The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.
Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deepliquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for currency traders.
Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.
The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.
The goal of this forex tutorial is to provide a foundation for investors or traders who are new to the foreign currency markets. We'll cover the basics of exchange rates, the market's history and the key concepts you need to understand in order to be able to participate in this market. We'll also venture into how to start trading foreign currencies and the different types of strategies that can be employed.
1989: It was a year of neon colors, big shoulder pads and even bigger hair. For Dennis Stattman, 1989 marked the start of a journey. He was a founding portfolio manager of the BlackRock Global Allocation Fund, a global, flexible, multi-asset mutual fund that was a novel idea for its time.
25 years later, the fads have faded, but Dennis’s journey continues strong. And as much as we’d like to wax poetic and say it’s been a long and winding road, that simply isn’t the case. In fact, the Global Allocation Fund has been able to capture the full growth potential of the global equity markets over its 25-year history, but with one-third less risk.*
It’s an accomplishment, and a milestone anniversary, worthy of mention. In that spirit, this blog post spotlights, in Dennis’s words, seven well-worn secrets to investment success.
1. “Diversify, buy low, sell high, have a plan.”
The virtues of diversification are long touted: All markets and assets are not affected by the same factors in exactly the same way, so the more diversified your portfolio, the better equipped it may be to weather a range of scenarios. And never overpay for an investment. Get in at the right price, the seasoned investor says, and you have a better chance of getting out at the right price. Finally, do it all within the framework of a well-thought-out plan. Having a plan can help you stay the course, even when volatility tempts you to stray.
2. “Beware risking a lot to make a little. Be open to risking a little to make a lot.”
Dennis and his colleagues, veteran portfolio managers Dan Chamby and Aldo Roldan, know that investment success comes not only from what you invest in, but also what you avoid. Case in point: They avoided the hot dot-coms in the late 1990s. Not everyone understood or agreed at the time, but it ultimately served their investors well.
3. “Know that things change.” (Therefore, the need for flexibility does not.)
Who could have predicted 30 years ago that U.S. interest rates would go from 15% all the way down to 1.7%? Clearly, things change — and sometimes they change a lot. For that reason, Dennis says, the need for flexibility never changes. Success through all market cycles requires an unfettered ability to adjust and adapt.
4. “When markets are happy, think about what could go wrong. When markets are in despair, think about what could go right.”
A contrarian mindset can allow you to see opportunities before the broader markets have acknowledged them. The goal: To enter underappreciated investments at attractive prices, and then exit once sentiment has rewarded them. This same mentality has allowed the Global Allocation Fund to avoid some “landmines” over the years and, ultimately, to survive in a competitive multi-asset category that has seen many others come and go.
5. “Do not allow analysis to trump common sense.”
When covering literally a world of opportunity, analysis is absolutely critical. But the Global Allocation Fund portfolio managers will be the first to acknowledge that the numbers do not necessarily tell the entire story—it’s the people looking at the numbers that make all the difference. And that leads to the next critical ingredient in Dennis’s secret sauce…
6. “Work with smart people.”
For Dennis and his colleagues, this has meant building a team of investors who both inspire and challenge one another’s assertions to arrive at what they believe to be the 700+ best investment possibilities available. For an individual investor, this might mean choosing high-conviction strategies with smart management teams that have a long-term record of success.
7. “Have fun, make money!”
Dennis has been focused on just that since he was a teenager in Kentucky overseeing his mother’s retirement assets. It’s the same spirit that inspires him to continue the journey he started with the Global Allocation Fund a quarter century ago.
“After-hours” trading and “late trading” both refer to investments made outside of normal business hours. While the two activities sound similar and often take place in similar time frames, the former is perfectly legal while the latter is not.
Pre-Market Trading and After-Hours Trading
Stock markets have normal business hours during which they are open for trading. In the United States, those hours are typically 9:30 a.m. to 4 p.m. Eastern Time (ET), Monday through Friday. The vast majority of trades take place during these hours. At one time, once the market closed for the day, only professional investors could place trades. Today, anyone can buy and sell stock during three distinct time periods, including two designated “extended-hours” windows during which the market is closed.
The first non-traditional trading period is known as “pre-market” trading. Pre-market trades take place in the morning, before the various stock exchanges actually open for business. Because investors trade through brokerage accounts, the specific times that they can trade may be limited by the rules associated with those brokerage accounts. TDAmeritrade (AMTD), for example, permits investors to engage in pre-market activity from 8 a.m. to 9:15 a.m. Fidelity permits trading as early as 7 a.m., while Vanguard does not permit it at all.
