Forex Trading Basics For The Novice Investor

By Cookie Maxwell

 

What is Forex Trading?

In order to understand forex trading basics, you must first know the meaning of the term. The foreign exchange market, or forex for short, is the trade of foreign currencies on the open market. This market used to be the playground of hedge fund managers and extremely wealthy people only, but the Internet has opened forex trading up to everyone. It is possible to buy and sell currency instantly over the Internet through brokerage accounts set up online.

The fluctuation of currencies is often very small on a daily basis. For example, trading USD for CAD would result in only a few cent differences per day. Foreign exchange is one of the most stable financial markets. The forex market provides many opportunities for even beginning investors. Before you foray into the world of foreign exchange, you must understand the forex trading basics.

The Benefits of Forex Over Other Financial Opportunities

Those who know forex trading basics can tell you that the market has grown rapidly over the past few years because of the rise of the Internet. It is almost impossible for any players to manipulate supply and demand, unlike the stock market. This is because the size of the market is so large that even the biggest players, such as so-called "megabanks," do not have enough power to move prices.

Forex trading is also a 24-hour a day process because markets are open at different times throughout the world. This is great for investors that want their money to be working for them while they are sleeping.

Forex trading allows your money to be liquid nearly instantly. Low transaction costs allow you to trade more frequently than you would be able to with stocks as well.
Types of Trades: Spot Market, Forwards and Futures

There are three ways for individuals and corporations to trade on the forex market. The spot market is the largest market because it is the only "real" asset. Before the rise of Internet trading, futures were more popular with traders because they were available for an extended time.

Those just learning forex trading basics often start with trading on the spot market. The spot market is where currency pairs are purchased and sold in accordance with current values. A currency's value hinges on supply and demand. Supply and demand of a currency depends on many different things, such as interest rates and a nation's current economic health overall.

Forwards and futures are not trading real currency pairs, but instead deal in contracts that represent specific currency types, an agreed upon price per unit and a date in the future on which the contract will be settled. Forwards are purchased and sold between individuals who agree upon terms they come up with personally.

Futures are traded on public markets. Federal governments also generally regulate futures. Contracts include things such as the number of units being traded, settlement dates, and price increments that cannot be changed.

Forwards and futures are both binding contracts that are generally settled for cash on expiration. They can offer protection against major risk when trading on the forex market.

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What Pips Represent In Forex Trading

By Arthur Robertson

 

With the commitment to learn Forex trading, you will be ensuring that you make any future financial investment decisions based on the best information possible. Educating yourself about the currency exchange markets, and by learning about pips and other issues, can give you the chance to make wiser investments. Ensuring a financial future that you have always dreamed about will be easier to do with the right information.

Making full use of any tools available in your efforts to educate yourself is the key to making more effective use of any opportunities that come your way. Ensuring that you have the chance to seize new investment opportunities in order to secure a greater return could be a wise use of your time and your efforts. Exploring such resources would be the best way to get started.

Online information can offer you fast and easy access to basic information, allowing you to construct a more accurate outline of the market and what investment opportunities may be found with it. Using such a tool brings with it the additional benefit of allowing you to find information on other resources and tools that can answer your remaining questions. Web searches give you the best way to get started.

Contacting a professional, firm or investment adviser in the hopes of learning even more may be a smart move as well. With the risks of placing your money in a poor investment being so costly, it would be wise to do all that you can to reduce them. With the right education, you may be able to do just that.

With further information, you will be able to develop a clearer picture of the process, markets and resources needed to ensure that your investments are well made. Doing otherwise may end up being more costly for you than you may have imagined. Protecting yourself, and your investments, by taking this opportunity to educate yourself would be only prudent.

Savvy investors have long known of the advantages that can be had with greater insight. Making use of the printed materials, web sites and professional services that will be able to offer you a greater understanding of the currency exchange market can really pay off. Smarter investment decisions will be possible as a result.

By using what you need to learn Forex trading skills, tips and strategies you can ensure that your investment decisions are superior ones. Giving yourself access to such information can make all the difference. You may be glad to have done so.

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The Truth About Diversification

By Anthony C Caruso

 

Diversification is a method that reduces risk by allocating money in a portfolio among various types of investment categories. Those categories are known as "asset classes", and deciding how much to put in to each asset class is known as "asset allocation". The rationale behind diversification is that a portfolio of different kinds of investments will generate higher returns with lower risk than one with only a few investments.

