General (Investing) Articles

Cheat Sheet / Updated 05-02-2022

Dark pools and high frequency trading (HFT) are contentious subjects in financial markets. Billions of dollars are traded through dark pools, and HFT algorithms with just small, incremental price differences make billions of dollars. And it all can happen in milliseconds. Most importantly, dark pools and HFT are part of the current market environment. Anyone who’s invested in the markets needs to know what they’re involved with and what they’re up against.

Cheat Sheet / Updated 04-06-2022

In high-level investing, investors and speculators track the major markets and critical global issues that affect stocks and other securities, both in the United States and other major markets. Check out the following sites, tools, and pointers to stay informed.

Cheat Sheet / Updated 03-17-2022

Money is the biggest component of the investing world, but time comes in a close second. When you combine the two, you have the potential to grow your money into a healthy nest egg. This Cheat Sheet offers some basic investing terminology and advice that will pay off with every dollar you invest.

Cheat Sheet / Updated 03-01-2022

Considering share investing? There are some fundamental aspects you need to be aware of before jumping in as a share investor in the UK. Avoid potential catastrophes and make the right investment choices by thinking ahead – take a look at the following points and tips.

Cheat Sheet / Updated 02-18-2022

Smart investing can help Canadians accomplish important financial goals like buying a home or retiring comfortably. Whether you’re an investing novice or your portfolio already consists of stocks, bonds, mutual funds, or real estate, these tips for Canadian investors can help you make informed choices. Read on for advice and resources to help you maximize your investment options and avoid common missteps.

Cheat Sheet / Updated 02-16-2022

Make the most of fundamental analysis by getting familiar with financial statements and investment terms as well as knowing the best places to find fundamental data.

Article / Updated 12-22-2021

A hedge fund differs from so-called “real money” — traditional investment accounts like mutual funds, pensions, and endowments — because it has more freedom to pursue different investment strategies. In some cases, these unique strategies can lead to huge gains while the traditional market measures languish. The amount of potential return makes hedge funds more than worthwhile in the minds of many accredited and qualified investors. Here are some of the basic characteristics of hedge funds. Hedge funds are illiquid One key characteristic of hedge funds is that they’re illiquid. Most hedge fund managers limit how often investors can take their money out; a fund may lock in investors for two years or more. In other words, investing in a hedge fund is a long-term proposition because the money you invest may be locked up for years. Hedge funds have little to no regulatory oversight Hedge funds don’t have to register with the U.S. Securities and Exchange Commission (SEC). Most funds and their managers also aren’t required to register with the Financial Industry Regulatory Authority or the Commodity Futures Trading Commission, the major self-regulatory bodies in the investment business. However, many funds register with these bodies anyway, choosing to give investors peace of mind and many protections otherwise not afforded to them (not including protection from losing money, of course). Whether registered or not, hedge funds can’t commit fraud, engage in insider trading, or otherwise violate the laws of the land. Hedges use aggressive investment strategies In order to post a higher return for a given level of risk than otherwise expected, a hedge fund manager does things differently than a traditional money manager. This fact is where a hedge fund’s relative lack of regulatory oversight becomes important: A hedge fund manager has a broad array of investment techniques at his disposal that aren’t feasible for a tightly regulated investor, such as short selling and leveraging. Managers receive bonuses for fund performance Another factor that distinguishes a hedge fund from a mutual fund, individual account, or other type of investment portfolio is the fund manager’s compensation in the form of a performance fee. (SEC regulations forbid mutual funds, for example, from charging performance fees.) Many hedge funds are structured under the so-called 2 and 20 arrangement, meaning that the fund manager receives an annual fee equal to 2 percent of the assets in the fund and an additional bonus equal to 20 percent of the year’s profits. You may find that the percentages differ from the 2 and 20 formula when you start investigating prospective funds, but the management fee plus bonus structure rarely changes. Hedge funds use biased performance data What gets investors excited about hedge funds is that the funds seem to have fabulous performances at every turn, no matter what the market does. But the great numbers you see in the papers can be misleading because hedge fund managers don’t have to report performance numbers to anyone other than their fund investors. Those that do report their numbers to different analytical, consulting, and index firms do so voluntarily, and they’re often the ones most likely to have good performance numbers to report. Add to that the fact that hedge fund managers can easily close shop when things aren’t going well; after it shuts down it doesn’t report its data anymore (if it ever did), and poorly performing funds are most likely to close. What all this means is that measures of hedge fund performance have a bias toward good numbers. Hedges are secretive about performance and strategies Some hedge funds are very secretive, and for good reason: If other players in the market know how a fund is making its money, they’ll try to use the same techniques, and the unique opportunity for the front-running hedge fund may disappear. Hedge funds aren’t required to report their performance, disclose their holdings, or take questions from shareholders.

