Mobilizing Savings for Investment

Stock exchange or bourse is a mutual organization which provides facilities for stock brokers and traders, in trading company stocks and other securities, and for the issue of redemption of securities and other financial tools and capital events like the payment of income and dividends.

• Government & Corporate Bonds Investment
  Most people know about the basics of investing in the stock market but many people are puzzled as to what bonds are. In one word a bond is a loan. The loans can be form

The securities traded on a stock exchange include shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.

Usually there is a central location at least for record keeping, but trade is less linked to such a physical place. Electronic networks run modern markets are, providing them great speed and cost of transactions.

Stock exchange is often called the most important element of a stock market. The Demand and Supply in the stock markets is attracted by number of factors that affect the price of stocks.

Mobilizing savings for investment:
When people draw their savings and invest in shares, it leads to a more balanced allotment of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized to promote business activity that benefits several economic sectors like agriculture, commerce and industry, resulting in a stronger economic growth.

History of stock exchanges:
In 12th century France, the courratiers de change were concerned with managing the debts of agricultural communities on behalf of the banks and these men also traded in debts. These men were the first brokers. In the middle of the 13th century, Venetian bankers traded in government securities. In 1351, the Venetian Government outlawed spreading rumors about lowering the price of government funds. Because of this rumor people in Pisa, Verona, Genoa and Florence also started trading in government securities which was possible because there were independent city states ruled by a council of powerful citizens during the 14th century.

Raising capital for businesses:
The Stock Exchange helps current and newly-formed companies raise capital for building and expanding their business through selling shares to the investing public.

Creating investment opportunities for small investors:
The Stock Exchange provides opportunity for small investors like the big investors to own shares of the same or different companies.

Government capital-raising for development projects:
Governments at various levels may decide to borrow money for financing infrastructure projects like sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds are raised through the Stock Exchange where public buy them, thus loaning money to the government. The issuance of such municipal bonds can prevent the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Listing requirements:
Listing requirements are the set of conditions forced by any given stock exchange upon companies that want to be listed on that exchange.

Requirements by stock exchange:
For companies to have their stock and shares listed at the stock exchange have to meet certain requirements of the exchange. But requirements vary in different exchanges.

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Shorting Stock: What are the Basics of & How to do it?

You need a securities brokerage account before you can trade stocks, bonds, options or other financial instruments.

How to Make Money Selling Stocks Short (Wiley Trading) by William J. O'Neil, Gil Morales The mechanics of short selling are relatively simple, yet virtually no one, including most professionals, knows how to sell short correctly. In How to Make Money Selling Stocks Short, William J. O'Neil offers you the information needed to pursue an effective short selling strategy, and shows you with detailed, annotated charts on how to make the moves that will ultimately take you in the right direction.

There are many reputable discount brokers that will establish an on-line account for you. You can open the account without depositing any funds, but, obviously, you must fund the account before you can trade securities. Normally, a new account must be funded with a minimum of about $1000. Some may let you start with a minimum of $500.

If you don’t want to trade on-line, your discount brokerage account is usually also accessible via touch-tone phone, either via automated menu or dealing directly with an account representative. Be aware that on-line commissions are generally the cheapest, with phone commissions being a little higher. You’ll pay the highest commissions if you deal directly with a human account representative.

Normally, if you are inexperienced in trading securities, you broker will restrict the type of securities you can trade in your new account. Novice investors are usually only allowed to buy shares of stock, and later sell shares they bought previously.

Options for the Stock Investor by James B. Bittman Straightforward option strategies that reduce your risk and increase your profit potential in virtually any investing or trading program, provide you with new option techniques and strategies, this comprehensive handbook explores: Risk-reduction strategies for conservative investors, including buying calls and covered writing Profit-generating strategies for aggressive traders, including vertical spreads, straddles, and strangles Flexible strategies for improving your risk/return profile, including covered straddles, covered combos and ratio spreads

After the account has been active for awhile, investors must ask their broker, in writing, for permission expand the account’s capabilities, such as trading stocks on margin or trading options. It’s not likely that many brokers will permit new investors to “short” stocks.

Short selling, or “shorting” a stock, is, simply, selling shares of stock you do not own. It’s where you, the investor, have identified a stock whose price you expect will fall. You want to profit from the price decline, so you ask your broker to permit you to sell the stock, even though you don’t own any shares of it.

If your broker has granted your permission to sell short in your account, he will either loan you the shares from his portfolio, or he will have to enter the market to see if he can find shares to borrow for you to sell short.

Most likely your short sale will be subject to a time limit, perhaps 30 or 60 days, at the end of which you will have to buy the shares back to repay the loan of the shares you sold short. Buying stock you have previously sold short is called “covering” or “short covering”.

Borrowing stock to short is similar to trading stocks on “margin”, which is when you put up part, say 50%, of the purchase price, and your broker loans you the other 50 percent. If you “short” stocks, don’t be surprised if your broker charges you interest, probably at the same rate as a “margin” trade, on the dollar value of the borrowed shares.