 

Why You Should Diversify

 

Let's say you have a portfolio of only one investment, all in a large insurance company. It grows nicely and pays a handsome dividend for years, but then, a series of tornadoes in the Midwest devastate thousands of homes. A short time later, two major hurricanes hit Florida then the gulf region. Potential claims are so substantial that the insurance company could go bankrupt, and its stock plummets. Your portfolio is crushed. But now let's say that instead of putting all of your money in to owning one insurance company, you had split your money equally putting half in to the insurance company and the other half in to a home improvement and building materials company. In this instance, while the storm damages would cause your insurance stock to lose value, at the same time, homes would have to be rebuilt or repaired and the demand for building materials would skyrocket, as would your investment in the building materials company. A statistician would say that because these two stocks seem to counterbalance each other, they do not have a strong "correlation", meaning that they do not act the same way. In building a diversified portfolio then, we want to have asset classes that not only do not act the same way, but actually have some degree of "inverse correlation", meaning that if some investments go down, others will go up to offset losses (stocks and bonds often move in opposite directions). This is why diversification keeps your risk of losses in check. Now as you might imagine, the more you diversify your portfolio with inversely correlated asset classes, the better chance you have to lower risk.

 

Diversification or Diworsification?

 

Diworsification is a play on the word diversification, coined by the famed fund manager Peter Lynch. While diversification involves a selection of assets with inverse correlations, which reduces risk and can increase potential returns, "diworsification" occurs by investing in too many assets that may appear to be different, but in fact act the same way. A common mistake for example, would be for an investor to split his money over the top five performing U.S. large company mutual funds, with the assumption that five different mutual funds would be five totally different "diversified" investments. On closer inspection however, by drilling down and looking at the top 25 stocks that each of these different mutual funds owned, one would be surprised to see that they all owned almost the exact same individual stocks.

 

Two Kinds of Risk

 

When we talk about managing risk in the investing process, it's important to note that there are actually several types of risk we need to be concerned with.

 

Systematic Risk - These are risks that affect the entire market and cannot be completely diversified away. Interest rate increases, recessions, political instability, exchange rates and wars are examples of systematic risks.

 

Unsystematic Risk - These are risks that are specific to individual stocks or investments, and can be diversified away as you increase the number of stocks or investments in your portfolio.

 

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the advantages of diversification will exist only if the securities in the portfolio are not perfectly correlated

 

What is Asset Allocation?

 

Asset allocation is the strategy of dividing your total investment portfolio among various asset classes (that are not perfectly correlated), such as equities (stocks), fixed income (bonds), real estate, commodities, precious metals, etc. Asset allocation is the method we use to achieve effective diversification.

 

Some common asset classes are as follows:

Large-cap stock - These are shares issued by large companies with a market capitalization generally greater than $10 billion.

 

Mid-cap stock - These are issued by mid-sized companies with a market cap generally between $2 billion and $10 billion.

 

Small-cap stocks - These represent smaller-sized companies with a market cap of less than $2 billion. These types of equities tend to have the highest risk due to lower liquidity.

 

International securities - These types of assets are issued by foreign companies in developed nations, and are listed on a foreign exchange. International securities allow an investor to diversify outside of his or her country, but they also have exposure to country specific economic or political risk.

 

Emerging markets - This category represents securities from the financial markets of a developing country. While investments in emerging markets can offer a higher potential return, there is also higher risk, often due to political instability, country risk and lower liquidity.

 

Fixed income securities - The fixed-income asset class comprises bonds or other debt obligations that pay the owner a set amount of interest, periodically or at maturity, as well as the return of principal when the security matures. Maturities can range from short term to intermediate or long term. These securities are intended to have lower risk because of the steady income they provide. In reality, bonds can fluctuate in value and be worth more or less than the price you originally paid, if you seek to sell them before maturity. In addition, there is always a risk of default if the issuer cannot repay the principal when due. Fixed-income securities include corporate and government bonds.

 

Money market - Money market securities are debt securities that are extremely liquid investments with maturities of less than one year. Treasury bills (T-bills) and short term commercial paper make up the majority of these types of securities.

