How Doing Your 'Share' Has Enriched Facebook

There are several – if not many – companies that have over a billion clients. Drink the world’s most popular soda or smoke its most popular cigarettes, and boom, you’re part of the customer base. But imagine a company with 1.2 billion registered users (give or take an Egypt or Germany’s worth of fake ones), many of them using its product for hours on end and cavalierly conveying their personal information while they’re at it. Founded in 2004, Menlo Park, Calif.-based Facebook (FB) is new enough that you’re probably familiar with its history. If not, here’s the one-sentence version: College kid notices how ugly MySpace is, makes something sleeker and markets it to post-adolescents. The phenomenon of Facebook, and the speed at which users joined and continue to join, is unprecedented. But just because a novelty is adopted by a large chunk of humanity, does that mean it’s inherently an economic powerhouse?

From Frothy to Flat, and to Frothy Again

If you believe that an overvalued juggernaut shouldn’t take more than two years to reenter the atmosphere, then the answer is most likely yes. Facebook stock lost half its value within three months of going public in May 2012, only to quadruple in value from that nadir. The stock still sits at close to an all-time high, resulting in a company with a market capitalization of $160 billion. That large number is the result of anticipation that Facebook will one day realize growth beyond its current apparent capacity. The company’s book value sits at a considerably less remarkable $15 billion, which is still substantial for an entity that didn’t even exist a decade ago and which doesn’t exactly provide an indispensable good or service.

Facebook's Real Users

Last year Facebook turned a profit of $1.5 billion on revenues of just under $8 billion, an enviable profit margin regardless of market sector. But unlike the company’s cohorts on the list of the world’s largest, Facebook doesn’t sell directly to customers. Tempting though it might be to collect even a nominal fee from each of those 1.2 billion users, the company charges them nothing to use the site. Instead, as you presumably know if you’re one of those 1.2 billion, Facebook’s true customers are advertisers. Some of the world’s largest purchasers of advertising, such as AT&T (T) and General Motors Co. (GM), have Facebook pages whose “likes” number in the millions. 

But large corporations are only part of Facebook’s true clientele. The company’s advertisers range from multinational oil refiners to neighborhood craft stores, each convinced that reaching potential customers by spending money on the world’s largest social media site is mandatory, not optional.

Rise of Mobile

As use of mobile devices has increased relative to desktop computers in recent years, Facebook and its advertising have followed suit. 2013 represented a watershed year in that for the first time, most of the company’s money came from smartphone/tablet advertising. That’s not the result of a small sample size, either. 2013 was also the year in which Facebook welcomed its millionth advertiser, confirming the truth that online advertising has left its legacy media brethren of print, radio and television behind, probably forever. 

Facebook might be a glorified coupon book, a constantly updated one on which you can post your vacation photos and wait for your friends and friend equivalents to leave banal comments, but there’s more to the company’s revenue streams than just advertising. Somewhat surprisingly, Facebook derives a lower percentage of its revenue from advertising than does its competitor in documenting every detail of its users’ lives, Google Inc. (GOOG). In fact, in its short existence Facebook has gone from exclusively dependent on advertising to operating a model in which 10% of revenue comes from payments. That most likely means via games. Play Candy Crush Saga or some other video game, buy 99 cents worth of additional gameplay, hundreds of times over, and not only have you thrown away enough money to buy a few shares of Facebook, but you’ve contributed to the company’s prospering secondary revenue source. Multiply by tens or hundreds of millions of users, and you get the idea.

The Bottom Line

A generation ago, the idea of a virtual meeting place for people of common interests to congregate was conceivable, if not necessarily practicable. The idea of monetizing such a place was even further removed from common understanding. As for monetizing it to the tune of tens of billions, buttressed by a population eager to spend money on non-physical trinkets and be advertised to continuously…well, that’s what makes Facebook’s rise so remarkable, and the company itself so distinctive a player among the world’s largest and most successful.

The Biggest One-Day Gains In Popular Commodities

With many investors looking to expand their portfolios beyond traditional holdings in stocks and bonds, commodities are gaining popularity in portfolios. After all, hard assets represent a dual play on inflation fighting, as well as increasing global demand and populations. Betting on natural resources seems like a win-win for portfolios and funds have exploded in popularity. However, commodities aren't without their set of quirks, especially in the volatility department. Large price movements can be the norm for many of the critical resources we use every day. From crude to corn, all have experienced some wild price swings since we've started trading on futures exchanges.

