Stock Trading Blog

Investing During a Correction

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Volatility has returned to the markets and a bearish mentality has begun to creep into many investors minds. Over the past week, the S&P 500 has dropped more than 3.5% while the NASDAQ has fallen over 4% in the same time period. While it’s too far early to call the movement a bearish reversal, it does appear to be a correction.

Corrections are a normal part of market dynamics. They typically result in a downturn of about 10%, helping to alleviate some of the overvaluations and allowing the market to cool down before resuming its upward trend. Tracking the performance of the broader averages over the past two months reveals a drop of about 10% for the S&P 500. The next few weeks should tell the story as to whether the dip is just a correction, or the start of a larger negative trend.

Portfolio protection doesn’t mean hiding your money away

Fear can be a powerful motivator, but often leads to rash decisions. In the stock market, this kind of panicked action can mean selling holdings for a loss and missing out on potential opportunities. The only real guarantee during a downturn is that any stocks sold at a loss means realizing an actual loss in your portfolio. As long as you still own the stock, any gains or losses don’t mean anything until you make a closing trade.

Some investors choose to get out of the market altogether during the first stages of a correction. They sell most or all of their holdings and park that money in a safe place such as a savings account. It’s hard to argue against it when you see broad drops in the stock market, but there’s a better way to handle the volatility.

Historically, investing at a market peak right before a downturn still results in a net profit when you consider long-term investing of a decade or more. If you had purchased an index fund for the S&P 500 in the summer of 2008 ahead of the sub-prime crisis and held it, you would still have a gain of nearly 70%.

Investors shouldn’t be discouraged from keeping some money on the sidelines in a liquid savings or money market account however. Even in bull markets, keeping a little money freed up on the side means having the ability to make quick purchases when opportunities present themselves.

When it comes to the economy as a whole, there’s no such thing as a broad trend with perfect correlation. In other words, there is always a bull market and bear market happening somewhere. Investors should remember that even during corrections and bear markets, there’s a sector of the economy that will benefit and post above-average gains.

Final thoughts

It seems counter-intuitive, but buying during a corrective phase when everyone is selling can mean getting fundamentally strong stocks at huge discounts. The key takeaway is the phrase “fundamentally strong.” Negative selling pressure can bleed over into broader market sectors with stock prices dropping for reasons unrelated to that company’s performance. For value investors, down markets can be the perfect environment for bargain hunting.

Is the Tech Sell-Off the Market’s Tipping Point?

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It’s been a while since investors have seen the kind of volatility the markets having been showing over the past couple of months. The broader averages have toppled from earlier highs reached back in September, but then bounced back somewhat in the past few weeks. As with most market corrections, earnings results have been one of the largest sources for the uncertainty.

Earnings from big tech names like Apple, Facebook, and others surprised investors in a bad way last month. Lowered guidance and poor earnings results shook markets instigating a steep sell-off across all economic sectors. As a cyclical sector, the unexpected drop has many investors nervous about where the market may be headed.

The power of corporate earnings

Stocks are valued based on the expected future earnings stream of a company. That means that analyst’s reports and company guidance play an important role in determining what price a stock should be trading at. It also means that corporate earnings drive the stock market – positive earnings mean stock prices move higher while lowered expectations will drive them down.

One of the most-looked at valuation ratios for investors is the price-to-earnings (P/E) ratio. For example, a stock that reports annual earnings of $1.00 per share and trades at $20 per share will have a P/E ratio of 20. If earnings drop to $0.75 per share, the stock price must retreat to $15 per share in order to stay at the same valuation. If the price remains unchanged, the P/E multiple jumps higher to roughly 27 – a more expensive valuation with more implied risk.

Companies report earnings on a quarterly basis marking four separate earnings seasons throughout the year. While the 4th quarter is usually given more importance as it wraps up the year, any quarter that has  widespread disappointment can have a detrimental effect on the markets. For the tech sector, normally a cyclical sector that performs well in a bullish economy, a bad quarter could be seen as a sign that the economy is slowing down.

Investors should note that quarterly earnings numbers shouldn’t always be taken at face value. Companies can manipulate earnings results through actions such as share repurchases which lower the total number of outstanding shares making earnings numbers appear higher than they actually should be if all things remained the same.

