The In’s and Out’s of ETF Trading

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In the investing world, exchange traded funds (ETFs) are the latest and greatest. Although they’ve been available for more than 10 years, it wasn’t until recently that the popularity of ETFs took off.

ETFs trade on the stock exchange as if they were stock. Usually they followed an index like the Dow Jones or NASDAQ. Recently, however, they are putting together ETFs that have a characteristic in common: they invest in a region or sector of the market, or have a certain market capitalization.

There are many advantages of ETFs over open and closed mutual funds. They are inexpensive to get because, like when purchasing stocks, you are paying a commission. If you use a discount brokerage you can purchase for little money. The regular maintenance fees for an ETF are also small when compared to managed mutual funds, and sometimes lower than index mutual funds.

Because ETFs trade like stock they have liquidity. With a simple phone call you can buy or sell. ETF exchange traded funds are priced every 15 seconds and trade continually throughout the day. This is not like mutual funds because mutual funds are only bought and sold at the end of the day. Since the exchange traded fund will be kept in a brokerage, it can be traded easily.

Tracking an index means less selling within the fund. This makes for a tax efficient fund. It is rare that an ETF declares a capital gain distribution. You choose when to sell and, as a result, you determine when you pay the taxes.

Index and managed funds keep some of their assets that are investable in cash. This is used to pay someone that is promoting their fund. Because ETFs trade like stocks, there is no need to keep a portion in cash.

There is no room for style drift in an ETF. In an actively managed mutual fund, the fund can say it is a large cap fund, but may chase performance by investing in small or mid caps at times. Exchange traded funds are required to keep a 99% correlation with the index or collection of stocks that it represents.

Regarding ETF trading strategies, because ETFs trade like individual stocks you have the additional features of stock. Exchange traded funds can be sold on margin or short. They can have limit, buy and stop loss orders for buying and selling. Call and put options can be bought and sold using exchange traded funds.

There are of course disadvantages to ETFs as well. They are not an appropriate investment to use with dollar cost averaging. If you have to pay a $10.00 fee each month when you make that $50 or $100 investment it can be difficult to make up that fee.

With the explosion of ETFs you have to watch what the fund is using as its underlying stocks. Sometimes it can be such a narrow focus that you really are not achieving diversification.

Due to the ease of trading you can get caught up in riskier strategies than you want. Short term trading and market timing can result in significant losses. Buying and selling ETF puts and calls, or buying on margin, is speculating and is riskier than buying and holding.

Exchange traded funds are the right choice under certain circumstances. You can use a broad index ETF as a core holding. This can be supplemented with targeted ETFs to provide weighting in a particular sector, region or type of market capitalization. As always know what you are investing in and be sure that it fits in your portfolio.

Quick Profits With Hot Stocks

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There is a new game in the stock market nowadays called hot stocks.  This goes against the normal Wall St.  Recommendation of buy low and sell high.  The new hot stocks strategy is to buy high and sell even higher.  The way it works is that you purchase stocks that are rising in price and sell them while they’re still rising.  The time between the buy and the sale is short. 

Find out what hot stocks are worth buying today.

Purchasing an undervalued stock and waiting for the price to rise is certainly smart idea.  It might take a while for the stock value to go up and during that time your money is tied up.  When you buy a hot stock, whose price is already rising, you can sell in short time and still make a profit.

This investment plan is especially suited to day traders.  You have to be conscious of the market trends and select stocks that are showing an obvious steady increase.  Buy the stock and after it rises enough to give you a profit, sell it.  Don’t feel tempted to hang onto it beyond making an honest profit.  This is a strategy, not a get rich quick scheme.   

If you selected a hot stock that turns out not to be so hot, lose it immediately even if you have to sell at a loss.  Holding on to the stock after it starts to drop could bring a much bigger loss.  The stock exchange is a bet and sometimes you lose.  Minimize your losses.

Hot stocks are brief investments and shouldn’t be held onto for more than a day or two.  Keep on top of the market trends and your stock costs so you can sell at the most advantageous time.  This technique of investment has risks and often you can lose.  That is’s alright.  The main thing is to chose more winners than losers.   