Texas Tea

Since it's one of the most consumed commodities on the planet, it's no surprise that crude oil is also one of the most heavily traded. Coming in a variety of "flavors" or grades, both Brent (NYSE: BNO) and West Texas Intermediate (WTI) remain the world's standard varieties. Brent originally got its name from the Brent oilfield in the North Sea and represents roughly two thirds of the world's traded oil supply. 

As such, Brent crude prices have had a series of huge gains over the years, as various market forces and shocks have taken hold. For example, when strikes in top producer, Norway, cut production of oil by roughly 250,000 barrels-per-day, Brent surged more than $6 a barrel back in June of this year. That is the fourth largest daily gain in dollar terms since the contracts were launched.

However, to find the biggest jump, we need to go back to Sept. 22, 2008. On that date, the market's anxiety over the U.S. government's $700 billion bailout plan finally took hold and touched off a buying frenzy of safe-haven investments. Crude oil leaped $16.37 that day, for a 15.66% gain.

All that Glitters

Like crude oil, gold is seen as a safe haven for investors in times of trouble. Therefore, it's only natural that its biggest one-day gain came during the depths of the credit crisis. After a series of bad derivatives bets on subprime housing, AIG (NYSE:AIG) received an $85 billion bailout loan from the Federal Reserve after it could not raise enough capital from the private sector. The day before AIG received the emergency measure, 158-year-old investment bank, Lehman Brothers Holdings, filed for bankruptcy. 

Overall, panic surged through the markets as investors questioned what financial institution would be next. Gold - which is known for holding its value during times of crisis - rallied. On Sept. 16, 2008, the precious metal jumped $70 during the regular session, topping the previous single-day record of a $64 gain back in January of 1980. In terms of percentage, it was the yellow metal's largest one-day leap since 1999 and the tech crash. That leap made investors in the physically-backed SPDR Gold Shares (ARCA:GLD) quite happy. 

As High as a Horse's Eye 

Found in everything from batteries to animal feed, corn is another one of the world's most heavily traded and used commodities and, like gold and oil, it has seen some pretty big price spikes. While global financial meltdowns have caused prices for the agricultural staple to spike, the bulk of its gains have come from the weather and supply disruptions. 

Some of corn's biggest jumps have come over this past summer as the worst drought in decades crippled main growing regions in the United States and Canada. That drought has kept supplies tight and prices rising. On September 28 of this year, the USDA's crop report showed that stockpiles of the grain shrank to less than 1 billion bushels for the first time in eight years. Those shrinking supplies caused corn prices to jump more than 5.6% on the day. It was corn's biggest rally since July 5 of this year. Not to be outdone, wheat also rose 5.5% that day, as its supplies have been hurt by the record dry weather as well. 

The Bottom Line

Commodities can be a volatile bunch. Whether it is due to crisis or supply issues, various global macroeconomic events can cause the prices of these hard assets to surge. The previous examples are just some of the biggest one-day gains natural resources have experienced. Odds are that there will more big gains to come in the future. 

How To Use A Moving Average To Buy Stocks

The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks, or any time period the trader chooses. There are advantages to using a moving average in your trading, as well options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long term investors and short-term traders. (see "The Top Four Technical Indicators Trend Traders Need to Know.")

Why Use a Moving Average

A moving average can help cut down the amount of "noise" on a price chart. Look at the the direction of the moving average to get a basic idea of which way the price is moving. Angled up and price is moving up (or was recently) overall, angled down and price is moving down overall, moving sideways and the price is likely in a range.

A moving average can also act as support or resistance. In an uptrend a 50-day, 100-day or 200-day moving average may act as a support level, as shown in the figure below. This is because the average acts like a floor (support), so the price bounces up off of it. In a downtrend a moving average may act as resistance; like a ceiling, the price hits it and then starts to drop again.

The price won't always "respect" the moving average in this way. The price may run through it slightly or stop and reverse prior to reaching it. 

As a general guideline, if the price is above a moving average the trend is up. If the price is below a moving average the trend is down. Moving averages can have different lengths though (discussed shortly), so one may indicate an uptrend while another indicates a downtrend.

Types of Moving Averages

A moving average can be calculated in different ways. A five-day simple moving average (SMA) simply adds up the five most recent daily closing prices and divides it by five to create a new average each day. Each average is connected to the next, creating the singular flowing line.

