This is in contrast to Microeconomics which looks at production and prices within specific markets.
When Macro-economists study an economy, they look at 3 major variables. These are output, the unemployment rate, and the inflation rate.
1. Output is the level of production in an economy as a whole. The measure of aggregate output in the U.S. is known as the Gross Domestic Product, or GDP. It can be thought of from 2 different perspectives, production and income.
From the production side: GDP is the value of the final goods and services produced in an economy during a given period. GDP is also the "value-added" that all the businesses added to the economy during a given period.
From the income side: GDP is the sum of incomes in the economy during a given period. This is the income or revenue that a business (a) is left with as profit, (b) pays to the government as taxes, and (c) pays to employees as wages.
2. The unemployment rate is the proportion of workers in an economy who are not employed but are seeking work. The total labor force is a combination of people who are working plus those who are not working but want to work.
In the U.S., the Bureau of Labor Statistics conducts the Current Population Survey or CPS. It interviews about 50,000 households each month to determine if the adults are employed.
The survey classifies an individual as employed if they have a job at the time of the interview and as unemployed if they don't have a job but have been actively seeking a job within the prior 4 weeks.
If someone isn't working and doesn't want to work, they are not counted as part of the labor force.
So the unemployment rate is the number of unemployed people seeking work divided by the total labor force. The lower the unemployment rate, the more people are working, and this results in higher economic output.
3. Inflation is a sustained rise in the general level of prices. The inflation rate is the rate at which the average price of goods in an economy increases over time.
And deflation is the rare opposite, a sustained decline in price levels. Deflation is also called negative inflation.
Here are some more economic scenarios: hyperinflation is extreme inflation and stagflation is when inflation gets combined with economic stagnation.
Macro-economists measure the cost of living by the consumer price index, or CPI. The CPI has been used since 1917 and is published monthly. It gives the cost in dollars of a specific list of goods and services over time.
U.S. Bureau of Labor Statistics employees actually visit over 22,000 locations in 85 cities to see what's happening to the prices of products on the CPI list such as cars, gas, clothing, food, etc.
As an index, the CPI is set equal to 1 in the base period chosen. This is so its level has no particular significance. The current base period are the years 1982 to 1984, thus the average for the period 1982 to 1984 is equal to one.
In the year 2000, for example, the U.S. CPI was 1.71. This means that when comparing prices for similar products, they were 71% higher in 2000 than they were in the time period 1982-1984.
When demand rises, this is called a Boom and it leads to inflation. Follow this:
When consumer demand increases, the goal of production is, of course, to keep up with that consumer demand. This entails paying workers overtime or hiring additional workers to beef up output. All this extra work means that labor costs rise because more people are being paid to do the work. These increased labor costs are passed on to the consumer in the form of higher prices. And higher prices, as we've said, are the definition of inflation.When demand falls, this is called a Recession and it leads to deflation. Follow this:
When consumer demand falls, workers get laid off or have their working hours cut back. If production needs decrease, fewer workers are obviously needed to fill the decreases in demand. The decreased labor costs are passed on to the consumer in the form of lower prices. Companies must reduce their prices to stay competitive in a shrinking marketplace. And lower prices are the definition of deflation.
Recession is a period of negative GDP growth. The time frame for a recession is debated. Many macro-economists insist that negative growth must last for at least 2 consecutive quarters.
Others define recession more loosely, as a significant decline in growth that lasts more than a few months. A sustained recession is called an economic depression."
A creative economy is the fuel of magnificence." -Ralph Waldo Emerson (1803-1882)
Saturday, December 29, 2007
Finding a System to Day Trade the Futures Market
When I first became interested in trading Futures I had no idea as to where to go to get information about trading. I didn’t know anyone that traded the Futures Market. In fact when I talked to anyone about Futures all I heard was “don’t trade Futures, it’s way too dangerous, you will lose everything you own”. Indeed you can lose money fast in the Futures market, but you can also make money fast because the leverage is fantastic and that’s what interested me. I knew I had to have a good system, but where would I go to find one.
At that time brokers would send you information, and maybe they still do, from various Exchanges about different trading strategies and how one might use them in a particular Futures Market. Well, this information looked pretty good! All I had to do was get a charting service and I was on my way.
I guess I wasn’t as bright as the person that gathered the information for the booklets because I simply could not make these indicators work for me. Surely someone was trading successfully using this information I thought, otherwise why would they publish the booklets. With this thought in mind I felt I just needed more information.
Books had to be the answer. Like I said previously, I guess I was not very bright because after reading thirty or forty books thoroughly, some two and three times, and having applied the techniques learned from the books, I was not able to trade profitably on a consistent basis. I’m sure some are capable of using these techniques to trade successfully, but I was not able to do so. While having a book burning party a few years ago, I decided to keep one book to remind me of my experience. It’s on my bookshelf and I glance at it once or twice a year to keep this experience fresh in my memory. There may be some great books out there that show you how to trade successfully on a consistent basis, but unfortunately I never found one. I wasted years on this endeavor.
By this time computer trading was getting popular. I received an advertisement about a program where I could actually write my own system and back test it to get results before actually trading it. Wow! This was great and it was only $4,500.00. They advertised anyone would be able to program this thing. Well they must have meant anyone with the exception of me. I wasted hundreds of hours trying to write programs unsuccessfully. I didn’t know the program language and I wasn’t able to get enough information to learn it so I decided to be intelligent about this situation and bought another program at only half the price of the first one. I was able to write a few programs that produced very well in back testing, if one could stand twenty point stops in the S&P. I really liked this idea but finally had to admit that it was not going to give me what I was searching for.
For years now I had been studying charts every single day plus weekends and evenings.
Of course I was aware that all indicators, strategies, systems etc. started with price. None of these things can be made without price moving first. Price can’t be wrong because it is what it is, therefore it is always right. So I decided to put all of my energy into the study of charts, or price and its movement, and finally I found it. It was right there in front of me all these years and I just didn’t see it. After another year or so of perfecting entries and exits and how to read where price should go, and if it would continue on or turn at that point, I finally had a system. This system will give you profits consistently. I found that price will tell you where it is going and where it is likely to turn, and if it doesn’t turn there it will tell you in advance that it will likely continue.
I had a hard time learning to trade without a mentor. It actually took years of commitment, hard work, and a lot of wasted money. If you are new to trading Futures, or any market, and you don’t have a mentor with a good system that will give you consistent profits, then by all means that should be your first endeavor. It is said that 90% to 95% of everyone trading in the futures market loses. Make sure you’re in the 5% to 10% that are winners. Jim Canter is a S&P 500 e-mimi day trader and the developer of the Precise Day Trading System. For more information see http://www.futurecommodityonlinetradingsystem.com
At that time brokers would send you information, and maybe they still do, from various Exchanges about different trading strategies and how one might use them in a particular Futures Market. Well, this information looked pretty good! All I had to do was get a charting service and I was on my way.
I guess I wasn’t as bright as the person that gathered the information for the booklets because I simply could not make these indicators work for me. Surely someone was trading successfully using this information I thought, otherwise why would they publish the booklets. With this thought in mind I felt I just needed more information.
Books had to be the answer. Like I said previously, I guess I was not very bright because after reading thirty or forty books thoroughly, some two and three times, and having applied the techniques learned from the books, I was not able to trade profitably on a consistent basis. I’m sure some are capable of using these techniques to trade successfully, but I was not able to do so. While having a book burning party a few years ago, I decided to keep one book to remind me of my experience. It’s on my bookshelf and I glance at it once or twice a year to keep this experience fresh in my memory. There may be some great books out there that show you how to trade successfully on a consistent basis, but unfortunately I never found one. I wasted years on this endeavor.
By this time computer trading was getting popular. I received an advertisement about a program where I could actually write my own system and back test it to get results before actually trading it. Wow! This was great and it was only $4,500.00. They advertised anyone would be able to program this thing. Well they must have meant anyone with the exception of me. I wasted hundreds of hours trying to write programs unsuccessfully. I didn’t know the program language and I wasn’t able to get enough information to learn it so I decided to be intelligent about this situation and bought another program at only half the price of the first one. I was able to write a few programs that produced very well in back testing, if one could stand twenty point stops in the S&P. I really liked this idea but finally had to admit that it was not going to give me what I was searching for.
For years now I had been studying charts every single day plus weekends and evenings.
Of course I was aware that all indicators, strategies, systems etc. started with price. None of these things can be made without price moving first. Price can’t be wrong because it is what it is, therefore it is always right. So I decided to put all of my energy into the study of charts, or price and its movement, and finally I found it. It was right there in front of me all these years and I just didn’t see it. After another year or so of perfecting entries and exits and how to read where price should go, and if it would continue on or turn at that point, I finally had a system. This system will give you profits consistently. I found that price will tell you where it is going and where it is likely to turn, and if it doesn’t turn there it will tell you in advance that it will likely continue.
I had a hard time learning to trade without a mentor. It actually took years of commitment, hard work, and a lot of wasted money. If you are new to trading Futures, or any market, and you don’t have a mentor with a good system that will give you consistent profits, then by all means that should be your first endeavor. It is said that 90% to 95% of everyone trading in the futures market loses. Make sure you’re in the 5% to 10% that are winners. Jim Canter is a S&P 500 e-mimi day trader and the developer of the Precise Day Trading System. For more information see http://www.futurecommodityonlinetradingsystem.com
Managing key information
When planning an information management strategy, there can be an overwhelming volume of documents and other content to address.
Within even a single business unit of a typical organisation, thousands of documents are created in a given year. While it would be desirable to have all of these managed to the same high level, this is clearly impractical.
In practice, however, there are certain types of documents that need to be managed more tightly, while others can be ignored (at least in the short term).
This briefing identifies some key categories of documents that should be targeted as part of information management projects, and discusses a number of practical approaches that can be
taken.
Identifying key information
While thousands of documents are created within an organisation, many of these do not warrant close attention as part of an information management (or document management) project.
Instead, our experience in organisations has shown that there are three main categories of key information within many organisations:
Key corporate information
Information shared within an organisation
Information communicated externally
This is not an exhaustive list, but it does provide a starting point for identifying which information should be managed more rigorously within an organisation.
Key corporate information
There is some information that is clearly important within an organisation, such as corporate policies, strategic plans and annual reports. Key corporate information may also include reports generated to meet regulatory or legislated requirements.
This information is generally well-recognised, and is often already the focus of document and records management projects. That being said, there are many situations where even this important information is poorly managed.
Information shared within an organisation
In many cases, this is the most important information to manage. Where documents are used by multiple teams or business units, they must be stored and communicated in a way that is recognised and understood by all groups.
For example, multiple teams may be involved in delivering a large project. This requires a clear file structure, and a consistent naming of key documents.
Information communicated externally
It is often very important to closely track information that is communicated to external stakeholders, or to the public as a whole. This ensures consistency of communications, as well as mitigating the risks of disseminating incorrect information.
There are often serious consequences to having multiple areas of the organisation sending out inconsistent information, or having some areas of the business not knowing what others have sent out.
Ignoring some documents
Beyond the documents in the categories above, there is much information within an organisation that can (and should) be ignored by information management projects.
For example, project teams typically create a huge number of documents across the lifetime of a project. Most of these documents are used solely by the project team, with only a few key documents shared with a wider audience.
In this situation, efforts should be focused on those documents that are shared or reused, with the others left to the project team to organise as they see fit.
Targeting efforts
In practice, information management initiatives should target their efforts first on the key documents. Better managing this information will have the greatest impact on the organisation, recognising that only a limited amount of change management is possible in a given timeframe.
Within even a single business unit of a typical organisation, thousands of documents are created in a given year. While it would be desirable to have all of these managed to the same high level, this is clearly impractical.
In practice, however, there are certain types of documents that need to be managed more tightly, while others can be ignored (at least in the short term).
This briefing identifies some key categories of documents that should be targeted as part of information management projects, and discusses a number of practical approaches that can be
taken.
Identifying key information
While thousands of documents are created within an organisation, many of these do not warrant close attention as part of an information management (or document management) project.
Instead, our experience in organisations has shown that there are three main categories of key information within many organisations:
Key corporate information
Information shared within an organisation
Information communicated externally
This is not an exhaustive list, but it does provide a starting point for identifying which information should be managed more rigorously within an organisation.
