Tag: investors

All Stock, Forex, Options and Cryptos 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
Lies That Traders Like To Tell To Competitors

Some traders’ and investors’ lies will confuse you; the other will take your money. Be aware!

By Guy Avtalyon

Maybe it’s tough to say, but there are too many lies that traders and investors like to tell. It doesn’t matter if they are lying to their rivals or the audience. I’m always astonished how people pinch every cent at the supermarkets but will let someone they hardly know take their money. Why would you believe anyone you barely know?

Actually, I can’t even imagine why anyone likes to tell me lies. Do such people want to make a false picture of themselves? What do they think after telling some lies? Are they bigger in their own eyes? More successful? Smarter? Someone might say they are not lying; they are creating a parallel reality. But why?

Keep in mind, you have to check everything, or you’ll end up losing your assets.

This post aims to unmask the big lies that traders and investors like to tell, yes. All the little lies, the myths, and misleads of traders and investors. I’ll give you the list of traps, so you’ll avoid falling in them.

What are the lies that traders like to tell?

Most of us are self-taught traders. We are learning to trade by reading books on trading; we are watching videos, we like to talk with successful traders and investors. In other words, we’re gathering knowledge from every possible source. And we believe they are trustworthy.

On the other hand, I’m up for the challenges. When someone tells me that something cannot be performed, I’ll spend hours and days showing how wrong such thinking is. That’s in my nature.

When I hear someone is picturing him or herself as a professional trader, my alarm turns red. I know they are convinced they are the best, but the truth is something else. For example, some traders would tell lies to give excuses for their lack of profit. Such traders will tell you that some strategy isn’t good enough or impossible to perform, only because they failed to succeed. If you believe them, take a step back, and think twice. Don’t let other traders’ failures stop you. It could cost you money, or, at least, you could waste your precious time.

If anyone in the world did it, then the contrary is a lie. I always tried to show them how wrong they are. Never believe when someone tells you, “you cannot do it.” Try it; instead, never leave the battlefield. If you know that anyone did it before, find out how it is possible and explore the strategy, method, and approach.

You will never make money in a short time

This is a true lie. Why shouldn’t you make money in a short time? You can do it in any trading period of time. We’re living in a high-tech era; we have computers, phones, laptops, we can trade from any place on the Earth at any time. For some trades, you’ll need a few seconds; for others, you’ll need months or years. Where is the problem?

Remember, you’re the one who chooses the timeframe. Choosing your trades’ timeframe depends on your budget, personality, trading style, goals, etc. That’s why we have short-term traders and traders with long-term timeframes. It’s completely great to have a trading strategy that combines the short timeframes. So, of the lies that traders like to tell is that you cannot make money in a short timeframe.

Lies that traders like to tell: you have to analyze the market full-time

C’mon! Once you understand how the market price is acting, it’s totally possible to turn on your computer at any time and enter the trade. It is actually recommended when you notice the price in the right position or see a good candlestick bar. What is the other way to make a good trade? There is no other way. Just turn on your computer at the right time, enter the trade, and make a profit with the right settings.

Of course, you’ll need to know a lot about price action and trading to enter the trade at the right time. But the truth is, you don’t need to look at your screen all day long or to study the market full-time. All you need is a good strategy to have more wins than losses. Keep in mind; trading has nothing with certainty; it’s all about probability.

You can’t profit with a small trading account

Really? When I hear something like this, I have to ask: Can you tell me what is the right trading account, please? For some traders, $100.000 is nothing. Well, guys, during my early days as a trader, $100 was big money for me. Honestly, it was all I can put into the trade.

Moreover, some of the most successful traders started with much less money. And look at them now!

The truth is that you need to know how to manage your trades to protect your capital invested. Always keep in mind the size of your position. That’s the key. Your primary goal should be to protect your capital. Your account will grow with the winning trades. As the old song says, the winners take it all.