Another popular type of moving average is the exponential moving average (EMA). The calculation is more complex but basically applies more weighting to the most recent prices. Plot a 50-day SMA and a 50-day EMA on the same chart, and you'll notice the EMA reacts more quickly to price changes than the SMA does, due to the additional weighting on recent price data.

Charting software and trading platforms do the calculations, so no manual math is required to use a MA.

One type of MA isn't better than another. An EMA may work better in a stock or financial market for a time, and at other times an SMA may work better. The time frame chosen for a moving average will also play a significant role in how effective it is (regardless of type).

Moving Average Length

Common moving average lengths are 10, 20, 50, 100 and 200. These lengths can be applied to any chart time frame (one minute, daily, weekly, etc), depending on the traders trade horizon.

The time frame or length you choose for a moving average, also called the "look back period", can play a big role in how effective it is. 

An MA with a short time frame will react much quicker to price changes than an MA with a long look back period. In the figure below the 20-day moving average more closely tracks the actual price than the 100-day does.

The 20-day may be of analytical benefit to a shorter-term trader since it follows the price more closely, and therefore produces less "lag" than the longer-term moving average.

Lag is the time it takes for a moving average to signal a potential reversal. Recall, as a general guideline, when the price is above a moving average the trend is considered up. So when the price drops below that moving average it signals a potential reversal based on that MA. A 20-day moving average will provide many more "reversal" signals than a 100-day moving average. 

A moving average can be any length, 15, 28, 89, etc. Adjusting the moving average so it provides more accurate signals on historical data may help create better future signals.

Trading Strategies - Crossovers

Crossovers are one of the main moving average strategies. The first type is a price crossover. This was discussed earlier, and is when the price crosses above or below a moving average to signal a potential change in trend.

Another strategy is to apply two moving averages to a chart, one longer and one shorter. When the shorter MA crosses above the longer term MA it's a buy signal as it indicates the trend is shifting up.This is known as a "golden cross."

When the shorter MA crosses below the longer term MA it's a sell signal as it indicates the trend is shifting down. This is known as a "dead/death cross"

Disadvantages

Moving averages are calculated based on historical data, and nothing about the calculation is predictive in nature. Therefore results using moving averages can be random--at times the market seems to respect MA support/resistance and trade signals, and other times it shows no respect.

One major problem is that if the price action becomes choppy the price may swing back and forth generating multiple trend reversal/trade signals. When this occurs it's best to step aside or utilize another indicator to help clarify the trend. The same thing can occur with MA crossovers, where the MAs get "tangled" for a period of time triggering multiple (liking losing) trades. 

Moving averages work quite well in strong trending conditions, but often poorly in choppy or ranging conditions.

Adjusting the time frame can aid in this temporarily, although at some point these issues are likely to occur regardless of the time frame chosen for the MA(s).

The Bottom Line

A moving average simplifies price data by smoothing it out and creating one flowing line. This can make isolating trends easier. Exponential moving averages react quicker to price changes than a simple moving average. In some cases this may be good, and in others it may cause false signals. Moving averages with a shorter look back period (20 days, for example) will also respond quicker to price changes than an average with a longer look period (200 days). Moving average crossovers are a popular strategy for both entries and exits. MAs can also highlight areas of potential support or resistance. While this may appear predictive, moving averages are always based on historical data and simply show the average price over a certain time period.

Reasons to Invest in Gold and Precious Metals Mining through USA Mining Companies