Key corporate information
There is some information that is clearly important within an organisation, such as corporate policies, strategic plans and annual reports. Key corporate information may also include reports generated to meet regulatory or legislated requirements.
This information is generally well-recognised, and is often already the focus of document and records management projects. That being said, there are many situations where even this important information is poorly managed.
Information shared within an organisation
In many cases, this is the most important information to manage. Where documents are used by multiple teams or business units, they must be stored and communicated in a way that is recognised and understood by all groups.
For example, multiple teams may be involved in delivering a large project. This requires a clear file structure, and a consistent naming of key documents.
Information communicated externally
It is often very important to closely track information that is communicated to external stakeholders, or to the public as a whole. This ensures consistency of communications, as well as mitigating the risks of disseminating incorrect information.
There are often serious consequences to having multiple areas of the organisation sending out inconsistent information, or having some areas of the business not knowing what others have sent out.
Ignoring some documents
Beyond the documents in the categories above, there is much information within an organisation that can (and should) be ignored by information management projects.
For example, project teams typically create a huge number of documents across the lifetime of a project. Most of these documents are used solely by the project team, with only a few key documents shared with a wider audience.
In this situation, efforts should be focused on those documents that are shared or reused, with the others left to the project team to organise as they see fit.
Targeting efforts
In practice, information management initiatives should target their efforts first on the key documents. Better managing this information will have the greatest impact on the organisation, recognising that only a limited amount of change management is possible in a given timeframe.
Tuesday, December 25, 2007
Eight Ways to Generate More Ideas in Groups
The scene is repeated in meeting rooms around the world every day. A problem has been identified and a group has gathered to solve the problem. When ideas are needed, the group decides to brainstorm. And all too often this exercise leads to a short list of not-that-creative ideas.
We know that if we generate more ideas we have a better chance of finding better ideas. This leads us to the logical conclusion that if we can find techniques to create more ideas, we will find better ones. No one technique however will guarantee the perfect solution. Instead your goals should be to have a variety of approaches to help stimulate idea creation in your repertoire. By doing this you will improve the overall quality of ideas by virtue of having more to choose from.
Whether you are unhappy with the current creativity of your group or are having good success with brainstorming sessions, but would like them to be even better, any of the eight suggestions below can help.
Look at problems in different ways. Get the group to change their perspective on the problem. Once people “lock into” one way of looking at things the idea flow will slow to a tickle. Have people take a new persona. Ask them to look at the issue from the perspective of another group – accounting, HR, or sales for example. Ask them to think about how their Grandmother or an 8 year old would solve the problem. These are simple ways to force people into a new perspective and the new perspectives will generate more ideas.
Make novel combinations. The ideas that land on the flipchart or whiteboard in a brainstorming session are typically considered individually. Have the group look at the initial list and look for ways to combine the ideas into new ones.
Force relationships. Once a group is finished with their initial list, provide them with words, pictures or objects. The objects can be random items, the words can come from a randomly generated list (email wordlist@KevinEikenberry.com and we’ll send you such a list), or from pictures in magazines or newspapers. When people have their random word, picture or item, have them create connections between the problem and their item. Use questions like, “How could this item solve our problem?” What attributes of this item could help us solve our problem?”
Make their thoughts visible. Have people draw! Too often the brainstorming session has everyone sitting except the person capturing the ideas. Let people doodle and draw and you never know what ideas may be spurred.
Think in opposites. Rather than asking your direct problem question, ask the opposite. “How could we ensure no one bought this new product?” could be one example. Capturing the ideas on “the opposite,” will illuminate ideas for solving the actual problem.
Think metaphorically. This approach is similar to forcing relationships (and is another way to use your words, pictures or items). Pick a random idea/item and ask the group, “How is this item like our problem?” Metaphors can be a very powerful way to create new ideas where none existed before.
Prepare. Too often people are asked to brainstorm a problem with no previous thinking time. If people have time to think about a topic, and let their brains work on it for awhile, they will create more and better ideas. Allow people to be better prepared mentally by sharing the challenges you will be brainstorming some time before the meeting whenever possible.
Set a Goal. Research shows and my experience definitely confirms that the simple act of giving people a quantity goal before starting the brainstorming session will lead to a longer list of ideas to consider. Set your goal at least a little higher than you think you can get – and higher than this group typically achieves. Set the goal and watch the group reach it!
While these suggestions have all been written from the perspective of a group generating ideas, they all work very well for individuals too. The next time you need to solve a problem by yourself, use these techniques and you will be astounded by the quantity of ideas you will generate!
We know that if we generate more ideas we have a better chance of finding better ideas. This leads us to the logical conclusion that if we can find techniques to create more ideas, we will find better ones. No one technique however will guarantee the perfect solution. Instead your goals should be to have a variety of approaches to help stimulate idea creation in your repertoire. By doing this you will improve the overall quality of ideas by virtue of having more to choose from.
Whether you are unhappy with the current creativity of your group or are having good success with brainstorming sessions, but would like them to be even better, any of the eight suggestions below can help.
Look at problems in different ways. Get the group to change their perspective on the problem. Once people “lock into” one way of looking at things the idea flow will slow to a tickle. Have people take a new persona. Ask them to look at the issue from the perspective of another group – accounting, HR, or sales for example. Ask them to think about how their Grandmother or an 8 year old would solve the problem. These are simple ways to force people into a new perspective and the new perspectives will generate more ideas.
Make novel combinations. The ideas that land on the flipchart or whiteboard in a brainstorming session are typically considered individually. Have the group look at the initial list and look for ways to combine the ideas into new ones.
Force relationships. Once a group is finished with their initial list, provide them with words, pictures or objects. The objects can be random items, the words can come from a randomly generated list (email wordlist@KevinEikenberry.com and we’ll send you such a list), or from pictures in magazines or newspapers. When people have their random word, picture or item, have them create connections between the problem and their item. Use questions like, “How could this item solve our problem?” What attributes of this item could help us solve our problem?”
Make their thoughts visible. Have people draw! Too often the brainstorming session has everyone sitting except the person capturing the ideas. Let people doodle and draw and you never know what ideas may be spurred.
Think in opposites. Rather than asking your direct problem question, ask the opposite. “How could we ensure no one bought this new product?” could be one example. Capturing the ideas on “the opposite,” will illuminate ideas for solving the actual problem.
Think metaphorically. This approach is similar to forcing relationships (and is another way to use your words, pictures or items). Pick a random idea/item and ask the group, “How is this item like our problem?” Metaphors can be a very powerful way to create new ideas where none existed before.
Prepare. Too often people are asked to brainstorm a problem with no previous thinking time. If people have time to think about a topic, and let their brains work on it for awhile, they will create more and better ideas. Allow people to be better prepared mentally by sharing the challenges you will be brainstorming some time before the meeting whenever possible.
Set a Goal. Research shows and my experience definitely confirms that the simple act of giving people a quantity goal before starting the brainstorming session will lead to a longer list of ideas to consider. Set your goal at least a little higher than you think you can get – and higher than this group typically achieves. Set the goal and watch the group reach it!
While these suggestions have all been written from the perspective of a group generating ideas, they all work very well for individuals too. The next time you need to solve a problem by yourself, use these techniques and you will be astounded by the quantity of ideas you will generate!
Finding a Legitimate Online Job
Finding a needle in a haystack would be easier than finding a legitimate work from home job on the internet on your own. One of the first things you need to know about a vast majority of online businesses is that it involves a lot of advertising for whatever it is you are selling. So if you are not comfortable with this aspect, then you probably would not enjoy working online.
The Work At Home Group has found that most trustworthy work from home jobs have a fee that is paid up front, although many people believe otherwise. Free internet business opportunities involve a lot of work such as multi-level- marketing. Believe me when I say that if the job is free then you are doing all the work, for someone elses' benefit. "You get what you pay for", is very true in the work at home industry. You have to take into consideration that companies that charge a fee supply you with information and valuable knowledge. Before we go any further let me say that every online business with a start-up fee is totally legitimate, is not necessarily true, there are a lot of scams on the internet. One way to find out if a company is legitimate or not is to do a simple search on the internet with their web address. Another good method is to check the BBB on online scam sites.
There are a wide variety of online opportunities on the internet. Everything from free no cost jobs to large and small start-up fees. The most success I have seen people have had were the home typing jobs. I came across about one year ago and of course it involves marketing. This type of job is really good because they cut through all the hype other companies try to sale you and just tell you up front what you will be doing which is placing ads and marketing. What does a home typing jobs involve? It involves placing ads for companies that do business on the interent. You can do this for free or pay a service to do it for you. The way it works is for each sale that your ad generates you will be paid a commission. These commissions range from 50-75% of that sale which sometimes is more then the company profits itself. There are small requirements to be successful with this type of job because most of them will supply you with all free or paid resources and information you need to begin. Another aspect is the tech support you get with these types of jobs. Check for yourself how the support is by emailing the company with a question, and see how long it takes for them to get back with you.
Your only concern is to generate the sales and collect your checks, the companies take care of shipping, order processing, and any refunds. There are several ways to market a company online, the most affective ways of course includes a service fee but you can also choose to do it yourself. This can be very profitable but involves many hours and committment to be successful at it. Being able to sit at home in your pajamas, save gas money and be able to make the same amount of money (if not more) as an outside job from your home is one of the major reasons people want to work from home.
The Work At Home Group has found that most trustworthy work from home jobs have a fee that is paid up front, although many people believe otherwise. Free internet business opportunities involve a lot of work such as multi-level- marketing. Believe me when I say that if the job is free then you are doing all the work, for someone elses' benefit. "You get what you pay for", is very true in the work at home industry. You have to take into consideration that companies that charge a fee supply you with information and valuable knowledge. Before we go any further let me say that every online business with a start-up fee is totally legitimate, is not necessarily true, there are a lot of scams on the internet. One way to find out if a company is legitimate or not is to do a simple search on the internet with their web address. Another good method is to check the BBB on online scam sites.
There are a wide variety of online opportunities on the internet. Everything from free no cost jobs to large and small start-up fees. The most success I have seen people have had were the home typing jobs. I came across about one year ago and of course it involves marketing. This type of job is really good because they cut through all the hype other companies try to sale you and just tell you up front what you will be doing which is placing ads and marketing. What does a home typing jobs involve? It involves placing ads for companies that do business on the interent. You can do this for free or pay a service to do it for you. The way it works is for each sale that your ad generates you will be paid a commission. These commissions range from 50-75% of that sale which sometimes is more then the company profits itself. There are small requirements to be successful with this type of job because most of them will supply you with all free or paid resources and information you need to begin. Another aspect is the tech support you get with these types of jobs. Check for yourself how the support is by emailing the company with a question, and see how long it takes for them to get back with you.
Your only concern is to generate the sales and collect your checks, the companies take care of shipping, order processing, and any refunds. There are several ways to market a company online, the most affective ways of course includes a service fee but you can also choose to do it yourself. This can be very profitable but involves many hours and committment to be successful at it. Being able to sit at home in your pajamas, save gas money and be able to make the same amount of money (if not more) as an outside job from your home is one of the major reasons people want to work from home.
Thursday, December 20, 2007
The Skinny on Forex
What is FOREX?
The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of about $2 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! Forex rocks!
What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.
Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions - and not by us “little guys”. However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.
What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument.
When Can Currencies Be Traded?
The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
The foreign exchange markets follow the sun around the world, so you can trade late at night (if you’re a vampire) or in the morning (if you’re an early bird). Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm but a bigger, nastier bird of prey can sneak up and eat you too…
Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
*No commissions-No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
*No fixed lot size.-In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
*Low transaction costs- The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
*A 24-hour market- There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
*No one can corner the market-The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
*Leverage-In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
*High Liquidity-Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
*Free “Demo” Accounts, News, Charts, and Analysis.- Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
*“Mini” and “Micro” Trading:- You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of about $2 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! Forex rocks!
What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.
Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions - and not by us “little guys”. However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.
What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument.
When Can Currencies Be Traded?
The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
The foreign exchange markets follow the sun around the world, so you can trade late at night (if you’re a vampire) or in the morning (if you’re an early bird). Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm but a bigger, nastier bird of prey can sneak up and eat you too…
Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
*No commissions-No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
*No fixed lot size.-In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
*Low transaction costs- The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
*A 24-hour market- There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
*No one can corner the market-The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
*Leverage-In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
*High Liquidity-Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
*Free “Demo” Accounts, News, Charts, and Analysis.- Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
*“Mini” and “Micro” Trading:- You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
Learn Forex Trading
Almost all internet marketers have heard of forex trading or online currency trading as it is sometimes referred to and many are curious about how the forex trading system works and where they can go to learn forex trading.
