Archive for January, 2010


A Statement On Stock Market Efficiency

Filed Under: Fundamental by Bill — Comments Off
January 9, 2010

The theory behind stock market efficiency has been around since the 1960’s.  Basically it espouses that all investors have the same information at about the same time and thus they all have an equal chance to act on that information at the same time.  This is especially thought to be true since the internet has made the dispersion of information so quickly.

There are really three forms of market efficiency.  The first one, weak market, is based on the premise that the information used is from price of the stock only.  This would incorporate all past and current pricing.  The second type, semi-strong market, is said to consider all pricing and any available information including all financial information and everything else that is in the public domain.  The third, strong market, is said to consider everything in the semi-strong and add to it any information including any private or public information.  Thus if a company was considering merging with another company but it was never made public, the strong market theory would take this into consideration.

Empirical evidence has suggested that there is strong support for the weak market theory and some evidence to support the semi-strong theory but no evidence to support the strong market theory.  Some studies have been shown that you can only consider the price history of the stock to determine when to buy shares of stock , but the margin of error is so small between that and the semi-strong theory that the cost of trading negate the difference.

Even though there have been many different studies done to prove or disprove the efficient market theory, there is still some disputation on the correct answer.  Studies have tied to look at instances where the movement of a stock went counter to the expected movement under an efficient market theory.  Even though numerous anomalies have been discovered they soon disappear as investors act on them.  A paradox with efficient markets is that if every investor believed the markets were efficient, the efficiency would probably disappear because an investor would no longer feel it was worth it to analyze securities.

One theory is that the answer is neither black or white but contains shades of gray.  It espouses that markets are efficient to some extent but that there are opportunities to act on the emotions of investors and make a profit on your trading system.

Investment managers of course do not want to agree to the efficient market theory since this would in essence put them out of a job.  If they could not sell that they have greater foresight and information, then why would an investor pick them over another manager.  The truth is that a manager does not always have a great year.  They may be right one year but fall out another year.  Faced with inference that they cannot add value, many managers argue that the market is not efficient.

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Advantages Of Spread Betting

Filed Under: Investment Strategy by Bill — Comments Off
January 8, 2010

Spread betting is the placing of a bet on the outcome of an event but where the amount you win or lose is determined by how accurate your bet was. You bet on whether the outcome will be over or under a range of possible outcomes. Spread betting is getting more and more popular but the risks are high because you can lose (or win) far more than you bet.

This article will look at the advantages of spread betting over other forms of investment.

  • Any profits that you make from your bets are not taxed.
  • The mechanics of spread betting are easier to understand and use when compared to other financial instruments like futures and options.
  • Spread betting is available in a wide range of indexes and markets, including foreign stock exchanges, housing, sport and many others.  These can all be bet on from one account.
  • Betting is not restricted to the stock exchange hours. Many spread betting firms offer 24 hour trading from the comfort of your own home using your internet connection.
  • Profits can be huge even on low investments due to leverage. Spread betting firms only require deposits of a percentage of the trade rather than the full cost as products are traded on margin.
  • You can exit your position in one or many goes without incurring huge broker fees for each exit.
  • No commissions are paid to the spread betting firm as these are covered by the bid-offer spread.
  • Beginners can find firms that will allow them to bet with small stakes and deposits, such as £30 on deposit and 10 pence per point. This allows them to work through their guide to spread betting with less risk. Spreads are not affected by smaller bets so small positions are not penalised.
  • Stop losses can be used – this means that you can automatically close your bet if the market turns against you and reaches a predetermined level.
  • Credit facilities may be available subject to status avoiding the need to keep capital tied up.
  • Bets are executed virtually immediately as spread betting firms are not brokers. This means there is no fluctuation in price or the chance of no party available to complete the transaction.
  • There is no currency risk as firms allow trades to be done in the customers local currency rather than the currency of the product being bet on.
  • Bets can be made on markets rising and falling.
  • Bets can be made on diversified portfolios. You can bet on an index as opposed to one share so your risk to the market movement is more balanced.
  • There is no need to own the share or other asset you are betting on to make a profit on it.
  • Obtaining a spread betting account is quick and easy.
  • Demonstration accounts are often available with firms, allowing beginners to put their spread betting tips into practice in a virtual environment until they are happy with what they are doing.
  • Spread betting companies are regulated so you know your winnings are safe.
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Buying Gold With Gold ETF’s

