Relative valuation

Posted by admin in Investment on Sep 28th, 2011 | 0 comments

Relative valuation involves using similar assets to value another asset.

One common example is in real estate, where prospective buyers will use the value of other properties of a similar size in the same area to determine the amount they are willing to offer for a particular property.

Relative valuation is proven for a range of assets every day – as fundamental issues are often relevant across sectors, or even markets, assets within those sectors or markets often move in tandem.

If we use share trading as an example, some of the common factors used to measure stock value include:

1.    Price to earnings ratio
2.    Return on equity
3.    Operating margin
4.    Enterprise value
5.    Price/cash flow per share

Example

Westpac and the Commonwealth Bank (CBA) are Australia’s two largest banks. On September 26, CBA shares were priced at AUD43.89, while Westpac shares were AUD19.11. CBA has a market capitalisation of AUD69 million and Westpac has a market capitalisation of AUD57 billion.

A share trader can use this information to determine whether investing in CBA or Westpac would be better value. Both companies’ market capitalisations are very similar, along with their enterprise values, so we’ll focus on the price to earnings ratio, return on equity and operating margin.

Although Westpac has a lower price to earnings ratio, the CBA has a higher return on equity despite having a lower operating margin. CBA also has a higher cash flow per share than Westpac and if it can continue churning higher cash flow, it’s a sign that it is creating more value from shareholders.

Limitations

Although relative valuations have their benefits, they also have their limitations. The greatest limitation is when the market has valued a business incorrectly – in the case of a bubble, it wouldn’t matter what either companies’ fundamentals were.

Also, company valuations are based on past performance, and future performance is what drives stock prices. Relative valuation accounts for the current and past value of a share, rather than future growth.

That being said, relative valuation is a simple tool that any trader can add to his arsenal, and the information required to perform your own evaluation is readily available.

Is Gold Trading Really Fair?

Posted by admin in Gold on Sep 27th, 2011 | 0 comments

If you’re an ethical trader, then chances are good that you evaluate the investments you make in multiple ways — not just what’s going to make you money. You also want to make sure that you have a fair fighting chance to actually get into a market and get the proper capital gains that you’re looking for. Unless you’ve been living on another planet for the last 50 years, you’ve probably heard about investing in gold. As an ethical trader, you’re naturally concerned with whether or not you’re going to have a fair and fighting chance in the world of gold.

The truth of the matter is that you actually will. There’s nothing wrong with making sure that everything is set up for you to do your very best in the world of gold. It just takes a little more time and it can take a lot more effort than it seems. This is because you don’t want to just step into the world of online gold trading without knowing a few facts first.

First and foremost, gold trading is open to anyone. You don’t have to have a massive cash roll waiting in the wings before you can make good money with gold. It’s just a matter of making sure that you truly take the time to research all of the different avenues that you can take in the world of gold. You need to figure out how you will invest in gold. Will it be big gold bars that belong in a safe? Or will it be gold bullion? You can also invest in gold mining companies and proper gold commodities and futures. There are a lot of pathways to investing in gold, and the right one will depend upon your own investing goals.

Trying to get started in the world of gold really isn’t difficult but it will require that you focus hard and think everything with the right perspective. You have to remember that gold is something that’s very precious, and that means that there’s a high demand for it. You might remember from your economics classes in school that the more demand for something scarce, the higher the price will actually be. It’s easy to feel overwhelmed when it comes to gold trading, but with such an open format it’s really hard to resist trading in something as precious as gold — why not start trading today?

What is the VIX, and How Can It Benefit You

Posted by admin in Investment on Sep 26th, 2011 | 0 comments

Have you heard about the Chicago Board Options Exchange Volatility Index? It’s affectionately nicknamed the VIX, and if you’re really trying to tighten your investing game it could even help you out. Some people are into it because the index measures how fearful investors might be at any time of the market. The true pros use the VIX to hedge against volatility because the entire index moves in the opposite direction of the S&P 500.

