Fair Value of A Common Stock

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A lot of discussions have been devoted towards finding fair value of an investment. The goal of every investors is to find undervalued investment and sell it when it reaches fair value. Admittedly, this is the hardest part of investing. So, what is fair value? Fair value is a point where the price of an investment reflect its earning power.
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A lot of discussions have been devoted towards finding fair value of an investment. The goal of every investors is to find undervalued investment and sell it when it reaches fair value. Admittedly, this is the hardest part of investing. So, what is fair value? Fair value is a point where the price of an investment reflect its earning power.

Fair value is relative and it depends on other factors beyond the investors’ control. In here, we will discuss on calculating fair value within our own boundary of control. In short, calculating fair value of an investment depends on the rate of return expected and the risk taken to achieve that return. Higher risk needs higher reward. It is quite simple.

So, what asset constitute lower risk investments? We can only compare. First thing that comes out of my mind is Certificate of Deposit (CD). You are guaranteed certain return (interest rate), if you can hold for a certain pre-determined time frame. You would never lose your principal at the end of the time frame.

The next low risk investment is Treasury Bond. This is the bond issued by the United States government, which is deemed to be safest in the world. There are certain risks associated with the small fluctuation in the bond price. However, if you held the bond until maturity, you are guaranteed certain rate of return. Your rate of return depends to certain extent on the price that you bought the bond at.

The next higher risk investment is buying common stock. This is what we are going to focus more here. It is considered higher risk than the two types of investments mentioned previously because you have a higher chance of losing money on your investments. Earlier, we established that higher risk needs higher reward. Therefore, stock investing requires a higher reward.

So, what does this have anything to do with fair value? Quite simply, the price of a common stock that we buy must gives us a higher annual return than bonds or CD. For example if a CD gives you a 3% return, treasury bonds give you a 4% return, then you would want your stock gives you a higher return of perhaps 6%.

What does it means for a stock to give investor a return of 6%? It never really say it, doesn’t it? You are partly right. While it is not explicitly shown, you can do a little digging and find out how much the return of your stock investment would be. For example, if your Certificate of Deposit (CD) gives you a 2% annual return, for $ 100 of investment, you would earn $ 2 every year. Let’s assume that you want your stock to give you a return of 6%, which is higher than CD or treasury bond. This implies for every $ 100 invested in common stock, it needs to give us a return of $ 6 annually.

Where can we get this information? You can get it on Yahoo! Finance or other financial publications. All we need to do is find the share price of a common stock and the profit per share (also known as earning per share) of that particular stock. Let’s use an example to illustrate my point. Magna International Inc. (MGA) is expected to post a profit of $ 6.95 per share for fiscal year 2005. Recently, the share is trading at $ 73.00. The annual return of buying Magna stock is therefore $6.95 divided by its share price $ 73.00. This gives us a return of 9.5%.

Will Magna continue to give investors a 9.5 % return year after year? It depends. If the stock price rises, Magna will return less than 9.5 % annually. What else? Well, Magna might not constantly produce the same amount of profit year after year. It might even produce a loss! So, you see, stock investing is inherently risky because there are two moving part in the equation. Price of the common stock and the profits produced by the company itself. That is the reason why investor need to aim for higher return when choosing their stock investment.

All right. So, let’s move on to the crucial thing in investing in common stock. What is the fair value of Magna stock assuming a constant profit of $ 6.95 per share? Personally, I assign fair value of a common stock to be at least 2% above the rate of Treasury bond. Please note that I am using the 10 year bond here. Recently, treasury bond can give us a 4 % return. Therefore, the fair value of Magna common stock is when it can give me a return of 6%

So, what is the fair value of Magna common stock in this case? For a profit of $ 6.95 per share, the fair value of Magna common stock is $115.80 per share. That’s right. At $ 115.80 per share, Magna common stock will return investors 6% annually. Having said that, we should never buy a common stock at fair value. Why? Because our investing purpose is to make money. If we buy stocks at fair value, then when do we profit from it? Do we expect to sell it when it is overvalued? Sure, it would be nice if we can do that all the time. But to be conservative, let’s not bank on our stocks reaching overvalued level.

There you go. I have explained how to calculate fair value in a common stock. Of course, the $ 6.95 per share profit figure is the expectation of profit compiled by Yahoo! Finance. It is not in any way an endorsement to buy Magna common stock. You should do your own calculation to verify that number.