Filed Under: Fundamental by Bill — Comments Off
January 7, 2010

Most people think that gold is only bought at the jewelry shop or by the big commodity traders in Chicago or on Wall Street, but the fact is that buying gold is easy using a gold ETF, also known as a gold exchange traded fund.

An ETF is like a mutual fund, but it is traded on the exchanges and can be bought or sold at will and can be shorted. When buying gold through an ETF, the purchaser is buying shares of a trust equivalent to a certain amount of gold for each share (usually 1/10 of an ounce). The advantage is that the buyer does not have to take physical possession of the gold, store it, or protect it because the gold is held in trust. This means the gold can be bought and held for a long period of time with at very low cost.

Here are a few options for buying or selling gold with ETFs.

GLD – State Street SPDR Gold Trust – This is the most popular and reputed best gold ETF to buy. It is very liquid, regularly exceeding 10-million shares traded per day. A share of GLD is equivalent to 1/10 of an ounce of gold. In addition to brokerage fees, the cost of owning GLD is 0.4% per year.

IAU – Barclays iShares COMEX Gold Trust – This ETF is less liquid than GLD, averaging 400k-500k shares traded daily. The expense ratio for IAU is 0.4% per year.

UGL & GLL – Ultra Gold ProShares and Ultrashort ProShares – UGL aims to return twice the daily performance of gold. GLL shoots for twice the inverse daily return. These gold ETFs are strictly designed for traders because they do not track the longterm price of gold, only the intraday price. They are also more expensive to own with a 0.95% expense ratio.

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Five Ways To Get Ahead In A Declining Market

Filed Under: Fundamental, Uncategorized by Bill — Comments Off
January 6, 2010

A lot of investor are thinking of what can they do to boost a portfolio’s bottom line when the stock market is headed downward. This trading system could get pretty scary for any investor anywhere in the world, but one way to boost the returns is to buy shares in high dividend paying stocks.

The problem started because of articles after articles on the internet that warned investors to keep away from stock paying over 10%. The market correction as big as this most recent one, high yield stocks can actually help lessen the horrible drop in your bottom line of investment. Here are the five ways to determine whether your stock is right to add to your portfolio.

First, you should use several sources to determine your Price per Earnings (P/E) of the stock if you are in question. Having a P/E under 20 is a good price for any stock, but having a high yield dividend stock may have a P/E as low as 2. Move away from stocks that has an N/A or a negative number in the P/E column.

Second, always use two sources when checking the stock’s dividend percent. If you want only the high yield to boost up your portfolio, then select stocks that pay over 8%. You should also, check the history of the payout. Make sure that the company has a history of paying each quarter, and that the dividend stays the same or increases with each payment.

Third, ask why the stock is paying so much. Is it basically taking a temporary correction because the sector is correcting? An investor could grab the stock at its recent low, and they would capture a yield over 10% as well. Of course in a common sense would say that oil will probably go up again, and surely investors didn’t let BPT languish long.

Fourth, check financial information. There are a lot of sources that is wealthy in information designed to help you determine the health of the company you are eyeing and some of it comes in easy to understand graphs. You should then check to see if revenues have been increasing yearly, and if the net income has been steadily growing. Then see if the executives of the company are buying the stock this is a great sign that the company’s health is solid.

Fifth, you should understand the risks that the stock is facing. Revenues are rapidly increasing, a great P/E, and a mystifying dividend of 24%. This is a simple examination of the newspapers could tell you that some banks are having trouble; the banks in trouble have been in the U.S a 24% dividend can put a lot of cash for your money market before the stock tanks. However, if you are willing to take a chance on a few thousand dollars, it could pay off handsomely for you.

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