Final considerations

A sell-off in one industry doesn’t necessarily indicate the beginning of a bear market. A number of things need to happen in order for a broad market correction or reversal to a bear market. What the tech industry is telling investors right now is that they should be paying close attention to how other cyclical industries are doing. Economic reports like inflation and unemployment are indicators of where the market may be headed next as well. Investors should also keep a watch for large share repurchases – this may be a way for companies to delay reporting falling earnings in order to keep the stock price as high as possible for as long as they can.

How To Invest In Foreign Currency

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If you’ve ever talked about investing in a foreign currency, odds are you’ll have heard about the Iraqi Dinar. There’s a commonly held belief that the Dinar will be revalued and that anyone who holds Dinar will suddenly see their amount changed overnight into a large sum of money. Unfortunately, the odds of this happening in exactly this manner are infinitesimally small.

That doesn’t mean that investing in foreign currencies are a wild goose chase however. There is a way investors can gain exposure to this asset class other than simply going to an exchange counter and turning your money into an equal amount of another nation’s currency. Through the Forex, investors gain global access and can freely engage in any type of currency trade, from simple spot transactions to futures contracts.

Getting to know the Forex

The Forex (FX) is the premier market for foreign currency trading, open 24 hours a day, 5 days a week, discounting holidays. It’s the largest, most liquid exchange in the world with all known currencies listed and available for trade. Once the realm of institutional investors like hedge funds and governments, currency trading is now as open to investors as the stock market.

Trading on the Forex exchange comes in one of three types of transactions – spot, forward, and futures. A spot contract is the simplest and involves buying one currency by selling another. For example, if you wanted to invest in yen, you would purchase an amount of yen you wanted in US dollars and make the trade. Transactions typically take two days to settle once a trade is executed.

A forward transaction is similar to a spot transaction but settles at a date set in the future. So investors are able to make long term speculation when it comes to foreign currencies and can make trades in any amount and settlement date so long as the date is not on a weekend or holiday.

Finally, the futures market can be used to make currency trades. These contracts are set at a particular amount and future date so investors can speculate, much like forward transactions. Mark-to-the-market accounting is used for futures contracts however, meaning that accounts are tallied and settled at the end of each business day. This makes long-term investments risky as small drops in value can eliminate positions before the settlement date arrives.

There are a number of trading strategies that come with currencies, but the most common in known as a carry trade. In order to execute a currency carry trade, investors will need two currencies with differing yields. The investor profits from the difference in interest rates, assuming the exchange rate remains constant. For example, let’s say that the yen has a 1% yield while the US dollar offers a 3% yield. They would sell yen and convert it to US dollars, resulting in a net yield gain of 2% for as long as the yields and exchange rates remain the same.

Final thoughts

Investing directly in a foreign currency is usually not the best way to attempt to make a profit. In the global economy, currencies are considered fiat money – not backed by anything other than the faith and credit authority of the issuing government. The Forex gives investors a safer way of speculating in foreign currencies without subjecting them to the same risks involved in buying the currency directly.

What to Expect from the Markets in 2019

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The stock market has been showing signs of trouble for several months now, with earlier gains erased by a series of corrections and then boosted again following a series of significant up days. Year-to-date, the S&P 500 is up around 2.7% while the NASDAQ has gained around 7.3%. However, both are off earlier highs which peaked around September.

As we head into the final month of 2018, all eyes have turned towards next year and what investors might expect to see. Inflation has been steadily rising, and with volatility returning to the markets, large swings up and down should be the norm for investors. With uncertainty spiking, investors need to have an idea of what next year might bring so that they aren’t caught unawares.

Looking ahead to next year

One of the big concerns for 2019 is where interest rates are headed. The Fed appears ready to raise rates at least three more times, with interest rates following suit. In 2018, the yield on the 10-year treasury jumped nearly 33% from 2.4% to an inter-annual high of 3.20% in September, but has since fallen slightly to about 3%. Next year should see yields climb again with a ceiling that has yet to be determined.

As interest rates continue to rise, financial stocks should see a boost as companies take advantage of greater ROI in their accounts. Long-term loan rates will climb faster than short-term rates, giving banking stocks a wider margin and translating to bigger earnings surprises for 2019.