1. USA provides stability of investment climate, which protects you from many forms of fraud and other forms of risks, especially those you might experience in the countries with political and economical instability. Business law exists in USA for hundreds of years, and it’s a common sense law. Experienced lawyers will be able to protect your interests starting from the preparing of necessary JV, loan or other documents. Title agencies in USA perform a title search, if real estate is involved, and insure the title. Public companies in USA report to SEC, and this protects you as a potential investor.
2. If you invest in mining, you do not have to worry about visas to visit your business; it’s much easier than investing in real estate.
3. American mining companies operate in an exploration sphere and precious and non-ferrous metals mining all around the world, so you will be able to choose a project you like and located in the geographical area of your preference.
4. USA has a lot of natural resources, and especially minerals. Mining has been practically stopped during the Second World War. People switched to other areas of activity. Mines remained closed. (Over 90% of mining even now is being done outside of USA.) Later low prices of gold prevented extensive mining of precious metals. This industry started to rebound only in the end of the last century, and now it’s quickly growing. Despite the quick growth, we are pretty sure that the precious metals and non-ferrous metals mining industry is substantially under-valued in USA.
5. Prices of gold, silver, platinum and many non-ferrous metals are skyrocketing, and it looks like a great upward movement is developing.
6. Many placer gold mines which earlier could not be developed with economically viable results due to relatively low grade of gold or due to the fact that fine gold (micron particles), constituting the major fraction of gold had to be extracted with chemical methods. Nowadays, micron particles of gold may be extracted effectively (over 95%) by modern gravitation separation technologies and machines using water and power only, and prices of precious metals stimulate developing of mines with relatively low grade of precious metals. Sometimes, the ore from hard rock mines demands chemical processing. Newly developed closed-circuit chemical methods of ore treatment consume less water, making it easier to get necessary permits and keep mining environmentally friendly.
7. Mineral mining law in USA makes it easy to claim and hold land for mining purposes. Some mining land can be sold and inherited as a real estate. There are three types of land which could be used for mining in USA.
8. Some small gold mining companies in USA currently do not have sufficient funding sources to finance development of many very well explored precious metals mining projects, based on small and medium size mines.
9. Amounts of funding required for every particular gold mining project could be relatively low because many mines are turnkey ones and ready to go, often even with equipment installed. There are some mining claims available where geological reports are impressive, reserves are well proven and permitting is done already.
10. Gold bullion or nuggets as well as the ore or concentrate could be kept after produced by the mining company without paying taxes until it is sold in the open market. This fact allows gold mining companies to sell precious metals on the peak of their prices or just borrow against the bullion.
11. Climate in the USA (except Alaska) and Central America mostly calls for 12 month operations, making it easier to achieve high return on the investment than if you mine precious metals in Canada, Siberia or Alaska having a operational season of 5-7 months in the best case scenario.
12. Reserves of precious metals may be placed on the balance of your enterprise according to certain rules, so the book value of the company may grow even before you start gold mining.
13. Taxes and accounting are very easy tasks in USA when you use professional companies for this purpose.
14. It’s a myth that only in Africa or Russia you may do as good as 50%-100% return per year. Stocks of some small USA mining companies made much over that this year already.

Beginning real estate investing

So why invest in real estate?

Unlike stocks, real estate isn't just an investment, but it also provides something that all people need: A place to live, to go to work, and to go to school, among others. This fact makes real estate something that is always in demand, and has shown to be one of the few investments that continues to increase in value over time. You can make money in real estate by building equity through price appreciation, in addition to earning a continual stream of monthly or seasonal rental income by investing in rental properties. And beginning real estate investing now might be the best time ever due to record numbers of foreclosures selling at fire sale prices!

Real estate property types

There are several different property types within real estate that you can invest in, and each type comes with it's own unique opportunity for profit:

• Single Family Residential (houses and condos)
• 2-4 Units (i.e. duplex, triplex, etc)
• Apartments
• Commercial property (retail, strip centers, offices)
• Land

What you invest in depends on whether you are looking for income, appreciation, or both. Do you plan to live in your investment as your primary residence, or do you want to rent it out? Other factors to consider include the geographic market you are looking to buy in, and what real estate investing opportunities are available in that market.

Is now a good time to invest in residential real estate?

I remember in around 2004 or 2005 I heard people asking if it was a good time to invest in real estate. And at that time, most of the "experts" I heard on TV or read about said "Yes!". Personally, I was a bit skeptical. There really was no doubt in my mind we were in a "bubble" (where prices rise unsupported by fundamentals), but the real question was how big of a bubble were we in, and how high would it continue to go? The one thing I had learned from my experience investing in technology stocks in 1999, was that bubbles do eventually pop, and sometimes the consequences can be quite nasty. So although I owned real estate at the time, I really couldn't figure out why the experts would think that buying into a bubble was a good time to buy. Couldn't they see what was coming? Not only did I not think it was a good time to buy, but I thought it was a very good time to sell, which I did, in 2006. Although I didn't make a huge amount of money, I did make enough so that it made the investment worthwhile.