So, for a simple example, if you short 100 shares of XYZ Corporation at $10 per share, your account is credited $1000. Then, if the price declines, as you expect, to, say, $6 per share, you buy the 100 shares and your account is debited $600. You keep the difference, which is $400 (minus your broker’s commissions and interest).

But, if you guess wrong and the stock price goes to $14 per share, you are $400 down on this deal. Remember, you may be working under a time limit for replacing the shares you shorted. Let’s say your time’s up and you must replace the shares at $1400. You must come up with $400, in addition to the $1000 you got when you shorted the stock, to buy the stock back (“cover the short”). In this case, you have lost $400 (plus commissions and/or interest).

Even if you do not have a time limit for covering, you need to decide in advance how long you will stay short if the price goes against you (up). A general rule of successful investors is to bail out of a position if the price goes against you by 5 to 10 percent.

An alternative to selling short is to buy “put” options. “Options” are the right, but not the obligation, to buy or sell a stock at a fixed price, called the “strike” price, before the date the option expires. Buy options are “calls”, sell options are “puts”.

Options are bought and sold in “contracts”. One contract “controls” 100 shares of the associated stock.

Put and call options are not available on all stocks. As a rule, a stock must have a substantial daily trading volume, perhaps 500,000 shares or more, before an options market will develop for it.

You can go two ways with options. If the price of the associated stock moves they way you had hoped, you can instruct your broker to “exercise” the put - sell the stock at the strike price and buy it back at its current price, which is lower than the strike price. If you exercise your put option, you profit on the difference between the strike price of the stock and the price you buy it back at, but you eat what you paid for the put.

Or, you can simply trade options as if you were trading stocks. If you buy a put expecting the price of the associated stock to fall, and it does, then the put will increase in value. You can sell the put at a profit under 2 conditions: It has not expired, and there is a buyer willing to buy it.

Be advised that broker commissions for options are higher than for stocks.

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Guide to Buying / Selling Stock

When to sell a stock is very difficult to know exactly when to sell. There has not been a lot of research on the subject, and when asking advice from a broker you usually get an answer like, “ Let’s watch for a few more days”, or “ It’s not doing well right now but let’s watch it a little bit more.” You never can get a straight answer. There are a few things to keep in mind; you must watch your stock. It is your money and no one is going to look after it better than you do. If the stock you have bought has gone up, there are two ways you can go, sell and take the profit or let it ride.

When it comes to determining how well an individual stock is going to be, look at the trend of the stock. The most important thing to look for is failure. A stock that has tried several times to make come back after a high sell, but sells lower each time is considered a failure. The stock must sell below the price level that it sold for the previous failure. This defines the stock’s trend as down not up.

When you have a failure, do not let the stock sit too long. Sell and sell fast, do not put it aside in hopes that it will come back up if you hold on to it long enough. This is a warning sign that you must heed to if you hope to recuperate any of your investment. The game of stocks entitles you to where you do not have to be concerned about what and why the stock is not doing well. When you have made that decision to sell you have made an objective decision, now stick to it and sell.

The best time to decide to sell is when the stock market has closed for the day, this way you will not let every up and down affect your decision emotionally. When you make the decision to sell use what is called a protective stop order. To issue a protective stop order all you have to do is notify your broker, tell him that when the stock drops below a certain point to automatically sell the stock.

Stock orders can and are used every day very effectively. You can use the system of stock orders when stock rises also. A stock order may be issued each time the price advances, all you have to do is cancel the old stop order and enter a new one. It is best to keep in contact with your broker if you decide to use stock orders. There is an important rule or stock secret to remember, when you decide to issue stop order either to sell or to buy, remember to set the stop order ten percent either below or above the current stock market price.

When the decision to sell is made keep in touch with your broker to make sure all transactions are handled professionally.

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What are Key Investment Ratios?

One aspect of smart investing is being able to determine whether or not a company is a healthy company in general and not just this past year. You also want to know if a stock is really a bargain or not. Stock price and dividends are good to know, but not the only pieces of information you need to make sound, long-term investment decisions. A good year of either doesn’t mean there will be more.

Magic Numbers: The 33 Key Ratios That Every Investor Should Know by Peter Temple Provides a straightforward primer to calculating and interpreting 33 key investment ratios. The book is organized into five sections that explain market-based ratios (e.g., market capitalization, P/E ratios), income statement ratios (margins, earnings per share), balance sheet rations (price/cash ratio, burn rate), cash flow ratios, and risk and volatility ratios. Each chapter clearly shows the inputs necessary to calculate a particular ratio and explains its relevance in evaluating a company's performance.

When making a decision about where to put their money, savvy investors use ratio analysis. There are three kinds of ratio analysis:

• Profitability Ratios: measure how much profit a company generates
• Gearing Ratios: assess a company’s leverage
• Liquidity Ratios: measure the ability of a company to meet its debts
• Investment Ratios: measure the performance of the overall business.