Defensive and non-cyclical industries like utilities, consumer staples, and pharmaceuticals should also outperform the broader indexes if the economy enters a contraction phase. Certain items like health products and utilities have constant demand regardless of the state of the economy. While these stocks may not see the bullish explosiveness of their cyclical counter-parts, they provide investors with a safe haven during volatile markets.

Corporate earnings will be the tell-tale sign along with total 2018 GDP results as to whether investors can expect a bear market next year. For the most recent quarter, investors have seen disappointing numbers coming from the technology industry led by Facebook, Apple and other large names, sending a signal to investors that there may be trouble ahead.

Final considerations

The end of the second longest bull market in US history is looking more and more likely to come to an end sooner rather than later. 2019 could be the year of the bear, so investors should establish defensive positions and de-leverage their riskier holdings. While there’s no way to know exactly when the bull market will end, there are enough signs that investors should at least hedge against a downturn.

How the Fed Affects the Stock Market

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The Federal Reserve is one of the most misunderstood institutions in the US right now. Investors and everyday Americans have begun to resent and distrust the Fed while political parties vilify them as an enemy to economic growth. But the Fed is an independent entity beholden to no political party that serves an important role in the economy.

Operating as an economic regulatory agency, the Fed has several missions that it is charged with. To execute its role, it also has three tools at its disposal to keep the economy on track – not too much growth that inflation becomes a runaway effect, but not so low that stagflation occurs.

The role of the Federal Reserve

The stated purpose of the Federal Reserve is four-fold: to manage inflation, supervise the financial system, regulate the money supply to maintain financial stability, and act as a lender of the last resort to banking institutions.

It has three methods at its disposal to perform this function as the economic referee by way of the Federal Open Market Committee (FOMC). The most common method is by using open market operations in which the Fed may buy or sell treasuries to financial institutions. If the Fed wants more liquidity in the markets, it will buy treasuries and if it wants a tighter supply, it will sell treasuries. The Fed can also raise or lower the federal funds rate – the rate that it charges banks to borrow funds – as a way of combating inflation. And finally, the Fed sets the reserve requirements for banking institutions. This is the amount of money banks are required to hold in reserve to cover the amount in loans it has outstanding. Used the least, this Fed tool can heavily impact the money supply by freeing up more money or restricting it.

Because the Fed’s actions directly impact the stock market, investors keep a close watch on what the Fed has to say. Fed meetings are often dissected under a microscope and every word analyzed to determine what actions may lie ahead. Fed meetings are often given labels such as ‘hawkish” or “dovish,” and while most Fed officials attempt to avoid overt statements about the economy, investors have grown skilled at reading between the lines.

Final thoughts

What happens in Washington D.C. rarely has a significant long-term impact on the stock market, although it can cause temporary dips or surges. What the Fed does, however, can have a deep and meaningful effect on the market. Changes in the Fed funds rate directly impacts interest rates for everything else. Even the smallest hint of dovish or hawkish behavior from the Fed can be enough to trigger large swings in volatility. For investors, paying attention to Fed statements can let them know what direction the market may be headed in.

Ignore the Politics: Focus on Fundamentals

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The much-talked-about mid-term elections are over, but the volatility seen in the stock market over the past few weeks has set many investor’s nerves on edge. The votes are in and America has a new political party in control of the House while another controls the Senate. In response, the market showed higher volatility – adding to the building level of unease investors have been feeling for the past several weeks now.

Whatever the climate, investors shouldn’t neglect due diligence and fundamental analysis. Stocks are driven primarily by just one statistic – earnings. Regardless of the politics, if earnings are down, stocks will be down as well, and vice versa. While some investors may put emphasis on political ideologies and views towards business and economics, the real market mover is earnings results and overall economic health.

What role politics plays in the market

The stock market is highly resilient from a long-term perspective when it comes to political events. While short-term bumps and dips can happen, the market ultimately balances out as investor attention returns to fundamental analysis rather than political happenings.

Minor shifts in the market have been observed however following election cycles. It’s been observed that the market typically performs well after an election in which one party controls the House while the other controls the Senate. The reason for this is that the mixture creates an environment where no major changes can occur leaving the market free to operate without fear of interference.

