When To Sell Penny Stocks

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Penny Stocks can be a very effective way to provide you with a secondary income. They can be used to create passive income because they do not require you to be constantly watching over them. The problem that most people have when it comes to stocks is – not knowing the right time to sell.

Penny Stocks can rise very quickly but they can also fall quickly too. The reason that most investors hold onto a stock is because the fail to separate their emotions from their actions…

Penny Stocks, Investments

Penny Stocks can be a very effective way to provide you with a secondary income. They can be used to create passive income because they do not require you to be constantly watching over them. The problem that most people have when it comes to stocks is – not knowing the right time to sell.

Penny Stocks can rise very quickly but they can also fall quickly too. The reason that most investors hold onto a stock is because the fail to separate their emotions from their actions.

All of your penny stocks buying and selling should, of course, be based on sound research both of the market and the companies?recent history. How the company is doing in terms of profitability, whether they are just about to, or have just announced profits, losses or new patents, discoveries and products, can all affect your decision on whether, or not, to buy.

Knowing the right time to sell your penny stocks however can sometimes seem, as much an art as a science, although getting it wrong can be fatal. Many people seem to put all their research efforts into knowing what penny stocks to buy and when to buy them.

Investors seem to forget about researching to sell stocks. Instead, they let their emotions take control and sell at the wrong time. Investors selling at the “wrong time?fall into two categories. These categories are, The Runners and The Sitters.

The Runners like to take profit way too early. They see their Penny Stocks rise a little and sell because they don’t want to “risk too much? I’ve seen it time and time again; these people set out to earn a 25% Return on Investment and end up taking profit at 1%. Someone who takes profit twice at 25% earns a lot more than someone who takes profit twice at 1%. Usually, as soon as they sell a penny stock, it will rise even further and they’ll be wondering why they sold so early.

The Sitters are the heavily emotionally involved in their penny stocks. They are gamblers at heart and just do not want to let go of a losing position because “it could bounce back any day now? When they do let go of their Penny Stocks – there is virtually nothing left. The sitters like to sit on a losing position. They like buying but dislike selling.

Do you want to be a Runner or a Sitter? Well, I hope you are neither. You want to be a winner. A winner will separate their emotions from their investment thinking and will also research when buying and also when selling. They will buy and they are not afraid of selling.

There is great deal of profit to be made from trading in Penny Stocks. But you have to know not only what to buy but also how long to keep it and when the best time to sell. The answer, as with most things in the world of finance, is good information and research. But that doesn’t end when you buy. Find out why your penny stocks are rising and this will put you in a much better position to know when to sell.

Why are Reverse Mergers Often the Victims of Short Sellers?

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There is a great deal of abuse going on in the OTC Bulletin Board Market and a lot of money is being made as result of it. Regulators are trying to deal with the problem but are unable to put a halt to it, unless they take drastic steps which will be detrimental to the small and micro-cap market.

15c211, reverse merger, direct public offering, regulation d, pink sheets

There is a great deal of abuse going on in the OTC Bulletin Board Market and a lot of money is being made as result of it. Regulators are trying to deal with the problem but are unable to put a halt to it, unless they take drastic steps which will be detrimental to the small and micro-cap market.

The small and micro-cap market is an essential part in bringing small and mid-size companies public through Reverse merger and Regulation D (504) offering, these are the two most popular methods used by small and mid-size companies to go public.

This two avenues are prefer by small and mid size companies because they simpler and less expensive than the traditional IPO, It can be refer to as a simplified fast track method by which a private company can become a public company.

I described the process in detail how small and mid-size companies can go public in previous articles, if you miss them, you can email me and I will be happy to explain it.

I have over 25 years of experience in the securities industry as market maker and trader. In my own brokerage firm and with a couple of the largest wholesalers in Wall Street. I believe my experience qualify me to write on the subject with clarity and honesty from a birds eye view.

I believe in short selling as a legitimate way of providing liquidity to the market as an essential part market making, that is not what I am referring to.

A short position is established when somebody sells a stock they do not own hoping to be able to buy it bac at a later day for a lower price.

There are several reasons why selling short the stock of companies that have gone public through a reverse merger is profitable and easy, I will identify them and suggest ways that this can be stopped once all for all without affecting the legitimate short seller who are willing to sell and bear the risks associated with carrying a short position. Reason number one (1). Corporate shells, in order for an operating private company to go public in a Reverse merger it must merger with a public shell. A public shell is what remains when a public company is bankrupt or liquidated, also some shell are created as Blank Check companies,

A Blank Check company has shareholder and maybe some cash in its books but nothing else, they are created by enterprising entrepreneurs for the sole purpose of merging an operating private company into it.