Automated trading algorithms control the markets

The truth is that automated trading algorithms do over 70 percent of all trades. Also, the truth is that they are not the largest part of the trading volume. Large institutions do account for the majority of the trading volume in the market. No one can say that algorithms control or run the market. That would be stupid. But it is one of the lies that traders like to tell when they fail.

How many times did you hear: What can I do against algorithms? They are smarter than I am? Oh, dear man, algorithms are made by people, like you and me, but they are smarter, that’s true. No jokes, these guys are programmers, developers very familiar with complicated mathematical operations, but there is a different case with the markets. Every second of a trading day, you can see traders taking the bull or bear side on every trade. What can you do as a home-based trader? Follow them. Copy their actions. The main goal in trading is to take the winning side—nothing less, nothing more.

One of the lies that traders and investors like to tell, especially to their competitors, is that they can’t learn to trade. They will try to discourage you by saying that you do or do not have the talent or abilities for successful trading. It’s BS, trash, pardon my French! Everyone can lose money; it’s the part of trading. No one is profitable all the time. Losing trades are normal. The goal is to have more winning than losing trades in sum.

Take your time, don’t waste it on lies that traders like to tell, build your confidence, learn as much as you can, and enter the trade.

26th November 2020
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
Defensive Stocks Are Excellent Investment But…

Defensive stocks provide dividends and stable earnings but the low volatility may cause fewer gains during bull markets.

By Guy Avtalyon

Several days ago, the website U.S.News posted an article about defensive stocks. As always, great and concrete suggestions. You can find their suggestions with an explanation of why the proposed defensive stocks are best picks for this June.
Here is one quotation about these stocks.

“More conservative investors who value both capital appreciation and preservation of capital might look to these stocks.” was written The U.S. News.

This might mean this kind of stock is less risky than most of the stocks in the market.

Further, in the same article, you’ll find a short description of what criteria investors should use when picking defensive stocks. For example, market capitalizations should be above $50 billion, such companies should have at least a 10-year track of continuous paying dividends, etc. All is followed by the list of these stocks that look like the best choice for June this year.

That simply imposed the topic, what are these stocks. Why buy them? How to choose? Where to look for them?

What are defensive stocks?

A long time ago it would be very easy to answer. You could be easily trapped listening to some financial experts saying how defensive stocks are boring investments. Moreover, you could hear they are too conservative. It might be true, even today. These stocks come into utilities, healthcare, and staples sectors. Well, one could think: Yeah, these sectors are not excited, not at all, so why should I invest there. We would like to ask you something. Would you like to invest in some company that generates steady cash flow, pays dividends regularly? Yes? We didn’t expect any other answer. Would you be surprised if we tell you that, for example, tobacco companies were viewed as defensive stocks?

But recently, investors changed their views of what these stocks are. Today, you can see that some technology companies are considered defensive stocks. Even if the definition is changed, the purpose isn’t, these stocks still have to play well during the recession. Nevertheless, these stocks have, as it always was, to provide stable earnings and regular dividends no matter what condition is the overall market. Period!

Are the defensive stocks less risky?

Since there is a constant demand for such companies’ products, these stocks seem much more steady and strong during many different aspects of the business cycle.

And here is the confusing part for some investors, especially if they are beginners. They aren’t the same as defense stocks. Do you know what we mean? Defense stocks are stocks of the companies that are producing munition, guns, war jets, etc.

Nowadays, companies with stable earnings growth, but also with innovative goods, pricing strength, are recognized as defensive stocks. Don’t be surprised if they can stir the waters. If we consider cash flow and the company’s power, nowadays Alphabet could be such a company, for example.

How to recognize defensive stocks

When uncertain time in the market comes everyone would like to protect the investment portfolio, the capital invested. Especially if it is connected to high volatility. Investors are looking for stable investments during such rough times. They would like, for sure, to increase their exposure to these stocks. For example, giants like Coca-Cola are recognized as defensive stocks. Non-cyclical stocks are recognized as defensive stocks also.

