October 27, 2007
What's Foreign Depends On Where You Stand
The New York Stock Exchange is not the oldest operating securities market. Though measured by total market capitalization, it's among the largest at $12 trillion - yes that's twelve trillion dollars. The Paris bourse goes back to 1724 and the Deutsche Boerse is even older: founded in 1585.
There is a new stock exchange in Budapest (1993) and old ones in Brazil (1890) and Australia (1837), and larger ones in Hong Kong - which trades six times the volume of the NYSE (7 billion shares per day).
Apart from some interesting historical info, that's to remind everyone that, though the U.S. market is large, it is not the only game in town - even for U.S. investors. And the latter are far from the only traders on Earth, though they sometimes think that way.
How to go about playing it?
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A call to a broker is generally required for a U.S. investor to trade a non-U.S. company stock, and a larger commission is charged. 1% is normal. On a $5,000 trade - often the minimum - that's $50, hefty in this day of online trading accounts. But other than that, the transaction is carried out, from the investors point of view just as normal business.
The research requirement to avoid losing money at more than the normal rate is considerably higher, however. Keeping tabs on the activity of foreign companies means understanding the local culture and business environment. It entails tracking many more laws that can impact earnings and knowing the rules that govern trades in different countries.
Fortunately, with the growth of consolidated exchanges like Euronext - formed in 2000 by merging the Paris, Amsterdam, Lisbon and Brussels exchanges - has made that significantly easier. That trend is likely to continue.
Risk, too, is higher. Trading outside one's home country means having to pay attention not only to all the usual factors, but exchange rates as well. And currency exchange is the largest and most active market in the world. For several years, the U.S. dollar was king of currencies but lately it's been taking a beating.
That isn't necessarily bad even for U.S. investors, since risk can be minimized and profits maximized in two ways. One way is to invest in offsetting currencies and equities - as one country's currency rises, one can buy more of their shares with that country's currency. The other, better, way for the average investor is to look to ETFs (Exchange Traded Funds) that focus on foreign securities and let those issues be handled by professionals.
Whatever your plan, having a healthy respect for research and a commitment to a well-thought out trading strategy is required for anyone interested in capitalizing on the growth of businesses far from home. Unless you just enjoy losing money.
Posted by Stock at 05:25 PM | Comments (0)
October 06, 2007
Government Influence on Share Prices
First, some statistics.
At the end of fiscal year 2005, the U.S. Federal debt was approximately $7.9 trillion. Yes, you read that correctly. That's almost eight trillion dollars. That's up from 930 billion in 1980, an increase of more than 849%. $4.5 trillion of that is owed to 'the public' - individual T-Bill and T-Bond (and other) holders, a third Japanese.
And that's just one form of influence from one country's government. Granted, the Federal debt and the U.S. in general are large components of the global picture.
Another big factor is interest rates.
Not all interest rates are set by government action. Private lenders determine - in the final analysis - whether a home mortgage, a CD (Certificate of Deposit) or a margin rate is 2% or 10%. But the Fed, Her Majesty's Treasury, and other countries' governments have a large influence. Whether by setting 'the prime' - the rate large banks pay to borrow short-term funds - or simply by being the enormous borrowers (as shown above) they are, interest rates are other than what they would be in their absence.
So, what's that got to do with stocks?
Apart from the general economic impact of regulations and direct taxation, bond rates (and interest rates generally) are one of the largest factors affecting share prices, outside of daily speculation.
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When governments borrow, they raise interest rates for everyone. The difference is, the government doesn't pay it back out of profits - they haven't any. They pay it back out of taxes and by inflation, which reduces the real amount they have to pay back. Thus, large government borrowing whacks the investor twice.
Also, since stocks effectively compete for investor dollars with bonds and other instruments, changing bond rates influences how attractive equities are versus those others.
Now, of course governments don't have infinite power to determine prices - in shares, bonds or loans (interest rates). A T-Bill or UK Govt Bond paying 1% is - other things being equal - going to attract fewer buyers than an 8% AAA bond or even (one may speculate) a 5% dividend from Google. (Google doesn't, and doesn't intend to, pay dividends by the way - it's just an example.)
Whether all this is a good or bad thing, or somewhere in between, is a debate we leave for another time. But whatever one's view, it definitely has an impact on the equities markets.
So next time you're researching whether to buy 100 shares of the next GoogYah NextBigThing, Inc be sure to factor in how affected they might be (relative to others in the same economic sector) by interest rates and government debt. And don't forget that impact on your own future cash flows either. After all, you may want to buy 100 more later.
Posted by Stock at 04:34 PM | Comments (0)
September 23, 2007
Wise Stock Investing
The title may sound strange to some investors or traders, especially to those that are new to the subject. Some people are convinced that this is the single most important thing for success in the stock market. But the truth is; when it comes to being a successful investor, how much money you make when you're right really isn't all that counts. The simple fact is you won't always be right. Oops. Bad news, right. It's not something you like to hear, but it's true. Isn't it? Even though it's possible that some of you may have met someone, at one time or another, that claimed to be right almost 100% of the time. And if you haven't met that person yet, you might run into him or her somewhere in the future. When you do, be careful. When someone tells you he or she is always right, in general, three scenario's are possible:
- You're talking to the world's best investor / trader
- You're talking to a textbook example of beginners luck
- You're talking to a liar
Let's take a quick look at all these possibilities. The first scenario is of course highly unlikely. Fortunately it's easy to find out if this is the case. Just take a look at the person's track record. People that like to brag about being right all the time, usually enjoy making their point. So they would love to prove their track record to you. If they fail to cough one up, they're probably not telling you the truth.