The second non-traditional trading period is the one most commonly referred to as “after-hours” trading. These trades take place after 4 p.m. ET, when U.S. stock markets are officially closed. Like pre-market trading, the hours during which after-hours trading is available vary based on the restrictions attached to a given brokerage account.
Why Investors Do It
Extended-hours trading provides a perfectly legal way to invest. It gives investors an opportunity to monitor stock prices based on earnings announcements, mergers and acquisitions, and other events that occur or are announced outside of normal trading hours. These events often cause stock prices to move, giving investors an incentive to buy and sell. Someday soon, investors will be able to trade 24 hours a day/7 days a week.
Risks and Challenges
On the other hand, just because you can trade after hours doesn’t mean that you should. After-hours trading can present a challenging environment for investors. Since trading occurs courtesy of a variety of electronic communication networks (ECNs), the rules, including security availability and trading hours, are set independently. Similarly, since the actual stock markets are closed during pre-market and after-hours trading, determining the fair “market” price of a given security can be a challenge. Most notably, the price on one ECN may not be the same as the price on another. Even getting the information you need to make an informed trade can be difficult. Beyond the mechanics of gathering information and placing a trade, the Securities and Exchange Commission warns investors about a host of potential hazards associated with after-hours trading. Some of the major challenges include those associated with:
· Quotes
Each ECN lists quote prices for stocks. Those quotes are often posted in isolation, meaning that they have no relationship to the quotes posted on other ECNs. The price you pay on a given ECN could be higher or lower than the price available on other networks.
· Liquidity
Most trades take place during normal business hours when the stock exchanges are open. The volume of trades during pre-market and after-hours trading is significantly less, which can make it difficult to find willing buyers/sellers to execute trades.
· Spreads
The reduced volume of trading activity outside normal business hours can cause prices to be higher than what they might be if the markets were open and a larger number of buyers and sellers were seeking to make deals.
· Volatility
Price fluctuations during extended-market trading can be notably larger than those seen during normal business hours.
It is also worth noting that the traders making after-hours moves during non-traditional hours are often professional investors at big firms. Other investors may be at a disadvantage in both experience and access to information when compared to the professionals. Still, even for investors who choose not to trade during extended hours, simply monitoring the results of the after-hours and pre-market action can provide insight into trends and prices. This information often provides an indicator of the future direction investors will see markets/securities move when normal business hours resume. (The official SEC guidelines for after-hours trading can be found here.)
Late Trading
“Late trading” describes mutual fund transactions in which a buyer or seller places an order after 4 p.m. but is permitted to price the trade based on the closing price that was struck at 4 p.m. Such trades are illegal, because they give the buyer or seller an unfair advantage over other investors. The advantage results from the fact that mutual funds are priced just once a day. Unlike stocks, which change prices many times throughout the day, mutual fund prices are set once per day at 4 p.m. All trades placed prior to 4 p.m. get that day’s price. Trades placed after 4 p.m. are supposed to receive the next day’s price - but it doesn’t always happen that way. (See also "Why Late Trading is Illegal.")
Scandal
In 2003, New York Attorney General Eliot Spitzer accused Nation’s Funds, owned by Bank of America (NYSE:BAC), of permitting hedge fund Canary Capital to engage in late trading as well as other unethical behavior. The scandal grew and ultimately engulfed more than a dozen companies, including Strong Capital Management, Putnam Investments, Alliance Capital Management, Goldman Sachs Group, Invesco, Janus, Morgan Stanley and more.
The Heart of the Crime
The essence of late trading is that it gives criminals an unfair information advantage. For example, consider an investor who purchased a given mutual fund at $10 per share. When the investor wants to sell these shares, he/she places a sell order. The amount the investor will receive per share is determined at the end of the day. The investor has no way to know for sure what that number will be prior to placing the order to sell. If the closing price is $9.99, the investor will lose money on the trade. If the closing price is $10.01, the investor will make a profit. Investors engaged in illegal late trading are told the closing price before they place their order to sell. If the price is $9.99, late traders would not place the trade. If it was $10.01, they would place the trade and lock in a guaranteed profit while taking absolutely no risk. Worse yet, because the trading costs are shared among all investors in a mutual fund, the illegal trade's cost is partially paid by the other investors who hold fund shares. The criminal makes a profit, while the legitimate investors take all the risk and help underwrite the costs of the illegal trade.
The Bottom Line
After-hours trading gives investors the opportunity to extend the length of their trading days. But for most long-term investors, normal business hours provide plenty of opportunity to trade and fewer potential pitfalls. If you are saving for retirement, a child’s education or other long-term goals, there is probably little need for you to engage in after-hours trading. Late trading is not something most investors will ever encounter during the course of their investment endeavors. It is an illegal activity that takes place between professional investors. Their bad behavior drives up costs for everybody else and generates bad publicity, which causes legitimate investors to question the ethics and intentions of major financial institutions and Wall Street in general.