In order to become a successful forex trader you need to know what forex trading is and how to successfully trade forex. In order to achieve sufficient knowledge it is vital to learn forex trading from experts. This can be done in the form of a forex tutorial and there are literally hundreds of forex companies offering online tutorials and guides.
An online forex tutorial will explain how the foreign exchange market works and will also explain the types of forex orders that are available to you as a forex trader. A forex tutorial will also explain about technical indicators and what they mean, the economic indicators you will need to be aware of and the various options and strategies that are available to you as a forex trader.
If you are new to forex trading then it is essential that you learn forex trading before parting with any of your hard earned cash. Many online forex companies offer free training and demonstrations that resemble that of real time forex trading. There are also forex trading courses available and these are also a valuable way to learn forex trading as you can refer to these course time and time again.
The most important aspect when it comes to forex trading is to learn forex trading so that you understand how to trade and how to trade successfully. The more you learn forex trading the more understanding you will have and the more success. Finding a forex tutorial or forex trading course is simple. All you need to do is a brief internet search and you will have a great deal of tutorials and courses to choose from. If you are serious about succeeding as a forex trader, then it�s down to you, learn forex trading now and learn to succeed.
In order to become a successful forex trader you need to know what forex trading is and how to successfully trade forex. In order to achieve sufficient knowledge it is vital to learn forex trading from experts. This can be done in the form of a forex tutorial and there are literally hundreds of forex companies offering online tutorials and guides.
An online forex tutorial will explain how the foreign exchange market works and will also explain the types of forex orders that are available to you as a forex trader. A forex tutorial will also explain about technical indicators and what they mean, the economic indicators you will need to be aware of and the various options and strategies that are available to you as a forex trader.
If you are new to forex trading then it is essential that you learn forex trading before parting with any of your hard earned cash. Many online forex companies offer free training and demonstrations that resemble that of real time forex trading. There are also forex trading courses available and these are also a valuable way to learn forex trading as you can refer to these course time and time again.
The most important aspect when it comes to forex trading is to learn forex trading so that you understand how to trade and how to trade successfully. The more you learn forex trading the more understanding you will have and the more success. Finding a forex tutorial or forex trading course is simple. All you need to do is a brief internet search and you will have a great deal of tutorials and courses to choose from. If you are serious about succeeding as a forex trader, then it�s down to you, learn forex trading now and learn to succeed.
Sunday, December 16, 2007
Gain Confidence and Boost Self Esteem in 5 Simple Steps
We all want to become more confident and feel good about ourselves so we can live our very best life. Here are some ways to gain confidence and raise self-esteem:
1. Do something that requires a decision and a follow-through.
Have you been putting off writing that letter to aunt Martha? Is there a friend you’ve been meaning to call? Wash the car, tidy the garden or clean the house. You’ll gain confidence by setting goals (even small ones) and following through on them.
2. Enjoy something you do well.
Do you have any hobbies or sports that you enjoy playing? Some things like going swimming, painting or writing can hold your attention and get you into a state of ‘flow’. While you are in the flow you forget about everything else.Afterwards, you’ll feel competent and capable. It’s a great way to boost your self-esteem. If you don’t have any particular hobbies or pastimes that you enjoy make an effort to try something you’ve always wanted to try.
Picture yourself doing it, and then give it a try! It doesn’t have to be something big - it can be as simple as joining a walking club.You’ll find that you are more centered and happier if you do something that puts you in that flow at least once a week.
3. Shift the focus.
It’s been shown that low self-esteem develops hand-in-hand with individuals who put too much focus on themselves. You can gain confidence by doing something that focuses on someone else or even something else.You’ll find that when you are in a situation where you are meeting new people, you immediately become less nervous when you focus on the person you are meeting.At the end of the day, you’ve interacted with others and will notice that you feel much lighter.
4. Relax, already!
Learning to become more relaxed is a great life enhancer. People who are more relaxed have fewer problems with their memories and are more likely to take the bumps in the road of life in stride.The practice of meditation has gained popularity for this reason. You might want to look into Tai Chi, which involves physical relaxation techniques.Whatever method you decide on, take relaxation seriously. The benefits are just too great to ignore. If you’ve never considered relaxation important, think of it this way: if you can attend to something that results in feeling good, how can you not gain confidence in your personal abilities?
5. Make a list of everything you’ve ever accomplished.
Think small. An accomplishment is an accomplishment! Some things you could put on your list: passed my driver’s test and got my license, scored a goal when I played hockey, managed to save enough money to go on a trip and so on.These are just a few ideas you can use to gain confidence and boost your self-esteem. Use these ideas as a base point and add these things permanently in your life.
Keep in mind, people are not born with good self-esteem, most of us have to work at it. It develops from your thinking and the things you do daily to make yourself feel good.
Wednesday, December 12, 2007
Creating Wealth In Stock Market
The 12 Rules of How to Avoid Losing and Start Making Money from the Stock Market
RULE 1: WHY DO YOU INVEST?
Make more money, this is the answer to most people.
If your reason is to make more money, then ask yourself these three questions:
1.Is your strategy making money?
2.Is your strategy safe?
3.How to increase the profit and minimize the risk?
RULE 2: HOW TO CREATE WEALTH IN STOCK MARKET WITH JUST $1,000
Let say we invest some lower price stocks with just $1,000 in the stock market, invest twice a year for short-to-medium term. If each time the return is double, you will make one million dollar cash within 5 years. If your starting capital is $20,000, after 3 years you will make one million dollar cash.
If you are using the same $1,000 capital, invest twice a year, but the return is only 50%, you will make one million dollar cash after 9 years.
So we can always start small. However, it is very important that we know how to select high profit and low risk stocks.
RULE 3: DON'T GET OBSESSED WITH STOCKS
Sitting and monitoring the market whole day long will not bring you profit. Instead, it increases pressure and misleads your judgment.
RULE 4: NEVER GAMBLE
95% of the people always buy at the highest price. They don’t really know when to buy, just relying on news, rumors and tips. Only 5% of the people knows how to trade at the lowest price. That’s why 95% are losing money, only the 5% are making money.
Investment Builds Wealth, Gambling Definitely Lose !
RULE 5: SAY GOODBYE TO NEWS
News used to be able to predict the market trend. But not anymore, it is difficult to judge which news could actually influence the market nowadays.
RULE 6: DO YOUR OWN ANALYSIS, FORGET ABOUT TIPS
Before investing, ask yourself these four questions:
1.How many people have already heard about the tips before you?
If many have heard about it before you, this news is already obsolete. The price is already high.
2.How long have the tips been spreading before it reaches you?
The next day?
3.Who told you?
Listed company director? Or friends?
4.Assuming that the tip is true, would you possibly know about it?
Normally insider news is not disclosed.
RULE 7: SELL YOUR STOCKS EVEN LOSING MONEY
It is easier to be said than done.
Sell at a loss is a difficult decision. Your heart will object, and your feeling will say "It is going to rebound, don't sell." Eventually price dropped further, causing a much tragic lost.
RULE 8: DON'T JUST FOCUS ON MAKING MONEY
How to protect your capital is much more important. Don’t try to make 100% profit. It is already good enough to have a 60% profit margin.
RULE 9: HISTORY WILL NOT ALWAYS REPEAT
Everyone expects to make some money from the stock market before Christmas, New Year, annual budget announcement or election, but the stock market is not always bullish during these events. We can say history is not always repeated.
The best way is “Let the Market Lead us”.
RULE 10: QUOTES FROM WARREN BUFFET
There are only two rules to make money in stock market:
The first rule: Never lose your money.
The second rule: Never forget the first rule.
RULE 11: TURN BAD STOCKS INTO GOOD STOCKS, DON’T JUST HOLD YOUR STOCKS
Don’t hold your stock too long, there is a value when stocks are sold.
How long have you been holding your stocks until now?
Since Year 1993? 1997? Or Year 2000?
Why didn't you exercise your stocks? Long term investment strategy is not practical anymore. Even the blue chips also crash when the market collapses.
The best strategy is to sell the stocks that are not earning money, and reselect some good counters. Buy low, sell high for several times will earn you more than enough to compensate the lost.
RULE 12: WAKE UP FROM MISTAKES
Stop investing if you are not sure of when to buy or sell.
Without the knowledge of investment, you are bound to lose again. This is an age of information. Investors are using knowledge, techniques and strategies to make money. Without investment knowledge, how do you protect your money?
Building wealth through investing starts with securing your capital.
RULE 1: WHY DO YOU INVEST?
Make more money, this is the answer to most people.
If your reason is to make more money, then ask yourself these three questions:
1.Is your strategy making money?
2.Is your strategy safe?
3.How to increase the profit and minimize the risk?
RULE 2: HOW TO CREATE WEALTH IN STOCK MARKET WITH JUST $1,000
Let say we invest some lower price stocks with just $1,000 in the stock market, invest twice a year for short-to-medium term. If each time the return is double, you will make one million dollar cash within 5 years. If your starting capital is $20,000, after 3 years you will make one million dollar cash.
If you are using the same $1,000 capital, invest twice a year, but the return is only 50%, you will make one million dollar cash after 9 years.
So we can always start small. However, it is very important that we know how to select high profit and low risk stocks.
RULE 3: DON'T GET OBSESSED WITH STOCKS
Sitting and monitoring the market whole day long will not bring you profit. Instead, it increases pressure and misleads your judgment.
RULE 4: NEVER GAMBLE
95% of the people always buy at the highest price. They don’t really know when to buy, just relying on news, rumors and tips. Only 5% of the people knows how to trade at the lowest price. That’s why 95% are losing money, only the 5% are making money.
Investment Builds Wealth, Gambling Definitely Lose !
RULE 5: SAY GOODBYE TO NEWS
News used to be able to predict the market trend. But not anymore, it is difficult to judge which news could actually influence the market nowadays.
RULE 6: DO YOUR OWN ANALYSIS, FORGET ABOUT TIPS
Before investing, ask yourself these four questions:
1.How many people have already heard about the tips before you?
If many have heard about it before you, this news is already obsolete. The price is already high.
2.How long have the tips been spreading before it reaches you?
The next day?
3.Who told you?
Listed company director? Or friends?
4.Assuming that the tip is true, would you possibly know about it?
Normally insider news is not disclosed.
RULE 7: SELL YOUR STOCKS EVEN LOSING MONEY
It is easier to be said than done.
Sell at a loss is a difficult decision. Your heart will object, and your feeling will say "It is going to rebound, don't sell." Eventually price dropped further, causing a much tragic lost.
RULE 8: DON'T JUST FOCUS ON MAKING MONEY
How to protect your capital is much more important. Don’t try to make 100% profit. It is already good enough to have a 60% profit margin.
RULE 9: HISTORY WILL NOT ALWAYS REPEAT
Everyone expects to make some money from the stock market before Christmas, New Year, annual budget announcement or election, but the stock market is not always bullish during these events. We can say history is not always repeated.
The best way is “Let the Market Lead us”.
RULE 10: QUOTES FROM WARREN BUFFET
There are only two rules to make money in stock market:
The first rule: Never lose your money.
The second rule: Never forget the first rule.
RULE 11: TURN BAD STOCKS INTO GOOD STOCKS, DON’T JUST HOLD YOUR STOCKS
Don’t hold your stock too long, there is a value when stocks are sold.
How long have you been holding your stocks until now?
Since Year 1993? 1997? Or Year 2000?
Why didn't you exercise your stocks? Long term investment strategy is not practical anymore. Even the blue chips also crash when the market collapses.
The best strategy is to sell the stocks that are not earning money, and reselect some good counters. Buy low, sell high for several times will earn you more than enough to compensate the lost.
RULE 12: WAKE UP FROM MISTAKES
Stop investing if you are not sure of when to buy or sell.
Without the knowledge of investment, you are bound to lose again. This is an age of information. Investors are using knowledge, techniques and strategies to make money. Without investment knowledge, how do you protect your money?
Building wealth through investing starts with securing your capital.