What happens is that when the shell owner sell the shell to the private company he retains 5-15% of the shares for himself, on top of collecting any where upward of $500,000.00 for himself. And even if he signed and agreement not to sell for a year, most of these people can not be trusted and will at some point dump the stock or have somebody create a short position in their behalf.

Solution: The shell owner must be made to sell the entire position and be content with the money, which in most cases represents an enormous profit. I don’t have anything against anybody making a lot of money, I am all for it because I also stand to make a lot of money, I am against the way they do it.

(2). The shareholder base: In order for a company be listed on the NASDAQ Small-Cap market or the OTC Bulletin Board it must have a specified number of shareholders to qualify for listing.

(2A). Improper due diligence: Prior to purchasing a shell the private company along with the consultant that they retain to assist them in the Reverse merger should do a complete review of the shareholder list. some of those shareholder may have excessive number of shares and the true beneficial owner may be the shell owner or the consultant himself, there are a lot of smooth talking wolves posing as consultant who are operating in conjunction with the shell owner.

Solution: First run the consultant’s named and his previous employer through google and see if he has been convicted of any securities related crimes and has been barred from participating in any stock related transactions. Second write the regulator and request that consultants be required to have a website with their name on it, most of this unscrupulous character operate in a stealth manner so that regulators can’t detect their activities.

Petition the Securities and Exchange commission requesting a reduction in the number of shareholders require for listing, and if a shell has too many shares outstanding don’t buy it!

(3), Market Makers: Market makers in OTC Bulletin Board Securities are permitted to maintain a short position in securities that they are acting as market makers, but what some trader do is they register for a stock and go out sell stock on the bid (the price other market makers are willing to pay) and immediately cease to make a market in the stock and keep the short position.

Technically when a trader does this, he is circumventing the intent of the rule which allows market makers to short a stock in his role as a market maker.

Solution: Require traders to remain acting as market makers until they purchase the stock back, also regulators must make clearing agent to enforce the rules concerning the delivery of the securities on settlement or execute a buy in (buy the stock back and charge the seller) if the seller fails to deliver the stock within the prescribed period of time.

I believe that these reforms will go a long way in altering the climate for participant in Reverse merger, and in removing the vultures the prey on unsophisticated business owner from the market place.

But until the regulators act the responsibility is on the business owner to perform the proper research, if I sound like a crusader maybe that is because the industry has been good to me and I hate to see the vultures taking it over.

For additional information please visit:
http://www.genesiscorporateadvisors.com

Upside potential with convertible bonds

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Convertible bonds are bonds issued by corporations that are backed by the corporations’ assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company.

convertible bonds, bonds, bonds trading

Convertible bonds are bonds issued by corporations that are backed by the corporations’ assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an “equity kicker” – if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.

Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following: 1. Convertible bonds offer regular interest payments, like regular bonds.

2. Downturns in this investment category have not been as dramatic as in other investment categories.

3. If the bond’s underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is “trading-off-the-common” which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying stock, and thus a decline in the value of the stock will also cause the bond to decline in value until it hits a floor that is the value of a traditional bond without the conversion.

4. If the value of the underlying stock increases, bond investors can convert their bond holdings into stock and participate in the growth of the company.

During the past five years, convertible bonds have generated superior returns compared to more conservative bonds. Convertible bonds have generated higher returns because many companies have improved their financial performance and have their stocks appreciate in value.

Convertible bonds can play an important role in a well-diversified investment portfolio for both conservative and aggressive investors. Many mutual funds will invest a portion of their investments in convertible bonds, but no fund invests solely in convertible bonds. Investors who want to invest directly could consider a convertible bond from some of the largest companies in the world.

Stock Investing Tip

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This is the best Stock Investing Tip you will ever receive.

stock trading,stock investing,stock market,stocks,trading,investing

If you are looking for a Stock Investing Tip you have come to the right place. Investing tips come from everywhere and from all sources. From strangers you over hear talking in the store to the gurus on the television.

When we are in a strong bull market, and it seems like the market will not go down no matter what, you can get a great stock investing tip just from throwing a dart at the list of stocks in Investors Business Daily, and come out with a winner.

An Investing Tip can come from an article you read in the newspaper or a magazine. Usually the time you read about it, the stock has already made it’s big move. That is when the smart money starts taking their profits and sells to the dump money.

Sometimes investing tips come as a pump and dump. With the smaller priced stocks it does not take much money to buy alot of shares. They will then start talking about, or writing newsletters about how good (pump) the company is just to get people to start buying the stock, and at the same time they are selling (dump) their shares.

If you are getting into the market because of a tip you got, you are bound to lose your hard earned money. Sure you might get lucky a few times, like in a strong bull market, but in the long run you will eventually lose all your money that you set aside for investing.

