and enhance your return. In other words, you have to set the right entry point to maximize winnings.

Also, it is extremely important to define where to set a stop loss. This point is worth in case the stock price starts to drop. Yes, some traders will wait for the dropping price to grow, but that may be dangerous in case the stock value continues to decline. This is especially important for short-term traders with the idea to buy and sell in a short time.

Traders usually practice stop and limit orders to maintain the balance between gains and losses.

The point is to have more winning trades, right?

To avoid permanent watching the charts and price changes you can set stop or limit order. That will provide you to enter or exit the investment according to your investment plan.

A limit or stop order means that you decide how much stock you want to buy at a specific price or when it peaks a specific price. So, you can place a limit or stop order for a higher or lower price than the current market price. The market price is the prevailing price of the stock.

Stop and limit orders act separately but associate to the trader’s action in the same way. They enable traders to not have to continually watch price movements, but traders have various goals with these orders.

For example, when setting a limit order, the intent is to buy or sell a stock at a defined price. To be more clear, if a stock’s value is $85, and you want to buy it, you may set a buy limit order at $80 if you think it is your best entry point.

Thus, if you want to sell the stock, you may place a sell limit order of $90 if it is your projected or planned exit point.

Stop order is a defensive strategy to lower losses.

To secure your investment, in case the stock continues increasing in value, you may set a stop order at a point a lot bellow the current price. But if you expect that stock to be trading below, you may try to minimize your losses with a higher-stop order that will be close to the current price or just a bit under the current price.

Stop and limit orders are created to trigger when the pre-arranged price is reached. If you set a limit order at $90, the stock will be sold immediately when the stock increases, and $90 is touched. Or vice versa, if you set a stop order below the current price, the stock will be sold when the price drops and it reaches that price.

I hope the point is clear, the trader with the limit order wants to sell when the price rises, and the trader who placed the stop order wants to sell when the price drops.

Why is important to know when to buy, sell, or hold on the stock?

There is some risk involved in limit orders. A limit order “guarantees the limit price or better” but on the other side, what if it never gets filled?

A stop order means an exit from the stock position if the price drops, after your stock scores the stop you’ve set. In that case, your stop order becomes a market order and there are many competitors waiting to be filled. Hence, you don’t have a guarantee that your order will be filled at the specific price you placed. In some cases, you may end up selling the stock significantly below that level.

Moreover, if you have a sell stop at $90 and the price falls to $40, your order will be triggered at $60, which is a good thing. But things could go in the wrong way too. For example, if you purchased a stock at $80 and placed a stop at $75, the stock might go down to $70 and be sold, of course, but it can jump back to $90.

When to buy stock?

In investing, it is important to determine what a stock is worth. Will it rise up to the estimated value? Set a range at which you would like to buy a stock. That might be helpful. Will you pay that amount for a particular stock? Be honest while giving the answer.

If you don’t know the price target range, you will be in trouble with determining when to buy a stock.

Also, you have to know about the financial health of a company. It is possible through the company’s financial statements that have a treasure of information.

You have to pay attention to the company’s revenue, for example, or how it relates to its past reviews. Are the company’s sales growing or shrinking? Read the company’s guidance for revenue or sales, which reveals how it expects to perform in the future.

Cash flow is important too because it will provide you information about a company’s liquidity. A very good sign is when more money is coming into the company than it spends. It is a positive cash flow.

Further, a stock might be undervalued. So, you must estimate a company’s upcoming prospects. Compare it with current reports. In this way, you will find a possible price target. If the current stock price is lower, buy it.

When to sell the stock?

Whenever the expected price is bigger than the current stock price, you have a chance to earn.

The size of the return depends on how much of a discount a stock trades related to its expected value. Also, it is related to how much time the market needs to update its expectations. The higher the stock price discount and the sooner the market corrects its expectations, the higher the return.

You can sell your stock when it hits its expected value, or a more winning stock arises, or you change your expectations.

When to hold the stock

You have to know that it can take time for a stock to reach its real value. Any stock price forecasting is actually simple guessing.

Your stock may need several years for a stock to reach close to a price targeted. If you are sure your stock will grow, hold it 3 to 5 years. Very often, you will profit more. It is essential to know when to buy, sell, or hold on the stock if you want a profit.

11th September 2019
Should you buy a stock because of its dividend?

3 min read

Never buy a stock because of its dividend. A dividend shouldn’t be a reason to invest in a poor business. Most important is the performance of the business. That will drive a stock’s return and the company will be able to pay a dividend. So, you must pay attention to the business as a whole, the company’s plans, its goals, even to management and how they treat their employees.

Dividend stocks are recognized as safe investments, that is true. They are the highest valued companies. They have grown their dividends during the past 20 years and these are usually held as safe businesses.

But, just because a firm is providing dividends doesn’t mean it is a trustworthy investment. You have to learn how to avoid pitfalls that may arise, at first glance, with good dividends.

Executives can use the dividends to pacify nervous and fidgety investors when the stock price isn’t running as they are expecting. You must know how the management is handling the dividends in a company’s strategy, for example. If you notice a lack of growth, stay away. Such a business isn’t good to invest in, even if it provides good dividends.