 

Real-estate investment trusts (REITs) - Real estate investment trusts (REITs) trade similarly to equities, except the underlying asset is a share of a pool of mortgages or properties, rather than ownership of a company.

 

There is no standard formula that can find the right asset allocation for every person. A customized asset allocation plan should only come after a professional assessment of an investor's age, level of risk tolerance (how much can he lose in the short term and still sleep at night), anticipated future additions to the portfolio during working years, investment objectives (such as how big does the portfolio need to be at retirement age to meet expected living expenses) and other pertinent financial planning issues. Only then can his specific investment goals be properly understood, and a roadmap to get there be designed.

 

Strategic and Tactical Asset Allocation

 

After an assessment is made and a suitable asset allocation plan is determined, a portfolio is divided in to various percentages of each asset class. Over time, some classes will grow in value, and others will lose in value. Using a strategic asset allocation method, those asset classes are periodically "rebalanced" back to their original starting percentages to keep risk management and diversification on track. For example, an investor with a $200,000 portfolio may start with an asset allocation of 50% in stocks and 50% in fixed income. After a year, when stocks have outperformed bonds, the portfolio now holds $130,000 in stocks and $110,000 in bonds. Rebalancing would result in the sale of $10,000 worth of stocks from the portfolio, and the proceeds would be used to buy bonds, to get back to the original 50%/50% allocation.

 

On the other hand, if a tactical asset allocation method is used, a portfolio manager seeks to create extra value by modifying the percentages in each asset class to take advantage of certain economic or market conditions. This is a more active strategy where a portfolio manager only returns to the portfolio's original strategic asset mix after desired short-term profits are achieved.

 

Conclusion

 

Diversification via asset allocation is a fundamental investing principle, because it helps investors maximize profits while minimizing risk. Choosing an appropriate asset allocation strategy and conducting periodic reviews will ensure you maintain your long-term investment goals and reach your desired return at the lowest amount of risk possible.

 

For more information please visit http://www.carusoandcompany.com

 

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Investment Types and Techniques

 

 

Investing is the process through which money and diverse forms of capital are put in an enterprise in order to produce a profit. In brief, investment is the purchasing of an item of value or a financial product in the hope of making profits. Investment involves the use of money for profit generation.

Savings differ from investment as they involve setting aside a portion of one's income. In contrast, investing is a long-term strategy that aims at accumulating more money. There are many advantages that are associated with investing. Investing tends to beat out inflation, helping financial goals to be reached.

Investments come in diverse forms. They are also known as investment vehicles. The risks and benefits depend on the particular type. To invest effectively, investors have to evaluate their objectives and resources. However, no matter what investment vehicle is chosen, the rule is that instruments are chosen for the purpose of creating more profits.

Stocks are among the most preferred investment tools. Stocks are a form of investment in publicly traded corporations. Corporate entities issue stakes of ownership or shares that are traded to the general public. The purchase and sale of stocks is carried out on the global stock exchanges.
Individuals who trade stocks with success have good knowledge of market tendencies and the various factors that determine stock prices. Stock prices go up and down depending on company's operations, profits, and other factors.

Bonds are investment tools and a form of loans made to governments and corporate entities by investors. In return, governments and corporations pay fixed interest rate to the investors over an agreed period or term. At the end of the term, the lender recovers the principal amount.

The bond investment carries medium risk to the investor. It is more secure relative to other types of investment in that the returns are almost always guaranteed. However, bonds don't yield returns that are as high as those of individual stocks. The value of bonds is assessed by third parties. Investors purchase bonds based on the reputation and trustworthiness of the authorities or corporation that issues the bonds.

Another common investment class is the mutual fund, which pools together a specific set of stocks and bonds. Mutual funds are further categorized into different subtypes, allowing investors to specialize in a sector of their choice.

Investing is preferred alternative by those who lack time or expertise to perform daily research and assess the stocks on the market. It gives access to professionals who trade stocks for investors. Mutual funds can range from low to high-risk types of investments depending on the sector the investor commits the resources to.

Real estate investment commits funds to a property to generate income through lease or rental. It always involves immovable property such as land and permanent assets such as buildings. The value of a real estate investment is determined by the acquisition of real estate which involves the bestowment of rights such as possession and control.