To choose stocks if you are a short-term trader – opening and closing positions within the space of a day – you first need to perform a basic analysis of a shortlist of companies to decide if you are going to buy or short sell them.
Basic analysis gives you a quick overview of a company without indepth examination of its balance sheet or mathematical analysis.
It helps you build basic knowledge of a number of companies. This means that when important announcements are made you can capitalise on any potential movement in their share price.
Step 1: read the news
Start by picking a handful of companies that you wish to analyse (read the previous lesson for an overview of how to shorten your list down to this level). Then start looking through the financial press for an overview of what's happening with those companies right now.
Look for the following:
- General performance of the companies' share price over the last three to six months
- New innovative products or projects that they are working on
- Any possibilities that one company is a target for a merger or acquisition (M&A)
- Analyst buy/sell recommendations and commentary on any of the companies
- Important expectations or upcoming announcements
Now, start recording this information on each company. Although you will be performing only basic analysis, it is important to note down any of the above that you find evidence of.
Step 2: consider different scenarios
From the information you have collected above, you can now start creating imaginary scenarios that you would be able to use as trading opportunities.
Start by working through the list of recent and likely events you have compiled for each company and try and work out what might happen to its share price under a range of different outcomes.
Any outcome that supports what you already know is likely to be priced into the company share price already.
However, if something changes – a plan goes wrong, an M&A deal collapses – this will not be priced in (at least fully) and you will be able to trade on the back of that.
Example
Consider Company A, a technology firm:
- It has a new product in development that is being touted as revolutionary.
- The product is scheduled to be unveiled at an upcoming company event in two weeks' time.
- Market hype surrounding this product has led to a 25% increase in the company's share price over the past month.
- The information is widely available online, in business magazines and numerous other resources.
The above information means that the market has already priced in the expectation of this new product release. Start imagining what could happen to Company A's share price if, for example, it announces a delay, cancels the project, faces additional costs, brings release of the product forward or simply comes out with a less impressive product than expected.
If this actually happens, then you know that you can look for short-selling opportunities.
Step 3: weigh up the odds
Once you have made a list of these potential scenarios, categorise them by likelihood:
- Highly likely – the market has priced in the product being as impressive as markets already expect. This is already priced into the share with the 25% recent increase.
- Possible – the product's launch could be brought forward. This outcome has not been fully priced in.
- Unlikely – the product is not as revolutionary as thought. Although this outcome is not priced in, some traders may be holding positions in expectation of this.
- Very unlikely – the product is cancelled. The market is not expecting this at all so it has not been priced into the share at all.
Now go through the list above and decide whether and how much the company's share price might go up or down if any of these outcomes materialised.
This will help you decide whether to go long or short of the shares if news that you have mentally prepared for does suddenly break.
Step 4: technical analysis
In this event that any of the above scenarios do materialise, go straight to your price charts and use technical analysis to find entry and exit points for the long or short trade you have chosen.
Markets and personal circumstances change and it is important that you manage your stock portfolio regularly to ensure that it remains balanced and on target to achieve your goals, as well as to reflect any major changes in your life.
Your balanced portfolio can change with a surge in share price
Market movements can shift the weightings in your portfolio quite quickly, with rises and falls in different companies' share prices distorting the careful balance of sectors and stock types that you worked so hard to achieve.
For example, if you initially decided to invest 5% of your portfolio in mid-cap natural resource companies – cyclical, relatively high risk but with good growth potential – but the price of one mining company's shares suddenly surges, you could find these kinds of investments representing as much as 10% of your total portfolio.
This means that relatively risky investments are now taking a bigger portion of your portfolio than the target you first set out for yourself. You may therefore want to sell some of your position in this company or one of its peers to bring resource companies' share of your portfolio back down to 5%.
Conversely, if you had determined that large-cap companies should account for 60% of your portfolio but a big pharmaceutical company you invested in has seen its share price plunge, this could cut the large-cap representation of your portfolio to as low as 50%. You are now relatively overweight on riskier small – or mid-cap stocks.
You could therefore sell shares in a small – or mid-cap company and reinvest them in another large-cap company to return to your target 60% level.
You could even buy more shares in the same pharma company whose price has fallen. Analyse that company carefully first of course, but it could be that you now have a rare opportunity to invest more money in it while its shares are cheap.
How to manage your portfolio
A successful investor should rebalance their stock portfolio at least every financial quarter and ideally every month.
Your first task is to accurately value your assets. Follow these steps:
- Revise your original investment strategy, going through the original targets you set yourself in terms of what proportion of your portfolio companies from certain sectors, geographies or risk profiles should have.