The best stock investing tip you will ever receive is going to be right here. Do not buy any stock on any tip that you here!!! Do not put your hard earned money in any investment blindly, do your homework. Many beginners in the stock market will feel that they have to jump in on the tip they have gotten in order to make the big buck. They are afraid the train is going to leave without them. They don’t want to be left out of the big move.

There is no reason to be jumping into any stock right away. There are thousands of stocks to invest in. Let the stock price come to you, do not go chasing a stock.

Learning how to invest in stocks is not difficult, but it does take time, just like learning anything in live. Take the time to learn, there are many books to read that will get you going in the right direction. Read them, study them, study the market, practice trading on paper. Take the time to learn how to invest, you will not regret it. The stock market is not going anywhere, it’s been here for a long time, and will continue to be here for a long time to come.

Soon the only stock investing tip you will be listening to will be coming from the knowledge that you have learned, and that is the best investing tip that you can get. Then your friends and family will be coming to you for investing tips.

Stocks -A Winning Way To Scan For Stocks That Are In Uptrends

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To find stocks that are outbreaking in price it is needful to scan and filter out these stocks on some indicators. One of the popular but effective indicator is that of the OBV or On Balance Volume. However, how can one know to what extent is the impending move? Is the outbreak strong enough to yield a short term trade net of brokerage and round trip commissions? Learn how successful traders go beyond just scanning for OBV in this article.

OBV, On Balance Volume, scan for winning stocks, stocks in outbreak upwards, Joe Granville, Joseph Granville, cumulative volume,charting

With thousands of stocks listed in the stock exchange for trading, how does a trader go about his stock selection? I am not refering to the fundamental approach where the trader studies the fundamentals of the company, and research the performance results of the company, check its price-earnings ratios or check its balance sheets and turnover and its dividend yield.

By and large among those successful traders who really make their living off by trading professionally in the stock markets, their preferred method seems to be the technical analysis approach.

By this, they use charting, and technical indicators applied to the stocks. They will devise filters or explorations, to scan for stocks that meet some selected indicators to show that the stocks are beginning to move or have started to move.

Professional traders who trade for a living have an array of trading tools to help them, but one of the most common tools they use to good effect is the indicator called On Balance Volume.

Popularised by Joseph Granville, the On Balance Volume or OBV in short is actually cumulative volume, where the underlying principle is that similar OBV should support equivalent price. By using this indicator, short term traders will be able to identify when there is a difference in this setting, or where OBV has outbreak already but price has still lagged behind, giving rise to the situation where an impending price jump is expected.

But how large is the impending jump? If there is indeed an OBV outbreak, and by inference the price should follow in the next few trading sessions, one must also ensure that the impending jump is of sufficient size to warrant a good margin of profit attractive enough for him to trade.

Added to this trading indicator, traders add yet another trading stipulation to nail those giant moves. We know in Elliot wave theory that the 3 and 5 waves of any stock are the impulsive and strong waves up.

I have seen much success from traders who scan their stocks with an OBV outbreak and are in their impulsive 3 and 5th waves which are their longest and strongest waves.

Armed with this understanding, when a stock is found to have just undergone an OBV Outbreak upwards and is moving within either its 3rd or 5th wave, you have an excellent candidate that will probably run away in price, and letting you reap a handsome profit within a short trading period.

Wall Street, October 1929

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The atmosphere of the great boom was savagely exciting, but there were times when a person with my European background felt alarmingly lonely. He would have liked to believe, as these people believed, in the eternal upswing of the big bull market or else to meet just one person with whom he might discuss some general doubts without being regarded as an imbecile or a person of deliberately evil intent – some kind of anarchist, perhaps.

Claud Cockburn, writing for the “Times of London” from New-York, described the irrational exuberance that gripped the nation just prior to the Great Depression. As Europe wallowed in post-war malaise, America seemed to have discovered a new economy, the secret of uninterrupted growth and prosperity, the fount of transforming technology:

“The atmosphere of the great boom was savagely exciting, but there were times when a person with my European background felt alarmingly lonely. He would have liked to believe, as these people believed, in the eternal upswing of the big bull market or else to meet just one person with whom he might discuss some general doubts without being regarded as an imbecile or a person of deliberately evil intent – some kind of anarchist, perhaps.”

The greatest analysts with the most impeccable credentials and track records failed to predict the forthcoming crash and the unprecedented economic depression that followed it. Irving Fisher, a preeminent economist, who, according to his biographer-son, Irving Norton Fisher, lost the equivalent of $140 million in today’s money in the crash, made a series of soothing predictions. On October 22 he uttered these avuncular statements: “Quotations have not caught up with real values as yet … (There is) no cause for a slump … The market has not been inflated but merely readjusted…”

Even as the market convulsed on Black Thursday, October 24, 1929 and on Black Tuesday, October 29 – the New York Times wrote: “Rally at close cheers brokers, bankers optimistic”.