Buffett's Big Bet
Over the past few days, there have been several stories written about Warren Buffett�s $14 billion bet on global stock markets. I believe these stories are all in reference to this excerpt form Berkshire Hathaway�s annual report:
�Berkshire is also subject to equity price risk with respect to certain long duration equity index put contracts. Berkshire�s maximum exposure with respect to such contracts is approximately $14 billion at December 31, 2005. These contracts generally expire 15 to 20 years from inception. Outstanding contracts at December 31, 2005, have been written on four major equity indexes including three foreign. Berkshire�s potential exposure with respect to these contracts is directly correlated to the movement of the underlying stock index between contract inception date and expiration. Thus, if the overall value at December 31, 2005 of the underlying indices decline 30%, Berkshire would incur a pre-tax loss of approximately $900 million.�
It�s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett�s thinking without knowing more details. But, there are a few things I�d suggest you consider when reading the news reports.
First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 million pre-tax loss. One article stated that a decline in the indexes to zero was highly unlikely given historical trends. It�s a lot more than highly unlikely. But, since we don�t know the details of Berkshire�s exposure, we can�t evaluate the real risk of a very large loss.
A lot of these news stories have called Berkshire�s �long duration equity index put contracts� a bet on global stock markets. A few individuals have been quoted as saying Buffett has become bullish long-term. Buffett�s always been optimistic about the very long-term insofar as he recognizes how better things are today than they have been at any other time in history, and how that is likely to remain true for some time. Despite Buffett�s concerns about nuclear war, he doesn�t see a return to the Dark Ages and those kinds of anemic returns on capital.
That�s important to keep in mind, because I�m not sure this bet is much more than that. If you assume returns on equity will be similar to those achieved in the years since industrialization began, and you assume central governments will continue to cause inflation, a long duration equity index put contract isn�t much of a stretch.
Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses� assets are increasing or remaining stable.
So, I�m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can�t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against very large losses in a diversified group of holdings.
Remember, someone is paying for this protection. In my opinion, it�s not the kind of protection investors need. It�s long-term protection on an index. I suppose I can see why a pension fund might want this (to increase exposure to equities), but it seems like exactly the sort of thing an insurance company can make money selling. There�s fear of a very large loss, and a lot of factors that are hard to see that will tend to make that loss pretty unlikely.
We don�t know what premiums Berkshire is receiving, so we really can�t evaluate these contracts. If someone writes hurricane insurance it doesn�t mean they think hurricanes are unlikely, it just means they think someone is dumb enough to pay more than the protection is worth. Knowing the odds of a decline in global stock markets isn�t enough to evaluate Berkshire�s contracts, because we don�t know the price.
I�m not enamored with current valuations in the U.S., but looking out a couple decades it�s not all doom and gloom. Markets tend to overshoot in both directions, but there�s usually someone sane enough to buy when stocks get cheap enough.
What�s remarkable about the way investors move stock prices isn�t the magnitude of the truly major moves (up or down); it�s the frequency of meaningful moves when there�s no meaningful changes in underlying values. Think about the price range of an average stock in an average year � that�s the really irrational part of investor behavior. I wouldn�t want to have anything to do with a one-year contract on a single stock. That�s a very different situation.
�Berkshire is also subject to equity price risk with respect to certain long duration equity index put contracts. Berkshire�s maximum exposure with respect to such contracts is approximately $14 billion at December 31, 2005. These contracts generally expire 15 to 20 years from inception. Outstanding contracts at December 31, 2005, have been written on four major equity indexes including three foreign. Berkshire�s potential exposure with respect to these contracts is directly correlated to the movement of the underlying stock index between contract inception date and expiration. Thus, if the overall value at December 31, 2005 of the underlying indices decline 30%, Berkshire would incur a pre-tax loss of approximately $900 million.�
It�s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett�s thinking without knowing more details. But, there are a few things I�d suggest you consider when reading the news reports.
First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 million pre-tax loss. One article stated that a decline in the indexes to zero was highly unlikely given historical trends. It�s a lot more than highly unlikely. But, since we don�t know the details of Berkshire�s exposure, we can�t evaluate the real risk of a very large loss.
A lot of these news stories have called Berkshire�s �long duration equity index put contracts� a bet on global stock markets. A few individuals have been quoted as saying Buffett has become bullish long-term. Buffett�s always been optimistic about the very long-term insofar as he recognizes how better things are today than they have been at any other time in history, and how that is likely to remain true for some time. Despite Buffett�s concerns about nuclear war, he doesn�t see a return to the Dark Ages and those kinds of anemic returns on capital.
That�s important to keep in mind, because I�m not sure this bet is much more than that. If you assume returns on equity will be similar to those achieved in the years since industrialization began, and you assume central governments will continue to cause inflation, a long duration equity index put contract isn�t much of a stretch.
Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses� assets are increasing or remaining stable.
So, I�m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can�t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against very large losses in a diversified group of holdings.
Remember, someone is paying for this protection. In my opinion, it�s not the kind of protection investors need. It�s long-term protection on an index. I suppose I can see why a pension fund might want this (to increase exposure to equities), but it seems like exactly the sort of thing an insurance company can make money selling. There�s fear of a very large loss, and a lot of factors that are hard to see that will tend to make that loss pretty unlikely.
We don�t know what premiums Berkshire is receiving, so we really can�t evaluate these contracts. If someone writes hurricane insurance it doesn�t mean they think hurricanes are unlikely, it just means they think someone is dumb enough to pay more than the protection is worth. Knowing the odds of a decline in global stock markets isn�t enough to evaluate Berkshire�s contracts, because we don�t know the price.
I�m not enamored with current valuations in the U.S., but looking out a couple decades it�s not all doom and gloom. Markets tend to overshoot in both directions, but there�s usually someone sane enough to buy when stocks get cheap enough.
What�s remarkable about the way investors move stock prices isn�t the magnitude of the truly major moves (up or down); it�s the frequency of meaningful moves when there�s no meaningful changes in underlying values. Think about the price range of an average stock in an average year � that�s the really irrational part of investor behavior. I wouldn�t want to have anything to do with a one-year contract on a single stock. That�s a very different situation.
Saturday, December 8, 2007
Master your Time, Double your Success
Time Management is an essential success skill
Practically speaking, time is constant: 60 seconds per minute, 60 minutes per hour, 24 hours per day, 7 days a week (24/7).
However, the usage of time differs among each individual. Some might give time the capacity to control their lives, and others may find themselves a slave of time. Some might have no time at all to relax and create a stress-free lifestyle.
But the bottom-line is not to make time an enemy. One must have time to think of things in order, to plan ways to minimize waste of time, energy, and valuable resources.
Effective time management involves patience and practical thinking. Time and the natural changes in the environment may be modified but, in the end, we should follow the natural order of things.
Remember "There's no day but today." We should use tools and ideas that can improve our efficiency in using time. Time is not renewable; and moments are irreplaceable. A thing done or a past experience cannot be recreated.
However, we can expect these changes and prepare ourselves for better or worse scenarios. We cannot control time but we can make adjustments based on a given moment.
Learning or studying something to achieve mastery is one good example where we can minimize errors or develop ourselves amidst the ever-changing times. During this period of learning, we must maximize the given resources (including time) to fully develop a skill or to acquire knowledge so that by the time we need such skill, we won't be wasting hours trying to figure things out.
One who is able to prepare for a number of possibilities upon entering a situation may have more time to think of the moves and decision to take to minimize the possibilities of errors.
Here are some tips:
1. Think of goals and aims as necessary achievements.
In achieving your desired goals, you should start with a positive outlook. You must be excited with the challenges and tasks that you have to do to give you the right start or motivation.
However, you should also see the path towards your goals in concrete terms. These achievements or aims can be reached by becoming realistic and by knowing your directions. Think of the scenarios of success but you should also recognize the fact that these roads have to be traversed in a given time.
This way, you are not only looking at the possibility of success, but you are also giving yourself the right motivation and the proper time to prepare for a fresh start and achieve your goals at the soonest possible time.
2. Think of the time frame in achieving goals and aims.
You are to do a task at a particular time. As you begin planning your strategies, you must also look forward and recognize your time frames in doing such tasks.
Time frames are the periods you are giving yourself to finish a task. These are just estimates or approximations since you are not the sole factor that will contribute in finishing the given task. Be wary of the processes in your environment; for example, if you are to write a book or an article, consider the time you are giving yourself for this activity in relation to your environment.
Finally, think of the flow of things or the movement of time in your daily life as you move forward in achieving your desired goals. Think of your other activities that might affect the time factor in finishing given tasks.
You might be spending too much time on a very idle activity (like too many late night parties or soir�es or a whole day in front of your computer playing online games) that will give you less time for your plans towards self-fulfillment and success.
3. Be realistic and expect changes.
Time Management involves flexibility and open-mindedness. Do not expect that you can finish a task in what you've considered as your time frame unless everything is laid down perfectly. You should allot some allowance in your time frame, probably for the sake of the unforeseen or unexpected circumstances.
Remember that contradicting factors bring development so don�t be upset with these changes since everything is undergoing a sort of a synthesis. For example, you already made your business plan and a lot of careful considerations have been completed, including the period in which you expect your business to give you financial and personal satisfaction.
However, during the course of application, there are other factors or changes, which you omitted in your feasibility study. In this case, you should have allowed some time for handling unknown variables.
Instead of becoming immobile or paralyzed with any situation, be flexible by making changes. Level the playing field with innovative strategies based on the situation and knowledge you will acquire from your experience in doing the task. Maximize your time by examining your errors and by moving on with solutions that will sustain whatever efforts you have given to traverse difficult situations and challenges.
4. Know your work style.
You are a time clock too. You work with your habits, your cycles, and bodily rhythms. You sleep, eat, exercise, read a book, or cook with either efficiency or a sloppy lifestyle. Give yourself some time to think about how fast you can work on things.
Your sleeping habits and work efficiency are based on what you've grown-up with as an individual. You may either stay up late at night or sleep early, unconsciously following past habits that no longer work for you. See what works for you and what needs to be changed.
Finally, examine yourself and know how fast you can work on things, like typing, filing office data, writing a term paper, or even reading a book. You don�t need to know the exact time a task takes but at least you will have an approximate measurement. When you are able to gauge how you spend your time and how long you take to do things, you can develop a meaningful schedule.
5. Know your environment or workplace
Your life at home has a time of its own, your office has schedules, and your neighborhood has activities to offer. You are surrounded by these time schedules. It would be better if you would be conscious of the time flow in your surroundings.
The daily tasks in your house determine your personal time. Your working hours are defined by the nature of your work and your workplace. And the activities by the people around you may affect your strategies and daily endeavors.
Finally, you are not alone in your workplace and other people are also wary of their time and schedules. All of these would affect your time frames and you must be in-synch with all of these to manage your limited time hassle-free.
6. Make Plans
Planning is a way of saving time for errors. Mistakes usually happen because of unexpected and unforeseen factors such as a wrong estimate of resources or new problems.
Add a small time allowance to your estimated time so that you may still finish the task in a given time-- even if things don't go as smoothly as initially planned. With the proper plan and preparation, these unforeseen circumstances can be expected as well as minimized.
Time management, then, is giving yourself a period to reflect on how time flows in your life. You are also recognizing the factor that affects time and its fluidity. If you manage your time, you'll find ways to have the time of your life.
Wednesday, December 5, 2007
Financial Analyst and Planning
Finance Analysts and Financial Planning Career Highlights
College graduates with excellent communication skills make the best analysts and advisors.
The increase in personal investors will improve businesses for both analysts and advisors, particularly for advisors.
Competition for analyst positions is tough, particularly for high paying jobs at elite securities corporations.
Financial Analyst and Financial Planning Career Overview
Financial planners and financial analysts help guide businesses and individuals in making investment choices. Both carry out financial research and analysis, which they use to provide investment suggestions to clients. But analysts and advisors differ in their clientele and in the information they give out. Financial analysts evaluate the economic outlook of different sectors and industries for organizations that wish to invest. Personal financial advisors work with individual clients and focus on a wide range of personal investment needs.