These companies have stable performances and the ability to overcome weak economic circumstances. They are also paying dividends. That might be a good reason to choose them primarily because dividends can mitigate the influence of the stock’s price dropping. These companies will rarely go bankrupt during the market downturn.

When things in the stock market get insecure, why would you like to own any stock? Honestly, you could find more safe places out there to invest in. The answer is profit. Defensive stocks provide a higher dividend yield than you can get with safe-havens. For example, Treasury bills will never provide you such an amount in interest rate. Moreover, defensive stocks mitigate investors’ fears because they aren’t as risky as other stocks. Take a look at what investment managers do when uncertain economic times come. They are moving to defensive stocks.

Better isn’t always the best

Defensive stocks are better performers than the overall market during recessions, for example. But nothing is so perfect even these stocks. Due to their low beta, when everything is blooming in the market, they could perform below the market. Less risk, less profit, that’s it.

For example, suppose a stock has a beta of 0,5 and the market falls for 2% in one week. Not a big deal, you’ll lose 1% of your investment. But what if we have the opposite situation and the price increases 2% in one week? Well, the defensive stock with a beta of 0,5 will increase by only 1%.

Beta shows the stock’s vulnerability or risk. Defensive stocks have beta under 1 which means they are less volatile. A conservative investor, who is, by default, with less risk-tolerance type, will choose defensive stocks that will deliver stable returns.

Advantages and disadvantages of Defensive stocks

They are often suitable for long-term investors because they are less risky than other stocks. These stocks together have a higher Sharpe ratio than the entire stock market. With less risk involved, you could beat the market. What else we need to understand is that defensive stocks are better investment choices than other stocks.

But there are some disadvantages also.

The low volatility of these stocks is one of them. This means smaller gains when the market is bullish. That could be the reason why some investors if not many, don’t like defensive stocks. These stocks usually cannot outperform the market in such a period. So, when investors need them most to profit more, they could betray them. There is one interesting thing about defensive stocks. When the market downturn is finished, some investors move to these stocks, but the truth is they had to do that earlier. After the market downturn is too late. The only thing that investors could catch is a lower rate of return. Think ahead of these stocks.

Why should you choose to invest in them?

For example, you don’t have a decent knowledge of the market condition. Also, if you are the risk-averse type of investor. Seeking for dividend-paying stocks is one of the reasons because these stocks provide regular dividends. Additionally, defensive stocks are a great choice when the markets are volatile.

These stocks managed to perform well even during the recessions. There are some goods that people will always need no matter what the economic situation is. For example, electricity, soap, or gas, everyone would need gas or soap even if the apocalypse is coming.

To summarize, defensive stocks have beta lower than 1, they are less volatile, they provide regular dividends. The main drawback is that they usually couldn’t generate high returns. But during the recession, they are excellent as protection for your other investments. Beta indicates the stock’s vulnerability or risk factor. This kind of stock has beta lesser than 1 which implies that they are less volatile. A conservative investor who is afraid of taking risks can invest in defensive stocks that will give stable returns.
These stocks are also recognized as non-cyclical stocks because they are not deeply associated with the business cycle. Here are a few types of defensive stocks. Such stocks are utilities, consumer staples, healthcare, gas, electricity, pharmaceuticals.

21st June 2020
The Settlement Period For Stocks – What is T+1, T+2, and T+3 Timeline?

When trading stocks, the settlement refers to the approved, an official shift from the buyers’ account to the sellers’ accounts. This never happens quickly, it will take a few days.

By Guy Avtalyon

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

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

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

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

The basics of the trade

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

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

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

Purpose of settlement period for the stocks

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

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

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

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

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

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

Consequences during the settlement period for stocks

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

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

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

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

Stockholder of record and dividends

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

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

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

Why the settlement period for stocks is important?

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

29th May 2020
Investment Portfolio Rebalancing – Why Should We Do That?

Even if you’re a less aggressive investor, you should rebalance your portfolio at least once a year.