Fundamentals to follow

Regardless of what the pundits might tell you, the numbers related to unemployment, GDP, inflation, and most other data is largely independent of Presidential activity. The economy is far too large and dynamic to be influenced by the actions of just one person, or party for that matter.

The direction of the market is influenced slowly over time which means that trends are where investors should concentrate their focus. Political parties rarely stay in power over both the White House and Congress for long which means that there isn’t enough time to make any significant changes that would re-direct the economy.

Final considerations

As with most news, investors shouldn’t pay more attention to it than the news deserves. While major paradigm-shifting events such as the terrorist attack on 9/11 have long-lasting repercussions, these “black swan” events are unpredictable and not considered in terms of typical market analysis and forward-looking guidance. Instead of getting distracted by the cacophony of Wall Street and media news stories, investors should remain vigilant in their own portfolios and keep doing their due diligence before making any investment decisions.

Economic Red Flags That Indicate A Recession Could Be Near

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It’s every investor’s worst fears come true – a market correction that turns out to the beginning of a larger bear market. If you saw the threat coming, you might not be surprised when it hits or even notice much of a change in your portfolio’s performance if you made preparations. But those that don’t see the warning signs could see their portfolio’s performing gut-wrenching dives.

Luckily, recessions don’t happen by random occurrence, except for certain rare black swan events such as an asteroid strike or something of that nature. For the most part, recessions give signals before their arrival giving investors who know what to look for time to adapt. By following the right line of data, you should be able to determine at the very least if market conditions are headed towards trouble.

Key indicators to watch out for

One of the most tried and true methods for forecasting recessions is by examining overall market margin levels. Historically, a rise in margin levels has preceded a recession making it one of the most accurate predictors investors have. Interestingly, margin levels at the moment are over $580 billion – a record high. With margin levels so high, there’s a lot of leverage in the markets. If a downturn happens, there could be a lot of selling to cover losses which could then trigger a deeper bear market.

Another good indicator is the average price-to-earnings value of companies listed on an exchange like the S&P 500. The mean P/E ratio comes out to be 15.70 so figures higher than that mean that the market is becoming overvalued. Right now the average P/E is 24.54, considerably higher than average. But the market can sustain high values for years before reversing course so while the P/E ratio is a good indicator of value, it doesn’t mean that a recession will happen tomorrow.

Another thing to watch for is a flattening of the yield curve. Normally, longer-term bond yields are higher than shorter term due to the time value of money. But when a recession nears, short-term yields can overtake longer-term ones indicating that investors are preparing for a possible market reversal.

Final considerations

The market is notoriously fickle, and trying to time a bearish reversal is far more difficult than simply identifying that the risk of one is higher than usual. Recessionary forces can stay high for long periods of time before it finally becomes enough that the economy enters a downturn. In practice, red flags should mean that investors take care to add defensive positions to their portfolio and avoid undue risks that could result in heavy losses if the market suddenly enters a corrective phase.

Easy Stock/Option Combination Strategies for any Investor

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Sometimes holding a portfolio of stocks that you buy and sell just isn’t enough. Whether you’re looking for risk management, higher returns, or just something to add a little excitement to your investment activity, options are a great addition to your investment strategy.

By combining your stock portfolio with a few choice option trades, you can greatly reduce the overall risk to your investments or boost returns to a level that would be difficult to achieve with stocks alone. While many investors think of options as being risky profit-enhancing tools, in actuality they often help reduce risk by providing hedges or allowing speculation on a stock without committing a large amount of capital.

Getting started with option trading

Options come in two forms – calls and puts. A call gives investors the right, but not the obligation, to purchase 100 shares of a stock at a given strike price while a put is an obligation to sell 100 shares of a stock at a given strike price should the put be exercised. To simplify, you buy a call if you’re bullish and buy a put if you’re bearish.

Options can also be sold giving investors upfront cash from the sale. However, this action comes with an obligation for calls and puts. Selling a call means you must buy 100 shares of a stock at a given strike price if exercised and selling a put means you must buy 100 shares of a stock at a given strike price.

One of the first option strategies investors usually practice with is the covered call. In this type of strategy, you sell a call with a strike price higher than the current price of a stock that you already own 100 shares of. This gives you upfront cash but limits your total upside potential should the stock rise above the call’s strike price.