This article focuses on investment ratios. There are countless ratios you can know about, but those referred to as the key investment ratios are the ones that will help the basic investor get the information they need to make a sound decision. The good thing is that most of the information you need to do these ratio’s calculations can be found in the financial statement, annual report or balance sheet of the company whose stock you’re investigating.

P/E Ratio is the ratio most people are familiar with and helps one determine whether or not a stock is too expensive or a really good deal by looking at the earnings relative to stock price. You divide the current stock price by the last four quarter’s earnings. If your company’s stock is trading at $20 a share with a .50cent EPS (earnings per share), your P/E Ratio is 40. A low P/E ratio means the company is undervalued and the stock is probably a good deal. If the P/E ratio is too high, the company is overvalued and you probably don’t want to pay more for a stock than its worth.

Return On Equity is a simple calculation that allows an investor to look into the profitability, asset management and financial leverage of a company. A company’s ability to maintain good levels within these groups signify a good investment for many. For ROE, you divide a year’s worth of earnings by the average shareholder’s equity (found on the company balance sheet) for that same year.

Earnings per share (EPS) is the most basic ratio and probably the simplest. You divide the number of average shares outstanding by net income minus the dividends on preferred stock. So, if a company’s post-tax profits are $1.2 million and there are 20 million shares issued, the EPS is .06. You’re looking for smooth, consistent growth here.

Dividend Payout Ratio calculates the percentage of earnings paid to shareholders by dividing earnings per share by yearly dividends per share or dividing net income by dividends. More mature companies have a higher payout ratio and if you’re looking to use dividend payments as income, this is important.

P/E Growth Ratio is used to determine a stock’s value while considering earnings growth. You divide annual EPS growth by the P/E ratio. A lot of managers prefer this to the P/E ratio because of the growth component.

Net Asset Value (NAV) is a ratio for mutual funds and equals the total value of the fund’s portfolio less liabilities. You’ll get this dollar amount by dividing the current market value of a fund’s net assets by the number of shares outstanding. So, if your fund has net assets of $100 million and there are one million shares in the fund, the NAV is $100.

Return On Investment (ROI) is what a company does with assets to generate additional value for shareholders. It is a percentage ratio calculated as net profit divided by net worth. It is also defined as a measure of a corporation’s profitability. If a $100 stock returns $15 a year, your ROI is 15%. Obviously, you want this percentage to be as high as possible.

Profit Margin is a calculation that fits into investment ratios as a key indicator of profitability. Usually displayed as a percentage, profit margin is calculated as net earnings after taxes divided by revenues and is useful when you want to compare stocks within a particular industry to those in similar industries. As you’ve guessed, a higher margin indicates a more profitable company.

Turnover Ratio is a measure of the number of times a company's inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold divided by average inventory during the time period. A high turnover ratio is a sign that the company is producing and selling its goods or services very quickly.

Leverage Ratio (also referred to as Debt To Equity Ratio) is found by dividing the company’s total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A company is likely able to make its interest payments on debt regardless of a moderate sales decline if their leverage ratio is under 50 percent. A company with a higher leverage ratio can offer greater returns to shareholders but can also be riskier.

Dividend Yield is a percentage ratio of a company’s annual cash dividends divided by its current stock price. To get your annual cash dividend, you multiply the next expected quarterly dividend by four. If a $100 stock pays $2.50 quarterly, then your annual cash dividend is $10. Divide this by $100 and you get your dividend yield: 10%.

Market Capitalization, the current market value of a company’s outstanding shares, can be found by multiplying the number of outstanding shares by the current price of each share. A company with 1 million shares outstanding, trading at $75 per share, has a market cap of $75 million.

Current Ratio can be calculated by dividing current assets by current liabilities. You would use this ratio to see if the company can pay their current debts without going against future earnings. You’ll want to see a ratio of 1 or higher here.

Price To Book Value Ratio is calculated by dividing the current price of a stock by the book value. Book value, an accounting term, is the net asset value of a company. Whether the ratio is high or low could be a result of a company being old or a new start up with stock that hasn’t yet depreciated. It’s not a tell-all ratio, but does help in your overall research.

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Value Investing

The term "value investing" is usually mentioned opposite another investment strategy, "growth investing." Really understanding the difference between the two strategies requires a little bit of investment theory.

The price of a stock (just like the price of any other financial instrument) is supposed to equal the present value of its future cash flows. "Present value" refers to the concept that a dollar today is worth more than a dollar next year. "Future cash flows" refers to the amount of cash your business generates - after interest expense, after taxes, and after capital expenditures, how much cash is actually available to shareholders?

Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema Explores the history and principles of value investing, and sets up guidelines for its successful application. Discusses where to look for underpriced securities, how to determine the intrinsic value of a stock, and alternative methods for constructing a portfolio that control risk without restricting investment return.

Value investing and growth investing differ in the pattern of expected future cash flows of the company. Value investing involves investing in established companies that are projected to have basically stable or slightly growing cash flows. Growth investing involves buying stock in companies that are projected to grow much faster than the market as a whole - and paying a premium for those companies. The projected cash flows of growth companies are much bigger, but much further away, and hence usually riskier.