Don’t put all of your money into hot stocks.  This is just a method to turn a profit in the stock market.  Investors should have a portfolio with solid stocks from different areas of business to protect their investments.  Don’t neglect your long-term investments in favor of hot stocks.  Some of your profits from hot stocks should be put into long tern investments. 

Hot stocks only work as a short term investment.  These are stocks which should be bought and sold in less than a week.  If the stock continues to rise after you sell, that’s’s okay, you definitely made a profit.  The stock could just as simply drop in worth. 

If you are paying a brokerage for your investments, hot stocks isn’t an option for you.  Brokerage charges can quickly swallow your profits.  Look into online stock services that charge a set weekly or monthly charge for unlimited trades.  Trans action fees can be really costly.  Let your brokerage firm handle your long term investments, take care of your hot stocks yourself.  

Everyone know that you can make money on the stock market.  The trick is to invest cleverly.  Using different monetary instruments and diversifying your investments helps grow your cash while shielding your principal.  If you are unable to afford to bet, don’t play.  While the exchange beats Vegas, the odds will not always be in your favor.  Hot stocks are a fun way to play the market, they just are not the only way.

Check out the best stock newsletter in 2008.

Have The Stock Markets Bottomed Out?

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The main stock markets from around the world have had quite a good start to the year. I am finding it hard to see why the markets are performing so well as I believe that the Western world is still in a major financial mess. I am asked on a regular basis whether I think that the stock markets will continue to rise in the second half of 2009.

I am actually loving the fact that these stock markets are doing so well. I love to invest on the markets, or gamble as my family like to call it.

I should mention however at this stage that I am not a financial adviser and that I am merely a novice investor who is hoping that the “gamble” will pay off. Please therefore do not take any of what you read in this article as financial advice as I am not authorised to give advice etc. I actually work on various projects including offering a DVD duplication service, offering stuttering therapy and also assisting a business cost reduction specialist.

Investors are hoping to see some green sheets of recovery and are eager to enter the market at the right time; or at “the bottom” as they call it. I am not sure about you but I certainly have not seen any green shoots so far!

Over the last few months we have seen some dramatic gains on more of a hope that the recovery has started. So just how will the markets react when it sees some “real evidence” that the credit crunch is starting to ease? Well they should, in my humble opinion, have a major rally. With interest rates at historical lows people are seeking an investment which offers a much greater return than the measly three percent offered on the high street.

I personally believe that there are going to be some rocky roads ahead but that the bottom of the market may have been reached.

The Benefits of Developing a Trading Edge

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First and foremost, you need to realize that only a small percentage of traders are successful at developing an trading psychology and the only reason for them being successful, is because they have learnt how to deal with the aspect of failure.

Developing a trading plan is of fundamental importance as far as trading is concerned. What’s of even greater importance though is that you the trader, manages to convince yourself 100% of the importance of a trading plan. Unless you believe your trading success rests solely on a trading plan, you’ll simply not be willing to invest enough time to develop one.

Likewise, I also emphasize the importance of separating oneself from the larger majority. In other words, one needs to find a trading edge. Remember, the vast majority who decide to trade will end up failing and unless you have an edge, you’ll end up joining them.

You’ve more that likely heard and read that on average; only 20% of people entering the markets are successful and actually make money from trading business. So, when you here me making references to the majority, it’s the group of 80% that I’m referring to.

So, where do these figures come from and how can we be so sure that only 20% of traders make money? I know I don’t have any evidence to back such a statement. In fact, when I first considered it, I was of the opinion that it’s no more than a popular cliche.

Frankly, I can see how such a statement could be backed by evidence unless of course there are accurate audits and precise statistical data.

I’ve spent a considerable amount of time mulling over these figures so it came as a welcome surprise when I became involved in a discussion with someone else who also doubted the accuracy of them.