- Work out the current market value of your stock investment in each company.
- Add these up to work out what percentage of the total you now have invested in each sector, etc.
- Now compare this to your original target and work out how much you need to add or remove from each sector.
You now need to actually rebalance the portfolio. There are a number of ways you can do this.
- Sell shares in the sector or company type that now exceeds its target and reinvest the money into other investments that are under target.
- Reinvest dividends from the sector or company type that now exceeds its target into other investments that are now under target.
- Invest new money into the sector or company type that is now under target.
- Bear in mind that there are costs attached to each of these methods.
You may have to pay broker fees to buy or sell shares.
In this instance, weigh up carefully those costs against the advantage of rebalancing your portfolio. If an investment is only 1% over target, for example, it might be worth waiting another month to see if your targets have re-established themselves naturally.
Also, selling shares that have risen in value may result in a big capital gains tax bill.
In this instance, you might be better off investing new money – if available – into your portfolio.
The power of dividends
Re-investing dividends, rather than taking the payment and spending it, can be a huge growth driver for your portfolio.
According to a Barclays study, £100 invested in equities at the end of 1899 would by 2012 be worth £160 in real terms.
If the same investor however had reinvested all dividends, the same £100 would by 2012 be worth a staggering £22,239, it found.
Of course, no individual investor lives for 113 years, never mind holds onto an equity portfolio that long. The figures show you however just how much difference your dividends can make.
The big question is where and how you reinvest your dividends.
The cheapest option is agreeing to let a company automatically reinvest the dividends it pays you in its own shares.
Reinvesting those dividends in another company can make more sense – especially as a tool for rebalancing your portfolio, as outlined above.
Stay on top of your stocks
As well as rebalancing your portfolio every month or quarter, you should also keep a close eye on the individual companies you have invested in.
Using the same metrics you used to pick stocks in the first place – for example price to earnings ratios or technical analysis – make sure that the companies you have invested in still represent a good deal.
As long as the target weightings you have set for yourself – for example 60% large-cap – still suit your needs, do not be afraid for example of ditching one big oil company for another as their growth or performance prospects change.
Factor in the cost of rebalancing
As with rebalancing your portfolio, however, it is important whenever you make any changes to your portfolio that you weigh up the benefits against any dealing costs. These can quickly erode the value of your portfolio if you are trading in and out of shares too often.
As a conservative investor you have already picked stocks that you think have long-term potential, so avoid the temptation of selling shares at the first sign of a downturn.
Remember too that markets are cyclical and if your portfolio has a planned 10-year lifespan it may well ride out any temporary market dips.
Life-changing events
One of the first tasks that you set yourself when you built a portfolio was assessing yourself – looking at your current financial resources and commitments, deciding what you wanted to achieve in the future, and therefore how much money you wanted to earn from your investments and how much risk you were prepared to take.
This task never ends.
At least once a year therefore, review your portfolio to check it is still right for your needs. You may have married/divorced, become a parent, lost your job or even inherited some money, and all of these will change your investment strategy.
If you have had a child for example, you may have less income to invest or may want to use more of it to buy a bigger home.
Conversely, you may want to start investing more for your child's education. This could mean you will change the time frame of your investment depending on when you will need the money. It could also mean you are prepared to take less risk on your investments.
As you approach retirement too, your appetite for risk will probably reduce as you want to lock in any profits that your investment has already made.
Many investors choose at this time to shift the balance of the portfolio to include only the safest equity investments, or even shift out of shares entirely and into fixed-income products like bonds or cash.
A significant advantage in forex trading is the ability to trade for twenty four hours each day throughout the week. However, the trading day consists of multiple trading sessions: the European session, American session and the Asian session – also known as the London, New York and Tokyo or Sydney sessions. This is because there is no single exchange in the forex market and different countries trade at different times.
When the traders in London have stopped trading for the day, the traders in New York continue. When the traders in New York stop trading for the day, then the traders in Sydney begin.
Different trading sessions have unique
characteristics
Each of these trading sessions are driven by the economies that are active and so each session has unique characteristics to them. There isn't necessarily a "best" time to trade forex.
When certain countries are open for business, that country’s currency and the currency of their trading partners are likely to be traded in greater volume.
For example, in the Asian session, the companies in Japan are open and will be buying and selling currencies in order to do business with companies in other countries. There will be a high volume of yen being exchanged with the domestic currencies of the corporations that Japanese firms do business with.
When Europe’s businesses are open, then the euro is likely to be traded in higher volume, due to businesses in Europe trading with companies in other countries. At night, when their businesses are closed, they do not trade with other businesses outside of Europe and the trading activity of the euro is going to be lower.
