Diversification Is Key To Success When investing in Stocks, Bonds, Mutual Funds, Commodities and ETF’s and just about every other legit investment available. Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don’t get full value. Some of you may have margin accounts. Its always best to have cash ownership of stocks you invest in. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments. Something can always go wrong in any one situation. Maybe something...
Convertible bonds are bonds issued by corporations that are backed by the corporations’ assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an “equity kicker” – if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money. Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following: 1. Convertible bonds offer regular interest payments, like regular bonds. 2. Downturns in this investment category have not been as dramatic as in other investment categories. 3. If the bond’s underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is “trading-off-the-common” which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying...
The price earnings ratio is the number that is looked at more than any other on the stock market. The price earnings ratio examines the relationship between a company’s earnings and the stock price. This is the most popular form of stock analysis, but it is important for any investor that they do not rely on just one type of information to guide them. The price earnings ratio is calculated by dividing the earnings per share of a company by the share price. The formula looks like this: Price Earnings Ratio=Stock Price/ Earnings Per Share. Why is the price earning ratio important to stock traders? This ratio is used by traders to get a basic assessment of what the market will pay for the earnings of a company. The higher the price earnings ratio is, the more money the market is willing to pay for earnings from a company. Some investors stay away from stocks that have a high price earnings ratio, and this may be because they think the stock is overpriced. But a high price earnings ratio may also mean that there are high hopes for the company on the market. A low price earnings ratio may mean that there is no confidence in the company on the market, but that does not make this stock a loser. Some stocks, called sleepers, are good stocks that get overlooked by the market. These sleeper stocks are also known as value stocks, and many traders have made a killing by recognizing these stocks when the market does not. There is no right or good price earnings ratio. One investor...
The most important decision you will ever make when it comes to trading stocks is your choice of a stockbroker. With the large number of brokerage firms available online, finding one that is a good match with you can seem like an impossible task. By knowing some of the questions to ask and what to look out for, the decision will be easier and finding the right stockbroker will be a simple matter. There are several factors that must be considered when you are choosing the right stockbroker. These include any discounts, the site performance history, alternative contact methods like phone and mail, trade costs per trade, the brokers reputation and track record, account types available to you, any minimum deposit, customer service with the broker, and the selection of products, to name some of them. Any discounts you receive should not be the only reason you choose a specific broker. In the beginning it is better to have a full service broker. Once you get really comfortable with your trading strategies then you can start taking some of the task on yourself. Once you reach this point, then a broker who offers a discount may become right for you. The performance of the brokerage site you are looking at is an important chunk of information that is needed to evaluate a potential online site. It is a good idea to visit the brokerage site during peak market hours to see exactly how fast it loads at peak times. Thoroughly research the broker, and find out what alternate contact methods he has in place if the computer is not...