Complacency isn’t a good thing in the market. When you become a complacent investor, you’re on the verge of losing money — if you haven’t lost it already. This is because you will be ignoring market trends that signal that it’s time to move your money out. Now, we’re not talking about people that already have market orders put in. That’s not being complacent — that’s being a smart investor, but you can get a little lazy if you’re not at least tracking your performance. You don’t just want to set up your market orders and never get concerned about what the market is really doing.

Let’s go back into the topic of fear in the market in a different direction. The VIX is based on a calculation that estimates how volatile the S&P 500 is over 30 days. This is a “measured prediction” of what the market’s future will be like.

It ties into the marketplace place in the following ways. For starters, both readings are the inverse of each other. When the stock market is up, the VIX is down. The opposite is also true — when the stock market is down, the VIX goes up.

Now as a smart investor, it’s up to you to use the VIX to your advantage. The first thing you’re going to want to do is break out of that 30 day bubble. You don’t want to just settle for 30 days worth of data when historical patterns have long been the go-to staple. Most trading programs will let you pull up longer data than just 30 days, so you will want to take that option if you have it. Even free websites will have data on the VIX — it’s really that important.

Yet how do we specifically wield the VIX as a powerful tool, the way it deserves to be used? That’s the good part — it’s not as difficult as it sounds.

First we have to see the VIX as a hedging tool, foremost. If you really want a quick and dirty path to playing the VIX well, you will want to actually use the VIX exchange traded note (ETN). These are very similar to ETFs, and the symbol for the VIX-oriented version is VXX.

You might be a little confused at this point — we jumped from talking about using the VIX to your advantage and then hopped over to exchange traded notes. This is because the VIX is just an index — you can’t trade the whole thing, you will need to go through an ETF, futures contract, or an option contract. We recommend the ETN here because VXX tries to match the VIX movements as much as possible. Since it’s not perfect, we don’t want to use it for long-term investment plays — just short term hedging when you need it. If you are trying to make a quick profit, then playing a short term strategy with the VXX note is a good way to go.

When it comes to hedging, you will want to make sure that you really do stay short term and make your exit when your risk tolerance level starts getting started. It’s also essentially that you will be looking at the news while you’re working with the VIX. Since this is the “fear index”, paying attention to what’s happening in the financial media around you is definitely a smart idea.

Overall, it can take some time before you’re up to speed on the VIX and how it plays well with the S&P 500. However, as long as you take small steps there’s no reason why you can’t make a great profit and take advantage of any market!

What Really Moves Stock Prices Up and Down?

Posted by admin in Stocks on Sep 21st, 2011 | 0 comments

When you start getting into the stock market, it can really seem like a thing of mystery. No one really explains to you why prices move up and down. Well, we should correct ourselves. It’s not that they don’t explain it — it’s just that everyone seems to have their own little conspiracy on why stock prices move up and down. It’s better to actually stop and really look into the best reason why stock prices move up and down. The starting answer that you get in classrooms is that the market is subject to supply and demand. If it were that simple, things would be a lot less complicated. So this guide is all about figuring out what really moves stock prices up and down.

It all starts with how the rise of the Internet has affected the way stocks are traded. Since the rise of the electronic exchange, stock prices can move around multiple times per second. This is all tracked by computer systems, which means that traders have to be a bit more focused on short term as well as long term price changes. There are always going to be swings in the market. It’s just a matter of taking action based on the things that you can control. If you try to react everything the price changes, then you’re definitely not going to keep up with the market.

If you really wanted a straightforward analogy, you could see the trading of stocks like the buying and selling of houses — is that not a trade? Currency in exchange for ownership of a property? Sounds like a trade to us. One thing that people don’t understand about the housing market is that nothing is ever fixed in stone. A seller might want $200,000 for the house, but the price is actually negotiable. This is why it’s called the asking price and not the fixed price. If you really think that you can get a better deal on the house, you will need to negotiate for it.