Therefore, whichever session is open, the countries that are trading at the time will directly correlate with the currencies being traded. This means that each trading session will be slightly different in terms of the activity of certain currency pairs, the market volume and volatility.
Forex trading sessions
Strictly speaking, there are no open sessions on the weekend. Trading starts when the Sydney session opens at the beginning of the week and finishes when the New York session closes at the end of the week. However, your location in the world will depend on what time and day this is. If you are trading in Japan, the trading week starts on Monday morning. However, if you are in the UK, this will actually be on Sunday evening.
The following table shows the trading sessions throughout the world according to GMT. You can see from the table, that the trading day starts with the Asian session (Sydney) at 22:00 GMT and closes at the New York session at the same time – 22:00 GMT.
We have shown you the trading sessions in the table above in GMT, because GMT never changes and so you can use it in whatever time zone you are currently in. However, you will need to adjust it to the time zone you are in. For example, if you are in Central Europe, then for the winter time you will use GMT +1 hour. When the times change in the summer, you will use GMT +2 hours.
Characteristics of each trading session
The following outlines the different characteristics of each trading session.
The Asian session
The Asian session starts at 22:00 GMT when Sydney opens. Since only Sydney is trading at this time, the volumes that are traded are relatively small and therefore the price changes are likely to be minimal compared to other sessions.
At 00:00 GMT, Tokyo opens and the trading volume increases. Australia and Japan are relatively small markets compared to Europe and the US and the price changes are still relatively moderate. Spreads on major pairs are likely to be slightly higher during these times and the liquidity will not be as high as they are in the European and US session.
During the Asian session, the Australian dollar, the New Zealand dollar and the Japanese yen are traded the most, because these are the domestic currencies of the major markets that are open at that time. The most traded currency pairs that are traded during this session are the AUD/USD, AUD/JPY, AUD/NZD, JPY/USD, NZD/JPY and NZD/USD.
The European session
At 8:00 GMT the London session opens and Tokyo is in the last hour of trading.
At this time a large number of traders are participating in the market. This results in larger movements compared to the Asian session alone, because day traders are exiting positions in Asia, whilst day traders are entering into positions in Europe.
During the European session there are no currency pairs that behave differently from normal, so in general, all pairs can be traded. There is also substantially higher volume in these sessions and so the spreads tend to be smaller.
There is also more liquidity in the London session than any other session as the London market accounts for almost 38% of the total volume – more than New York (17%) and Japan (6%) put together. Trading when the London session is open is a good start to ensure that you are trading in a highly liquid market.
The American session
At 13:00 GMT, the New York session opens at the same time as the London session. With the combined participants from both the London and New York sessions, volume and volatility are generally increased.
At 17:00 GMT, the London session draws to a close and then New York trades by itself until the Asian session opens again.
At that time, only New York is open and although the trading volume is still higher than during the Asian session, the volume is likely to decrease with the exit of the European traders.
During the American session there are no particular currency pairs that should or should not be traded.
Overlapping sessions
The darker circles in the tables above show where there is an overlap in trading sessions. Tokyo and London share an hour when the Asian session closes and London opens. London and New York also share four hours of trading from GMT 12:00 to GMT 17:00.
The significance of these overlaps is that there are considerably more traders trading at the same time, which affects the conditions of the market. When there are more active traders, there will be more liquidity in the market. Higher liquidity means that slippage is less likely, orders are more likely to be filled and the spreads on currency pairs are reduced. These tend to be good times to trade.
In the table above, you can see the price range movement of EUR/USD per hour, as the day progresses through a twenty four hour cycle. The red line represents the average movement and highlights the peaks and troughs throughout the day.
During the overlap of the Asian and the European session, and the overlap of the European and American session, you can observe that there is heightened activity. During this period, the price movement can be very volatile with rapid movement in both directions, especially at the very start of the overlaps, and so caution is advised when looking to trade.
Caution is also warranted when the trading week starts with the Asian session and when it ends with the New York session – at these particular times, the market volume is very low.
Caution at certain times
There are also national holidays that will change forex market conditions, such as a UK or US bank holiday, because without these countries participating, the market volume and liquidity will be a lower than usual.
At certain times during the day, news and reports are released that have an impact on the forex market. At these times, the impact can be dramatic, causing the price to move rapidly in a single direction and re-trace just as quickly. This is due to low volume because banks and institutions are taking their positions out of the market, and so quick and rapid price movements in both directions can be observed.
The publishing times of these reports are available ahead of time and so volatile conditions can be avoided.
