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  • 10 Things To Consider Before Selecting An Online Broker

    One of the most important investment decisions you'll make has nothing to do with stocks, bonds or mutual funds. This crucial decision is picking a broker. There are dozens of companies offering brokerage services on the internet. How do you decide which one is best for you?

    Here are 10 critical factors you'll want to consider:

    1. Discount is not always the answer- Consider starting out with a full-service broker. They are often best for novice investors who may still need to build confidence and knowledge of the markets. As you become a more sophisticated investor, you can graduate into investing more of your money yourself.

    2. Availability - Try hitting the company's website at different times throughout the day, especially during peak trading hours. Watch how fast their site loads and check some of the links to ensure there are no technical difficulties.

    3. Alternatives - Although we all love the net, we can't always be at our computers. Check to see what other options the firm offers for placing trades. Other alternatives may include touch-tone telephone trades, faxing ordering, or doing it the low-tech way - talking to a broker over the phone. Word to the wise: make sure you take note of the prices for these alternatives; they will often be more expensive than an online trade.

    4. Research the broker - What are others saying about the brokerage? Just as you should do your research before buying a stock, you should find out as much as possible about your broker. is a great place to find unbiased evaluations.

    5. Price - Remember the saying you get what you pay for. As with anything you buy, the price may be indicative of the quality. Don't open an account with a broker simply because they offer the lowest commission cost. Advertised rates for companies vary between zero and $40 per trade, with the average around $20. There may be fine print in the ad, specifying which services the advertised rate will actually entitle you to. In most cases there will be higher fees for limit orders, options and those trades over the phone with your broker. You might find that the advertised commission rate may not apply to the type of trade you want to execute.

    6. Minimum Deposit - See how much of an initial deposit the firm requires for opening your account. Beware of high minimum balances: some companies require as much as $10,000 to start. This might be fine for some investors, but not others.

    7. Product Selection - When choosing a brokerage, most people are probably thinking primarily about buying stocks. Remember there are also many investment alternatives that aren't necessarily offered by every company. This includes CDs, municipal bonds, futures, options and even gold/silver certificates. Many brokerages also offer other financial services, such as checking accounts and credit cards.

    8. Customer Service - There is nothing more exasperating than sitting on hold for 20 minutes waiting to get help. Before you open an account, call the company's help desk with a fake question to test how long it takes to get a response.

    9. Return on Cash - You are likely to always have some cash in your brokerage account. Some brokerages will offer 3-5% interest on this money, while others won't offer you a thing. Phone or email the brokerage to find out what they offer. In fact, this is a good question to ask while you're testing their customer service!

    10. Extras - Be on the lookout for extra goodies offered by brokerages to people thinking of opening an account. Don't base your decision entirely on the $100 in free trades, but do keep this in mind.

    With a click of the mouse, from just about anywhere in the world, you can buy and sell stocks using an online broker. The right tools for the trade are key to every successful venture. Finding success in the market begins with choosing the right broker.

    Read more:

    Apr 28 3:18 AM | Link | Comment!
  • What Causes Stock Prices To Increase?

    All Investors hope that every stock that they buy will increase in price. But few investors understand much about what would cause a stock price to increase.

    Mathematically, we can divide all stock price changes into just two categories:

    1. A stock's price can change because its multiple(s) change. This means that stock traders change their view of what a stock is worth without any underlying change in the stocks achieved revenues or earnings. For example the (trailing) P/E ratio or multiple changes, or the Price to Book value ratio changes. Generally this means that the outlook for future earnings has become more positive or more negative or the required rate of return on the stock has changed.

    2. A stock's fundamentals change as a result of releasing updated financial data. For example the stock's book value, trailing 12 months revenue or trailing 12 month's earnings changes when it releases financial performance for the latest quarter.

    Category 1 (multiple changes) are responsible for almost all of the day-to-day, minute-to minute, movement in stock prices.

    Category 2 (fundamental growth) is responsible for most of the long term change in a stock's price over a period of years.

    This creates two major categories of ways to make money from stock price increases.

    1. You can look for stocks that seem under-valued based on their multiples. For example a company with a strong earnings outlook that is trading at (say) 10 times earnings and (say) 1.5 times book value could increase rapidly in price due to a "multiple expansion". For example the market could suddenly recognize that the stock is under-valued and the P/E could jump from 10 to 20 as the stock price doubles. If you buy this stock at a P/E of 10 and then it rises to a P/E of 20, you have effectively out-smarted the investor who sold it. The company's fundamentals may not have changed but the market's view of what the company is worth has simply increased. This is classic value investing and generally involves buying stocks with low multiples.

    2. You can buy stocks of companies that seem likely to grow their earnings per share over time. These could be stocks in growth industries. Or it could be a successful market leader in a mature industry that has a history of growing earnings at a reasonable and steady pace. For example Canadian banks have, on average, increased their earnings per share and book value per share over the years. It seems reasonable to assume that this will continue into the future. If you buy a share of a Canadian Bank now at a P/E multiple of say 14, then you can be reasonably confident that over a long period of time such as 5 to 10 years, the Bank's earnings will grow and therefore the stock's price must rise if the P/E remains the same.