Article / Updated 12-22-2021

Even the legendary investing and speculating pros have failures and losses. The key is that all these people learned from what they did and modified their approaches going forward. Here are ten aspects of losses, either helping you minimize them or suggesting what to do if you have them. Use stop-loss orders "Have your profits run, but limit your losses." This age-old advice may be a cliché, but it's the quintessential grand strategy. In today's marketplace, limiting your losses is easy to do thanks to technology. Considering how crazy and volatile the world is, the stop-loss order should be a ready weapon in your investing and speculating arsenal. The trick is knowing when to place a stop-loss order, how long it should be in effect, and how far to place the stop loss-order from the stock's (or exchange-traded fund's) market price. You put a stop-loss order on a holding in your portfolio (such as a stock or ETF) to limit the downside risk of the holding without limiting the upside potential. Employ trailing stops The trailing stop is a stop-loss order that essentially trails the stock price like a giant tail as the stock price zigzags upward. The moment the stock reverses and falls, the trailing stop-loss order stays put at the most recent level it reached. When and if the stock does hit that stop-loss price level, the trailing stop turns into a market order and the stock will be sold. At that point, you've avoided further losses. Go against the grain When everybody and their uncle are ebullient about the stock market and the bulls-to-bears ratio is similar to the ratio of Red Sox fans to Yankees fans at Fenway Park, then it's time to be a contrarian — a cautious one. Starting to step away from a party that is overdue to end is a good way to avoid losses. Sure, you might miss a little more upside, but no one gets hurt taking a profit by selling or by using other loss-limiting strategies. Have a hedging strategy Having a hedging strategy after the crash is like closing the barn door after the horses escaped. The best time to consider a hedging strategy is before a major market reversal. A hedging strategy is basically knowing (and doing) what is necessary to preserve gains or simply to limit the downside. A hedging strategy differs depending on the duration of the expected fall. For corrections, you consider hedging by buying put options, for example. For bear markets, you look to sell and be in cash. Hold cash reserves Opportunities happen constantly — risks show up to derail or delay the best plans — but the prepared investor always has cash on the sidelines. Some extra cash is like a secret weapon; it's also a saving grace when your positions are down, and you need money for some unforeseen expense. Sell and switch When your stock is down, can you do a fancy two-step that can save you on taxes and set you up for a profitable rebound? Keep track of your unrealized gains and losses and see whether there are opportunities for tax benefits, given what is happening in your portfolio. Maybe you have an opportunity to sell a losing position in your portfolio to book a capital loss. Realized capital losses are generally tax-deductible (check with your tax advisor to be sure). You can play the rebound in a variety of ways, but make sure that the tax loss makes sense in your situation and that you did your due diligence regarding the potential rebound of the stock or the sector it's in. Discuss your personal tax situation with your tax advisor. Diversify with alternatives Keep in mind that as an investor, even if you have limited capital, you live in a time where there are many strategies and investment alternatives. When you have a stock in mind that you'll be investing in, you should list or research the alternatives that could accompany or augment your investment choice and help you limit or even reverse a potential loss. Using leveraged ETFs is a good example of this approach. A leveraged ETF is a speculative vehicle that seeks to emulate double or even triple the move of the underlying asset. Leveraged ETFs are a form of speculating. They may magnify gains when you're right, but they can magnify losses if you're wrong. Consider the zero-cost collar You have a stock that has done well, but you're worried. The stock may have some upside, but the downside risk seems to be growing. You don't want to sell the stock because the gain is sizable (and taxable!), but the short term worries you. Can you protect your stock from a potential correction without needing to sell it? Consider doing the zero-cost collar, a combination of writing a covered call and buying a put on the same stock (or ETF). When you write a covered call, you receive income (from the premium you receive when you "write" or sell it); you can then use this income to buy the put. This combination is called a collar because it effectively boxes in, or collars, the stock price. Here's how events may play out: If the stock goes down: The put that you bought comes into play. The put will increase in value the more the stock falls. If the stock goes up: You make a small profit on the stock when it's sold at the strike price of the call option you wrote. But that's it, because the covered call limits your upside; you can't realize any gains above the strike price. If the stock moves in a flat or sideways manner: Both the call you wrote and the put you bought would expire. No worries, though. Your stock is okay, and because both positions were acquired as a zero-cost collar, no harm is done when they expire. The collar didn't cost you, so there's no real loss. Try selling puts Say you have a stock with a loss. You review the wreckage and see that the stock price may be down (negative!), but everything else about the underlying stock and its company are positive. Suppose you have a stock that went from $50 per share and is wallowing in pain at, say, $25. Do you sell and take the loss, even though the company is really hunky-dory? Measure twice on this — is the stock price down only because investors left the sector entirely due to factors that are temporary and not fundamental to real value in the sector? Say that the company is fine but you could use the loss for tax purposes (capital losses in your portfolio are generally deductible). So consider selling the stock and then writing a put option on the same stock. Why? When you sell the losing stock, you pick up the loss on your taxes. Also, because the stock is down sharply, the puts on it are probably "fat" (meaning they picked up lots of value due to the stock's price drop). Given that, write a put option on that stock; it will give you good income and you can lock in a good price because the put will require you to buy the stock at the lower price (the strike price in the put option). The bottom line is that you took a bad event (the stock's fall) and turned it into something more positive. Prepare your exit strategy Stocks are meant to be a means to an end. You get stocks either for income or gains, maybe both. If you have a great stock and you've been getting great (and growing) dividends, year after year, then an exit strategy is either not a consideration or not a major concern. You develop an exit strategy for that type of holding in case you really need the money for a concern outside the realm of investing, such as funding college for your grandchild or buying that retirement home with all cash, no mortgage. When will you exit your position with stock X? And why? What type of scenarios would make you sell that particular stock? Give exit strategy some thought before the need to sell materializes. Many investors think about an exit strategy even before they make the initial purchase.