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How To Trade Stock, Timing Is Everything

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Aim for the best timing in stock market trading. It is the only option for a successful stock market investor learning how to trade stock.
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The following article lists some simple, informative tips that will help you have a better experience with how to trade stock.

Aim for the best timing in stock market trading. It is the only option for a successful stock market investor learning how to trade stock.

In order to raise capital and invest in the business, companies issue their stocks and the public may then buy and sell. The price varies depending on the supply and demand. This is what a stock market trader takes full advantage of.

The business of stock market trading can offer better profits to the investor compared to ordinary stock enterprise. The stock market offers a wide variety of stocks to choose from for any investor to go on with stock trading. There is always a moving stock out there amongst the thousands of others registered.

However, a careless attempt to proceed with stock market trading can produce undesirable result. Big losses can be incurred if the market trend is not properly predicted. Small profits would also frustrate the purpose of doing stock market trading. An uninformed stock trader may also end up waiting for that decisive moment that would never come.

Market Timing

The more authentic information about how to trade stock you know, the more likely people are to consider you a how to trade stock expert. Read on for even more how to trade stock facts that you can share.

To avoid the adverse effects of poor stock market trading, investors use market timing to forecast when the market will change its course. Market timing presumes that the decisive point can be predicted ahead. The direction of the market is predicted through a thorough examination of the price and economic data.

Best Timing

The consistency of such trend prediction is subject to many factors, that is why the aim of any would-be successful investor is best timing. At first glance, market timing sounds like a guaranteed way to make it big. This however requires exertion of considerable effort and persistence in carefully studying the various factors this is the proper way to learn how to trade stock.

Avoid mere speculating. Speculating is a desperate move when the investor hasn’t done his homework.

Investors also buy stocks because they got a hot tip from someone. Most of these tips however prove to be false, as they are mostly given by parties with vested interests.

Market timing requires involvement in research to know the company’s history and calculate the trend by charting the movement of the stock price. This involves analysis of the value of the stock to come close to accurate in predicting the trend. This is ideal in developing standards for when to buy and when to sell for the investor must accurately settle on the proper time to sell. One must also correctly determine when to regain, reselling the stock bought when it reaches its peak value. This way, the maximum profits can be realized.

Is there really any information about how to trade stock that is nonessential? We all see things from different angles, so something relatively insignificant to one may be crucial to another.

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Do Any Companies Offer Free Online Stock Trading?

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Companies that offer “free online stock trading” are generally offering free access to a members-only online stock trading site,
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While some companies offer what they claim is “free online stock trading,” no company can ever realistically offer a product for free, unless they are a non-profit organization with a stated goal to help bad stock traders learn how to trade better. And because no such organizations exist, you will have to trade with a company that charges you fees, whether it is explicitly or implicitly.

Companies that offer “free online stock trading” are generally offering free access to a members-only online stock trading site, which will allow you to use a range of stock trading analysis tools; it will also usually give you access to dozens of free stock tips from different sources, often including relevant newspaper clippings about publicly-owned companies.

If you opt for a “free online stock trading” company that gives you a free membership, that site will likely generate revenue by selling ad space or by charging commissions on trades. This means that your stock trading experience may be significantly inhibited by pop-ups, flashy ads, and biased information; or it may mean that you will have to pay excessive fees every time you make a trade.

On the other hand, some “free online stock trading” companies charge membership fees, but do not charge for trades. If you plan to make a lot of small stock trades each month, then you should consider opting for one of these companies, which will charge you each month, but wont require you to pay fees when you trade. However, on the other hand, if you plan to make few large trades, then you should consider selecting one of the online stock trading companies that will charge you per trade, rather than per month.

Keep in mind that there is no best solution to this problem for every person. The best solution for one trader may be completely different for you. This is why is it is crucial to inspect each deal in terms of what it will offer you personally as a trader.

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Not Limiting Your Losses

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Hate to lose? Who doesn’t? But there a difference between losing and losing BIG. Lots of traders fail to limit their losses in search of that one, big win. They feel like any loss is a failure, and so they don’t incorporate a strategy for losses at all. That the first mistake. Luckily, it easily avoided.
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If you know the pitfalls of trad¬ing, you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly?mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once youe already off the road.

Traders often fail to limit their losses in search of a big win. Of course, the only way you can make a fortune with trading is to actually stay in the game, and it hard to stay in the game when you’ve already lost all of your money. The problem is that people often feel like any loss is a failure, and so they don’t incorporate a strategy for “safe?losses. They may feel like “planning?for a loss is planning to fail when, in fact, it planning to keep themselves in the game.