By Guy Avtalyon

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

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

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

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

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

Why is investment portfolio rebalancing important?

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

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

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

The drawbacks of investment portfolio rebalancing

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

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

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

The real-life example

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

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

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

Why rebalancing your investment portfolio?

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

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

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

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

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

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

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

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

How often should you do that?

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

28th May 2020
Trading Bonds – How to Start Making Money

A bond is a loan that the bondholder gives to the bond issuer. Governments, corporations, and municipalities issue bonds when they need cash.

Trading bonds may seem unusual and difficult. But it isn’t. Actually, the whole process can be quite simple. Anyone interested in trading bonds shouldn’t have a problem getting started. You can find plenty of opportunities in trading bonds and the bond markets. But some things are special for trading bonds and bond markets. If you are not familiar with them, trading bonds might be very confusing. Honestly, it is important to trade bonds so let’s see how to do that.

First of all, bond markets are much bigger than, for example, stock markets. One of the most important differences between bonds and stocks is that there is no exchange for trading bonds; it is done on the “over-the-counter” market but some kinds of bonds can be traded on exchanges. For example, convertible bonds are possible to trade on exchanges. Actually, trading bonds can happen anywhere where the buyers and sellers can make a deal.

Trading Bonds: The participants in trading

There are two types of participants in trading bonds: bond dealers and bond traders.

Traders can trade bonds among themselves, but trading is customarily done through bond dealers. Well, to be more precise, these places where you can trade bonds are dealers’ bond trading desks. Bond dealers are kind of intersection points. They have all types of connections available. Phones, computers are on their desks. But also, they are connected with some traders whose job is to gather all information about bonds, they are quoting prices for buying or selling bonds. To make the story short, these traders are responsible for creating the market for bonds.

Dealers and traders

Dealers’ job is to provide liquidity for bond traders and make it easier to buy and sell bonds with a limited concession on the price. But they have some other possibilities to take part in trading bonds. Dealers can also trade bonds between each other. Sometimes they do so through bond brokers, meaning anonymously. Dealers make money from the spread between the bonds buying and selling price. This also the way how they can lose money.

Bond trading can be very lucrative. That’s the reason why pension and mutual funds, financial organizations, and also governments are involved in trading bonds. When you have such powerful players in the market, it isn’t surprising that $1 million worth of bonds is small initial capital. The bond markets don’t have any size limit, trades may worth over $1 billion but also $100 million. That isn’t the rule for the institutional markets, there are no size limits for individual traders, also. Their trades are ordinarily below $1 million.

Trading bonds strategies

Trading bonds can be passive or active. Both approaches are legit and can produce you the gains.

You can make money from bonds in two ways. You can invest in them and hold and receive interest payments after the maturity date. It is usually twice per year. That is a passive way of trading bonds.

The other way to make money from bonds is by trading them. You can sell your bonds at a higher price than you bought them. For instance, you bought bonds at a nominal value of $20.000. After some time, their market value increases by 20% and you can sell them at $24.000. You’ll earn $4.000.

Bond laddering is also one of the more active strategies and very convenient to start trading if you hold bonds with different maturity dates. You can use the profit from bonds with shorter maturity dates to buy bonds with longer maturity dates. This is named “income stream” and you don’t need a lot of money to use this strategy. It is pretty much economical and cheap.

Bond swapping is another active approach to trading bonds and very attractive for skilled traders. Where is the catch? Let’s say one of your bonds isn’t a good player and it is more likely a losing one, it’s not going to recover. Traders usually are selling these bonds to get a tax write-off for the loss. The money gained from the selling bond they reinvest in high-yielding bonds. That helps them to build a firm portfolio.

The differences between the trading bonds and investing

In trading bonds you are actually speculating on the price changes during a short period in time. You are buying bonds only when you believe they will increase in price. And vice versa, you are selling them only when you believe their prices will drop. So, your profit is coming from the bonds’ price movements. Trading bonds is also when you use the advantage of leverage. To be honest, that might magnify your profits but also, you may be faced with great losses.