Anyway this brings us to where we are today. In the US, housing prices have dropped by as much as 30% to 40% off their peaks in some areas, and they are still falling. In my opinion, this is the time when you want to start thinking about investing in real estate, especially if you are thinking of beginning real estate investing now. Real estate is cyclical (meaning the market goes in cycles based on supply and demand), and right now we are coming off a period of record high demand (or maybe hyper demand is a better word!), and prices have stopped appreciating. Not only have they stopped appreciating, but they are falling, and hard. The reason for this is that unlike a normal supply/demand cycle, there are a record number of foreclosures literally being "dumped" on the market at fire sale prices, which results in rapidly declining market values. For those who don't know, a foreclosure is when the homeowner stops making their mortgage payments, the loan goes into default, and the bank starts the process of repossessing the home. This legal process is called "foreclosure".

So why so many foreclosures?

Well, one of the features you tend to see in real estate boom cycles is relaxed lending standards from banks and mortgage companies, due to increased competition for mortgages fueled by the demand. What this does is allow people who might not normally qualify for a mortgage in leaner times, to qualify. While this is normal, what isn't so normal is that in the recent housing boom you had a large increase in loans to "subprime" borrowers (people with poor to very bad credit), using financing options like ARM loans (adjustable rate mortgages), interest-only loans or loans without verification of income or other assets. You also had a good number of speculators and "flippers", who were buying properties with no other intention than holding on to them for a few months and then reselling them for a higher price. Add to this the astronomical increase in prices (some areas of the country saw 100%+ increases in home values in just 2 or 3 years), and you had a recipe for disaster.

How low will prices go?

While nobody can say for certain how low housing prices will go, the housing market will stabilize eventually and if history is any guide, prices will recover. And, with prices already down 30%-40% off their highs in some areas, much of the speculation premium that worked it's way into the market 3 and 4 years ago is well on it's way to working itself out. Where the opportunity lies is finding substiantually below market properties that are owned by banks (called REO properties, or "real estate owned"), or by homeowners or investors in foreclosure who need to sell their properties as quickly as possible.

Social trading risks: how not to be a foolish follower

Watch your money management

Firstly, be aware that when you follow a trader, you are mirroring their money management as well as their trades.

If, for example, they risk 5% of their account on a trade, you also risk 5%. This means you are automatically breaking the money management rule of not risking more than 2% on a single trade.

So first check by looking at how much a lead trader is risking before you copy any trades. Some platforms allow you to scale down the positions on the trades that you copy.

Dig deeper into a trader's past performance

Social trading providers usually show a chart of a trader's equity curve or a percentage increase/decrease or their account, so you can quickly scan different traders. Click on the image to the right for an example:

Although a trader's past performance can be a good gauge of their ability, it provides no guarantee of their future results. In some cases, good performance may not even reflect their ability to trade.

Their performance could be the result of one of the following reasons you need to watch for:

1. The Martingale system

The Martingale system involves doubling a position size every time a losing trade occurs. When the trader does eventually win, that winning trade will cancel out any previous losses.

However, for this to work, a trader needs infinite wealth in order to reach the winning trade. It is more likely that the trader will wipe out their account before they win.

To identify a trader who is using a Martingale system, look at their individual trades. You will be able to see if each loss is getting bigger and bigger each time they occur in a row.

2. Survivor bias

Survivor bias is simply opening a number of accounts and trading a different strategy on each. By default, one will out-perform the others and 'survive'. However, because you will not know that all these different accounts – most of them losing – belong to the same person, the one wnning account will give the impression that the lead trader is a successful trader.

Anyone choosing a lead trader may base their decision to follow that trader purely on that top-performing account, not being aware that the same trader has produced less impressive profits or even losses on other accounts.

3. Performance based only on closed trades

The first thing that a follow trader is likely to see is the lead trader's equity curve or percentage increase on their account.

The problem is that most performance charts only take into account trades that have actually been closed. They do not include any trades that are still open, regardless of whether they are currently in profit or loss.

Find any open positions a lead trader has and include them in your own calculations of how well that trader is really doing.

Don't put all your eggs in one basket

When you choose a trader to follow, you are actually investing your money in that trader's performance, just as you might choose a fund or a company to invest in.

Build a 'portfolio' of traders to follow, as relying on a single trader can make you dependent on them.

Don't switch too soon

Even successful traders go through periods of making a loss – sometimes for just a few trades, sometimes for a few days or longer.