    Often companies with very high expected growth trade at high multiples such as 50 times earnings or more. In this case the investor is hoping that the earnings will grow very rapidly and therefore the stock price will rise even if the P/E multiple falls back somewhat. This is classic growth stock investing and generally involves buying stocks with high multiples.

    Some investors combine features of both strategies.

    Warren Buffett , the world's most successful investor is known to look for companies that he is very sure will grow relatively rapidly for at least 10 years. He does not necessarily require the company to grow at exorbitant rates because that is unrealistic for large companies. He looks for companies that will predictably grow at an acceptable rate such as 10% to 20% per year. Warren teaches that companies that grow predictably are those with strong competitive advantages. He often looks for strong brand names like Coke and Gillette and American Express. And his chosen universe of companies often grow while paying a healthy dividend. Warren then will only buy these companies if they are available at a reasonable price multiple. Essentially this is a predictable-growth-at-a-reasonable-price strategy.

    I am increasingly of the view that this predictable-growth-at-a-reasonable-price strategy is an excellent strategy for investors. It forces investors to try to restrict their purchases to good companies that are available at good prices. This avoids the common mistake of value investors of buying bad companies at what appear to be very good prices. Bad companies can often continue to deteriorate and destroy value. Buying a stock at 6 times earnings is no bargain if earnings are about to disappear. This strategy also avoids buying growth stocks that are very unpredictable. Buying a stock that my grow at 1000% or that may go bankrupt, depending on how things work out, can often be a painful experience. Finally, this predictable-growth-at-a-reasonable-price strategy avoids buying good companies at overly inflated prices. Buying a stock that grows at 20% per year can be a bad investment if the price you paid was implicitly assuming 30% growth

    Read more:

    Oct 24 8:51 AM | Link | Comment!
  • Lack Of Timing Is Everything

    The U.S. stock market, measured by the Standard & Poor's 500 index, began this week less than 8 percent below the all-time high it reached in 2007. Other markets around the world have more ground to make up, but virtually all are far above the lows they reached in the panic of 2008-09.

    So how is your portfolio doing?

    Even if you were hammered by the crash, you ought to be in pretty good shape if you followed two simple rules during the past five years: First, you did not panic and sell your equities amid the general rush for the exits, and second, you were diversified enough to ensure that your investment results would track the market's overall trends.

    These were not Wall Street secrets. Advisers proclaimed them at every opportunity throughout the crash, yet thousands of people succumbed to fear and doubt and sold at the market's lows. Many were amateurs who repeated a long-familiar pattern of buying at market tops and selling at the bottom, but plenty of professional money managers, pension fund administrators, endowment trustees and others who should have known better also dumped equities at the worst possible time. They were convinced that recovery could not come any time soon, or that they would be fired for holding on in the belief that it might. We are all human and subject to the foibles of human psychology.

    More than anything else, the ability to persuade clients not to act against their long-term interests out of undue fear or exuberance is where financial advisers earn their keep.

    Most people assume that the recent past is a strong predictor of the near future. They therefore expect world-beating results from last year's top-performing mutual fund (or sports team, for that matter - this psychology is not confined to finance). Sometimes a champion does repeat. More often, it does not.

    All trends continue for a period of time; that's how they become trends. Following a trend can work for a while. That is why so many people decided to become day traders during the Internet stock bubble in the late 1990s. They convinced themselves that their profits proved they were smarter than others in the marketplace, when all it really showed was that it was easy to make money when stocks only moved in one direction. A few years later, nearly all those traders were doing something else for a living.

    From the Dutch tulip craze in the 17th century, to the October 1929 stock market crash, to the end of the housing boom a few years ago, market trend reversals have consistently defied people's attempts to time them.

    We can't predict short-term stock market directions, either. The S&P index began the year around 1,250. Since that time, we have seen Europe's credit crisis spread to Italy and Spain; continued lagging growth and high unemployment here and in Europe, with a marked slowdown in China and elsewhere; a legislative deadlock in Washington that is bringing us closer to the dreaded "fiscal cliff;" a rising threat of conflict between Israel and Iran; and an explosion of anti-American anger across the Middle East.

    And with all that, the S&P is up more than 15 percent this year.

    Unless the market reverses itself soon, we are likely to see a slow but steady return to stocks among individuals and institutions. Ben Bernanke and the Federal Reserve certainly hope so. They are choking the life out of interest rates in order to drive money into more volatile investments, like stocks, in hopes of triggering a wealth effect that will encourage consumers to spend. Just as so many people ignored advice to stay calm when the market crashed, they will ignore advice not to over-expose themselves to stocks just as the market gets more expensive.

    Success comes from having a long-term plan and sticking with it. This principle is not a Wall Street secret either, but not many people have the discipline to follow it.

    By Larry M. Elkin

    Read More

    Oct 24 8:49 AM | Link | Comment!
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