Cheat Sheet / Updated 12-13-2021

Whether you’re new at investing online or a grizzled veteran, you can always find better ways to make the internet work for you and your portfolio. You’ll want to make sure you know a few basics before you get started. And some tricks of the trade will literally help you to trade. Finally, you’ll want to know the terminology of investing online to make sure you are talking the talk.

Article / Updated 11-08-2021

Ordinarily when you invest in stocks online, you hope to profit from a company's good times and rising profits. But there's a whole other class of investors, called shorts, who do just the opposite. They search the internet for news stories about diners getting food poisoning at a restaurant, for instance, and look for ways to cash in on the stock falling. To sell a stock short, you follow four steps: Borrow the stock you want to bet against. Contact your broker to find shares of the stock you think will go down and request to borrow the shares. The broker then locates another investor who owns the shares and borrows them with a promise to return the shares at a prearranged later date. You get the shares. Don't think you're getting to borrow the shares for nothing, though. You'll have to pay fees or interest to the broker for the privilege. You immediately sell the shares you have borrowed. You pocket the cash from the sale. You wait for the stock to fall and then buy the shares back at the new, lower price. You return the shares to the brokerage you borrowed them from and pocket the difference. Here's an example: Shares of ABC Company are trading for $40 a share, which you think is way too high. You contact your broker, who finds 100 shares from another investor and lets you borrow them. You sell the shares and pocket $4,000. Two weeks later, the company reports its CEO has been stealing money and the stock falls to $25 a share. You buy 100 shares of ABC Company for $2,500, give the shares back to the brokerage you borrowed them from, and pocket a $1,500 profit. When you short a stock, you need to be aware of some extra costs. Most brokerages, for instance, charge fees or interest to borrow the stock. Also, if the company pays a dividend between the time you borrowed the stock and when you returned it, you must pay the dividend out of your pocket. You're responsible for the dividend payment, even if you already sold the stock and didn't receive the dividend.