In an editorial on October 26, it blasted rabid speculators and compliant analysts: “We shall hear considerably less in the future of those newly invented conceptions of finance which revised the principles of political economy with a view solely to fitting the stock market‘s vagaries.” But it ended thus: “(The Federal Reserve has) insured the soundness of the business situation when the speculative markets went on the rocks.”

Compare this to Alan Greenspan Congressional testimony this summer: “While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy … (The Depression was brought on by) ensuing failures of policy.”

Investors, their equity leveraged with bank and broker loans, crowded into stocks of exciting “new technologies”, such as the radio and mass electrification. The bull market – especially in issues of public utilities – was fueled by “mergers, new groupings, combinations and good earnings” and by corporate purchasing for “employee stock funds”.

Cautionary voices – such as Paul Warburg, the influential banker, Roger Babson, the “Prophet of Loss” and Alexander Noyes, the eternal Cassandra from the New York Times – were derided. The number of brokerage accounts doubled between March 1927 and March 1929.

When the market corrected by 8 percent between March 18-27 – following a Fed induced credit crunch and a series of mysterious closed-door sessions of the Fed’s board – bankers rushed in. The New York Times reported: “Responsible bankers agree that stocks should now be supported, having reached a level that makes them attractive.” By August, the market was up 35 percent on its March lows. But it reached a peak on September 3 and it was downhill since then.

On October 19, five days before “Black Thursday”, Business Week published this sanguine prognosis:

“Now, of course, the crucial weaknesses of such periods – price inflation, heavy inventories, over-extension of commercial credit – are totally absent. The security market seems to be suffering only an attack of stock indigestion… There is additional reassurance in the fact that, should business show any further signs of fatigue, the banking system is in a good position now to administer any needed credit tonic from its excellent Reserve supply.”

The crash unfolded gradually. Black Thursday actually ended with an inspiring rally. Friday and Saturday – trading ceased only on Sundays – witnessed an upswing followed by mild profit taking. The market dropped 12.8 percent on Monday, with Winston Churchill watching from the visitors’ gallery – incurring a loss of $10-14 billion.

The Wall Street Journal warned naive investors:

“Many are looking for technical corrective reactions from time to time, but do not expect these to disturb the upward trend for any prolonged period.”

The market plummeted another 11.7 percent the next day – though trading ended with an impressive rally from the lows. October 31 was a good day with a “vigorous, buoyant rally from bell to bell”. Even Rockefeller joined the myriad buyers. Shares soared. It seemed that the worst was over.

The New York Times was optimistic:

“It is thought that stocks will become stabilized at their actual worth levels, some higher and some lower than the present ones, and that the selling prices will be guided in the immediate future by the worth of each particular security, based on its dividend record, earnings ability and prospects. Little is heard in Wall Street these days about ‘putting stocks up.”

But it was not long before irate customers began blaming their stupendous losses on advice they received from their brokers. Alec Wilder, a songwriter in New York in 1929, interviewed by Stud Terkel in “Hard Times” four decades later, described this typical exchange with his money manager:

“I knew something was terribly wrong because I heard bellboys, everybody, talking about the stock market. About six weeks before the Wall Street Crash, I persuaded my mother in Rochester to let me talk to our family adviser. I wanted to sell stock which had been left me by my father. He got very sentimental: ‘Oh your father wouldn’t have liked you to do that.’ He was so persuasive, I said O.K. I could have sold it for $160,000. Four years later, I sold it for $4,000.”

Exhausted and numb from days of hectic trading and back office operations, the brokerage houses pressured the stock exchange to declare a two day trading holiday. Exchanges around North America followed suit.

At first, the Fed refused to reduce the discount rate. “(There) was no change in financial conditions which the board thought called for its action.” – though it did inject liquidity into the money market by purchasing government bonds. Then, it partially succumbed and reduced the New York discount rate, which, curiously, was 1 percent above the other Fed districts – by 1 percent. This was too little and too late. The market never recovered after November 1. Despite further reductions in the discount rate to 4 percent, it shed a whopping 89 percent in nominal terms when it hit bottom three years later.

Everyone was duped. The rich were impoverished overnight. Small time margin traders – the forerunners of today’s day traders – lost their shirts and much else besides. The New York Times:

“Yesterday’s market crash was one which largely affected rich men, institutions, investment trusts and others who participate in the market on a broad and intelligent scale. It was not the margin traders who were caught in the rush to sell, but the rich men of the country who are able to swing blocks of 5,000, 10,000, up to 100,000 shares of high-priced stocks. They went overboard with no more consideration than the little trader who was swept out on the first day of the market’s upheaval, whose prices, even at their lowest of last Thursday, now look high by comparison … To most of those who have been in the market it is all the more awe-inspiring because their financial history is limited to bull markets.”