Securities analysts are employed by insurance companies, banks, securities firms, pension and mutual funds, and other organizations interested in assisting their customers in the investment process. Analysts research industry statements and use company sales, costs, commodity prices, tax rates, and expenses to evaluate a firm’s current and projected value. Analysts also meet with executives to evaluate an organizations leadership and market outlook. In addition, analysts research whole industries, evaluating business strategies, product trends, and market competition. In order to correctly interpret a company’s success and value, analysts must also be familiar with and understand the market effect of industrial regulations and policy changes.
Using statistical software and spreadsheets, financial analysts evaluate data, identify patterns, and formulate predictions used to make recommendations about selling or buying various investment and securities products. Analysts with asset management responsibilities often make purchasing and selling decisions for their clients. Some Analysts focus on determining risk levels connected with different investment possibilities.
Some companies have investment banking divisions with teams of analysts dedicated to researching companies interested in making initial public offerings. These teams also make certain that all paperwork is filled out in accordance with the guidelines of the Securities and Exchange Commission. In addition, they present information to investors regarding the potential of new corporations. Financial analysts are also responsible for researching the pros and cons of possible company mergers and buyouts.
Ratings analysts assess the capacity of bond issuing company’s (or governments) to fulfill loan obligations. From their findings, the analyst team gives the company or government a bond rating that is similar to an individual’s credit rating. Often finance professionals also evaluate credit, analyze budgets, and assess costs.
Personal Financial Advisors (sometimes referred to as financial consultants or financial planners) combine their experience and understanding of tax laws, insurance, and investments to help clients accomplish their short and long range financial objectives. The items advisors typically focus on are estate planning, saving for college, retirement, as well as general investment. The typical advisor can provide recommendations in many aspects of finance, but there are some who concentrate on specific areas like asset protection, retirement, or estate planning.
Advisors start by sitting down with a client looking at their financial situation to help them identify financial goals. From this information an advisor creates a financial plan for the client that addresses problems and suggests ways to fix them, and then Identifies possible investment ideas that best meet the needs of the client. Very often these recommendations are verbal, although some advisors prepare formal reports. Once a plan is in place, advisors generally meet with their clients on a yearly basis to revise and adjust the plan to life changes and new investment opportunities. In addition, advisors respond to questions about the impact of life changes and benefit plans on their financial situation.
There are advisors who act as brokers, buying and selling stocks, bonds, and other investment products while others recommend the services of other professionals. For instance, an advisor may recommend a particular accountant or insurance agent or lawyer. In addition, many advisors act as asset managers for their clients.
The most essential skill a financial advisor can have is the ability to attract and keep customers. Happy clients are best resource for finding more happy clients. Some advisors use seminars and finance classes to attract new customers.
Career Training and Job Qualifications for Financial Analysts and Planners
A bachelor’s degree is essential for financial analysts and highly recommended for personal financial advisors. Analysts should probably have a degree in business administration, accounting, finance, or statistics. In addition to training in statistics, business, and economics, and understanding of administration and accounting are strongly suggested. Additional recommendations include courses on bond valuation, risk management, and options pricing.
While there is not a particular emphasis of study preferred for personal financial advisors, a degree in economics, law, business, accounting, finance, or mathematics offers a good footing for the position. Investment, risk management, tax, and estate planning classes are vital. Financial planning degrees are also becoming more common on college campuses. Still, a large number of advisors begin in other associated fields like insurance sales, law, financial services brokerage, auditing, and accounting.
Personal financial advisors and financial analysts must have computer, analytical, mathematical and problem-solving skills. Also, because analysts and advisors must explain their findings and recommendations to others, they must have excellent presentation skills, self-confidence, maturity, as well as the ability to work alone.
Among other skills a financial analyst must possess are a strong attention to detail, a drive for research, and an understanding of tax laws, money markets, and the economy in general. In addition, people skills and salesmanship are also very important.
While not necessary to work in finance, there are several certification organizations that offer professionals opportunities to increase their knowledge, understanding, and prestige through certification. The association of Investment management and Research offers certification as a Chartered Financial Analyst (CFA). Qualifications for certification include a completed bachelor’s degree, three years financial experience, and successful completion of three essay tests. The test, which includes topics like economics, accounting, portfolio management, asset valuation and securities analysis, is taken annually until all three are completed.
Certification for personal financial advisors includes the Certified Financial Planner designation offered by the Certified Financial Planner Board of Standards, Inc. Candidates must have earned the necessary education, have applicable experience in finance, pass an examination, and agree to and follow an established code of ethics. The Chartered Financial Consultant (ChFC) is another credential that is obtainable from the American College in Bryn Mawr, Pennsylvania. In addition to career experience, candidates must finish eight instructional classes to qualify for certification. Annual refresher courses are required to maintain status in each of these designations.
Though personal financial advisors do not need to be licensed, if they wish to provide services as an investment or real estate broker then they must be licensed to offer those respective services. In addition, legal advice cannot be given unless the advisor is licensed to do so. Many advisors who lack these qualifications offer clients the services of other licensed professionals.
Financial analysts can move up to positions as finance or portfolio managers that oversee all the investments of a corporation or customer. Upward movement for personal financial advisors is typically accomplished by expanding your clientele; however those who work for organizations can advance by filling management positions.
Job and Employement Opportunities
Because of the expansion of both individual and business investment, jobs for financial analysts and personal financial advisors will continue to grow through the next decade. As the number of people involved in investment increases, and as the next generation of retirees begins to think more seriously about the future both analysts and advisors will have the opportunity to provide them the financial services they need. The increased life expectancy also forced retirees to plan for more years of retirement. As the international securities economy expands, so will the need for advisors and analysts who understand it.
Another catalyst for growth in the financial services industry is deregulation. In the past few years insurance companies, banks and brokerages have been able to broaden the services they provide to include investment advice. Many banks are becoming involved in brokerage and investment activities and need qualified financial analysts to support new customers.
The demand for personal financial advisors will likely outstrip average demand for all other occupations over the next decade. The increase in 401(K) and other individually managed retirement accounts will likely persist. As investment activity of all kinds increase, people will seek out the expertise of qualified financial advisors to assist in their investment planning. Certified professionals are among those with the greatest outlook.
The demand for financial analysts will likely keep stride with the average demand for all other occupations over the next decade. Because of the expanding popularity of the mutual fund, mutual fund companies will have to hire more and more analysts that can make investment suggestions for the different funds.
Investment banking will also continue to require the services of qualified financial analysts to generate funds and assess mergers and buyouts. Although, the demand for financial analysts may be limited by the fact that more companies are outsourcing research to independent firms, which may lead to a reduction in internal research positions.
The need for financial analysts in investment banking is tied heavily to the performance of the stock market, and thus can vary widely. Likewise, corporate downsizing could possibly lead to the reduction of analyst positions throughout the industry. Elite job opportunities will be few and highly contested.
Students, Get Your Foot In The Door!
In the 1970s, financial planners essentially had two career choices: they could become stockbrokers or insurance agents. The paths were set, and the expectations were simple. Much has changed since then. There are many more choices available, but this also means that students are expected to know more and do more than ever before in fierce competition. Preparing for a career in financial planning requires a great deal more training in areas that were traditionally relegated to other professions, such as accounting and psychology.
In this article we'll explore things that recent and soon-to-be graduates can do to decide where they want their financial planning career to go and to then get a leg-up on the competition. (If you're not sure planning is for you, take the quiz in Is A Career In Financial Planning In Your Future?)
Prepare before you graduate
Perhaps the first and most obvious course of action is to simply choose an appropriate major. These include business, economics, finance or accounting. Personal financial-planning programs are being offered at more universities, both at the graduate and undergraduate levels. These programs can be especially helpful because they also often cover a number of topics that other programs fail to include, such as consumer rights, the dynamics of finance within the family and the psychology of retirement. (If those topics piqued your interest, check out Kids Or Cash: The Modern Marriage Dilemma and Journey Through The Six Stages Of Retirement.)
Traditional financial-planning curricula will only cover material that is directly relevant to the Chartered Financial Planner (CFP®) Board exam, such as investments, insurance and taxes. Therefore, choosing financial planning as a major will provide students with a much broader base of knowledge from which to begin their careers. Understanding the psychology of finance and investing will be an invaluable aid when dealing with clients, and is in fact a skill that all financial planners must master to some extent. (For more on the education paths open to you, check out Finding Your Place In The Financial Industry.)
Extracurricular Activities
Of course, choosing the correct major is only one step that students can take to further their careers before graduation. There are a number of other options available to students that will look good on a resume to prospective employers. Here are some examples.
Preparing income tax returns.
This is a good practical skill that can greatly benefit the student in a number of ways. In addition to providing solid, hands-on experience with customers in the financial industry, it will also teach the student basic tax information that will be tested on the CFP® Board exam.
Working at a bank.
Student planners often find that working at a bank provides multiple career benefits. It's a job that easily fits around an academic schedule. The pay is better than many other after-school jobs. It looks good on a resume, gives practical work experience and shows you are responsible.
Sitting for the Enrolled Agent exam.
This exam is administered by the IRS every September. The test covers virtually all of the tax material found in the CFP® Board exam. Passing this test and earning this designation will be an impressive credential to present to prospective employers in any field of financial practice. You'll also gain a tremendous advantage over CFP® applicants that have had no previous tax training.
Internships.
Working as an intern at a financial planning firm will provide obvious benefits for any student. But while any internship can be beneficial, working at a smaller company will likely provide more hands-on experience with clients and the financial planning process than a larger firm, where interns are often relegated to administrative support or marketing roles.
Finding A Job
Graduates have a number of tools at their disposal that can greatly increase their exposure to the financial community. Obviously, a graduate who completed an internship at a local company has a substantial advantage over an unknown competitor in the job-selection process.
For those who do not have this luxury, the internet can be an indispensable resource. Websites such as brokerhunter.com continually list all available postings from many companies. Those who prefer to take a face-to-face approach and network themselves (and even those who don't) would be wise to join the local chapter of a financial planning organization, such as the Financial Planning Association or the National Association of Insurance and Financial Advisors. These groups offer many resources to both rookie and veteran planners and are well worth the cost of membership. Their websites often contain job postings, too. (For more examples of organizations to join, check out The Benefits Of Joining A Professional Association.)
After graduation
Knowing what job is the best fit for you can be a challenge. Here are some more items to consider when choosing your career path:
There are a number of different business models being used in the financial planning industry today. Stockbrokers and insurance agents generally work on commission, while Registered Investment Advisors tend to charge either an hourly fee or a percentage of assets under management as compensation.
The size of the company matters. Large companies will provide such amenities as office space, business cards and letterhead. However, larger companies may also have stiff production quotas, lower payouts on commissions and a highly regulated environment.
In turn, small financial companies offer a more relaxed atmosphere and a more comprehensive array of products and services. Working at a smaller firm can also provide a much broader range of experience for new representatives, who may have the freedom to implement a well-rounded financial plan for a client that could include such things as mortgage planning and income tax preparation. It's doubtful you would have this kind of responsibility at a large company. (To learn more, read What Is A Registered Investment Advisor? and Trying On Potential Employers.)
Training and support differ from company to company. Financial firms such as Smith Barney or Northwestern Mutual will provide their employees with all the necessary education and training that they need in order to pass the requisite tests, as well as thorough sales and product training. Many new advisors will benefit from the training programs offered by the large companies. Even if you ultimately lose out to the competition at a large firm, you will still have marketable skills that will be attractive to small firms who can't provide the kind of training and licensing you've received.
Finally, regulations from the Financial Industry Regulatory Authority require sponsorship by a broker/dealer in order to sit for any securities licensing exam.
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Conclusion
College students have many things that they can do to improve their marketability before graduation. Once you're out in the real world, remember that the initial key to success in the financial planning business is persistence. Some graduates will find their place in the field immediately, while others may have to try a few different working environments to find the one that best suits them. Hard work and perseverance will always pay off for those who are willing to risk failure to achieve their dreams.
In this article we'll explore things that recent and soon-to-be graduates can do to decide where they want their financial planning career to go and to then get a leg-up on the competition. (If you're not sure planning is for you, take the quiz in Is A Career In Financial Planning In Your Future?)
Prepare before you graduate
Perhaps the first and most obvious course of action is to simply choose an appropriate major. These include business, economics, finance or accounting. Personal financial-planning programs are being offered at more universities, both at the graduate and undergraduate levels. These programs can be especially helpful because they also often cover a number of topics that other programs fail to include, such as consumer rights, the dynamics of finance within the family and the psychology of retirement. (If those topics piqued your interest, check out Kids Or Cash: The Modern Marriage Dilemma and Journey Through The Six Stages Of Retirement.)