Stock sellers are the same way — they are offering shares for sell, at a certain asking price.

In both the stock market and the real estate market, buyers want to get what they’re trying to purchase at a price that’s as low as possible.

So in the real estate market, we might have a buyer that places a bid for $150,000. That’s the bid — notice that it’s lower than the “ask”.

That’s a principle that’s related to the stock market as well — there are times where there will be a “bid” of $150,000 for a stock, even though the offer is $200,000. That’s the “bid/ask” spread — the difference between what the seller wants to get and the buyer is willing to pay.

What this means for stock price changes is this: it’s the demand on the market coupled with the inventory available. If there are a lot of shares on the market, then each share isn’t worth as much. However, if there aren’t many shares and an inventor really wants a piece of the company, they’re going to have to offer a better price. This logic plays out multiple times per second and involves a lot of people — it’s no longer a single transaction between a buyer and a seller, but many transactions happening all at once across the globe. A global market gives everyone the theoretical chance to really get deep into the market and make money. Now, in reality, there will be limits — not everyone will be playing with the same starting capital.

This is the most straightforward explanation of stock price changes that we can give. This should give you the appropriate reference that you need when it’s time to look at charts and the like to determine what play to make next.

Open a Brokerage Account Online, Save Money

Posted by admin in Investment on Sep 19th, 2011 | 0 comments

So, you’ve heard about opening a brokerage account online to save money. The truth is that it’s definitely possible, and many people are learning that going online is a great way to get deeper into the investing world. Your computer, combined with the Web, can create a powerful research tool that will let you measure performance with ease. If you were going to a traditional broker offline, you would have to rely on paper charts, which can be too much of a hassle to really embrace. It tends up becoming a question of convenience, and this is where the Web really wins.

So, is it just a matter of running out and picking any online brokerage? No. You will still need to take a few considerations into account if you’re really serious about making the online brokerage experience as strategic as possible for your agenda.

First and foremost, you should understand that there really two types of brokerage firms — the traditional (which some still call “full service”), and discount. As you can imagine from the name, full service brokerages are going to offer more features than their discount counterparts. It’s really all about what type of experience that you want to have. For example, if you really want to be guided by the hand, a full service firm is definitely for you. You’ll have the peace of mind knowing that you don’t have to be a Wall Street wizard yourself — you can have someone put their expertise to the text for you. Now, this also means that you will have to think even harder about the type of service that you want to get, because this “golden gloves’ treatment isn’t cheap. You’ll pay a lot more in commissions going with a full service firm.

Don’t forget that the higher price tag comes with being able to work one-on-one with someone. A good stockbroker will give you ideas on where to go next with respect to your financial goals, as well as send you detailed reports with how your investments are actually faring in the marketplace. You will be able to reach them by phone or email to buy a wide variety of securities, which can be very appealing. In theory, you wouldn’t even have to be at your desk to make market plays. When you’re someone that has a very packed schedule, this is an appealing feature to have on your side.

However, what if you’re looking for a less feature-filled service that still gives you the meat and potatoes — in this case, that means the ability to still buy and sell securities when you need to do so. You might not get the dedicated one-on-one service, but you would be able to still take charge of your financial life.

Discount brokerage services are all about doing things as a do-it-yourself investor, which can be appealing to people that already have a proper financial background. They don’t offer investment advice, but they do offer you the ability to get things done just the same. Most discount shops are online because the overhead is less, which means that your fees are less. However, you can find a discount side to even some full service houses too. If you go with an offline shop (why you would is beyond us — online is far superior), you would be calling in your order to any broker, not just one assigned to you.

So why would you even go in this direction? Well, it’s a good way to make sure that you keep your commission costs low. However, some of the discount shops offer another bonus: lower opening balance minimums.

Indeed, when you open up an online brokerage account, you’re going to be asked to deposit a certain amount of money into the account to start out with. You want to make sure that you maintain that starting balance, because there could be some fees if you let your account sink below this mark. Those fees can really add up — sometimes to the equivalent of 6-8% or better!