Losses are a part of our business. The key to trading success is to limit your losses. Too many traders give a trade way too much “room,?and they take big hits, which can shrink an account down by 20%, 30%, and sometimes even 40%. You have to put a system into place which will ensure that you set small losses to avoid emptying your account.

There a huge difference between losing big on a regular basis and losing small in a controlled trading plan. You already know that you should keep your losses small; the key is to keep them smaller that your average wins. Even if your winning percentage is only 50%, you’ll still be profiting if you set yourself up correctly. For example, if you have a weekly strategy that gets you $300 for every win but only takes $200 for every loss, a tie of a win and a loss will still get you a $100 profit for that week.

The real key is to set a weekly goal and to be sure that you set a loss limit for each trade. So let say your goal is $300 each week, and you want to be sure that you lose no more than $200 per trade. If your first two trades of the week were losses, then youe down $400. But all you need is three more wins through the rest of the week to make your profit. Once you meet your goal, stop trading, otherwise, you may end up with further losses, putting you behind schedule and gouging into your account funds, which will simply set you back further.

The basic rule: always know when to exit a trade. Set a loss limit and stick to it. But also set short-term goals, and stop when you’ve reached those goals. Don’t ever gamble. Remember that looking for small gains over the long term is a much more reliable and consistent strategy which will help you avoid losing too much too quickly.

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Online Stock Trading, Is It Here To Stay?

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Trading stocks on the internet is a relatively new thing for most people but it won’t be for long. The only reason that it is new in the first place is that the internet is new relatively speaking. In 1999 a little under 3 million people traded over the internet, now online stock trading has ballooned with more than 10 times that number of people trading daily.

So why have people begun to do this? Why is it so popular? Well there are several reasons and some are good and s…
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Trading stocks on the internet is a relatively new thing for most people but it won’t be for long. The only reason that it is new in the first place is that the internet is new relatively speaking. In 1999 a little under 3 million people traded over the internet, now online stock trading has ballooned with more than 10 times that number of people trading daily.

So why have people begun to do this? Why is it so popular? Well there are several reasons and some are good and some are not as sound when you think critically. The most popular reason cited for online stock trading is that they no longer have to forfeit some of their earnings to brokers in fees charged per trade. This doesn’t get them out of being charged fees per trade but it does cost a lot less to do it yourself with one of the dozens of day trading companies that there are available on the internet.

People are often trying to get away from brokers all together for more than just the fees they charged. Many people are fed up with brokers who did poorly in the recent downturn in the market. Their performances were sub par and people lost a lot of money so you can’t blame them. However the word of caution is to not lump all brokers into the overpaid and under skilled group. There are many brokers who are well worth their weight in gold because they know the market so well and have such good instincts-this shouldn’t be your only draw to online stock trading.

Other reasons people left their jobs to go into full time trading on the internet because they think that they can do better at it than at their real job and it will be more fun to boot. There is a certain romantic idea that people have about sitting in their beautiful home sipping gourmet coffee and checking in on their online stock trading portfolios a few times a day while making hundreds of thousands of dollars. This is a dangerous move for lots of people because they have no idea what they are getting into.

In order to be successful you have to have knowledge of the world economies and how that can be affected by the current events of the day. You also have to be good at evaluation of companies as far as potential for profit and so on. The third thing that you must have is nerves of steel and a loose grip on the money that you are trading with. Many day traders (or former thereof) will tell you of the “hits?they have taken totaling many thousands of dollars in a few hours for a wrong move.

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Dow Turns Moderately Bearish

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This article talks about the stock markets from a technical pont of view.
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In trading yesterday, only the tech-laden NASDAQ avoided the selling, edging up 3.04 points to hold at above 2300 and its five-year high. As I have said, breadth in the NASDAQ has improved.

The DOW was the big loser on the day giving up 65 points or 0.58% to fall to 11,150.70, which is just below its key short-term 20-day moving average, a warning. The S&P 500 lost 2.64 points. The near-tech technical signals for these two indices are the weakest of the four indices.

Small-cap stocks continue to hold after breaking to a new historical high on Wednesday. The Russell 2000 fell 1.58 points or 0.21%, which is positive given the extreme overbought condition. The barometer of small-cap performance is up a healthy 13.28% this year. While impressive, I question whether the index can maintain this rate of appreciation.