Traditional financial-planning curricula will only cover material that is directly relevant to the Chartered Financial Planner (CFP®) Board exam, such as investments, insurance and taxes. Therefore, choosing financial planning as a major will provide students with a much broader base of knowledge from which to begin their careers. Understanding the psychology of finance and investing will be an invaluable aid when dealing with clients, and is in fact a skill that all financial planners must master to some extent. (For more on the education paths open to you, check out Finding Your Place In The Financial Industry.)
Extracurricular Activities
Of course, choosing the correct major is only one step that students can take to further their careers before graduation. There are a number of other options available to students that will look good on a resume to prospective employers. Here are some examples.
Preparing income tax returns.
This is a good practical skill that can greatly benefit the student in a number of ways. In addition to providing solid, hands-on experience with customers in the financial industry, it will also teach the student basic tax information that will be tested on the CFP® Board exam.
Working at a bank.
Student planners often find that working at a bank provides multiple career benefits. It's a job that easily fits around an academic schedule. The pay is better than many other after-school jobs. It looks good on a resume, gives practical work experience and shows you are responsible.
Sitting for the Enrolled Agent exam.
This exam is administered by the IRS every September. The test covers virtually all of the tax material found in the CFP® Board exam. Passing this test and earning this designation will be an impressive credential to present to prospective employers in any field of financial practice. You'll also gain a tremendous advantage over CFP® applicants that have had no previous tax training.
Internships.
Working as an intern at a financial planning firm will provide obvious benefits for any student. But while any internship can be beneficial, working at a smaller company will likely provide more hands-on experience with clients and the financial planning process than a larger firm, where interns are often relegated to administrative support or marketing roles.
Finding A Job
Graduates have a number of tools at their disposal that can greatly increase their exposure to the financial community. Obviously, a graduate who completed an internship at a local company has a substantial advantage over an unknown competitor in the job-selection process.
For those who do not have this luxury, the internet can be an indispensable resource. Websites such as brokerhunter.com continually list all available postings from many companies. Those who prefer to take a face-to-face approach and network themselves (and even those who don't) would be wise to join the local chapter of a financial planning organization, such as the Financial Planning Association or the National Association of Insurance and Financial Advisors. These groups offer many resources to both rookie and veteran planners and are well worth the cost of membership. Their websites often contain job postings, too. (For more examples of organizations to join, check out The Benefits Of Joining A Professional Association.)
After graduation
Knowing what job is the best fit for you can be a challenge. Here are some more items to consider when choosing your career path:
There are a number of different business models being used in the financial planning industry today. Stockbrokers and insurance agents generally work on commission, while Registered Investment Advisors tend to charge either an hourly fee or a percentage of assets under management as compensation.
The size of the company matters. Large companies will provide such amenities as office space, business cards and letterhead. However, larger companies may also have stiff production quotas, lower payouts on commissions and a highly regulated environment.
In turn, small financial companies offer a more relaxed atmosphere and a more comprehensive array of products and services. Working at a smaller firm can also provide a much broader range of experience for new representatives, who may have the freedom to implement a well-rounded financial plan for a client that could include such things as mortgage planning and income tax preparation. It's doubtful you would have this kind of responsibility at a large company. (To learn more, read What Is A Registered Investment Advisor? and Trying On Potential Employers.)
Training and support differ from company to company. Financial firms such as Smith Barney or Northwestern Mutual will provide their employees with all the necessary education and training that they need in order to pass the requisite tests, as well as thorough sales and product training. Many new advisors will benefit from the training programs offered by the large companies. Even if you ultimately lose out to the competition at a large firm, you will still have marketable skills that will be attractive to small firms who can't provide the kind of training and licensing you've received.
Finally, regulations from the Financial Industry Regulatory Authority require sponsorship by a broker/dealer in order to sit for any securities licensing exam.
FREE REPORT: The Five Things That Move the Currency Market
Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now!
Conclusion
College students have many things that they can do to improve their marketability before graduation. Once you're out in the real world, remember that the initial key to success in the financial planning business is persistence. Some graduates will find their place in the field immediately, while others may have to try a few different working environments to find the one that best suits them. Hard work and perseverance will always pay off for those who are willing to risk failure to achieve their dreams.
Tuesday, December 4, 2007
Start With A Financial Plan
Trading stocks should be treated as a business venture — it will require
time, knowledge and money to succeed. Your Financial Plan represents your
roadmap to success.
Decide Your Financial Objectives.
If you are a 60 year old looking for cash flow to fund your impending retirement, your priority would be to generate an income stream rather than large asset value growth.
If you are a 25 year old who wants to begin to invest, capital growth would be the priority, rather than income stream.
Your financial objectives will determine whether you trade liquid shares or not.
Decide Your Risk Level.
Decide on your risk level and the types of investments you can afford to make will be set. Remember, the higher the return you want to achieve, the higher the risk.
Low Risk Level
I am not very comfortable with risk and will invest
in fixed interest/capital guaranteed securities
(government bonds, bank term deposits).
Medium Risk Level
I can take on a moderate amount of risk (blue chip
Industrial and Banking and Finance sector shares).
High Risk Level
I am comfortable with risk. I am seeking a high return
and prepared to evaluate companies early in their
growth phase (recently listed resource companies).
How Do You Fund Your Investments?
For most of us, we do not have immediate access to a large pool of ready savings.
Using the equity you have in a property to fund your share portfolio is a common
approach.
EPF savings is also an effective vehicle for providing funds for investing and
the majority of Malaysians have access to these funds.
Most major banks and insurance groups offer margin loan facilities. This is where
you start a portfolio with savings and then use this portfolio as security to borrow
further funds to buy more shares.
In most instances, the problem is not acquiring funds to start a portfolio,
it is having the knowledge to invest with confidence.
time, knowledge and money to succeed. Your Financial Plan represents your
roadmap to success.
Decide Your Financial Objectives.
If you are a 60 year old looking for cash flow to fund your impending retirement, your priority would be to generate an income stream rather than large asset value growth.
If you are a 25 year old who wants to begin to invest, capital growth would be the priority, rather than income stream.
Your financial objectives will determine whether you trade liquid shares or not.
Decide Your Risk Level.
Decide on your risk level and the types of investments you can afford to make will be set. Remember, the higher the return you want to achieve, the higher the risk.
Low Risk Level
I am not very comfortable with risk and will invest
in fixed interest/capital guaranteed securities
(government bonds, bank term deposits).
Medium Risk Level
I can take on a moderate amount of risk (blue chip
Industrial and Banking and Finance sector shares).
High Risk Level
I am comfortable with risk. I am seeking a high return
and prepared to evaluate companies early in their
growth phase (recently listed resource companies).
How Do You Fund Your Investments?
For most of us, we do not have immediate access to a large pool of ready savings.
Using the equity you have in a property to fund your share portfolio is a common
approach.
EPF savings is also an effective vehicle for providing funds for investing and
the majority of Malaysians have access to these funds.
Most major banks and insurance groups offer margin loan facilities. This is where
you start a portfolio with savings and then use this portfolio as security to borrow
further funds to buy more shares.
In most instances, the problem is not acquiring funds to start a portfolio,
it is having the knowledge to invest with confidence.
Types Of Stocks
What types of stocks are there?
Ordinary Stocks: When purchasing an ordinary stock, you own a share of the company. This entitles you to receive profits from the operations of the company in the form of dividends. At the annual general meeting (also referred to as an AGM), you have voting rights. Ordinary stocks are what you will start to trade in and most traders never venture beyond this.
There are, however, other types of securities and these are:
Preferential Stocks:
A preference stock is different from an ordinary stock. Preference stockholders receive dividends before dividends on ordinary stocks are announced. If the company is wound up, preference stockholders rank above ordinary stockholders in the distribution of assets. Preference stocks can often have a fixed dividend rate.
Bonus Issue:
This is a free issue of stocks to the stockholders based on the number of stocks already owned.
Rights Issue:
A rights issue can be granted to stockholders to buy stocks in the company, often below market price.
Derivatives:
There are also securities you can trade on the market that derive their price from the parent stocks. There are two types – Options and Warrants – and these are collectively known as Derivatives.
There are two parties involved in an options contract, the writer or seller and the taker or buyer. The writer writes the option and has the obligation of accepting or delivering the stocks. The takers have the right, but not the obligation, to buy or sell the stocks.
There are many advantages of options trading, the least of which is leverage. An option can be bought and sold for a fraction of the stock price, giving an effective higher return (or loss) on investment for a stock price move.
Warrants:
Warrants, like options, derive their price from the parent security. Warrants though are issued by banks and other financial institutions and are classified based on whether they have an investment or trading purpose.
Warrants may be issued over securities, a portfolio of securities, a stock price index, currency or commodities.
Ordinary Stocks: When purchasing an ordinary stock, you own a share of the company. This entitles you to receive profits from the operations of the company in the form of dividends. At the annual general meeting (also referred to as an AGM), you have voting rights. Ordinary stocks are what you will start to trade in and most traders never venture beyond this.
There are, however, other types of securities and these are:
Preferential Stocks:
A preference stock is different from an ordinary stock. Preference stockholders receive dividends before dividends on ordinary stocks are announced. If the company is wound up, preference stockholders rank above ordinary stockholders in the distribution of assets. Preference stocks can often have a fixed dividend rate.
Bonus Issue:
This is a free issue of stocks to the stockholders based on the number of stocks already owned.
Rights Issue:
A rights issue can be granted to stockholders to buy stocks in the company, often below market price.
Derivatives:
There are also securities you can trade on the market that derive their price from the parent stocks. There are two types – Options and Warrants – and these are collectively known as Derivatives.
There are two parties involved in an options contract, the writer or seller and the taker or buyer. The writer writes the option and has the obligation of accepting or delivering the stocks. The takers have the right, but not the obligation, to buy or sell the stocks.
There are many advantages of options trading, the least of which is leverage. An option can be bought and sold for a fraction of the stock price, giving an effective higher return (or loss) on investment for a stock price move.
Warrants:
Warrants, like options, derive their price from the parent security. Warrants though are issued by banks and other financial institutions and are classified based on whether they have an investment or trading purpose.
Warrants may be issued over securities, a portfolio of securities, a stock price index, currency or commodities.
Friday, November 30, 2007
What Are Structured Warrants?
What to look out for before investing in structured warrants
Action 1 – Understand the characteristics of warrants
As for other investment products, you should get a clear view and gain a better understanding of the nature of warrants, i.e. how it works, its benefits, as well as the risks involved. This is to ensure that warrants are the right investment product that matches your investment goals.
Action 2 – Identify the market direction
A warrant is a derivative product and its value is directly linked to the price of the underlying shares. If the price of the shares goes up (or down), the price of the warrants will move in tandem. For instance, if an investor anticipates that the market will do well, he can buy a call warrant to take advantage of price increases in the future. In the case of cash-settled warrant, if the current price of the underlying share is higher than the warrant’s exercise price and the warrant is exercised (before the maturity period), the holder will be entitled to the cash amount, i.e. the positive difference between the current price of the share and the warrant’s exercise price.
Action 3 – Determine the investment horizon
Set a deadline for the underlying share to reach its target level. Remember that structured warrants are a short-term trading instrument and will expire after the exercise period.
Action 4 – Comparing warrants
When you have narrowed down your choices to two to three warrants, you need to compare the warrant prices by identifying how the price of the underlying share fluctuates during a specific period of time. As a general rule, a warrant with a stable price fluctuation is a better choice for investment.
Action 1 – Understand the characteristics of warrants
As for other investment products, you should get a clear view and gain a better understanding of the nature of warrants, i.e. how it works, its benefits, as well as the risks involved. This is to ensure that warrants are the right investment product that matches your investment goals.
Action 2 – Identify the market direction
A warrant is a derivative product and its value is directly linked to the price of the underlying shares. If the price of the shares goes up (or down), the price of the warrants will move in tandem. For instance, if an investor anticipates that the market will do well, he can buy a call warrant to take advantage of price increases in the future. In the case of cash-settled warrant, if the current price of the underlying share is higher than the warrant’s exercise price and the warrant is exercised (before the maturity period), the holder will be entitled to the cash amount, i.e. the positive difference between the current price of the share and the warrant’s exercise price.