Some investors prefer the simplification that "value investing" means investing in companies with low P/E's (price-to-earnings ratios, a proxy for the amount of cash flow a company is producing) - usually under 10.0x. "Growth investing" means investing in higher P/E companies. Underlying the high P/E is the concept that an investor is paying upfront for expected growth.

It is impossible to mention "value investing" without also mentioning Warren Buffett. Buffett doesn't consider himself a value investor, but the things he watches for in investing: a solid business model, competent management, and an excellent price - are all worth watching for in your own forays into value investing.

The first thing Buffett looks for is a tried and true business model. That means a company must have established its line of business, competed successfully within its industry, and produced reliable profits for its investors year over year. Whether the business is airplane manufacturing or clothing retailing, a strong history of profits is the clearest way to demonstrate that a company's way of doing business will withstand the challenges of time. Most value investors like to target companies that have had consistent histories of profit for the past three to ten years. Looking exclusively for historically profitable businesses protects the value investor from the risks that new and unprofitable businesses represent.

The next thing to look for in a value investment is a competent, ethical management team. Ordinary investors may not have the opportunity to meet management face-to-face, but value investors can look for other ways to gain insight into a management's priorities, such as by reading the Company's "letter to shareholders" in its annual report and listening to company earnings conference calls. Value investors seek out managements that are focused on shareholder interests and capable of delivering excellent results.

If you have a stable, profitable business and a competent management team, then you're ready to move to the third critical pillar of value investing, "an excellent price." As mentioned above, value investments are usually considered those with P/E's below 10x. Ask yourself this: would you be willing to spend $10 today to earn $1 each year, every year into eternity? With a stable business, this is exactly the concept that a P/E of 10x symbolizes.

Value investing doesn't appeal to everyone. Rather than talking with friends about the latest hot medical device patent or IPO, value investors must invest time and effort looking for the best companies in traditionally stodgier industries. Rather than gleefully anticipating 30%+ returns, value investors must remain focused on the long-term cash-generating power of their portfolios. However, for investors looking to build long-term wealth in the stock market, a value investing approach will go a long way.

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Creating Cash Flow Formula for Your Investment

Many of us invest in the stock market for long term growth. However, there may be times when you need to generate some cash flow and there are some relatively safe strategies you can use to produce income. One of these strategies is known to many stock brokers as channeling.

Winning the Cash Flow War: Your Ultimate Survival Guide to Making Money and Keeping It by Fred Rewey A proven path to success for anyone seeking financial freedom in today’s challenging world

There are certain stocks that move within a specific price range in a repeatable pattern and while this can be frustrating for a long term growth investor, it provides a wonderful opportunity for those who could use some extra cash.

The following is an example to show you how this plan works. You bought a stock we will call “xyz” at four dollars a share. In a few weeks, the stock moves up to around six dollars a share before falling back down to the four dollar price range. How is this going to make you money you ask? Simply by selling the stock at six dollars. And when it falls back down around four dollars, buy again. Repeat this method over and over again, of course each time you will have more money to buy more stock.

Let’s say you bought 1,000 shares of xyz at $4.00. That would mean you had to come up with $4000.00 for your initial investment. Several weeks later, the stock has moved up to $6.00 and you sell. You now have $6,000.00 which means you have made $2,000. The stock falls

back down to $4.00 a share and you buy in again, only this time you buy 1500 shares at $4.00 which equals $6,000 cash out. When the stock rises back up to $6.00 sell again. This time you will have made $3,000.00. 1500 shares X’s 6.00 a share equals $9000.00 minus $6,000.00 equals

$3,000. See how it works? Eventually, you will build up quite a bit of money from doing this play over and over again.

However, there are a few things to keep in mind. What if you buy the stock at $4.00 and then it falls down to $3.00 and never goes back up? You will have lost money then. One way to keep this from happening is to set a stop loss order. For example, place the order so that if the stock falls below a certain price, then the stock will automatically sell before the stock can fall any lower. You will lose a little bit, but you won’t lose the whole thing, and your money will be free to do something else.

What if the stock goes higher than $9.00? Won’t you lose out on the potential to make more? When you see the stock begin to climb close to the $6.00 mark, move up your stop loss order. Be careful to not squeeze it too closely, because sometimes a stock can fall back momentarily only to surge up higher and limit your potential by selling too soon. So when the stock climbs up to $6.00 place your stop loss order at $5.75 (example only) and then if it moves on up to $6.50 then move the stop loss up to $6.25 and so on.

You should however, have a pretty good idea of when to buy and when to sell. If you wait to sell too long, thinking it will go higher, then you could lose out because the stock can drop back down quickly. Just be sure to use these strategies to keep that from happening.

I am sure many of you are now wondering where you can find these stocks? One thing you can do is buy a Wall Street Journal and the use a free Internet stock chart and then start researching the stocks. It is important to realize though that when you are starting out, especially with a small amount of money to buy stocks within the $1.00 to $15.00 ranges. You can buy more stock this way and your returns are really not that much different from the more expensive stocks at this point.