Using options can also make short-selling less risky by using a covered put. For this strategy, you short-sell a stock that you’re bearish on and sell a put at a lower strike price. The upfront cash helps hedge against risk but limits your total profit potential if the stock falls below the put strike price. If you want an even better hedge, you could also buy a call while shorting the stock to limit your losses if the stock moves higher unexpectedly, although this means your breakeven point will require the stock to drop below a certain price.

Final considerations

Not every option strategy requires you to actually own the underlying stock. Other combination strategies involve using just options as a way of speculating on a stock without having to buy 100 shares of it. Others are designed to profit from a stock that’s trading sideways – not moving up or down. Once you start to get comfortable with adding options to your stock investments, you’ll be ready for a more advanced kind of trading that gives you access to even more strategies.

How Economic Growth, Interest Rates, and Inflation Work Together

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Three of the strongest forces to affect the markets, and subsequently your portfolio, are economic growth rates, interest rates, and the inflation rate. It’s relatively easy to track each of these separately by looking at GDP data, the yield on the 10-year treasury, or the latest CPI chart. But understanding how these interact with each other is the key to predicting market moves and protecting your portfolio.

After several years of stagnation, interest rates and inflation are back on the rise. Rates are at their highest level in four years and don’t look to slow down anytime soon. Inflation meanwhile is around 2.5% along with a global economy that appears to be growing healthy and strong. But these currents are what drive markets, and investors need to know how to navigate the waters if they want to keep their portfolios in the black.

A complex relationship

Nothing in the economy exists in a vacuum. A change in bond yields affects the value of the dollar which impacts stock prices that in turn can influence commodities. The market is a dynamic organism that expands and contracts during the business cycle on a fairly regular basis, but it’s not limited to just cyclical changes.

Many investors are under the false impression that bond yields and the economy have a strong positive correlation. That is, when yields rise, the economy must be growing. Unfortunately, there’s no evidence to suggest that this is true. Data from the Federal Reserve shows that since 1930, the actual correlation between the GDP and the yield on the 10-year treasury is effectively 0.

Anomalous years in which yields are high but growth is low and vice versa mean that there’s something going on. For example, in 1980 the yield on the 10-year was 12.8% but GDP growth was at 0%. And in 1950 GDP growth was an astounding 13.4% but yields were only at 2.4%.

It’s actually inflation that has the highest correlation with bond yields. As inflation rises, the Fed raises interest rates which in turn impact bond yields. In order to combat purchasing power parity, yields need to rise to create an equilibrium.

Inflation is the one commonality between bond yields and GDP. Usually, rising inflation kicks off higher bond yields and higher GDP. But it’s not always the case. Stagflation – when inflation remains high but GDP lags can also come with high bond yields.

Final considerations

Economics isn’t a hard science. At best, economists can give a general idea of how things relate to one another, but there always seems to be that one case that disproves the hypothesis. From one-off events like war or a depression to stagflation, it’s not always possible to create a one-size-fits-all rule. Investors should keep an eye on all three – inflation, GDP data, and bond yields – in order to keep their portfolios optimized for profits.

Do Alternative Investment Funds Actually Work?

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The traditional portfolio consists of stocks and bonds and little to nothing of other asset classes. Adding more than that to the mix has generally been left up to professionals to handle. But with the advent of ETFs and other asset creations, everyday investors now have relatively easy access to all sorts of alternative investments from futures to long/short equity funds to derivative investments.

Investors can use alternative investments to boost returns or mitigate risk and with a plethora of options to choose from, there’s virtually no strategy off-limits. The market for alternatives is growing fast with more than $300 billion invested in alternative mutual funds and ETFs as of 2012. Giving investors the ability to profit in any type of market seems like a powerful tool, but with limited data, their actual effectiveness varies.

The role of alternatives in a portfolio

The alternative investment space can be broken up into five main categories: equity-based funds, nontraditional bond funds, commodities, multi-currency funds, and derivatives. Let’s take a look at how each one applies to a portfolio.