Interestingly enough, we both agreed that as with other professions, traders fall into one of three categories. On one end of the scale you have the top 20% who are highly successful while on the other end of the scale; you have 20% who fail completely. This in turn leaves us with 60% of traders in between, and this is the group who don’t really fail, but they also don’t make any noticeable achievements either. So, now we can see how the 80% group is made up.

Clearly, the largest percentage of traders falls within the 60% group where they just tend to go with the flow. What is it then that drives others further, thus allowing them to enter the top 20% group?

Given what I do for a living, I firmly believe that most people fear failure to such an extent, that they’re in turn reluctant to take risks. I also believe that far too many people perceive failure to be an entirely negative experience when in fact it need not be.

Years ago when I first started with a trading education, an instructor once said that I should never see failure as failure, but instead, we should rather see failure as an opportunity to improve ourselves. Let’s face it, when you experience failure in a certain area, you’ll be particularly vigilant the next time round in order to avoid making the same errors.

An ideal attitude towards failure can be seen in the likes of Thomas Edison who himself experienced many failures along the road to success. Interestingly enough, Thomas once said that instead of failing, he’s simply discovered thousands of ways which don’t work.

Having come to the conclusion that so many people fear failure, Thomas Edison later added that a large percentage will give up, without actually realizing just how close they are to success.

Of course no trader should be willing to storm ahead blindly but there’s a fine line between caution and the fear of failing. I often have to remind myself that I only live once, in order to give myself that extra bit of encouragement for taking a risk. Of course, I then have to do whatever is necessary in order to prevent myself from worrying about my decision.

If this article leaves you with just one thing, I hope it will encourage you to cast off those shackles which keep you restricted to the middle 60% group. While I certainly don’t advocate throwing caution to the wind, please don’t allow yourself to be intimidated by a fear of failing. Take some risks and face your fears, and you’ll be much more likely to get into the top 20%.

Red Hot Stocks For 2010

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It may be still be a few months away however the professional investors will already be preparing their stock portfolios for 2010. Research into various companies, sectors and countries are all a part of this research. So where could be the best place to invest your hard earned cash in 2010?

Now it is important that I a make one thing clear to the readers of this article before I continue; please do not take what you read as any form of financial advice as I am not a financial adviser. I am just another run of the mill guy who likes to play the stock markets. I see it as a bit of fun and very much a gamble. By trade I am offer a web promotion advice service, a stuttering therapy service (I used to have a stutter myself) and I am also involved in company that offers a professional DVD duplication service.

I really like the companies that are looking to invest their way through this current crisis. This takes a bit of nerve and a lot of ready cash but is a move that is likely to prove very beneficial in the long run. It has to be said that there has possibly never been a better time to buy a business. There are many small business owners seeking to sell up and this is where a bargain could be had.

Those companies that are willing to invest are the ones that are likely to emerge as the strongest once this recession ends. It is all about ensuring that you are best placed out of all of your competitors when business starts to boom again.

As for regions, I am particularly attracted to the stock markets in Russia, in India and in China. A slightly riskier proposition is the Japanese stock market but is one that could easily shine next year.

For all you investors out there – good luck in 2010! Steve Hill from the UK, invester of the year 2094!

Advantages of Financial Analysis

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Analysis of financial statements of companies accords you an understanding on how the corporation is conducting its establishment. Financial analysis provides the management with the financial health of the company, along with information on whether companies are performing according to their expectations, and whether any new projects are returning the required rate of returns. Capital Budgeting and Capital Structure are some of the parts of a financial statement analysis that the management of the corporation will look into. With financial statement analysis, shareholders and management will able to decide how well the firm is performing in comparison to its competitors within the industry.

Based on a business’s required rate of return, a financial analyst could either advice a project to the management after a financial statement analysis. Financial Analysts who are give recommendations to the management might advise them to pick a certain project over other depending on the amount of returns it will provide over the course of time. Expected returns from projects are provided by financial analysts to the management. To maximize company’s profits, the financial analysts in the company’s payroll will advise the management the best way to raise money to fund new projects, whether it issuing new stocks, bonds, or borrowing it through loans. The roles of performing capital budgeting and capital structuring will be taken on by financial analysts.