On the charts you should be able to see a repeatable pattern of the stock fluctuating between a certain price. Of course it isn’t as clear cut as it never falling below 4.00 or rising only up to $6.00. You should take a piece of paper and place it horizontally across the chart and see how many times it has hit a certain price, also where the basic support line is at the bottom price range also.

Take your time and be patient. Research your companies well. Keep in mind here though that many lower priced stocks up to $5.00 don’t always have just a whole lot of information. Only use money that you can afford to gamble with a little bit. But if you will use these strategies, then you should be able to greatly reduce the risk of losing which will enhance your chances of creating a steady stream of cash flow.

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Buying Blue Chips as An Investment

When people on Wall Street talk about “Blue Chips” they refer not to an assortment of fancily colored crunchy munchies, rather, they speak of the most valuable and stable stocks on the stock market. The phrase “Blue-Chip” originated in 1904 and comes from the blue chips people used as the highest bidding chip in the game of poker. Blue-chip stocks are still considered by many in the industry to be the highest bidding chips in the investing game.

Blue-Chip stocks are large-cap companies, meaning their market price, a value achieved by calculating the number of shares outstanding by the price of one individual share, exceeds five billion dollars. Not all companies represent large-cap stocks; there are three other descending categories of capitalization; mid-cap for companies totally between one and five billion, small-cap for companies at the two-hundred fifty million to one billion mark, and lastly, micro-cap companies, those whose value is below two-hundred and fifty million.

Many of these Blue-Chip corporations are found in the market indexes. There are several indexes on the market, the two main being The Dow Jones Industrial Average and the S&P Index. The Dow is the most popular market index. It is comprised of the shares of thirty public U.S. companies from a variety of industries—industries ranging from computer manufacturing to fountain drink production. Some of the companies that are considered Blue-Chip and that make up the Dow are American Express, AT&T, Boeing, Caterpillar, CitiGroup, ExxonMobil, General Electric, Hewlett-Packard, Home Depot, Wal-Mart, 3M, Intel, IBM, Disney, and United Technologies. This partial list of thirty shows represents a popular measure against which an investor makes his or her decisions. Some investors not only use the Dow as a comparison tool, rather, they make their most significant investments in the index itself.

Popular Blue-Chip stocks are also found on the S&P, which is another market index. The S&P is composed of five-hundred companies based not just on market cap, rather, the percent of influence a company has within its own industry. A stock may be part of the DJIA index but may not be included on the S&P if another company within its industry outperforms it. Some of the industries covered by the S&P are telecommunications, health care, biotechnology, food and beverage, and consumer brands. Like the Dow, the S&P attracts many investors not only because of its value as a stock performance index, but as a source of solid investment.

Blue-chip stocks, particularly those found on the Dow and S&P are popular choices for investors because of their potential to outperform the market. Investing in large-cap companies is generally less risky than buying smaller, lesser-known stocks. For instance, companies that have already proven their salt; a UPS or an American Express, will likely provide a stable investment for you where as a relatively new company with no history can prove volatile and unsuccessful. With Blue-Chip stocks the income may be gradual and profits will take quarters and years to realize, you have made a reliable, long-term, high yield investment. Blue-Chip stocks do carry a greater risk due to their high price-per-share cost when compared to micro-cap companies, however, they are generally safer picks due to their predictability and tendency to stay on top of the market.

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What is Bond Ratings

When any lending institution makes a loan to a consumer for an expensive purchase like a house or a car, the institution evaluates the borrower’s credit. Since the goal is for the institution to be paid back in full with interest, the institution tries to make sure that the borrower is currently financially able to meet the payment schedule and that the borrower has a track record for paying back loans on time. In other words, the bank or other institution evaluates the credit risk of any loan made to that borrower. Credit risk is a measure of the likelihood the borrower will default on the loan, causing the lending institution to lose money.

The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More by Annette Thau Provides investors with the information and tools they need to make bonds a comforting, important, and profitable component of their portfolios. Thoroughly revised, updated, and expanded from its best selling first edition, this all-in-one sourcebook includes: A new section on using the Internet to research, buy, and sell bonds A new chapter devoted to increasingly popular foreign bonds Detailed information on the inflation-linked Treasury bonds Explanation of the new categories of bond funds Tips on how to evaluate and buy bond funds

Bond ratings are a gauge of the credit risk you take as a bond purchaser. When you buy bonds, you are essentially making a loan to the issuer of the bonds. As an investor in bonds, your goal is to get your money back with interest. If the government, municipality, or corporation that issued your bond becomes insolvent and cannot pay what it owes to its creditors, you stand a chance of losing all or part of your investment. Thus it’s important that you have a means of determining the credit risk associated with a particular bond issue before you buy.

Fortunately, as an investor you don’t have to dig deeply into the financial records of organizations issuing bonds to assess their credit risk. Just as there are companies that provide banks and mortgage companies with credit reports on individual consumers, there are companies that specialize in doing the research required to provide credit reports on bond issuers. These companies investigate the financial condition of the issuers, their management practices, and their strategic plans in light of current economic and political conditions. A bond rating represents the sum of their findings.