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Then of course we have the third and most likely scenario. In this case, you would take the same approach as you did with the super investor. You ask them to show you their track record. The liar of course will never give you this. Instead they will try to convince you with wonderful stories. All of which are probably fascinating. Some would be interesting enough to serve as a plot for a Hollywood blockbuster on Wallstreet. However, none of these stories will do you any good when it comes to making it in the stock market.
The plain and simple truth is that nobody can invest for any period of time and be right each and every time. It simply is not possible. Now that doesn't mean that anyone telling you they never lose is lying. It depends on what they're really saying. They are not saying that they never lose on a trade or on a specific investment. What they may be saying is that they never close out a year with a loss at the end. So how come they can make money every year even when they lose on some trades just like everybody else? The answer is simple; they are right more often then they are wrong. And more importantly, when they are wrong they limit their losses.
To illustrate this, let's compare the stock market to a game of roulette. Some people could easily substitute one for the other. They live under the assumption that both are simply games of chance. Others may find this comparison ridiculous because the two are so vastly different. The two camps would probably never agree, so let's not go into that discussion here. However there is something very important we can learn from roulette.
In a game of roulette the odds are actually divided in a reasonably fair way. If you were to continue playing by constantly just betting a small amount, say $10.00. And you would consistently play the same color, say black. You would be right 18 out of 37 times on average. Of course you would also be wrong 18 times. If you would consistently play the game this way, you would probably never win much, but you couldn't lose much either. As a matter of fact if you would just continue playing long enough, you would eventually lose on 1/37th of all your bets.
Unfortunately the same can not be said for the stock market. The odds are quite different there. Yes, the market can go up and down, and there is no zero, but there are many more factors to be taken into account than in a game of roulette. The same strategy that was described in the roulette example could work quite well in the stock market, but it could also cost you everything you've got. One part about being a successful trader is to be right as often as possible. And even though you cannot predict the market, at least not perfectly. You can do your homework by studying the technical analysis charts and doing some fundamental analysis into the company. If you know what to look for, this will greatly increase your chances of being right.
However, you still will not be right all the time. And that is where both the lesson from the roulette example and the title of this article come in. First of all, you have to place your 'bets' evenly. Stick to the $10.00 example. Don't be persuaded to invest a significantly large part of your investment capital into any one trade just because you're so sure this time. This may work out fine many times, but sooner or later it will hurt you, and it will hurt bad. You see it is not how much you make when you're right that counts. It is what you keep yourself from losing when you're wrong that really matters in the long run. You can be right 90% of the time and make some pretty good money. But it won't do you any good if you lose it all on the 10% of your trades when you're wrong. Of course diversification and proper asset allocation can help protect you, but that simply isn't enough. You have to know when to get out.
So next time when you're about to make a trade, ask yourself: "What if I'm wrong". And then determine a price level at which you will take your loss and get out. Once you've determined this simple rule, just stick to it. It may cause you to lose a little money every once and a while. Even on trades that may bounce back just one day later. But in the long run that will hurt far less than the losing trade you so desperately hang on to, hoping it will recover. Only to find out that it won't.
Posted by Stock at 10:13 AM | Comments (0)
June 06, 2006
Stock Markets
The term 'Stock Market' is commonly used to encompass both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country. When we hear an expression such as 'The stock market was down today' it refers to the combined activity of many stock exchanges i.e. the New York Stock Exchange (NYSE), Nasdaq etc. in the United States.
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Stock exchanges exist throughout the world and it is possible to buy or sell stocks on any of them. The only restriction is the opening hours of each exchange. Both the NYSE and Nasdaq for example operate from 9:30 a.m. to 4:00 p.m. Eastern Time from Monday to Friday. Other exchanges have similar opening hours based on their local time. If you want to trade on the Hong Kong Stock Exchange your order will be executed sometime between 9:30 p.m. and 4:00 a.m. New York time.
The major stock exchanges of the world are located in Japan (Tokyo Stock Exchange), India (Bombay Stock Exchange), Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange), the People's Republic of China (Shanghai Stock Exchange) and the United States. The major exchanges in the US are the NYSE, Nasdaq, and Amex.
Stock markets closely follow the economic health of a country. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downtrends in the economy. Inflation and unemployment are rising and stock prices are falling.
Fluctuations in stock prices are also driven by supply and demand, which in turn are determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short term fluctuations. Stock prices tend to normalize after such runs.
The stock exchange is only one of many opportunities to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.
The FOREX is the biggest (in terms of value of trades) investment market in the world. FOREX traders buy one currency against another and can profit from small changes in value. Most FOREX trades are entered and exited in one 24 hour span, and traders have to keep a close watch on the market in order to make profitable trades.
The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value. Most investors in the futures market are not interested in the actual goods – only in the profit that can be realized in trading the contracts.
The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.
All three of these markets are quite risky and require considerable knowledge and experience to prevent substantial losses. They also require close attention to market movements. Stocks, on the other hand, are less risky because movements of the market are usually gradual. Although short term investment strategies are possible, most view stocks as long term investments.
Posted by Stock at 09:11 PM | Comments (0)