Overseas – mainly European – selling was an important factor. Some conspiracy theorists, such as Webster Tarpley in his “British Financial Warfare”, supported by contemporary reporting by the likes of “The Economist”, went as far as writing:

“When this Wall Street Bubble had reached gargantuan proportions in the autumn of 1929, (Lord) Montagu Norman (governor of the Bank of England 1920-1944) sharply (upped) the British bank rate, repatriating British hot money, and pulling the rug out from under the Wall Street speculators, thus deliberately and consciously imploding the US markets. This caused a violent depression in the United States and some other countries, with the collapse of financial markets and the contraction of production and employment. In 1929, Norman engineered a collapse by puncturing the bubble.”

The crash was, in large part, a reaction to a sharp reversal, starting in 1928, of the reflationary, “cheap money”, policies of the Fed intended, as Adolph Miller of the Fed’s Board of Governors told a Senate committee, “to bring down money rates, the call rate among them, because of the international importance the call rate had come to acquire. The purpose was to start an outflow of gold – to reverse the previous inflow of gold into this country (back to Britain).” But the Fed had already lost control of the speculative rush.

The crash of 1929 was not without its Enrons and World.com’s. Clarence Hatry and his associates admitted to forging the accounts of their investment group to show a fake net worth of $24 million British pounds – rather than the true picture of 19 billion in liabilities. This led to forced liquidation of Wall Street positions by harried British financiers.

The collapse of Middle West Utilities, run by the energy tycoon, Samuel Insull, exposed a web of offshore holding companies whose only purpose was to hide losses and disguise leverage. The former president of NYSE, Richard Whitney was arrested for larceny.

Analysts and commentators thought of the stock exchange as decoupled from the real economy. Only one tenth of the population was invested – compared to 40 percent today. “The World” wrote, with more than a bit of Schadenfreude: “The country has not suffered a catastrophe … The American people … has been gambling largely with the surplus of its astonishing prosperity.”

“The Daily News” concurred: “The sagging of the stocks has not destroyed a single factory, wiped out a single farm or city lot or real estate development, decreased the productive powers of a single workman or machine in the United States.” In Louisville, the “Herald Post” commented sagely: “While Wall Street was getting rid of its weak holder to their own most drastic punishment, grain was stronger. That will go to the credit side of the national prosperity and help replace that buying power which some fear has been gravely impaired.”

During the Coolidge presidency, according to the Encyclopedia Britannica, “stock dividends rose by 108 percent, corporate profits by 76 percent, and wages by 33 percent. In 1929, 4,455,100 passenger cars were sold by American factories, one for every 27 members of the population, a record that was not broken until 1950. Productivity was the key to America’s economic growth. Because of improvements in technology, overall labour costs declined by nearly 10 percent, even though the wages of individual workers rose.”

Jude Waninski adds in his tome “The Way the World Works” that “between 1921 and 1929, GNP grew to $103.1 billion from $69.6 billion. And because prices were falling, real output increased even faster.” Tax rates were sharply reduced.

John Kenneth Galbraith noted these data in his seminal “The Great Crash”:

“Between 1925 and 1929, the number of manufacturing establishments increased from 183,900 to 206,700; the value of their output rose from $60.8 billions to $68 billions. The Federal Reserve index of industrial production which had averaged only 67 in 1921 … had risen to 110 by July 1928, and it reached 126 in June 1929 … (but the American people) were also displaying an inordinate desire to get rich quickly with a minimum of physical effort.”

Personal borrowing for consumption peaked in 1928 – though the administration, unlike today, maintained twin fiscal and current account surpluses and the USA was a large net creditor. Charles Kettering, head of the research division of General Motors described consumeritis thus, just days before the crash: “The key to economic prosperity is the organized creation of dissatisfaction.”

Inequality skyrocketed. While output per man-hour shot up by 32 percent between 1923 and 1929, wages crept up only 8 percent. In 1929, the top 0.1 percent of the population earned as much as the bottom 42 percent. Business-friendly administrations reduced by 70 percent the exorbitant taxes paid by those with an income of more than $1 million. But in the summer of 1929, businesses reported sharp increases in inventories. It was the beginning of the end.

Were stocks overvalued prior to the crash? Did all stocks collapse indiscriminately? Not so. Even at the height of the panic, investors remained conscious of real values. On November 3, 1929 the shares of American Can, General Electric, Westinghouse and Anaconda Copper were still substantially higher than on March 3, 1928.