Do you know what has happened in 2008?

A great stock’s dividend yields were forced to unnaturally high levels due to stock price drops. The dividend yields seemed fascinating, but as the economic crisis developed, the profits fell. That caused the numerous dividend plans to be canceled entirely. The best example is the banks’ stocks in 2008.

They were paying great dividends but whenever dividend is paid the stock value instantly falls by an equal amount. That’s the point. And you may ask if the bankers knew that? Of course, they did.

Let me explain you something.

Very often, the chief purpose why some company pays dividends is because the executives can’t discover some solid growth possibilities within their own company to invest its earned profits in.

Hence, the company allows extra earnings to stockholders by paying dividends. But this is good, you may say. Yes, but…

When a company gives a dividend equivalent to its profits, that is a sign that they are not able to find investment opportunity within their own business that would give greater return. If such a company stays for a long time in a similar situation, the growth will be slow. And at some point in time, they will stop paying dividends and the stock price will decrease to worthless.

That’s the secret. So when you ask yourself should you buy a stock because of its dividend, be careful and have a bigger picture in mind.

You should buy a stock because the company is paying attention to the development, research, infrastructure… Things that will increase your profit as the stock price is going up.

Now, can you answer me, should you buy a stock just because of its dividend?

Of course not.

Moreover, dividend-yielding stocks are taxable income.

A dividend is a delivery of a part of a company’s earnings to stockholders. It can be done in cash, stocks, or other assets. It is a bonus to investors.

Yes, many investors see dividends as the main point of stock holding. They want to hold the stock long-term and the dividends are an addon to income. Nothing is problematic in that. But buying a stock just because of dividend is very wrong.

Dividends are an indication that the company is doing well, dividends are not bad. It has profits to share, more cash than it demands and it can give it to its stockholders. And a stock’s price may rise quickly after a dividend is paid.

And there is a catch, on the ex-dividend day, the stock’s value will surely drop. The value of the stock will drop by a sum almost the same to the amount paid in dividends.

When you want to buy some stock do it because you believe in business or you think the value will rise. Don’t do it only because of a dividend.

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10th September 2019
October Effect – Investing When The Stock Market Go Lower

Is October effect just a myth or there is something?

By Guy Avtalyon

The October effect is a recognized market oddity when stocks tend to fail during October. The October effect is an irrational suspicion of some investors related to previous market crashes that happened during October. Investors become superstitious, you might think. Well, the fact is that some great historical market crashes happened this month.

We will point some of them. In 1907, the Panic, later, in 1929, were three large crashes – Black Tuesday, Black Thursday and Black Monday, after almost 60 years 1987, Black Monday happened October 19, when the Dow fell 22.6% in one day. Also, on Oct. 9, 2002, the market caught a five-year low. And the market plummeted 16% in October of 2008 when the Great Recession began.

When the stock market crashed in 1929, the investors were surprised. It was quite unusual because only a few weeks before the stock market was on the highest level ever, the stock prices were 25% higher than in the year before. In October 1929 stocks dropped nearly 25% for only two days. It cost investors billions of dollars. This market crash led to the Great Depression. October has accepted as a permanent warning to investors of how suddenly wealth can turn over.

What is October Effect?

There’s no proof that this great market crashes occurred in October for any other cause. Coincidence is truly a master of the game. Since there were not too many market crashes in October, we are free to say that investors will make money during October more often than they will lose.

According to research conducted by Yardeni Research, the medium monthly return in October 2015, was 0.4%.

It wasn’t a great return but still, it was. But can we say the chain of unfortunate market events over October is broken?

The truth is that if markets go down over October, they do it very hard and painful. But just for a sec try to be reasonable. Compare the drop of 4.7% in one month with 11 good months when the average gain was about 4.1%. Everything is math.

So, we can say, at least, that October could turn high in any direction.

For investors, September is statistically the worst month since they lose approx 1% during this month. History shows that September can be difficult for stocks. Since 1950, it has been the most critical month for the S&P 500, with declined at an average of 0.5%. But, for the last 10 years, the S&P 500 has a 0.9% profit in September.

Is it possible to predict the stock market?

It is hard to predict the stock market. Markets are going up and down. You can be sure of one thing: when it is down, it will climb up. The markets go up over time and you are a long-term investor you shouldn’t be worried about the market’s condition over one month. But if you are a short-term investor your portfolio should be built mostly on cash and bonds, less on stocks. That means it is better to be a conservative investor. So, the October effect will have no or less influence on your investments.

Investors’ sentiments can become negative when October is near. That may influence the stock market play. As investors’ feelings incline to the depressed, negative market growth can produce overreactions. They will start to sell stocks in panic and the negative influence will increase more.

Keep in your mind, statistically October isn’t the worst month, it is September. But due to the great market crashes that occurred over October, we have that scary phrase – October Effect.

By the way, do you know which month is the best for the stock market? July! Remember this.
It would be amazing if the market crashes chose to happen just in one particular month of the year. Honestly, it is impossible, like the impossible is to have just one incredible good market month.

October is just one of the 12 months of the year. The difference from others is that leaves start to fall. That is the October effect.

10th September 2019