Action 3 – Determine the investment horizon
Set a deadline for the underlying share to reach its target level. Remember that structured warrants are a short-term trading instrument and will expire after the exercise period.
Action 4 – Comparing warrants
When you have narrowed down your choices to two to three warrants, you need to compare the warrant prices by identifying how the price of the underlying share fluctuates during a specific period of time. As a general rule, a warrant with a stable price fluctuation is a better choice for investment.
Wednesday, November 28, 2007
The Impact Of Currency Conversions
The currency price of one country advances and retreats daily against another country's currency. But what exactly does that mean for those who don't trade in forex market? Currency exchange rates affect travel, exports/imports and the economy. In this article, we'll discuss the nature of currency exchange and its effect on people and the economy.
Before delving into the topic in more detail, we must first establish a constant; for demonstration purposes we will be talking about the relationship between the euro and the U.S. dollar. More specifically, we will be talking about what happens to the U.S. economy and to the economies of Europe if the euro trades markedly higher against the U.S. dollar. The assumption we will be making is that US$1 will purchase 0.7 euros.
The Impact on Travelers
If US$1 buys 0.7 euros, U.S. citizens will be more reluctant to travel across the pond. That's because everything from food to souvenirs would be more expensive - about 43% more expensive than if the two currencies were trading at parity. However, under these conditions European travelers would be much more apt to visit the United States for both business and pleasure. American businesses and governments (via taxes) in the areas that European tourists visit will prosper - even if just for a season. (To read more about traveling, see Travel Tips For Keeping You And Your Money Safe.)
The Impact on Corporations and Equities
The impact that this scenario would have on corporations (particularly large multi-nationals) is a little more complex because these businesses often conduct transactions in a number of different currencies and tend to obtain their raw materials from a wide variety of sources. That said, U.S.-based companies that generate the majority of their revenue in the U.S. (but that source their raw materials from Europe) would likely see their margins take a hit on higher costs. (To read more on this subject, see Commodity Prices And Currency Movements and Global Trade And The Currency Market.) Similar pain would be felt by U.S. companies that must pay their employees in euros. And by definition, these decreased margins would likely have an adverse impact on overall corporate profits, and therefore on equity valuations in the domestic market. In other words, stock prices may drop due to these lower earnings and forecasts for future profit potential.
On the flipside, U.S. companies that have a hefty overseas presence and draw in a significant amount of revenue in euros (as opposed to dollars), but pay their employees and other expenses in U.S. dollars could actually fare quite well.European companies that generate the lion's share of their revenue in euros but who also source their materials or employees from the United States as part of their business would likely see margin expansion as their costs and currency decrease. By definition, this could lead to higher corporate profits and equity valuations in some overseas stock markets. However, European companies that garner a significant amount of their revenue from the United States and must pay their expenses in euros are likely to suffer.
The Impact on Foreign Investment
Under these assumptions, it is likely that Europeans (both individuals and corporations) would expand their investment in the United States. They would also be better suited to make acquisitions of U.S.-based businesses and/or real estate. In fact, this has happened at several points in the past. For example, when the Japanese yen traded at record highs against the dollar back in the 1980s, Japanese firms made significant purchases of real estate - including the world-renowned Rockefeller Center.
Conversely, U.S. corporations would be less apt to acquire a European company or European real estate under US$1 for 0.70 euros scenario.
How can you protect yourself from currency moves?
When planning a trip, check the most up-to-date currency conversion before they book their vacations so they can plan their choice of locations appropriately. (There are many ways of finding out local currency rates, including looking in the business section of your local newspaper, checking with a travel agency or searching the internet.) Incidentally, one of the best tips for travelers making purchases overseas is to use a credit card. The reason behind that is that credit card companies tend to negotiate the best rates and the most favorable conversions because they do such a high volume of transactions. These companies take out all the guess work for you, paving the way for smoother (and probably less expensive) transactions. (For more information about foreign currencies, check out Get To Know The Major Central Banks.)
For small and large business owners operating in the U.S. that source some of their raw materials from Europe, one of the best moves can be to stock certain supplies if the price of the euro starts to climb rapidly against the dollar. Conversely, if the euro starts falling against the dollar, it may make sense to keep inventory at a minimum in the hope that the euro will decline enough for the company to save on its purchased goods.
Bottom Line
Over time, currency values can vary quite dramatically. However, individuals, investors and business owners can take steps to mitigate risks and take advantage of such currency movements.
Monday, November 26, 2007
Profits in Small-Cap Stock: Where You Have the Advantage Over Warren Buffet
What if I said I could make you 50% a year? Scratch that. What if I told you that I know I could? Better yet, I'll do it using nothing more than publicly traded stocks that any retail buyer can pick up.
But there's a catch.
It can't be done buying Coca-Cola, American Express, or even Berkshire Hathaway. Instead, you have to back up the truck on lightly followed small cap stocks -- the very ones where retail investors have the advantage over institutions.
In fact, in this situation, you even have an advantage over Wall Street maven Warren Buffett. He may be the world's second richest man next to Bill Gates. Everything he's touched turned to gold -- Coca Cola, Berkshire Hathaway, GEICO, Gillette, The Washington Post, and American Express. He's regarded as godlike by Wall Street, with the power to move markets with his words.
Small-cap envy
But his billions are keeping him from buying the very stocks he wants to buy. And if you don't believe me, here's what he had to say in 1999.
"The universe I can't play in [small caps] has become more attractive than the universe I can play in [large caps]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."
What does that mean? It means Buffett may be a little jealous... well, just a little. He's the second richest person in America with the knowledge that mosquitoes are still producing 50% a year, as compared to large caps today. He's painfully aware that from 1925 through 2005, small cap stocks returned annual 12.6% returns, as compared to annual returns of 10.4% for large cap stocks.
Exponential profits in small caps
Truth is, exposure to small cap stocks is a necessity if you want to build a strong portfolio and accumulate lasting wealth. Even Buffett will tell you that after seeing how small cap stocks have performed from 2003 to present day.
Despite a YTD 125% move, Elixir Gaming (EGT) remains a relative unknown with exposure to the explosive Asian gaming markets. It's now trading just below multi-year highs after announcing agreements for another 700 electronic machines.
What's impressive is its exposure to Las Vegas and the growing popularity of Macau. While it's not yet profitable, buying now is the smart play. And here's what I mean: there are only two analysts covering this Asian gem.
This baby is well below Wall Street's radar.
Small caps profit from Asian gambling addiction
EGT is still a small and highly speculative name with a $162.3 million market cap and a float of 18.2 million shares. We're looking for additional investor interest once it shows up on the 52-week high lists again.
Just to give you some background on Asian gaming growth, take a look at Macau at the tail end of 2006. In less than a year, Macau saw visitor growth soar by some 12% thanks in part to a raft of casino openings in the region. And it's only expected to skyrocket even more as casino developers rain down on a region where 1.3 billion people live within a three-hour flight of Macau, and another 100 million people are within a radius of a three-hour drive, according to Macau Business News.
What does that mean for investors? Buy any company that'll be involved in Macau casino growth.
And how about the fast-exploding $900 million social networking market!
In fact, Visa, Mastercard, and American Express -- all the big players responsible for processing more than $6.6 trillion in annual credit card transactions -- have partnered with Concur. Even payment process behemoth Automatic Data Processing, has partnered up with them. Clearly, Concur has got something good going on here.
There's explosive growth appeal for Facebook, which will IPO one day along with LinkedIn and Classmates. U.S. visitors to Facebook have doubled inside a year to 33.7 million, as MySpace visitors grew 23% to 68.4 million.
But are there undervalued, under-the-radar-gems that already exist for small cap investors?
Israel's IncrediMail (MAIL) allows users to add thousands of e-mail backgrounds, Emoticons, Ecards, sounds, animations and 3D effects to e-mail. It's fun for the younger generations who are flooding the social networking scene. But here's why investors should pay attention.
IncrediMail Ltd. (MAIL) has been flying under the radar since early 2006, all the while posting impressive growth and profitability. Numbers prove it's just beginning to scratch the surface of long-term profitability.
Q2 2007 revenue increased 111% to $4.3 million. Six-month revenue soared 106% to $8.7 million. And net was up 59% to $600,000, thanks in part to advertising revenues, which just hit $1.9 million and growing. Insiders are loading up. There's no debt, and $28.7 million in cash on hand. And there's a severe shortage of analyst coverage.
For a profitable company to be growing its bottom line that fast, this is a steal. And it doesn't hurt that other Internet companies have shown real interest, including (from what I've heard), Facebook.
But there's a catch.
It can't be done buying Coca-Cola, American Express, or even Berkshire Hathaway. Instead, you have to back up the truck on lightly followed small cap stocks -- the very ones where retail investors have the advantage over institutions.
In fact, in this situation, you even have an advantage over Wall Street maven Warren Buffett. He may be the world's second richest man next to Bill Gates. Everything he's touched turned to gold -- Coca Cola, Berkshire Hathaway, GEICO, Gillette, The Washington Post, and American Express. He's regarded as godlike by Wall Street, with the power to move markets with his words.
Small-cap envy
But his billions are keeping him from buying the very stocks he wants to buy. And if you don't believe me, here's what he had to say in 1999.
"The universe I can't play in [small caps] has become more attractive than the universe I can play in [large caps]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."
What does that mean? It means Buffett may be a little jealous... well, just a little. He's the second richest person in America with the knowledge that mosquitoes are still producing 50% a year, as compared to large caps today. He's painfully aware that from 1925 through 2005, small cap stocks returned annual 12.6% returns, as compared to annual returns of 10.4% for large cap stocks.
Exponential profits in small caps
Truth is, exposure to small cap stocks is a necessity if you want to build a strong portfolio and accumulate lasting wealth. Even Buffett will tell you that after seeing how small cap stocks have performed from 2003 to present day.
Despite a YTD 125% move, Elixir Gaming (EGT) remains a relative unknown with exposure to the explosive Asian gaming markets. It's now trading just below multi-year highs after announcing agreements for another 700 electronic machines.
What's impressive is its exposure to Las Vegas and the growing popularity of Macau. While it's not yet profitable, buying now is the smart play. And here's what I mean: there are only two analysts covering this Asian gem.
This baby is well below Wall Street's radar.
Small caps profit from Asian gambling addiction
EGT is still a small and highly speculative name with a $162.3 million market cap and a float of 18.2 million shares. We're looking for additional investor interest once it shows up on the 52-week high lists again.
Just to give you some background on Asian gaming growth, take a look at Macau at the tail end of 2006. In less than a year, Macau saw visitor growth soar by some 12% thanks in part to a raft of casino openings in the region. And it's only expected to skyrocket even more as casino developers rain down on a region where 1.3 billion people live within a three-hour flight of Macau, and another 100 million people are within a radius of a three-hour drive, according to Macau Business News.
What does that mean for investors? Buy any company that'll be involved in Macau casino growth.
And how about the fast-exploding $900 million social networking market!
In fact, Visa, Mastercard, and American Express -- all the big players responsible for processing more than $6.6 trillion in annual credit card transactions -- have partnered with Concur. Even payment process behemoth Automatic Data Processing, has partnered up with them. Clearly, Concur has got something good going on here.
There's explosive growth appeal for Facebook, which will IPO one day along with LinkedIn and Classmates. U.S. visitors to Facebook have doubled inside a year to 33.7 million, as MySpace visitors grew 23% to 68.4 million.
But are there undervalued, under-the-radar-gems that already exist for small cap investors?
Israel's IncrediMail (MAIL) allows users to add thousands of e-mail backgrounds, Emoticons, Ecards, sounds, animations and 3D effects to e-mail. It's fun for the younger generations who are flooding the social networking scene. But here's why investors should pay attention.
IncrediMail Ltd. (MAIL) has been flying under the radar since early 2006, all the while posting impressive growth and profitability. Numbers prove it's just beginning to scratch the surface of long-term profitability.
Q2 2007 revenue increased 111% to $4.3 million. Six-month revenue soared 106% to $8.7 million. And net was up 59% to $600,000, thanks in part to advertising revenues, which just hit $1.9 million and growing. Insiders are loading up. There's no debt, and $28.7 million in cash on hand. And there's a severe shortage of analyst coverage.