Don’t forget that there will always be some tools and research gear that will be offered to you as a customer. After all, they have to make sure that you actually have the tools you need to track how your investments are actually doing. There are some premium services that might be available to you, so you’ll need to make sure that you have money set aside to take advantage of them.

You shouldn’t forget about the tax implications — since this is a taxable account, you will be getting a statement at the end of the year — the same statement will be reported to the IRS. This means that if you have capital gains, you will have to declare them on your tax return and pay taxes on the amount. You can deduct capital losses against what you made on the account, and you can also place them against $3,000 in earned income. So that’s also a tax shelter in of itself, to a point.

Overall, getting your way into an online brokerage really isn’t difficult. We avoided naming names for a reason, of course — we’d rather you research the companies that interest you and then see if they’re going to be a good place to put your money. That’s all there is to it!

ETFs Give You Diversification Without Complications!

Posted by admin in Investment on Sep 19th, 2011 | 0 comments

Let’s get risky! One of the prevailing beliefs about the investing world is that it’s something where people cannot make money. And when we say people, we mean regular people. Warren Buffett can probably make money with his eyes closed, but they don’t call him the Oracle of Omaha for nothing. It’s all about being at the right place at the right time — or is it?

The truth is that if you really try hard to time the market, you’re going to end up unsatisfied. That’s because the market as a whole is volatile, and market timing just doesn’t work. You have to look at things from a more strategic standpoint.

The cornerstone of strategy in this case is definitely diversification. However, when you’re starting out it can take a while before you can sit back and really say that you’re truly diversified? What does it really take in order to get the experience that you’re looking for? Well, it involves picking the right investing tools from the beginning.

If you’re looking for diversification without complications, one of the first things that you need to look at are ETFs. Now, we did cover ETFs on the surface a little while back, but we wanted to cover ETFs again so that you really appreciate the value of these securities.

On the surface, ETFs (Exchange Traded Funds), are simply a group of stocks. They offer diversification in a big way, and they also offer convenience. Instead of trying to run around researching stocks all day, you can just tag along with an ETF that includes the category of stocks that you really want to pursue. If you’re an oil and energy fan, you can find EFTs for that. If you would prefer to dabble with commodities…there are ETFs that can satisfy your needs. OK, that sounds dirty — let’s move on.

Now, you might be wondering why ETFs sound so good and they aren’t expensive on their own. This is because they aren’t actively managed — investors don’t hold shares directly. What really happens is that when you own an ETF, you have ownership in the shares of the fund. In turn, that fund has a portfolio of common stocks in a certain part of the market. This can even be an international thing — there’s nothing that says that you have to only deal with domestic securities. When you turn to ETFs, the entire world becomes your investment playground, and many investors like that.

The trouble with ETFs — and why so many people don’t like them — is because you have to make sure that you still follow classic allocation strategy. You don’t just want to go with ETFs at random. You will still need to think about degrees of risk. You will still need to read the proper financial disclosures in order to decide whether the ETF is right for you. Don’t just let people push you into an ETF — you need to make the decision for yourself.

Keep in mind that you don’t want to trade too much within the ETF system — you have to go through a broker to make all of your trades, and that means that you’re going to have commissions. Since you can trade ETFs intraday (throughout the day), it means that you can make many trades during the day. You can even place stop or limit orders, which can help you make things more automated.

At the same time, you don’t want to go too automated. If you just think that you’re going to set and forget about your money, you’re in for a rude awakening. Fundamental and technical analysis is still the name of the game, which means that you need to watch performance and be ready to bail if things start making a trend south rather than north.

Does the rise of ETFs mean that you can forget all about mutual funds? Definitely not. You will still need to make sure that you look at your value goals and push forward carefully.

Overall, ETFs are still appealing enough in terms of diversification without complications. Start checking it out today!