The three major companies that rate bonds are Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Bonds are rated when they are first issued and when the circumstances of the issuing organization change significantly. The conclusions of the three ratings companies are often the same, but not always. Moody’s, S&P, and Fitch have slightly different ways of notating their ratings. All of them rate bonds on a scale from highest to lowest quality. In general a high quality bond is one that has a low likelihood of default, but pays less interest than a low quality bond. As an investor you get rewarded for accepting more risk if things go well.

The rating scales listed here are ordered from the highest to the lowest degree of safety. The greatest credit risk is associated with the lowest rating. For example, an AAA or Aaa rating indicates the safest possible investment grade bond with almost no chance of default. A rating of B or B2 indicates a very speculative choice. When you get down to C and D ratings you are looking at issuers already in default or looking like they’re headed that way.

Moody’s: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C

Standard & Poor’s: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, D

Fitch: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC, DDD, DD, D

Bonds with BBB/Baa and above ratings are usually considered “investment grade.” Bonds with ratings of BB/Ba and below are considered “below investment grade” or “speculative” bonds. These lower-ranked bonds are also called “junk” bonds, reflecting their high credit risk, or “high-yield” bonds, reflecting their potential returns.

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Fundamental VS Technical Analysis

There are two main ways of picking stocks (or any kind of investment).

Fundamental analysis is concerned with looking at the economic fundamentals affecting the particuar stock (etc) and covers everything from the economy it operates in (interest rates, unemployment, exchange rates etc), through sector prospects (is the sector growing or declining, the competition etc) down to the particular stock’s accounts, and management team.

Select Winning Stocks Using Technical Analysis by Clifford Pistolese Provides expert advice on tactical trading errors, controlling your emotions, and steering clear of the “herd mentality,” as well as how to: Locate companies with effective business models Use free technical analysis resources on the Internet Readjust your portfolio for bull, range-bound, and bear market phases Diversify your investments to control risk Recognize the signals that a stock should be sold Spot common investment pitfalls and avoid them

On the surface it seems fundamental analysis provides a reasoned and rational basis for investment decisions. The problem is that the information you’ve based your analysis on (plus that you missed) is also available to everyone else - including the smartest pro traders and analysts, their super dooper computer models, and the inevitable snippets they’ll discover that you won’t. Result, by the time you’ve done your fundamental analysis your findings (plus the stuff you didn’t take account of) is already reflected in the price.

Technical analysis is concerned with (don’t laugh) trying to guess future price movements by looking at historic price charts. In theory this would seem about as useful as trying to guess price moves from studying tea leaves. Technical Analysis is dismissed as useless by academic, author, and succesful investor Burton Malkiel (A Random Walk Down Wall Street). And yet the fact that technical analysis is still widely used might just make it a proverbial self-fulfilling prophecy; ie a technical buy signal occurs, lots of people buy, the price goes up… Though I suspect such a thing - if it exists - works only in the very short term.

Ultimately, the safest bet is simply to buy an index via a low-cost tracker fund, and that’s where your core investments should be. Either in a managed fund, or (if you can afford it) in a broad spectrum of diversified stocks.

But if you want a bit of fun, with non-critical money, do your fundamental analysis, do your technical analysis, but leave the final choice to that little voice within - your intuition.

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Knowing Your Bonds by Reading the Yield Curve

Yield curves depict how a bond’s yield is related to its maturity. Yield curves based on the US Treasury are published daily in major financial newspapers. Yields on shorter-term bonds, such as 1-month, 3-month, and 6-month Treasuries, are depicted on the left side of the curve. Yields for longer-term bonds, up to the 30-year bellwether Treasury, are on the right side of the curve.

Typically, higher yields are available on longer maturities. This is because investors expect to be compensated for giving up their capital for longer periods of time. On a yield curve, this translates into an upward-sloping line. A “flat” yield curve has only a small spread between the yields available on the shortest and longest securities. As a practical example of a flat yield curve, if the 1-month Treasury yielded 5.00% when the 30-year Treasury was yielding 5.80%, the spread would be just 0.80%, or 80 basis points. Conversely, if the 30-year Treasury was yielding 6.50%, the spread would be 1.50% and the yield curve would be considered “steep”. During times of steep yield curves, investors demand a significantly higher yield on their long-term securities.

Sometimes, however, higher yields are actually available on shorter maturities. This results in a downward-sloping or “inverted” yield curve. Usually inverted yield curves happen when investors believe that interest rates are about to decline. And since interest rates usually decline during recessions, an inverted yield curve can sometimes predict tough economic times ahead. However, the inverted yield curve tends to be somewhat pessimistic: it has predicted nine out of five recessions.

Historically the yield curve has moved all over the place. There have been periods of long bonds yielding much more than short bonds (steep yield curves), to long bonds yielding just a little more than short bonds (flat yield curves), to long bonds actually yielding less than short bonds (inverted yield curves.)