Financial statement analysis is also done by external agencies to evaluate the health of a corporation, and to give shareholders recommendations on whether to buy or sell a stock. External financial analysts could be employed by credit agencies, hedge funds, brokerage companies who give their clients recommendations on what stock to buy or sell based on recommendations by their financial analysts. As owners are influenced in the purchase of stocks based on recommendations of financial analysts, it is crucial that financial analysis are done accurately. A financial analyst might suggest selling of a share if after a financial statement analysis he believes that the company prospects are no more bright. If such a suggestion were to be public, and the analyst was from a well known investment corporation, it could have serious affect on the price of that company’s stock.

Good Mutual Funds – Stocks Tips to Choosing the Best Performing Mutual Funds

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Mutual funds are making a strong penetration among common people. The reason is very clear. Every individual keeps interest to make money. But, due to lack of proper knowledge they hesitate to enter into the stock markets. So, mutual funds give a good platform for common investors.

If you do not want to concern yourself with the management of your portfolio, then investing in mutual funds is a great way to doing so as a majority of these are professionally managed. Depending on your risk level, there are many different categories of funds that invest in specific holdings.

In a poll taken by the media, consumers overwhelmingly voted for mutual funds as the best investment, mostly because there is so little risk involved. In recent years, investments in these funds have surpassed national saving certificates and the public provident fund as the best way to save money. Investors also find that they can save on taxes by investing in them.

If you’re new to investing, you will find a great deal of information on the internet that will teach you the best ways to buy and sell funds so that you can save money on your investments and earn maximum profit.

From there, it simply becomes a matter of doing more research into the company including the board of advisors and how well the company has done in the past. Use resources such as Morningstar to get a better picture of how likely a particular fund will perform in the future.

Another valuable resource is to make use of the Lipper Leader Fund Ratings which use total return, tax efficiency, expense, preservation and consistent return as criteria for rankings. The information in these resources should never be taken at face value but they should be instead used as a guide.

Resource Author Francisco Rodriguez Higueras
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Master The Art Of Back Testing With Your Trading Systems

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By utilizing the back test, trading systems avoid sightless guessing with no data or analysis. With back testing, you will no longer be trading blindly and give you the chance to prove yourself. Don’t be the easily-fooled trader who crashes and burns, losing lots of money. By using all of the tools at your disposal, you can avoid many mistakes in the minefield of the market. Like I have said previously, one of my favorite aspects of trading is that you can test your plan or system without fronting any money. Back testing makes this possible.

The back test as an methodology that is not given much importance by most traders. The psychological importance and management of money has been highlighted by me and many other trading coaches.  All you have to do is look around on the web to see the vast array of information that’s available. The additional attention has, however, been at the expense of the back test, and consequently, the least appreciated and unstated area of trading is now back testing.

Using the back testing process is vital, because it influences your entries, exits, money management, and psychology in these ways:

– Back testing allows you to test your whole system operation with historical information, which allows you to alter it as needed to get the reaction you want.

– It allows you to see which system works best for you it is possible to try back testing on your money management models.

– As pointed out earlier, knowing the positive and negative aspects of your system, even if they are only theoretical, will boost your confidence, which will, in turn, increase your performance when you really trade.

No matter what technical routine you use (moving averages, volatility breakouts, or any other trading scheme) you will need to evaluate it fully to be confident in it.

Traders often question the effectiveness of their systems if they don’t run test before actually completing the task. Due to problems in their trading structure, many get lured into using other models which prove to be either the latest fad or totally ineffective. Spinning their wheels in chat forums, traders will wind up either making no decision or one that’s simply awful.

Things which look good on the service, but are actually not really any good will attract a trader who is dissatisfied with the trading system. For this reason, back testing should be the thing implemented so that there is a level of confidence by the trader.  Otherwise, the trader will not obtain the required self-assurance and self-belief to successfully trade the system.

The back test makes sure you get a good idea of trading, and how successful the system can be.