Switching or cutting these traders too quickly often means that you get stuck in a cycle of dropping lead traders before you get the benefit of their winning streaks. If they have not changed the way they behave and seem to be following the same rules, then you do not want to cut them too quickly – just going into a drawdown period is not enough.

Conservative portfolio – the plan

A conservative portfolio is one that's designed for the longer term – typically five to ten years – and is comprised mainly of big, established companies with steady growth prospects and relatively low risk.

It is the right kind of portfolio for you if you want minimal risk and are determined to get back all the money you have invested – for example to fund your retirement – and would also like to earn some dividend income.

Of course there is never a guarantee that you will get back the money that you have invested, however, a conservative portfolio is right for those that want to see their money grow, but also will be prepared to take a limited amount of risk in the form of small-cap or speculative shares.

A reasonable growth expectation for a conservative portfolio would be around 6% per year, although this will vary from year to year within its life span.

The process

Building a conservative portfolio takes time, commitment and a lot of research. It's a relatively straightforward process though, which can be broken down into some simple steps.

The first stage is designing the basic framework for your portfolio: deciding on its life span and what percentage of your total investment will be taken up by different sectors and different kinds of companies.

This mix will determine the overall risk attached to your portfolio and how much it is likely to grow. We will discuss this in more detail in this lesson.

The next stage is working out the detail: deciding which specific companies you will invest in to achieve your desired level of exposure to a sector, for example. We will discuss this in more detail in the next lesson.

Make a list of your expenses

As a conservative investor, you commit for the long term, aiming to watch your investments grow steadily over five to ten years.

As you start to build your portfolio, first make a list of any big expenses you will have over the next five years. Put money aside so that you can access it quickly for these expenses.

This will reduce the temptation to dip into your long-term stock portfolio, which could distort the careful asset balance you have achieved and increase dealing costs by exiting positions.

Make regular contributions

Once your portfolio is up and running, it pays to invest regularly. By drip feeding money into your portfolio, rather than bulk buying shares once a year, you can smooth out the average price at which you invest in shares.

Although buying shares in large quantities does reduce your dealing costs, the danger is that you end up buying $10,000 worth of a company's shares, for example, on the single day when their price is 20% higher than their average price over the rest of that year.

Doing this just a few times could have a big negative impact on the ultimate value of your portfolio.

Choose at least 15 stocks

Investment professionals are divided over what is the optimal number of companies to have represented in a well-diversified portfolio.

Twenty years ago, ten companies were considered sufficient if an investor wanted to make sure that when one stock under performed, other stocks would compensate.

As stock markets have become more volatile however – and hence the chance of one or more companies experiencing big price falls – a minimum of 15 is now a more usual recommendation.

Quality not quantity

Although some investors with very large portfolios can accommodate up to 200 different stocks, some analysts argue that there is little benefit in individual investors holding more than 40.

At this point, they argue, the benefit that each additional stock adds in terms of reducing risk is minimal.

One thing that everyone agrees on, however, is that having a good number of stocks in your portfolio is essential.

Diversify into different companies

In the same way that investing in a broad range of sectors will help protect your portfolio against downturns in one part of the economy, owning shares in a broad range of companies will help protect your investment from single-stock fluctuations.

Even if you have carefully balanced your portfolio to include certain ratios of certain business sectors, it is possible that one company within an industry will suddenly underperform its peers, regardless of how well you have done your initial analysis. And sometimes this underperformance can last as long as the life of your portfolio.

Shares in BP, for example, were trading at just over $60 per share in March 2007. By March 2013, they had fallen to just over $40, representing a 33.3% decline.

No investor could have predicted the Macondo oil spill that triggered most of the damage to BP's share price. The fact remains, however, that an investor with a five-year portfolio who bought BP shares in 2007 could have taken a big hit had BP represented more than 6% or 7% of their portfolio.

Building the portfolio

To achieve the right risk-to-reward balance for conservative growth, you need to weight your portfolio carefully. You also need to diversify in terms of different sectors and geographies.

The following provides you with a guide line in how to diversify your portfolio to include a number of different company types and from different sectors. Note that a company may fall into one or more of the following categories.

Distribution by company size

Large-cap companies: 60-70%

Large-cap or so-called blue-chip companies may have lower growth potential than small-caps and start-ups but they are typically financially strong, are regular dividend payers and have been tried and tested throughout numerous economic cycles.

You should therefore consider making such companies account for 60-70% of your portfolio.