The ultimate dollar hedge investment will always be gold. Investing in gold through ownership of the metal itself, mutual funds, or gold mining stock provides the most direct counter to the dollar. As the dollar falls, gold will inevitably rise. In a moment, we’ll provide you with many ways for positioning your portfolio to profit from a bull market in gold. For now, we emphasize the high probability of gold’s future. The real potential for profits in the coming years and decades is not going to be found in the traditional American blue chip industry. That is a financial dinosaur that can no longer compete in the world market.
The future growth is going to be seen in gold. The world economy may remain off the gold standard, but ultimately the tangible value of gold as the basis for real value-whether acknowledged by central banks or not-will never change. Historically, this has always been the case, and it always will be. In other words, we are on a “gold standard” in spite of the popularity of fiat.
You have many choices.
In the following paragraphs, you’ll discover five ways to invest in gold. Based on your level of market experience and familiarity with products, one of these will be appropriate for you.
1. Direct ownership. There is nothing like gold bullion, the ultimate expression of pure value. Historically, many civilizations have recognized the permanence of gold’s value. For example, Egyptian civilizations buried vast amounts of gold with deceased pharaohs in the belief that they would be able to use it in the afterlife. Great wars were fought, among other reasons, to pillage stores of gold. Why the allure? The answer: Gold is the only real money, and its value cannot be changed or controlled by government fiat-the underlying reason for governments to go off the gold standard, unfortunately.Gold’s value will rise based on the pure forces of supply and demand, no matter what Mr. Greenspan decrees regarding interest rates or greenbacks in circulation. The big disadvantage to owning gold is that it tends to trade with a wide spread between bid and ask prices. So don’t expect to turn a fast profit. You’ll buy at retail and sell at wholesale, so you’ll need a big price jump just to break even. However, you should not view gold as a speculative asset, but a defensive asset for holding value. Since your dollars are going to fall in value, gold is the best place to preserve value. The best forms for gold ownership are through minted coins: one-ounce South African Krugerrands, Canadian Maple Leafs, or American Eagles.
2. Gold exchange-traded funds. The recent explosion in exchange traded funds (ETFs) presents an even more interesting way to invest in gold. An ETF is a type of mutual fund that trades on a stock exchange like an ordinary stock. The ETF’s exact portfolio is fixed in advance and does not change. Thus, the two gold ETFs that trade in the United States both hold gold bullion as their one and only asset. You can locate these two ETFs under the symbol “GLD” (for the streetTRACKS Gold Trust) and “IAU” (for the iShares COMEX Gold Trust). Either ETF offers a practical way to hold gold in an investment portfolio.
3. Gold mutual funds. For people who are hesitant to invest in physical gold, but still desire some exposure to the precious metal, gold mutual funds provide a helpful alternative. These funds hold portfolios of gold stocks-that is, the stocks of companies like Newmont Mining that mine for gold. Newmont is an example of a senior gold stock. A senior is a large, well-capitalized company that has been around several years and has a profitable track record. They tend to own established mines that produce known quantities of gold each year. For many investors, selection of such a company is a more moderate or conservative play (versus picking up cheap shares in fairly young companies).
4. Junior gold stocks. This level of stock is more speculative. Junior stocks are less likely to own productive mines, and may be exploration plays-with higher potential profits but also with greater risk of loss. Capitalization is likely to be smaller than capitalization of the senior gold stocks. This range of investments is for investors whose risk tolerance is broader, and who accept the possibility of gold-based losses in exchange for the potential for triple-digit gains.
5. Gold options and futures. For the more sophisticated and experienced investor, options allow you to speculate in gold prices. But in the options market, you can speculate on price movements in either direction. If you buy a call, you are hoping prices will rise. A call fixes the purchase price so the higher that price goes, the greater the margin between your fixed option price and current market price. When you buy a put, you expect the price to fall. Buying options is risky, and more people lose than win. In fact, about three-fourths of all options bought expire worthless. The options market is complex and requires experience and understanding. To generalize, options possess two key traits-one bad and one good. The good trait is that they enable an investor to control a large investment with a small, and limited, amount of money. The bad trait is that options expire within a fixed period of time. Thus, for the buyer time is the enemy because as the expiration date gets closer, an option’s “time value” disappears. Anyone investing in options needs to understand all of the risks before they spend money. The futures market is far too complex for the vast majority of investors. Even experienced options investors recognize the high risk nature of the futures market. Considering the range of ways to get into the gold market, futures trading is the most complex and, while big fortunes could be made, they can also be lost in an instant.
We cannot know, predict, or even guess, when the demise of the dollar is going to occur, or how quickly it will take place. But we do know it is going to occur. The tragic mismanagement of monetary policy by the Fed over many years has made this inevitable.