John Campbell and Robert Shiller, author of “Irrational Exuberance”, calculated, in a joint paper titled “Valuation Ratios and the Lon-Run Market Outlook: An Update” posted on Yale University’ s Web Site, that share prices divided by a moving average of 10 years worth of earnings reached 28 just prior to the crash. Contrast this with 45 on March 2000.

In an NBER working paper published December 2001 and tellingly titled “The Stock Market Crash of 1929 – Irving Fisher was Right”, Ellen McGrattan and Edward Prescott boldly claim: “We find that the stock market in 1929 did not crash because the market was overvalued. In fact, the evidence strongly suggests that stocks were undervalued, even at their 1929 peak.”

According to their detailed paper, stocks were trading at 19 times after-tax corporate earning at the peak in 1929, a fraction of today’s valuations even after the recent correction. A March 1999 “Economic Letter” published by the Federal Reserve Bank of San-Francisco wholeheartedly concurs. It notes that at the peak, prices stood at 30.5 times the dividend yield, only slightly above the long term average.

Contrast this with an article published in June 1990 issue of the “Journal of Economic History” by Robert Barsky and Bradford De Long and titled “Bull and Bear Markets in the Twentieth Century”:

“Major bull and bear markets were driven by shifts in assessments of fundamentals: investors had little knowledge of crucial factors, in particular the long run dividend growth rate, and their changing expectations of average dividend growth plausibly lie behind the major swings of this century.”

Jude Waninski attributes the crash to the disintegration of the pro-free-trade coalition in the Senate which later led to the notorious Smoot-Hawley Tariff Act of 1930. He traces all the important moves in the market between March 1929 and June 1930 to the intricate protectionist danse macabre in Congress.

This argument may never be decided. Is a similar crash on the cards? This cannot be ruled out. The 1990’s resembled the 1920’s in more than one way. Are we ready for a recurrence of 1929? About as we were prepared in 1928. Human nature – the prime mover behind market meltdowns – seemed not to have changed that much in these intervening seven decades.

Will a stock market crash, should it happen, be followed by another “Great Depression”? It depends which kind of crash. The short term puncturing of a temporary bubble – e.g., in 1962 and 1987 – is usually divorced from other economic fundamentals. But a major correction to a lasting bull market invariably leads to recession or worse.

As the economist Hernan Cortes Douglas reminds us in “The Collapse of Wall Street and the Lessons of History” published by the Friedberg Mercantile Group, this was the sequence in London in 1720 (the infamous “South Sea Bubble”), and in the USA in 1835-40 and 1929-32.

On Volatility and Risk

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Volatility is considered the most accurate measure of risk and, by extension, of return, its flip side. The higher the volatility, the higher the risk – and the reward.

Volatility is considered the most accurate measure of risk and, by extension, of return, its flip side. The higher the volatility, the higher the risk – and the reward. That volatility increases in the transition from bull to bear markets seems to support this pet theory. But how to account for surging volatility in plummeting bourses? At the depths of the bear phase, volatility and risk increase while returns evaporate – even taking short-selling into account.

“The Economist” has recently proposed yet another dimension of risk:

“The Chicago Board Options Exchange’s VIX index, a measure of traders’ expectations of share price gyrations, in July reached levels not seen since the 1987 crash, and shot up again (two weeks ago)… Over the past five years, volatility spikes have become ever more frequent, from the Asian crisis in 1997 right up to the World Trade Centre attacks. Moreover, it is not just price gyrations that have increased, but the volatility of volatility itself. The markets, it seems, now have an added dimension of risk.”

Call-writing has soared as punters, fund managers, and institutional investors try to eke an extra return out of the wild ride and to protect their dwindling equity portfolios. Naked strategies – selling options contracts or buying them in the absence of an investment portfolio of underlying assets – translate into the trading of volatility itself and, hence, of risk. Short-selling and spread-betting funds join single stock futures in profiting from the downside.

Market – also known as beta or systematic – risk and volatility reflect underlying problems with the economy as a whole and with corporate governance: lack of transparency, bad loans, default rates, uncertainty, illiquidity, external shocks, and other negative externalities. The behavior of a specific security reveals additional, idiosyncratic, risks, known as alpha.

Quantifying volatility has yielded an equal number of Nobel prizes and controversies. The vacillation of security prices is often measured by a coefficient of variation within the Black-Scholes formula published in 1973. Volatility is implicitly defined as the standard deviation of the yield of an asset. The value of an option increases with volatility. The higher the volatility the greater the option’s chance during its life to be “in the money” – convertible to the underlying asset at a handsome profit.