The Latest Tool In Trading Communications – Twitter

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Ask any city trader, such as a hedge fund manager or invest banker and they will tell you that communication plays a massive role in their job. They need to be one step ahead of the game in many respects and be tightly connected to the latest news. This information tends to come from a great deal of sources, including mediums such as press releases, business statements, cable news channels and many more. However, because the world of finance often moves faster than a speeding bullet, traders need to get the latest information from a wide variety of sources, and they need it now. The social media platform Twitter is now a tool that is being used by many traders to keep up with business knowledge according to the National Australia Bank (NAB).

Twitter, which is known as a micro-blogging site, allows users to update their profiles with posts of a maximum 160 characters. This keeps the ‘tweets’ short and concise, “which is what traders like” says Henry Allan of the London Lite Trading Group. Users within a certain niche, such as the alpha wire sector, can follow other Twitter members who they want to receive updates from, and can themselves be followed. There is very little that is still local when it comes to city trading these days and often businesses and individuals need to stay connected to lots of other people around the world, who may be working in different time zone. Twitter allows groups of people from various sectors such as the media, banking and business to alert each other of the latest updates or discuss predicted market trends.

Some people have voiced concerns that Twitter could be used as a platform for insider trading as messages can be sent out privately to people using the site. Although supporters such as this cable ties business are quick to point out that this was always possible via email and the real power comes from the ability to alert hundreds of thousands of people publically, which of course can be monitored for underhanded dealings if necessary

Discover the Secret of a Flawless Trade Entry

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So what is a perfect trade entry and what’s the secret to finding it? While this may come as a disappointment, its better that you learn the truth so let me say this, “the secret is, there’s no such thing as a perfect trading entry. Yes you’ve read correctly so you can save yourself a lot of time and effort if you accept the fact that you’re not going to discover the Holy Grail of trading. That’s right; that perfect indicator which tells you when to jump in and when to get out, simply does not exist.

Once again, if you’re still relatively new to trading, you need to realize that a perfect indicator simply does not exist.

Why is it that so many still continue to believe in such indicators?

Renowned trading guru and accomplished author dr van tharp is of the opinion that this belief in a perfect trade entry, particularly between novice traders, stems from them believing that so long as they’re involved in the selection and entry into a trade, they have a certain degree of control over the markets. In fact, Van Tharp even goes as far as calling it the “lotto bias”, stating that the same tendency can be seen in people choosing lottery numbers based on birthdays, anniversaries or any other numbers they deem to be relevant.

Why do so many lottery punters choose numbers from birth dates and etc? Simply because they believe whole heartedly that those are the best possible numbers. Of course, irrespective of what they want to believe, their combination of numbers stands the same chance as any number of combinations. Unfortunately, because there’s an emotional connection, these punters have a tendency to feel as though they have a certain amount of control over the outcome. The same applies to traders and trade entry.

At that point in time when you’re just about to enter into a trade, you’re in full control of any trade entry. However, once you’ve taken the plunge, you need to let go. Once you’re actually in a trade, you no longer have any control over the markets. They’ll do exactly as they please and there’s absolutely nothing you can do to change it.

Interestingly enough, the amount of money you rake in from a trade isn’t determined by when you buy your stock, but rather, it’s determined by how much you put in and when you exit.

Let’s take a look at the following example:

Okay, so you’re ready to buy some stock and by implementing the system you use, you know that you should buy the stock at $10 per share, and that you should exit when they reach $12 per share. In this example we’ll look at two different scenarios. In the first one you have $1000 and in the second you have $10,000.
1. Buying at $10 per share, your $1000 gets you 100 shares which in turn means that when you sell at $12 per share, you will have made $200 profit.
2. Buying at $10 per share, your $10K gets you 1000 shares. In this case, when you exit at $12 per share you’ll be $2000 richer.

So, now you have it. Your trading entry doesn’t determine how much profit you make but instead, it’s the amount of money you invest that will determine your profits. This is without a doubt your cornerstone of effective money management.