Removing the U.S. monetary system from the gold standard was not merely a decision of short-term effect. Nixon may have seen the move as a means for solving current economic problems, but it had long-lasting impacts: trade deficits, growing federal debt, and the ability to print money endlessly and build a new credit-based economy. Internationally, the decision by the United States virtually forced all other major currencies to also go off the gold standard.
Any investor who views the economic situation broadly-both domestically and internationally-can see that trouble lies ahead. We have delayed the inevitable because China is a partner in our monetary woes.
The Chinese are building their own debt on the dubious foundation of the U.S. dollar, and other Asian economies have been forced to go along for the ride. When the dollar falls, many other countries will suffer as well. The offset, logically, is found in commodities. Investing in oil stocks makes sense, for example, because the price of oil is rising and as it becomes more difficult to drill oil those companies that own drilling and exploration operations will benefit. It makes sense to invest in other commodities as well.
The tangible asset play is clearly where future value is going to lie. With China’s never-ending need for coal, iron ore, tungsten, copper, oil, and other metals, the future of tangible markets is the bright spot in the gloomy financially based economics of the world.
Leading the charge is gold. It is ironic that monetary policy follows a predictable pattern.
Governments overprint money and their currency crashes. Inevitably, they always return to gold, but often at great expense and with considerable suffering. We find ourselves in another one of those moments in time where irresponsible monetary policy has put us at risk. But we don’t have to simply hold on and wait for the demise of the dollar; we can take action now because that demise is great for your portfolio-if you position yourself in tangible assets rather than in empty fiat promises and the bizarre economic premise of U.S. monetary policy.
Goods and services can be paid for only with goods and services. Currency is nothing but an IOU, a promissory note that is not backed up with any tangible value. Once we reach our national credit limit, monetary policy will be forced to retreat. When that happens, traditional investors and their savings accounts are going to be hit hard. The beneficiary of the falling dollar will be the investor whose holdings emphasize tangible value of goods: resources and precious metals.
Every danger to one group of people is invariably an opportunity to another. It all depends on where you position yourself. Those investors positioned in dollar-based investments are going to suffer the loss of purchasing power when the dollar’s value disappears. Those who have moved their investments to higher ground will benefit from the change.
There are two basic categories of futures participants: hedgers and speculators.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.
Hedgers are very often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take, for instance, a major food processor who cans corn. If corn prices go up. he must pay the farmer or corn dealer more. For protection against higher corn prices, the processor can "hedge" his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if corn prices rise enough to offset cash corn losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.
For speculators, futures have important advantages over other investments:
If the trader's judgement is good. he can make more money in the futures market faster because futures prices tend, on average, to change more quickly than real estate or stock prices, for example. On the other hand, bad trading judgement in futures markets can cause greater losses than might be the case with other investments.
Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract (usually 10%-15% and sometimes less) as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. (Compare this to the stock investor who generally has to put up at least 50% of the value of his stocks.) Moreover the commodity futures investor is not charged interest on the difference between the margin and the full contract value.
In general, futures are harder to trade on inside information. After all, who can have the inside scoop on the weather or the Chairman of the Federal Reserve's next proclamation on the money supply? The open outcry method of trading - as opposed to a specialist system - insures a very public, fair and efficient market.
Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.
Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade's execution.
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One of the advantages of our No Dealing Desk execution is that we make money on a per trade basis, so we benefit from successful traders. Therefore, we focus heavily on providing educational services to help you become better traders. Through www.gcminternationalinc.com, we offer free news and market research, on-demand educational videos, live instructor sessions, and ongoing trading support by the course instructors.
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Savings accounts such as money market accounts and CD's (certificate of deposit) are a great way for people to put money away and also earn a modest return on their money, without the risks associated with the stock market or other similar investments. Although technically money market investing isn't actually investing, it is a form of savings.
Money market accounts are good for people who want the security of having their money in cash, knowing it will not lose value at any time. Additionally, money market accounts offered by banks and other financial institutions in the United States are insured by the federal government through the FDIC (Federal Deposit Insurance Corporation), up to $100,000. So, you can sleep easy at night knowing your money is safe.
Although I am an avid stock market investor, I always keep a percentage of my assets in an interest bearing money market account because I want to know I have a cushion if I ever need it. Whether I need money for unexpected expenses or some other reason, I want to know I can count on that money if the time comes.
There are three main types of savings accounts, detailed here:
Basic or Traditional Savings
This type of account often comes with no minimum balance requirement and pays a modest rate of interest. Money can be withdrawn without penalty.
Money Market Accounts
A money market account is similar to a passbook savings account, but likely has a minimum balance requirement, which can range from a few hundred dollars to several thousand. Money market accounts also tend to pay out a higher rate of interest than basic savings. Fees may be charged if your balance falls below a minimum.