In commodities news, the May light crude futures on the NYMEX broke above $67 a barrel on Thursday. The near-term signals look relatively bullish and the minor trend is positive. The breakout materialized after a Rectangle formation at between $61 and $65.50. Oil could move towards the $70 level, last encountered in February, if it can hold at $65.50-$66. But watch for some selling pressure as the contract is overbought. High oil prices will pressure stocks.

Trading in the NASDAQ has come in at over 2 billion shares in the last three straight sessions. Trading volume on the NASDAQ came in at about 2.22 billion shares yesterday, above its 5-day and 10-day moving averages of 2.11 billion and 2.18 billion shares, respectively. The strong volume in yesterday marginal up day is encouraging following a strong volume breakout on Wednesday.

On the NYSE, daily trading picked up yesterday. Trading on Thursday was 1.61 billion shares, above the 5-day and 10-day moving averages of 1.55 billion and 1.55 billion shares, respectively.

The near-term technical picture for the NASDAQ is bullish but is showing some potential weakening. The Relative Strength remains relatively strong, suggesting more gains if it can hold. The index is holding at above its previous pivot point of 2332.95 and its five-year high of 2333, a bullish sign. The index is trading at above its 20-day and 50-day moving averages of 2297 and 22854, respectively.

The MACD continues to flash a moderate buy signal. The MACD trend is negative but has reversed course. The upside break was bullish after largely trading in an intermediate term sideways channel. Now we will see if the NASDAQ can hold and edge higher towards 2366 and 2387. The index is now marginally overbought so watch for some potential selling pressure.

On the blue chip side, the near-term signs for the DOW weakened further and are now moderately bearish. The intermediate trend is bullish but yesterday break below its 20-day moving average of 11,156 is a warning and could signal further deterioration if it cannot hold. The Relative Strength also fell to below neutral, showing a potential lost of momentum. The MACD turned bearish yesterday and is flashing a moderate sell.

The key for the DOW is whether it can hold at around its 20-day moving average. Indications suggest further weakness, albeit the selling has created a near oversold condition. Failure to hold could drive the DOW down to 11,092, 11,077 and 50-day moving average at 11,016. A rebound could see the DOW move back to above its 20-day moving average and a pivot point at 11,234.

The Bollinger Bands on the DOW are trending upwards and widening, indicating increased volatility in the near-term. Watch this.

On the S&P 500, the near-term picture is neutral to moderately bullish. The Relative Strength weakened yesterday and is marginally above neutral. The index is trading at above its 20-day and 50-day moving averages of 1,294 and 1,283, respectively. The MACD is neutral.

Near-term targets are 1,310 and 1,333. The index needs to hold at its 20-day moving average or we could see weakness.

On the small-cap side, the Russell 2000 is bullish. The Relative Strength is relatively strong but watch if it can hold. The recent break above the previous pivot point of 745.18 was positive. The trend is positive with higher highs and lower lows.

Watch if the Russell 2000 can trend higher but given the buying, the index is extremely overbought. The MACD is positive and appears to have reversed the downtrend.

The next area of resistance for the Russell 2000 is 772 and 803.

The advance-decline line on the NYSE (0.77:1) continues to be mixed, coming in at below 1.0 yesterday. The NASDAQ (1.004:1) managed to hold at above 1.0. The daily A/D reading on the NASDAQ has been above 1.0 in 7 of the last 10 sessions. The 5-day moving average for both the NYSE (1.27:1) and NASDAQ (1.42:1) remains above 1.0.

The market is continuing to show bullish sentiment. The new high new low ratio (NHNL) for the NASDAQ came in at above the bullish 70% level for the 14th straight day, coming in at 89.35%. The NHNL ratio on the NYSE (82.69%) has been above 70% for the last 15 straight sessions.

The current technical picture for the four key indexes is as follows:

NASDAQ: Bullish; Relative Strength: Above Neutral; Marginally Overbought

DOW: Moderately Bearish; Relative Strength: Below Neutral; Near Oversold

S&P 500: Neutral to Moderately Bullish; Relative Strength: Neutral

RUSSELL 2000: Bullish; Relative Strength: Relatively Strong; Extremely Overbought

Here is what to watch for on Friday.

The DOW faces more selling pressure as its near-term technical picture is moderately bearish and the weakest of the four indices. Watch for potential support as the index is nearly oversold.

Tech and small-cap stocks continue to show the strongest technical strength but watch the extremely overbought condition in the Russell 2000 and marginally oversold condition on the NASDAQ.

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