The equity-based category can be broken up further into three subsets: bear market funds, long/short funds, and market neutral funds. Bear funds specialize in short selling and other strategies aimed at profiting from down markets. Long/short funds hold net long positions but hedge against downside risk with some short calls. Market neutral funds are designed to profit from markets that trade sideways and don’t have a lot of volatility. Bear and market neutral funds are designed for short-term use only though and shouldn’t be held in a long-term portfolio.

Nontraditional bond funds invest in bonds but may use a variety of strategies to reduce interest rate risk or take advantage of high-yield debt holdings. This aggressive bond strategy shouldn’t be confused with other types of bond holdings which are generally classified as conservative.

Commodities can be invested in a number of ways. Investors can directly invest through futures, or choose ETFs to take advantage of individual commodities or groups of commodities like agriculture. Investors can even choose to stick with stocks that are heavily tied to a commodity like mining companies.

The multi-currency category involves investing the relative differences between two or more currencies. Usually, these funds short the US dollar and take a long position in a different foreign currency. The higher-yielding currency is usually the long position while the lower yielding one is shorted.

Finally, the derivatives category rounds out our list. It comes in several different forms like equity funds did: managed futures, volatility funds, and inverse/leveraged funds. Managed futures invest directly in futures but come in a more compatible asset class like ETFs allowing them to be traded as easily as stocks. Volatility funds take long or short positions on the VIX, the popular Wall Street “fear gauge.” And lastly, inverse/leveraged funds make up the largest category of alternative funds and allows investors to take inverse or leveraged positions in a variety of assets.

Final considerations

Investors interested in alternative funds should carefully consider the risks. Many of these types of asset classes are designed for temporary use and come with higher-than-usual risk. Limiting alternative funds to 20% or less of your portfolios total holdings will help reduce the risks involved and take it to the next level.

Tips And Tricks For Quick Stock Screening

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Building a stock portfolio is no easy task – there are thousands of publicly listed stocks in the US alone. Trying to filter that down to a portfolio made up of 10 to 20 stocks can seem like an overwhelming challenge. But by keying in on just a few specific ratios, investors can narrow down their search options to a manageable level.

Stock screeners come with any brokerage account and some are offered online for free as well. While there are a few differences, the ratios we’ll be discussing can be found in any stock screener. By isolating just a few, you can eliminate worthless stocks and focus just on the ones that fulfill your criteria.

Basic stock screening

While certain industries are exceptions, most stocks can be filtered out by looking for specific ratios and fundamentals. Depending on whether you’re searching for dividend payers, value stocks, or growth stocks, you’ll likely change your search criteria as well.

Regardless, there are a few important criteria you should know so you can search for the best stocks as efficiently as you can.

Price-to-Earnings (P/E) – This ratio is one of the most often used metrics when it comes to screening because it tells investors the earnings multiple others are paying for the stock. It’s one of the most basic ratios for estimating value in a stock and should be compared with industry peers in order to bring context to the figures.

Price-to Earnings-to-Growth (PEG) – Another essential ratio for virtually any stock, the PEG ratio shows investors the relationship between the P/E ratio and the EPS growth rate. A number higher than 2 means that investors are paying more than twice the EPS growth rate for the stock while a figure of 1 or less usually indicates an undervalued stock.

Debt-to-Equity – This underrated ratio is often overlooked but essential for determining the level of debt a company holds relative to its value. This figure can be wildly different depending on the economic sector of the stock and should be compared to industry peers for context.

Dividend Payout Ratio – Dividend seekers should pay particular attention to this ratio. It reflects the percentage of income that’s being spent on dividend payments. The lower the number, the more wiggle room during economic contractions and gives the company the ability to easily raise the dividend in the future. At 100%, the company’s entire income is used towards paying the dividend and anything more than that means the company is losing money by paying out a dividend – an unsustainable situation.

Final considerations

Other than using stock screens to search for potential investments, you can start off ahead of the game by building a watchlist. It takes a little homework, but knowing your top 5 stock picks for any given market sector allows you to quickly analyze winners and losers and identify what sector your portfolio would most benefit from. From there, it’s much easier to stay abreast of changing conditions and quickly take advantage of opportunities as they arise.

A Quick Guide To Biotech Stocks

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Equities are not all the same thing. Even beginning investors know that they’re broken up into categories based on industry or sector of the economy the company participates in. Building a portfolio by mixing up economic sectors is one of the most basic tenets of diversification, but knowing what sectors to invest in isn’t so easy.