Say you’ve looked at the yield curve and determined that it is upward-sloping; that is, longer-term bonds are yielding more than short-term bonds. Why would you ever buy a lower-yielding short or intermediate-term security under these conditions? The answer is that long-term securities present both greater risks and greater rewards. The primary risk for long-term bond investors is interest rate risk. If interest rates increase, the price of long-term bonds will decline more than the price of short-term bonds will decline. If you need to reclaim your capital before the bond matures, you will need to sell it into the market at a loss. This is a large and misunderstood risk for bond investors, and it is one that the yield curve can help you mitigate.

Shorter-term securities are less susceptible to interest rate risk, but they offer a lower yield. There is no perfect solution; only a tradeoff between security and maximum potential return. The yield curve captures this trade-off clearly, on a daily basis. For example, if 90% of the yield on a 30-year bond is available on a 10-year bond, you will probably be best served by buying the 10-year bond. The yield curve tells you that you will not be adequately compensated for the additional risk inherent in the long-term bond.

On the other hand, what if you are looking at an inverted yield curve? Why would you buy a longer-term, lower-yielding security rather than a less risky, higher-yielding security? The answer is simple: you will lock in returns for longer. During the 1980’s, interest rates rose to unprecedented highs. Investors who locked in the high yields for long periods of time made a lot more money than those who were forced to reinvest their money at lower interest rates just a year or two later.

In summary, a yield curve shows you how a bond’s yield is related to its maturity. A careful look at the yield curve can help you determine if you are being adequately compensated for the risk you are assuming with your bond portfolio, and thereby increase the security and return of your entire portfolio.

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What is an Index Fund?

Investing with Exchange-Traded Funds Made Easy: Higher Returns with Lower Costs - Do It Yourself Strategies Without Paying Fund Managers by Marvin Appel "Today, exchange-traded funds are the most innovative and rapidly growing investment vehicles. Marvin Appel’s new book provides, in a highly readable framework, a wealth of information on what they are and–more importantly–how private and professional investors can use them to build wealth through a simple and easy-to-implement investment program."

Most investment and financial planning experts agree that a mutual fund is an ideal way to maximize the potential of your investment while at the same diversifying your portfolio and reducing your risk. This is because a mutual fund is a collective effort – rather than you as the individual investor selecting stocks or bonds or other investment vehicles in which you’d place your money, instead you give your money to a mutual fund manager. The manager takes all the money that all of the investors have given the fund, and then uses that money to buy quantities of shares in a variety of investments. In this way, by making one investment, you are able to own shares of stock from across the board. This is automatic diversification – if one company that the fund holds does poorly, it is a good bet that another of the myriad investments will do well. On the other hand, if you bought stock on your own, and it performed poorly, you would simply lose money.

The bet here is that the mutual fund manager is going to a better job than you in selecting stocks – this is their profession after all – and at the end of the year the return on the fund will depend on how well the manager predicted the markets. There are many kinds of mutual funds – large-cap, mid-cap, small-cap, aggressive-growth, etc. The list goes on and on, and sometimes it is difficult to know what kind of fund is best for you. Investment experts crow about the benefits of each type of these funds, but the fact of the matter is that unless the mutual fund manager is exceptional, there is little chance that he or she is going to do better than the market indexes themselves. In fact, it is estimated that only about 20% of actively managed funds have done better than the stock market average over the past two decades. If the idea of putting your money in the hands of a mutual fund manager who tries to beat the market sounds like too risky a proposition for you, then an index fund may be the answer.

An index fund is really quite simple in its premise: the investments in the fund are designed to behave as the market does as closely as possible. This is done by selecting an index – the S&P 500 and the NADSAQ 100 being two of the most popular, though others exist – and then buying shares in companies listed in that index at about the same ratio as they exist in the market. This takes the guesswork and the predictive element out of the fund’s investing practice. In fact, most of these funds are run by computers and a small support staff, since the buying and selling of shares are based purely on another quantifiable index. This has a number of advantages for investors.

First, index funds are cheaper than regular mutual funds. This is because mutual fund managers make millions of dollars a year to handle your money, and their support staff costs millions of dollars per year as well. This money needs to come from somewhere, and unfortunately, it usually comes from the investor in the form of a high expense ratio. While the expense ratio for some mutual funds can be between three and four percent, index funds are usually less than one percent. A matter of a few percentage points may not seem like a big deal at first, but consider that the money is coming out of your pocket – and your future earnings. That small percentage can actually translate into tens of thousands of dollars over the long term.

Second, index funds have a lot less risk, and actually on average make more money. While the upside to risk is that the payoff can be greater, the downside is that the losses can be considerable. Because index funds merely ape a chosen index, there is no chance that a manager is going to blow your investment by suddenly believing that cathode ray televisions are going to become popular again. As mentioned earlier, it is extremely difficult to “beat the market” (which is why mutual fund managers earn such egregious salaries), and for eighty percent of these highly paid managers, it has consistently proven too difficult to do. In fact, over the past two decades, the average return on the market has been about 13%, while the average return on a mutual fund has been about 11%, which makes index funds seem even more appealing.