Investing in bonds means that you are holding bonds for a long time. You decided to hold them whatever is happening and you are taking the risk to lose your money if bonds prices decrease. When investing in bonds the profit will come from interest payments. Further, on the maturity date, you will put down the total value of your position.

Should you trade stocks or bonds?

Bonds and stocks are the most traded assets but in different separated markets. When trading stocks, you are actually buying ownership in some companies. When the company or companies are doing well, the value of your shares will grow.
When trade bonds, you are actually lending money to the issuer of the bonds for a fixed period of time. For that you’ll charge interest. Bonds are often seen as safer than stocks. People use them as saving for retirement, for example.
So, trading bonds is an investment strategy. You can use them as we mentioned above, but also, bonds are very useful if you want to diversify your portfolio.

What to look out

Buying bonds can be a difficult path when you aren’t purchasing them right from the underwriter or you are buying used bonds. What to look out, how to know you’re making a good deal?
Look out for the credit rating. It is important to know if the company can pay its bond. Standard and Poor’s and Fitch use a rating system that ranks bonds, the best quality is marked as AAA and the worst as D. Between these two marks you’ll find, in range of quality from good to less good, AA, A, BBB, BB, B, CCC, CC, C bonds.

Further, you’ll need to know the bond duration. That is an indicator of how unstable the bond can be in terms of changes in interest rates. If the duration is longer, that means a higher fluctuation when interest rates shift. The problem is in the nature of the bonds. If interest rates increase, the price of a bond decreases. Also, be careful when buying bonds through the brokerages. They will charge you the fees. Check it before any bond-buying. Use publicly available data on the pricing of bonds, or bonds with equal maturities, interest rates, and credit ratings.

Why trade bonds?

Trading bonds can boost the yield on your portfolio. The yield represents the total return you’ll receive if you keep a bond to its maturity, but you’ll want to maximize it. The point is to sell bonds with lower yield and buying bonds with better. You are selling bonds with low yield and buying another to earn from the spread. For example, you hold a bond that yields 4,75% and you noticed a similar bond but it yields 5,25%. That is 0,50% more. So, you can sell your bond and buy this better yielding one and you’ll have a spread gain – yield pickup of 0.50%.

Credit-upgrade trade is used when a trader assumes that a particular debt problem will be upgraded soon. When an upgrade happens on a bond issuer, the price of the bond will rise and the yield will decline. A credit-upgrade means that the company is marked as less risky. Traders want to catch this expected price increase and buy the bond before the credit upgrade. For this type of trade you’ll need some skills for credit analysis.

You might like to take credit-defense trade.

It is very popular. When uncertainty in the economy and the markets increase, some sectors are weaker to fulfill their debt obligations. If you hold this kind of bond, just take a more defensive position. Pull your money out of that sector, don’t hesitate to get out.

Also, you can trade your bonds to adjust a yield curve and change the duration of the bond portfolio you are holding. In this way, you’ll get an increase or decrease in sensitivity to interest rates, whatever you prefer. Keep in mind that the price of the bond is inversely correlated to the interest rate.

The reason for trade bonds might be the sector-rotation. For example, you want to reallocate your capital to bonds from the sector that is supposed to outperform the industry or some other sector. If you are trading bonds in the same sector, one strategy could be to switch bonds form cyclical to the non-cyclical sector or vice versa.

Bottom line

To trade bonds, you’ll need an account. Choose your bond, when trading bonds, you can buy or sell assets from all over the world.
Now, decide when you would like to open the position. Timing the opening and closing of trades plays the greatest role in how you are successful in the markets.
Open your position by using some online trading platform. Determine how much you want to put on the position and do you want to go short or long. Add stops and limits orders.
If your trade isn’t closed automatically by stops or limits, close it yourself to take profits or cut the losses. To calculate your profit or loss, subtract the opening price of your position from the closing price.

Simple as that.

26th May 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
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
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