One of the most promising sectors right now is biotechnology. Advances in medicine are happening on a daily basis and money is pouring into the industry with venture capital surpassing $10 billion in 2017 alone. For investors looking for fast growth and long-term returns, including a biotech stock is a no-brainer.

Biotech basics

Unlike other industries like mining or consumer staples, biotechnology isn’t quite as easy to understand. The industry doesn’t operate like a standard business where price-to-earnings ratios and sales numbers define a company’s real value. Research and development costs can be staggeringly high while revenues streams can take years to actually become net positive.

One of the biggest uncertainties in biotech investments is the way the FDA drug approval process works. Phase 1 usually takes one year and consists of testing on fewer than 100 individuals to determine dosage and drug safety. Phase 2 can take between one and three years while testing is expanded to several hundred individuals who have the condition the drug is aimed at treating. Finally, phase 3 can take around two to three more years with testing involving thousands of individuals. Investors should note that roughly 10% of new drugs actually make it through all three phases.

One of the most critical metrics used in biotech stocks is research and development as a percentage of sales. Because biotech companies need to invest in research and development in order to create new drugs, costs in this department are usually much higher than other types of industries. However, the more spent relative to sales, the less the company is actually making money on successful products. Investors want this ratio to be as low as possible to emphasize thriving product lines.

Finally, patents can also be an important part of a stock’s value. Patents give a company unique rights to develop and disseminate a drug which could give it an edge over its competition. But patents don’t last forever and expiring patent rights can be devastating to a company who has thrived on just one or two staple drugs. It can also be a windfall for companies looking to take advantage of expiring copyrights in order to develop their own generic line.

Final considerations

Due to the volatile nature of the biotechnology industry, investors may be better served by investing in biotech specific mutual funds or ETFs rather than trying to invest in a single stock. Blue-chip Dow components aside, biotech stock performances are notoriously difficult to predict. Patent laws can be ambiguous at best and passing FDA requirements is never a guarantee, despite what management might have to say about their own drug. Investors should strongly consider investing in an index of biotech stocks to minimize downside risks.

Technology Companies to Watch for the Next Decade

 

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Technology is one of the fastest growing sectors in the global economy. Tune into any financial news network and if they aren’t already discussing a tech company, it won’t be long before they do. There’s even an entire index made up primarily of technology companies – the NASDAQ.

There’s no shortage of promising tech companies out there but the field is largely led by just a handful of giants. While new players will undoubtedly come onto the scene in the next several years, investors looking for long-term strategies should stick to companies that have demonstrated success.

Companies with staying power

There’s a nickname Wall Street has given the top technology companies in the market right now – FANG. That stands for Facebook, Amazon, Netflix, and Google (now known as Alphabet). Out of that list, three of them are technological conglomerates that are involved in far more projects than their original business. These tried and true leaders in the industry have the innovative capacity and management teams to keep pushing the boundaries of what’s possible.

Facebook – The company that revolutionized the idea of social media is involved in a number of technology concepts ranging from data gathering to a number of different social media platforms. With more than 2 billion registered users, Facebook isn’t likely to fade away anytime soon.

Amazon – Amazon is best known as one of the largest the biggest online marketplaces in the world. But the company also offers television streaming services through Amazon Prime as well as tech devices like the Fire tablet and Echo smart speaker. It’s also on the leading edge of cloud computing technology while its founder Jeff Bezos pushed the frontier of commercialized space travel with his company Blue Origin.

Alphabet (Google) – This holding company contains 20 other companies in its portfolio including Google. From search engines to automated vehicles to its most recent endeavors into artificial intelligence, Google is positioned as one of the greatest technology conglomerates on the planet.

Other companies worth keeping an eye on include Apple and Tesla as well. Apple’s smartphone products and tablets are in high demand globally while Tesla’s electronic and automated vehicles are paving the way for the next breakthrough industry in automation tech.

Final thoughts

Despite their current standing in the US economy, any of the listed companies could find themselves suddenly behind the curve. Technology by its very nature is a disruptive industry and new innovations can make old ideas obsolete without any warning. While major tech companies are more resilient than smaller ones, investors shouldn’t assume a popular stock is immune to competitive pressure.