CD (Certificate of Deposit)
A CD is like a basic savings account, but it is at a fixed interest rate for a fixed term of time. It could be 6 months, 1 year, or more. There may or may not be a balance requirement, and your interest rate is determined by the amount of your deposit, and the term. A typical CD term might be if you deposit $10,000 for 1 year, your bank agrees to pay you a fixed interest rate, almost always much higher than a money market account. The beneift of this type of account is that if interest rates fall, you are still guaranteed the higher interest rate. The drawback is that if you need to withdrawl your money for some reason, you can incur a penalty.
Who pays the best rates?
Online banks often pay better savings rates than banks with branches. Why is this? Because maintaining a branch network costs money, which is overhead, which is always passed on to you, the customer - either in the form of higher fees or reduced interest earnings on your savings accounts.
I have found a way around this by opening a free checking account at a bank with branches, and then opening a money market account with an online bank, which pays me a high interest rate. My checking account and online savings account are linked, so when I need to access my savings account all I do is transfer money to my checking account - which is all 100% free!
I highly recommend this type of setup if you hate paying fees as much as I do, but also want a good rate of return on your savings. You can shop around to find the best savings rates and check with different banks to find out if they have free checking, or if you want to save time I have created links to the banks I use in the Open An Account tab on the menu. Opening one or both accounts online only takes a few minutes, and you'll be good to go!
If you are a long-term investor, you need to analyse companies in your short list in much more detail.
You will be less concerned with news that might move a company's share price over the short or medium term – for example, a single earnings release or change to its full-year outlook – but are more concerned with the overall financial health of the company.
You are essentially looking to see whether the fundamentals of each company are able to sustain a rise in its share price over a long period of time.
To help you decide which shares to invest in, work through the following steps:
Step 1: determine your stocks' real value
The first step in deciding which company to invest in for the long term is to work out which shares are currently undervalued or overvalued. You can then make a decision on them eventually returning to a price that reflects their true value.
To do this, look at each company's earnings report and calculate the following ratios:
Financial health ratios
Using financial health ratios will tell you if a company has ample money to pay its costs or is in danger of going bankrupt. Start with the following financial health ratios, using data from the past two to five years: Current ratio, quick ratio and 'debt to equity ratio'.
Performance/efficiency ratios
A company's financial performance ratios will give you an idea of how efficient its management is at making the most of the capital and assets at hand. Start by analysing the following: 'Return on equity' and 'return on capital employed'.
Evaluation ratios
Evaluation ratios tell you if a company appears to be undervalued or overvalued. Start by analysing the 'price to earnings' ratio.
Step 2: record your data
Record all this information, creating a detailed file on each company.
Because ratios give you a concrete number to work with, they are also a simple way of comparing different companies in the same sector.
For this reason, you might want to create a spreadsheet containing key ratios for a number of companies, all in one place.
Step 3: analyse your data
To decide whether the shortlist of companies you are interested in represent a good investment prospect, work through the following checklist:
- Look at each company's share price performance compared with that of the index it trades on and also its sector – this will tell you whether the company seems to be underperforming or overperforming its peers.
- If it appears to have been underperforming other companies in its sector or market, ask yourself why – look again at its financial ratios to try and decide whether it is undervalued (and therefore might see its price rise) or simply inefficient.
- Look at changes in each company's financial, performance and evaluation ratios over the past two to five years – look for trends that show you its financial health or performance is improving or worsening.
- Compare evaluation data with what you can find out from each company's balance sheet and in the news. If, for example, evaluation methods suggest that it is overvalued, worsening earnings or a weak take-up of its products might confirm this.
- Consider each company's performance ratios in context of its current plans – if its management is actively working to cut costs and seems to have made some headway, for example, you might choose to be less deterred by a low return on capital or equity.
- Use financial health to categorise companies you are interested in as high risk, moderate risk or low risk – this will provide you with some context to view other ratios in.
- If, for example, a company's financial health ratio suggests it is high risk, its performance ratio is also weak and evaluation methods suggest it is overvalued, this might be a stock to avoid.
Another way of refining your list is to grade companies using a system – for example 1 to 5, with 1 meaning strong potential and 5 meaning low potential.
Step 4: choose your stocks
Once you have taken all the above into account and applied it to your shortlist of stocks, you should have identified two or three stocks that you want to go ahead and invest in.
Remember however that as with any form of fundamental analysis, every stage in the above process involves a level of subjectivity.
There is no 'one size fits all' method for choosing which stocks to invest in, but as you gain in experience you will find through trial and error which ways work best for you.