The financial institutions that assist corporations and authorities in fund raising are called investment banks. They act as agents in the issuance of securities. Investment banks also assist businesses that are involved in derivatives, mergers and acquisitions, etc. Ancillary services represent trading of derivatives, market making, equity security, and fixed income instruments. In contrast to commercial banking institutions, investment banks do not take deposits from their customers.

 

About the Author

 

Vera JohnesI like to write about finance, investment, debt, credit, banking, loans.

6 Common Misconceptions about Dividends

by Jason Whitby,CFP, CFA, MBA, AIF

During periods of low yields and market volatity, more than a few experts recommend dividend stocks and funds. This may sound like good advice, but unfortunately, it is often based on misconceptions and anecdotal evidence.

                 

It is time to take a closer look at the six most common reasons why advisors and other experts recommend dividends and why, based on these reasons, such recommendations are often unsound advice.

Misconception No. 1: Dividends are a good income-producing alternative when money market yields are low.

Taking cash and buying dividend stocks isn't consistent with being a conservative investor, regardless of what money markets are yielding. Additionally, there is no evidence that money market yields signal the right time to invest in dividend-focused mutual funds. In fact, money market yields were anemic throughout 2009, a year that is also one of the worst periods for dividend-focused funds in history.

Many advisors also call dividends a good complement to other investments during times of high volatility and low bank yields. In an October 22, 2009 article, financial guru Suze Orman recommended the following dividend funds: iShares Dow Jones Select Dividend Index (NYSE: DVY), WisdomTree Total Dividend (NYSE:DTD) & Vanguard High Dividend Yield Index (NYSE:VYM).

Reality Check: The 12-month performance after Orman's recommendation was DVY (+7.86%), DTD (+21.91%), VYM (+17.72%). These returns seem pretty good - until you realize you could have just held on to the S&P 500, which was up +26.36% over the same period.

Misconception No.2: Dividend companies are more stable and better managed.

It is generally believed that companies that raise their dividends over a long period have solid market positions and strong cash flow. As a result, the stocks' total return is likely to outpace other stocks.

It's also common to hear the argument that dividends tend to hold companies to a certain standard of financial discipline and that, as a result, these companies budget more carefully and avoid wasteful projects out of fear that shareholders will punish the stock if it fails to return profits to its investors.

Reality Check: It's easy to pick a "solid" stock in retrospect but it is impossible to pick a company today that will meet this statement moving forward. Sure, if you had purchased Coke in 1962…but what about today? In 2007 we would have said that General Electric (NYSE:GE) and AIG (NYSE:AIG) were stable and well-managed dividend companies. Would we say the same in 2009? What about in the future?

The notion that dividend-paying companies are held to higher standards does not bear out. Look no further than the financial industry. In September 2008, AIG had a $4.40 dividend - almost a 4% dividend yield. By 2009, it was clear that AIG and others such as Freddie Mac, Fannie Mae, Bank of America, Bear Stearns and Citigroup were far from being financially disciplined companies, despite that fact that they were all long-time dividend-paying companies. As it turns out, dividends aren't much of an indicator of the financial discipline or the quality of a company's management.

Misconception No.3: You can count on dividends from solid companies.
Many people believe that it's rare for a solid company to suddenly reduce or rescind its dividend payment.

Reality Check: "Solid" companies like Bank of America (NYSE: BAC), General Motors, Pfizer (NYSE:PFE) and GE, have either suspended or cut their dividends. Unfortunately, it is a lot easier to identify companies that had a solid record than to identify companies that will have a solid record going forward. It is impossible to predict which "solid" companies today are going to be on shaky ground tomorrow. There is no certainty or stability in future dividends.

The idea that dividends allow you to get paid to wait doesn't make sense. It is the total return of your portfolio that matters, not the current yield. Throughout 2008 and 2009, companies were cutting or suspending their dividend payments at record levels, proving that there is no guarantee for those who buy in to these companies. Just ask anyone holding Freddie Mac since June 12, 2008, which was when Freddie Mac last distributed a dividend and traded at $23.01 a share. At that time, Freddie Mac had a dividend yield of 4.34%. By October of 2009, the stock was down over 90% and hope for future dividends had all but evaporated.

Misconception No.4: Dividend stocks provide upside potential and downside protection.
A 2009 SPDR University brochure states that "Dividends provide a stable source of income that can help partially offset market price depreciation that occurs in turbulent markets."