One disadvantage to index funds is that they are more of a slow-growth investment. If you are the type of investor who likes to get in and out of the market, buying and selling frequently, index funds may not be for you. Because the market has traditionally grown slowly over the years, with very few years of seeing massive returns or losses, index funds are perfect for people who have a number of years to let their money mature. For this reason, many experts recommend index funds as part of a retirement portfolio, especially if you are fairly young.

Index funds are certainly not the most glamorous of investments. However, they consistently provide a better return than most mutual funds, providing all of the benefits of those investments without the risk.

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Investment Guide in Startup Companies

The person who wants to invest in start-up companies wants to invest in the future. He’s different from the widow or orphan who invests in bonds or utilities, the retiree who invests for dividends, or the gold bug who invests in mining companies. But due to the nature of the start-up company, he has the most in common with the latter: both want to find the hidden value where others see only barren ground.

Startup companies are usually small companies and usually new companies. They are unproven, frequently having little money and less market share. Often they are started on a shoestring and a dream, a song and a prayer--but you want to find them before they become a household name.

The ABCs of IPOs: Investment Strategies and Tactics for New Issue Securities by Robert Anthony Chechile Explains the factors that can signal whether an offering will be successful by describing: Typical IPO market price behavior, as illustrated by various IPO offerings Securities regulations and the environment that necessitated their enactment Different securities markets, including the stock exchange and the multi-tiered, over-the-counter markets The underwriting process and the information required in the prospectus Evaluation techniques, including how to read a financial report and also how to determine a security’s intrinsic value How to allocate investment capital to avoid gambler’s remorse Selection guidelines for IPOs, limited partnerships, and convertibles

There is a world of difference between investing in startup companies and investing in the stock market, and the main difference lies in where your money goes. When you buy a stock in the stock market, your money usually goes to another individual: the person who owned the stock before you. But when you invest in a startup, you're investing directly into the company, buying newly issued stock that no one has owned before. So to invest in startups, you've got to find companies that are issuing stock directly into the market to raise money.

The first place to look is your full-service broker, and if you don’t have one, it’s time to get one. You don’t have to do all your trades with him, but you must have a relationship with a broker who brings these companies to market. Why? It’s simple: your broker provides a service to the company by selling newly-issued stock to their own customers through a private placement, and you can’t get in on a private placement unless you are a customer.

But since hundreds of companies go public every year, you can’t be in on all of them. So how do you choose which ones you want to be in on? Your choices will be limited, at least at first, by those companies that work through your broker, but you should tell your broker what kinds of deals you’re interested in. Let him know what you want.

Do you like exploration stocks? Biotech? Oil and Gas? Talk to your broker, let him know that you’re interested, and find out what he offers, and pay your commissions. It’s been said that it takes money to make money, and your broker needs to make money from you before he’ll make money for you.

But your broker is only half the equation. You also need to become an expert in whatever it is you want to invest in. You need to understand the business, because only in knowing what the company is trying to accomplish can you determine whether an investment is right for you. You must rely on your broker for access, but it's best to rely on your own research to decide if a company is worthy of your investment.

But when all that’s said and done, you’re still paying retail. Yes, you’re first in line, but you’re still paying close to market prices for stock. Maybe it will go up--maybe not. But isn’t there a better way to get in on startups than hoping your broker brings you a winner? Yes, there is, and that way is by already being on the inside when it goes public.

I mentioned above that startups often have no money and no market. That means they often need accounting services, websites, distribution channels. Once you’ve found a company that may go public in the future, you may have an opportunity to invest in the next Microsoft by receiving stock for your services, not your money.

So what can you provide for a company in exchange for very cheap stock? Do you have an office they can rent? Can you sell their products in your store or office? Can you provide tax or accounting help? If it’s a mining company, can you take a week to go to the mine and help clear timber? Can you simply answer the phone? Ask yourself what you can offer the company (remember, a true startup probably needs everything) and provide it in exchange for stock.

A company can’t go public until a lot of work is completed first. All the accounting and taxes and distribution and assembly, all the work that turns an idea into a company must be done by someone, and those people often get paid in shares of that company. And difference in return between buying stock and earning stock can be phenomenal.

So how do you find these companies? You start by looking in your own backyard. Do you know someone with an idea but no follow through? Helping him understand what a public offering can mean for the company and for his pocketbook can bring you a long way to the inside. Find out what he needs and help organize it. Put up some money to increase production. That way you can buy a part of the next Microsoft while it’s still micro.

Talk to your broker about little companies that may, someday, go public. Then get on the phone and see how you can help.

Do you know anyone who has taken a small company public? People don’t generally do just one, and chances are he knows people who are doing it, companies that are planning for the eventuality of an IPO. Get in, get your hands dirty. Network. Offer value to companies, and they will reciprocate.

A true startup can take years from the idea phase (and you’ve got to understand and believe in the idea or you won’t stick it out), to the day it goes public to fanfare and ticker-tape. Being on the inside for years can help you accumulate a lot of very cheap stock. Then when it does go public, you’ll already be a winner.

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