Without delving too deeply into the model, this mathematical expression works well during trends and fails miserably when the markets change sign. There is disagreement among scholars and traders whether one should better use historical data or current market prices – which include expectations – to estimate volatility and to price options correctly.

From “The Econometrics of Financial Markets” by John Campbell, Andrew Lo, and Craig MacKinlay, Princeton University Press, 1997:

“Consider the argument that implied volatilities are better forecasts of future volatility because changing market conditions cause volatilities (to) vary through time stochastically, and historical volatilities cannot adjust to changing market conditions as rapidly. The folly of this argument lies in the fact that stochastic volatility contradicts the assumption required by the B-S model – if volatilities do change stochastically through time, the Black-Scholes formula is no longer the correct pricing formula and an implied volatility derived from the Black-Scholes formula provides no new information.”

Black-Scholes is thought deficient on other issues as well. The implied volatilities of different options on the same stock tend to vary, defying the formula’s postulate that a single stock can be associated with only one value of implied volatility. The model assumes a certain – geometric Brownian – distribution of stock prices that has been shown to not apply to US markets, among others.

Studies have exposed serious departures from the price process fundamental to Black-Scholes: skewness, excess kurtosis (i.e., concentration of prices around the mean), serial correlation, and time varying volatilities. Black-Scholes tackles stochastic volatility poorly. The formula also unrealistically assumes that the market dickers continuously, ignoring transaction costs and institutional constraints. No wonder that traders use Black-Scholes as a heuristic rather than a price-setting formula.

Volatility also decreases in administered markets and over different spans of time. As opposed to the received wisdom of the random walk model, most investment vehicles sport different volatilities over different time horizons. Volatility is especially high when both supply and demand are inelastic and liable to large, random shocks. This is why the prices of industrial goods are less volatile than the prices of shares, or commodities.

But why are stocks and exchange rates volatile to start with? Why don’t they follow a smooth evolutionary path in line, say, with inflation, or interest rates, or productivity, or net earnings?

To start with, because economic fundamentals fluctuate – sometimes as wildly as shares. The Fed has cut interest rates 11 times in the past 12 months down to 1.75 percent – the lowest level in 40 years. Inflation gyrated from double digits to a single digit in the space of two decades. This uncertainty is, inevitably, incorporated in the price signal.

Moreover, because of time lags in the dissemination of data and its assimilation in the prevailing operational model of the economy – prices tend to overshoot both ways. The economist Rudiger Dornbusch, who died last month, studied in his seminal paper, “Expectations and Exchange Rate Dynamics”, published in 1975, the apparently irrational ebb and flow of floating currencies.

His conclusion was that markets overshoot in response to surprising changes in economic variables. A sudden increase in the money supply, for instance, axes interest rates and causes the currency to depreciate. The rational outcome should have been a panic sale of obligations denominated in the collapsing currency. But the devaluation is so excessive that people reasonably expect a rebound – i.e., an appreciation of the currency – and purchase bonds rather than dispose of them.

Yet, even Dornbusch ignored the fact that some price twirls have nothing to do with economic policies or realities, or with the emergence of new information – and a lot to do with mass psychology. How else can we account for the crash of October 1987? This goes to the heart of the undecided debate between technical and fundamental analysts.

As Robert Shiller has demonstrated in his tomes “Market Volatility” and “Irrational Exuberance”, the volatility of stock prices exceeds the predictions yielded by any efficient market hypothesis, or by discounted streams of future dividends, or earnings. Yet, this finding is hotly disputed.

Some scholarly studies of researchers such as Stephen LeRoy and Richard Porter offer support – other, no less weighty, scholarship by the likes of Eugene Fama, Kenneth French, James Poterba, Allan Kleidon, and William Schwert negate it – mainly by attacking Shiller’s underlying assumptions and simplifications. Everyone – opponents and proponents alike – admit that stock returns do change with time, though for different reasons.

Volatility is a form of market inefficiency. It is a reaction to incomplete information (i.e., uncertainty). Excessive volatility is irrational. The confluence of mass greed, mass fears, and mass disagreement as to the preferred mode of reaction to public and private information – yields price fluctuations.

Changes in volatility – as manifested in options and futures premiums – are good predictors of shifts in sentiment and the inception of new trends. Some traders are contrarians. When the VIX or the NASDAQ Volatility indices are high – signifying an oversold market – they buy and when the indices are low, they sell.

Chaikin’s Volatility Indicator, a popular timing tool, seems to couple market tops with increased indecisiveness and nervousness, i.e., with enhanced volatility. Market bottoms – boring, cyclical, affairs – usually suppress volatility. Interestingly, Chaikin himself disputes this interpretation. He believes that volatility increases near the bottom, reflecting panic selling – and decreases near the top, when investors are in full accord as to market direction.