Reality Check: Dividends provide very little - if any - downside protection during market corrections. The S&P 500 was down -41.82% during the September 2008 to March 2009 crash. During the same time, the SPDR S&P 500 Dividend ETF was down -35.87%, which doesn't seem like much downside protection. Additionally, some well-known, dividend-focused funds provided no downside protection and performed worse than the S&P 500 over this period. For example, the Fidelity Dividend Growth Fund was down -46.94% and the iShares Dow Jones Select Dividend Index was down -43.07%.

Since 1926, dividends have provided about one-third of the total return for the S&P 500, while capital appreciation has provided the other two-thirds. Focusing on dividends, which provided less returns than capital appreciation, makes little sense, especially since the dividend focus is just as risky.

Misconception No.5: Preferential tax treatment makes dividend stocks more attractive.
This misconception seems to imply that dividend stocks are more attractive investments since they are taxed at a preferential rate. Obviously, the lower rate is better than the normal income rates but what does it really mean? Does it mean you should avoid dividends in tax-deferred accounts since they are less attractive?

Reality Check: Of course it doesn't. Then why should the tax treatment warrant dividend investments more attractive than capital gains? It doesn't, which is shown by the lack of any noticeable bounce in 2003 when the preferential tax law was implemented. We need to remember that the tail should not be wagging the dog. After-tax returns are important, but taxes should not drive your investment decisions.

Misconception No.6: Dividend-focused investing is ideal for retirees and conservative investors.
An October 5, 2009, article in the Wall Street Journal stated that "Most types of fixed-rate bonds don't provide any protection against inflation and can lose value when investors are worried inflation will flare. Rising dividends, along with any appreciation in the share price of the company paying them, offer a measure of insurance against inflation."

Reality Check: This statement is incredibly misleading. First, if you want a bond that protects against inflation, you can buy an I-Bond instead of taking equity risk. Secondly, all equity investments provide a measure of protection against inflation, not just dividend stocks.

No one ever said you could only have one investment. If you are a conservative investor, you can simply create a portfolio of bond funds and a little bit in a stock fund. The idea is to create an investment portfolio, not an investment collection. Each investment in the portfolio should work with the others to achieve a goal. This works much like the ingredients in a recipe, which come together to create a great dish.

Why are dividends a better way to generate income than capital gains? Capital gains are not a sure thing, but neither are dividends. And there is simply no way to know which stocks will continue to be "solid" in the future.

Conclusion
Dividends are absolutely an important part of the investment equation. Yet there is no empirical evidence that focusing on dividends is a wise decision. Actually, Miller and Modigliani received the Nobel Memorial Prize in large part for their paper, "Dividend Policy, Growth, and Valuation of Shares," in which they found that dividends are irrelevant to a company's value ("irrelevant" is their word, not mine).

On one side the media is dishing out long-lived misconceptions about dividends. On the other side, the Nobel winners are saying dividends are "irrelevant" to stock values. I'm not sure about you, but I know which one of these two groups I'm going with.

by Jason Whitby,CFP, CFA, MBA, AIF
www.investorsolutions.com

 

About the Author

 

Jason Whitby

Jason Whitby, MBA, CFA, CFP®, AIF® is a Senior Financial Advisor at Investor Solutions, a fee-only investment management firm for high net worth clients and institutions.
www.investorsolutions.com

Can Investing in Dividend Companies Make One Rich?

By Shawn Seah

 

 

This article is going to examine the issue of dividend-paying stocks: can investing in dividend paying firms make us rich, in comparison with investment in growth stocks? The literature on this topic of dividend stocks versus growth stocks is divided, with some arguing yes and some no, so let's look at the logic.

If dividends were 20% a year, and an investor reinvested dividends year after year in companies that paid the same percentage return, this would be a great idea. It's definitely workable. Just put money in regularly and reinvest, reinvest, reinvest - and Bob's your uncle!

But this assumes inflation is low, taxes on dividends are low or nonexistent, and also assumes that you can always find companies that pay 20% dividend, which is difficult if not impossible.
Some investors say, you can find companies that have paid dividends over the years consistently. Some call them "dividend kings", others call them "aristocrats of the stock market".But the issue is that if they are reliable and always pay, then the stock price would most likely reflect this in terms of higher prices and that means that their payout rate has to be low, i.e. less than 5%? In other words, their prices would reflect this dividend.