Why You Should Care About Foreign Markets

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As an investor and a US citizen, what happens to the American economy is important – not only to your portfolio but also your job and quality of life. Domestic stock market performance is usually the only financial data most investors follow while economic reports like unemployment figures and quarterly GDP are given priority over others. The data investors usually check is insulated to the US and doesn’t take into account outside influences.

In the modern economy though, there’s no such thing as a truly independent market. The advent of globalization has connected all countries to a single global economy which means that events happening overseas can impact the domestic economy.

Globalization and your portfolio

In the information age, technology is the biggest driver of the global economy. The proliferation of IoT and smart technology has connected the world in a way that’s never been seen before in human history. What that means is that investors need to take into account international economics even if they only hold a portfolio of US stocks.

Many US companies have operations overseas with a large portion of their earnings being derived from international sales. Investors holding Dow components or other large-cap stocks will invariably end up investing overseas in some capacity as a matter-of-fact. That means that companies are subject to foreign currency exchange risks as the US dollar fluctuates in value relative to another countries currency. Profits can be amplified by this effect or muted as some profit is lost when converted back to US dollars.

Small-cap companies tend to be relatively unaffected by foreign markets. They usually don’t have any international operations and business operations are dependent upon a local market or economic factor. While some may import goods or materials from overseas, most don’t have economies of scale to engage in such business practices. However, holding a portfolio of small-cap stocks ignores proper diversification and is riskier than maintaining a diversified portfolio of small and large cap stocks.

Another consideration when it comes to international influence is how interest rates between countries differ. Not only does it impact foreign exchange rates, but it also impacts commodity values and investor interest in other countries. If one country has higher interest rates relative to the US, investors may begin pouring money into that economy.

Final considerations

Not all investors hold to the same belief that international markets matter to investors. Noted investor and founder of The Vanguard Group has stated that he thinks investors need only invest in an index fund like the S&P 500 and let it grow for several decades. While some evidence suggests that holding an index fund over a long period of time is a valid investment strategy, the push for a more interconnected commercial base around the world means that even a domestic portfolio will be impacted by overseas markets.

Easy Stock/Option Combination Strategies for any Investor

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Sometimes holding a portfolio of stocks that you buy and sell just isn’t enough. Whether you’re looking for risk management, higher returns, or just something to add a little excitement to your investment activity, options are a great addition to your investment strategy.

By combining your stock portfolio with a few choice option trades, you can greatly reduce the overall risk to your investments or boost returns to a level that would be difficult to achieve with stocks alone. While many investors think of options as being risky profit-enhancing tools, in actuality they often help reduce risk by providing hedges or allowing speculation on a stock without committing a large amount of capital.

Getting started with option trading

Options come in two forms – calls and puts. A call gives investors the right, but not the obligation, to purchase 100 shares of a stock at a given strike price while a put is an obligation to sell 100 shares of a stock at a given strike price should the put be exercised. To simplify, you buy a call if you’re bullish and buy a put if you’re bearish.

Options can also be sold giving investors upfront cash from the sale. However, this action comes with an obligation for calls and puts. Selling a call means you must buy 100 shares of a stock at a given strike price if exercised and selling a put means you must buy 100 shares of a stock at a given strike price.

One of the first option strategies investors usually practice with is the covered call. In this type of strategy, you sell a call with a strike price higher than the current price of a stock that you already own 100 shares of. This gives you upfront cash but limits your total upside potential should the stock rise above the call’s strike price.

Using options can also make short-selling less risky by using a covered put. For this strategy, you short-sell a stock that you’re bearish on and sell a put at a lower strike price. The upfront cash helps hedge against risk but limits your total profit potential if the stock falls below the put strike price. If you want an even better hedge, you could also buy a call while shorting the stock to limit your losses if the stock moves higher unexpectedly, although this means your breakeven point will require the stock to drop below a certain price.

Final considerations

Not every option strategy requires you to actually own the underlying stock. Other combination strategies involve using just options as a way of speculating on a stock without having to buy 100 shares of it. Others are designed to profit from a stock that’s trading sideways – not moving up or down. Once you start to get comfortable with adding options to your stock investments, you’ll be ready for a more advanced kind of trading that gives you access to even more strategies.