For a profitable company to be growing its bottom line that fast, this is a steal. And it doesn't hurt that other Internet companies have shown real interest, including (from what I've heard), Facebook.
Saturday, November 24, 2007
Let's Talk Shares!
You would have heard adults talking about shares or the stock market. They are a favourite and frequent conversation topic among grown-ups - just as much as you would debate about the latest music or movie sensation in town. You probably don't know what shares are exactly, but you would have an idea from the reactions of the adults that they can bring tremendous joy or great grief - and it all has to do with making money (that's bringing joy) or losing money (that's bringing grief)!
Like when your mother is pleased with the stock market and nothing can spoil her good mood, not even when you accidentally break her favourite casserole dish. But if she has lost money in the stock market, you know to stay clear away or she would pounce on you for even the way you sit on the sofa!
Well, if you're slouching now, sit up! Read on so that you can understand shares. You already know the two smart moves you could do with your money - first, to start saving and second, to invest your savings to make your money grow. Well, buying shares is one of the ways to invest your savings.
What are Shares?
Ownership of companySo, let's get started with the basic question, "What is a share or what is a stock?" Stock or sometimes called equity, is ownership of a company. Shares of stock represent pieces of ownership of a company that are sold to the public (like your parents or any adult who is interested to buy them). Here in Malaysia, the words 'share' and 'stock' are sometimes used interchangeably to mean the same thing.
When you buy shares, you are buying a proportion of the ownership of a company, and you become a shareholder of the company, or part owner of the company. For example, let's say a Mr Bong owns a sports shoe company called Nikee Shoes where he has divided ownership into one million shares of stock. If you buy 1,000 of his shares, you thus own one-thousandth of Nikee Shoes. Likewise, if your mother has bought some shares of the real company KFC Holdings (Malaysia) Berhad, you can go around telling your friends that mum owns a slice of their favourite fast food chain KFC, and you will be telling the truth!
But for you to be able to buy some of its stock, a company must be willing to sell some shares. So the question that probably pops up in your mind is why would a company want to sell part of its ownership? We ask you, why would anyone sell something? To get money in return, right? So it is with a company selling its stock. A company needs money (or what is known as capital in economics) to carry out its business.
Raising money
Let's go back to the example of Nikee Shoes. After a few years making athletic shoes, Mr Bong wants to expand his business by manufacturing casual shoes that produce(can squeak out) the latest hip tunes. He thinks it is a great idea that will be a hit with the younger population but he needs more funds/capital to manufacture them. There are, of course, many ways to raise the additional capital that he wants: sell some property, borrow the money from the bank (the interest rate might be too high) or he could use savings that the company has set aside from
the profits earned earlier. If any of these options doesn't appeal to Mr Bong, he can opt for another way to raise the funds he needs - by selling a part of the ownership of Nikee Shoes through selling some shares of its stock. That's why a company would give up part of its ownership.
Initial Public Offering or IPO
When a company first decides to sell part of its equity, it determines a suitable price for that amount of shares based on the company's worth, and offers to sell those shares to the public through what is known as an Initial Public Offering or IPO. Thus the public first gets to buy the shares of a company or to first become shareholders of a company through an IPO. The money that these shareholders pay for the IPO shares - that is, the funds raised from an IPO - goes to the company for financing its operations. Referring to our example of Nikee Shoes, let's say that Mr Bong has worked out that he needs RM100,000 to manufacture the casual-musical shoes. So what does he do? He offers 10,000 shares of Nikee Shoes to be sold at RM10 a share in an IPO:
10,000 shares x RM10 a share = RM100, 000. (That's the amount of capital needed to manufacture the musical shoes).
10,000 shares x RM10 a share = RM100, 000. (That's the amount of capital needed to manufacture the musical shoes).
In this way, Mr Bong gets the funds he needs to finance his musical shoes venture. However the sacrifice that he has to make to get those funds is that after the IPO, he no longer owns every inch of his company. Now 0.01 per cent (10,000 shares divided by 1,000,000 shares) of Nickee Shoes is owned by others. But the way Mr Bong has thought it out - giving up a tiny part of the equity is nothing compared to the tons of money that he fervently believes his musical shoes will rake in for him!
How Investors Often Cause The Market's Problems
Sure, the economy sometimes hits a slump, whether because of a war (pick a year) or unforeseen natural disaster (say the drought in the 1930s). Of course, these things are beyond an investor's control. But turbulence in the market can often be linked not to any perceivable event but rather to investor psychology. A fair amount of your portfolio losses can be traced back to your choices and the reasons for making them, rather than unseen forces of evil that we tend to blame when things go wrong. Here we look at some of the ways investors unwittingly inflict problems on the market.
Following the Crowd
Humans are prone to a herd mentality, conforming to the activities and direction of others. This is a common mistake in investing. Imagine you and a dozen other people are caught in a theatre that's on fire. The room is filled with smoke and flames are licking the walls. The people best qualified to get you out safely, such as the building owner or an off-duty firefighter, shy away from taking the lead because they fear being wrong and they know the difficulties of leading a smoke-blinded group.
Then the take-charge person steps up and everyone is happy to follow the leader. This person is not qualified to lead you to the local 7-11, let alone get you out of an unfamiliar burning building, so, sadly, you are more likely to end up as ash than find your way out. This tendency to panic and depend on the direction of others is exactly why problems arise in the stock market, except we are often following the crowd into the burning building rather than trying to get out. Here are two actions caused by herd mentality:
1. Panic Buying - This is the hot-tip syndrome, whose symptoms usually show up in buzzwords such as "revolution", "new economy", and "paradigm shift". You see a stock rising and you want to hop on for the ride, but you're in such a rush that you skip your usual scrutiny of the company's records. After all, someone must have looked at them, right? Wrong. Holding something hot can sometimes burn your hands. The best course of action is to do your due diligence. If something sounds too good to be true, it probably is.
2. Panic Selling - This is the "end of the world" syndrome. The market (or stock) starts taking a downturn and people act like it's never happened before. Symptoms include a lot of blaming, swearing, and despairing. Regardless of the losses you take, you start to get out before the market wipes out what's left of your retirement fund. The only cure for this is a level head. If you did your due diligence, things will probably be okay, and a recovery will benefit you nicely. Tuck your arms and legs in and hide under a desk as people trample their way out of the market.
We Can't Control Everything
Although it is a must, due diligence cannot save you from everything. Companies that become entangled in scandals or lie on their balance sheets can deceive even the most seasoned and prudent investor. For the most part, these companies are easy to spot in hindsight (Enron), but early rumors were subtle blips on the radar screens of vigilant investors. Even when a company is honest with an investor, a related scandal can weaken the share price. Omnimedia, for example, took a severe beating for Martha Stewart's alleged insider activities. So bear in mind that it is a market of risk.
Holding Out for a Rare Treat
Gamblers can always tell you how many times and how much they've won, but never how many times or how badly they've lost. This is the problem with relying on rewards that come from luck rather than skill: you can never predict when lucky gains will come, but when they do, it's such a treat that it erases the stress (psychological, not financial) you've suffered.
Investors can fall prey to both the desire to have something to show for their time and the aversion to admitting they were wrong. Thus, some investors hold onto stock that is losing, praying for a reversal for their falling angels; other investors, settling for limited profit, sell stock that has great long-term potential. The more an investor loses, however, the larger the gain must be to meet expectations.
One of the big ironies of the investing world is that most investors are risk averse when chasing gains but become risk lovers when trying to avoid a loss (often making things much worse). If you are shifting your non-risk capital into high-risk investments, you're contradicting every rule of prudence to which the stock market ascribes and asking for further problems. You can lose money on commissions by overtrading and making even worse investments. Don't let your pride stop you from selling your losers and keeping your winners.
Xenophobia
People with this psychological disorder have an extreme fear of foreigners or strangers. Even though most people consider these fears irrational, investors engage in xenophobic behavior all the time. Some of us have an inborn desire for stability and the most seemingly stable things are those that are familiar to us and close to home (country or state).
The important thing about investing is not familiarity but value. If you look at a company that happens to look new or foreign but its balance sheet looks sound, you should not eliminate the stock as a possible investment. People constantly lament that it's hard to find a truly undervalued stock, but they don't look around for one; furthermore, when everyone thinks domestic companies are more stable and try to buy in, the stock market goes up to the point of being overvalued, which ironically assures people they're making the right choice, possibly causing a bubble. Don't take this as a commandment to quit investing domestically; just remember to scrutinize a domestic company as closely as you would a foreign one.
Following the Crowd
Humans are prone to a herd mentality, conforming to the activities and direction of others. This is a common mistake in investing. Imagine you and a dozen other people are caught in a theatre that's on fire. The room is filled with smoke and flames are licking the walls. The people best qualified to get you out safely, such as the building owner or an off-duty firefighter, shy away from taking the lead because they fear being wrong and they know the difficulties of leading a smoke-blinded group.
Then the take-charge person steps up and everyone is happy to follow the leader. This person is not qualified to lead you to the local 7-11, let alone get you out of an unfamiliar burning building, so, sadly, you are more likely to end up as ash than find your way out. This tendency to panic and depend on the direction of others is exactly why problems arise in the stock market, except we are often following the crowd into the burning building rather than trying to get out. Here are two actions caused by herd mentality:
1. Panic Buying - This is the hot-tip syndrome, whose symptoms usually show up in buzzwords such as "revolution", "new economy", and "paradigm shift". You see a stock rising and you want to hop on for the ride, but you're in such a rush that you skip your usual scrutiny of the company's records. After all, someone must have looked at them, right? Wrong. Holding something hot can sometimes burn your hands. The best course of action is to do your due diligence. If something sounds too good to be true, it probably is.
2. Panic Selling - This is the "end of the world" syndrome. The market (or stock) starts taking a downturn and people act like it's never happened before. Symptoms include a lot of blaming, swearing, and despairing. Regardless of the losses you take, you start to get out before the market wipes out what's left of your retirement fund. The only cure for this is a level head. If you did your due diligence, things will probably be okay, and a recovery will benefit you nicely. Tuck your arms and legs in and hide under a desk as people trample their way out of the market.
We Can't Control Everything
Although it is a must, due diligence cannot save you from everything. Companies that become entangled in scandals or lie on their balance sheets can deceive even the most seasoned and prudent investor. For the most part, these companies are easy to spot in hindsight (Enron), but early rumors were subtle blips on the radar screens of vigilant investors. Even when a company is honest with an investor, a related scandal can weaken the share price. Omnimedia, for example, took a severe beating for Martha Stewart's alleged insider activities. So bear in mind that it is a market of risk.
Holding Out for a Rare Treat
Gamblers can always tell you how many times and how much they've won, but never how many times or how badly they've lost. This is the problem with relying on rewards that come from luck rather than skill: you can never predict when lucky gains will come, but when they do, it's such a treat that it erases the stress (psychological, not financial) you've suffered.
Investors can fall prey to both the desire to have something to show for their time and the aversion to admitting they were wrong. Thus, some investors hold onto stock that is losing, praying for a reversal for their falling angels; other investors, settling for limited profit, sell stock that has great long-term potential. The more an investor loses, however, the larger the gain must be to meet expectations.
One of the big ironies of the investing world is that most investors are risk averse when chasing gains but become risk lovers when trying to avoid a loss (often making things much worse). If you are shifting your non-risk capital into high-risk investments, you're contradicting every rule of prudence to which the stock market ascribes and asking for further problems. You can lose money on commissions by overtrading and making even worse investments. Don't let your pride stop you from selling your losers and keeping your winners.
Xenophobia
People with this psychological disorder have an extreme fear of foreigners or strangers. Even though most people consider these fears irrational, investors engage in xenophobic behavior all the time. Some of us have an inborn desire for stability and the most seemingly stable things are those that are familiar to us and close to home (country or state).
The important thing about investing is not familiarity but value. If you look at a company that happens to look new or foreign but its balance sheet looks sound, you should not eliminate the stock as a possible investment. People constantly lament that it's hard to find a truly undervalued stock, but they don't look around for one; furthermore, when everyone thinks domestic companies are more stable and try to buy in, the stock market goes up to the point of being overvalued, which ironically assures people they're making the right choice, possibly causing a bubble. Don't take this as a commandment to quit investing domestically; just remember to scrutinize a domestic company as closely as you would a foreign one.
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