But most market players follow the trend. They sell when the VIX is high and, thus, portends a declining market. A bullish consensus is indicated by low volatility. Thus, low VIX readings signal the time to buy. Whether this is more than superstition or a mere gut reaction remains to be seen.

It is the work of theoreticians of finance. Alas, they are consumed by mutual rubbishing and dogmatic thinking. The few that wander out of the ivory tower and actually bother to ask economic players what they think and do – and why – are much derided. It is a dismal scene, devoid of volatile creativity.

Saving money through investing in mutual funds

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A good mutual fund company will know how to use the investor’s money to buy and sell large amounts of securities. The aim of mutual fund companies is to increase their profit margins.

mutual funds

A good mutual fund company will know how to use the investor’s money to buy and sell large amounts of securities. The aim of mutual fund companies is to increase their profit margins. The individual who invests on mutual funds also has a similar objective of squeezing maximum profit out of it. It’s a win-win situation, only if you know how to make the most out of investing in mutual funds and thus saving your money from being wasted. When selecting funds, be sure to take note of your goals and ambitions so that you can invest in the right fund.

Investing in mutual funds has emerged as the new buzzword amongst consumers in order to save money. But, for first time investors it requires a little bit of knowledge about the current market scenario. You need to keep in mind that when you are buying mutual funds you are actually investing in the shares of a corporation. You need to master the art of maximizing returns and minimizing risks to benefit most by investing in mutual funds. In terms of variety, flexibility and liquidity mutual funds are perhaps the best option.

A recent media poll confirmed that mutual funds are the most popular choices amongst investors primarily because of its risk-free nature. Mutual funds have its own share of advantages, which make it a preferred choice amongst most investors, big or small. Many people see it as an effective tax saving tool. Mutual funds have infact, took precedence over the traditional options of national saving certificates and public provident fund to save money.

If you are a starter, there are many courses which will provide you a veritable mine of information on how you can buy and sell your mutual funds to extract the maximum profit and save money through investing.

Higher risk mutual funds, however, work best when you want to make short-term investments. The Internet these days is replete with information on mutual funds. Even investors with no investment experience go for mutual funds to save money. Many consider award-winning funds as the most suitable investment option for people. But you need to bear in mind that the funds falling in the award-winning category may not suit your interests best.

Careful fund management and proper market survey can go a long way in helping you to save your taxes through mutual funds. Do not be hesitant to take the help of mutual fund brokers in case you are not sure about whether you are taking the right move or not.

Winning the battle of life becomes all the more easier with investing in mutual funds. So it makes sense to invest in mutual funds to make you capable enough to sail through even the worst financial situations of life without having any tension.

If retirement blues is haunting you or you are worried about your kid’s future take heart. With investing in mutual funds you can save enough money to lead a happy and peaceful life. Let mutual funds ensure that you do not work for money, instead the money works for you.

Trading Stocks Online – What Works

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Imagine you are trying to do car repairs, and the only tool you have is a hammer. Sure, you’ll be able to get some jobs done, but they won’t be done properly and you’ll most likely break something else in the process. Trading stocks online is much like that. There are many ways to trade, but only some of them truly work.

trading, stocks, online, invest, mutual fund, market, trade, investment

Imagine you are trying to do car repairs, and the only tool you have is a hammer. Sure, you’ll be able to get some jobs done, but they won’t be done properly and you’ll most likely break something else in the process. Trading stocks online is much like that. There are many ways to trade, but only some of them truly work. Sometimes, investors end up losing money because they didn’t take the time to find the proper investment method or tool. Here are some tips that can help you to trade successfully.

If you want to reduce the risk that comes with holding an investment, you will want to look into the practice known as hedging. One of the best ways to hedge your investments is to take any shares you have in a company and sell them to the company’s opposition.

For stability, you will want to look to investing a pre-arranged amount of money each month into one or more mutual funds. Mutual funds are composed of shares from approximately 10 companies, and often focus on a specific area of the market, such as energy, paper, or currency. Although there is still a risk that you can lose money through your mutual funds, they are much more stable and have a much higher chance of recovery, based on the fact that they center on stocks from more than one company. Be patient if the market takes a downturn; don’t sell your funds or stock immediately. History has shown that if a market goes down, it will also go up.

Another online trading tactic is to look at the stock market and find good, stable companies whose stock has taken a downturn. The way to find them is to look for ones that have dividend yields. Pick several of these companies and invest equal amounts of money in buying stocks from each of them. Although there is risk involved with this method, the history and stability of these companies is often enough to pull them through the slump they may be experiencing. And when their stocks begin to rise in value, you will benefit from this wise trading investment.