So, dividends can make you have a regular income, and can discipline savings. Yet it is highly unlikely that a pure dividend strategy would work. Perhaps one can try a growth strategy that pays minimal dividends. A mixed strategy would payoff better rather than a fixation on dividends.
Let's also look at a few more reasons why a pure dividend strategy won't work in practice. It is highly unlikely that the stock in question will rise much further since it is a consistent dividend giver and not a growth company. Therefore, a pure dividend strategy is highly unlikely to work if one thinks one can make money on capital gains.

Next, dividends in many countries worldwide are - at most - given out four times a year or once a year. And this can be cut at any point on time a recession or crisis hits. Thus, a pure dividend strategy can help you only when you're already rich.

Some astute investors note that a capital gains strategy is not necessarily at odds with a dividend play. That's because sometimes you can find a stock that delivers quite a good gain over time in capital appreciation, while also giving out a good and reliable dividend. However, that kind of stock is quite rare.

In fact, the problem is that usually the stocks that are needed for a capital gains strategy are those that are riskier and usually give no dividends whatsoever.

This brings me to the end of our short discussion on stock strategy. Dividend stocks or growth stocks? It seems that in conclusion it would seem that to make money in stocks, you might wish to build up a capital base first using a capital appreciation strategy on growth stocks and then later on in life go for the dividends - that should be the way to square the circle.

Shawn Seah is a blogger who writes on many diverse topics, primarily investment, finance and education. He has a website on Ideas on how to become rich as well as many other blogs on many diverse topics such as "How to Learn German Fast, "Get Your University Degree Online, and "English Language Resources Online". In the " Dividends Issue, Shawn discusses a dividend investment strategy.

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Insuring Your Investment by Hedging Option

By Satyes Mukherjee

 

What is Hedging?

Hedging is an option widely practiced by various companies, producer of commodities and many investors trading in the stock market. It is like insuring your assets against all possible loss. Suppose, you have a home which present market value is $1,00,000 and you would like protect it from any natural calamity or by human made activity like burglary, theft etc by paying a nominal annual insurance premium of $100. Thus by paying $100 only you can secure your asset worth of $100,000.

More on Hedging

Hedging is very popular to the experts and professionals. Hedging originates from the term 'Hedge'. Any method of strategy considered for reducing the possible loss comes within the term hedging. Hedging is not confined to monetary risks. Hedging activity presence in all activity of our live, like medical insurance for unforeseen medical expenses, farmer to protect his crops, an exporter to protect his material cost and so on. So hedging is a tool to attenuation risks.

Why do traders prefers hedging?

A trader prefers in hedging to protect his existing stock of a particular sector for possible loss in the market. For example trader A have 100 stocks in XYZ company whose present market price is $10, he purchased another stock of ABC company with same quantity for $8 each. If the stock price of XYZ company falls by $1 and stock price of XYZ company increase by $1, trader will incur no loss, although his investment to ABC is lesser than XYZ company.

Advice on how to handle stock future option

If you are new in the stock market and don't have sound knowledge on the stock market, hedging is risky to you. Keep in mind, it doesn't set off your option concurrently for all the time. Stock market is a game of mind. As an example - once you cut an extended option in money, if you narrow the futures option as well, except brokerage you do not lose any money. You are still in the market to pay only the brokerage. So, once you cut the money option, you have a tendency to carry the futures option, assuming that market will fall further, and you can make some profit. Therefore you keep it say for another day. If the market rebound on the next day, one rumor and you cut your short futures option. As a result you finally end up with overall loss.

Whether you earn profit or not relies upon whether you are there for the long period and at what level you get into. These need regular study of the stock market activity.

If you are a day trader only, settle your account daily, when you have earned a profit and avoid stop-loss. To act on that you shouldn't have a dual thoughts. just cut it when your stop-loss has broken or pre-FEED the stop-loss into the practice (which is possible with modern terminal or on the internet trading). On the contrary you will expose yourself a sad guy at the end of the day when stock market closes.

If you visit stockmarketsreport.com you will have more knowledgeable topics on stock market. Here you will have resourceful articles to master your knowledge on the stock market.

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