Mid-cap companies: 15-20%

Mid-cap companies could account for around 15-20%. These companies offer better growth potential than large cap companies, but still offer stability.

Small-cap companies: 10%

These kinds of companies are a bigger risk but if you strike lucky they could significantly outperform the wider stock market and drive growth in your portfolio.

Value versus growth companies

Growth companies: 15%

You also want to make sure that you have a mix of different stock classes. As identified earlier, you should have a mix of both growth and value stocks in your portfolio. This is because they tend to fall in or out of favour with markets at different times.

Value companies: 85%

Conservative investors however tend to have a bigger proportion of value (also known as income) stocks – typically up to 85% of their portfolio.

These stocks pay better dividends than growth stocks and are often the same blue-chip companies that we just discussed.

Defensive versus cyclical companies

Defensive companies: 60-70%

A conservative portfolio will usually contain 60-70% companies in so-called defensive sectors. These are industries whose goods and services tend to remain in demand even during an economic downturn – for example utilities. This means their share prices tend to remain stable even in difficult times.

Cyclical companies: 30-40%

Cyclical companies will, however, also be represented, with around a 30-40% weighting.

Cyclical shares are those that tend to outperform the overall stock market when an economy is expanding – for example banking stocks – but tend to take a bigger hit during downturns.

An investor will therefore need to perform any initial analysis particularly carefully when choosing which cyclical stocks to include. You should look for companies in these sectors that appear to have much stronger prospects than their peers or which have strong enough balance sheets to endure a prolonged downturn.

Domestic versus overseas companies

It is generally safer to invest in companies that are listed on your home stock market. This is because overseas-listed companies expose investors to currency risk and some stock markets – for example in emerging markets – are more volatile.

For this reason, most conservative portfolios mainly comprised of stocks listed in the same country you are from.

And when conservative investors do buy overseas-listed stocks, they are usually the shares of well established international players with a huge market share and consistent growth record – for example Coca Cola.

Understanding stock portfolios

What is a stock portfolio?

Investing in a stock portfolio is a way of trying to profit from increases in the share price of a range of companies rather than simply betting on one.

By owning shares in a range of companies – carefully chosen to represent a balance of different sectors and company types – you have more control over the risk associated with equity investment.

The idea is that if one of the stocks you invest in falls in price, this will be more than compensated for by increases in the price of other stocks in your portfolio.

Learn while practicing

You can build a pretend portfolio with Google finance and then discuss your pretend investments in the thread.

Putting a portfolio together

Building a stock portfolio is a highly personal process and requires some intense self-scrutiny.

How you shape your portfolio will depend on everything from your current income, your attitude to risk and your age to what you want the money for and when.

Throughout this module, we will show you how to build a "conservative growth" portfolio, but first it is important that you understand portfolios in general, and what you want to achieve by building one.

First identify your goals and time horizon

Before you start investing it is vital that you develop a strategy based on who you are and why you are investing.

Forming a clear idea of your own financial goals and how much risk you are prepared to take will vastly improve your chances of success.

So before you buy a single share, ask yourself the following:

What is my risk/reward profile?

Understanding your attitude to risk and reward is arguably the most important step when planning your investment strategy. You might be attracted to the prospect of great performance, but how much risk are you willing to take to achieve it?

How much money do I want and what do I want it for?

Be clear about why you are investing. Perhaps you want to save up a deposit to get on the housing ladder. Perhaps you want to save for retirement. Perhaps you simply want a financial safety net if ever your circumstances take a turn for the worse.

Whatever you want, work out how much money you will need and when you're likely to need it. Break down your goals into short (1-3 years), medium (3-5 years) and longer-term (5+ years) time frames. If you don't need the money for a decade, for example, you can usually be more aggressive in your investment strategy and take on more risk than if you need the money in a couple of years.

What are my financial circumstances?

Be realistic about how much money you can set aside for investment and how much money you expect to earn in the future. You may aspire to earning a six-figure salary in the next five years, but is that really going to happen? There's no point starting to invest more money than you can afford if that means you're going to dip into your stock portfolio prematurely. Conversely, if you expect to inherit a large sum of money, you can – with caution – factor that in to your calculations when you decide how big an investment pot you aim to achieve.

How old am I?

The life stage you are at will be a big factor when you decide how to invest. Generally, the younger you are, the greater level of risk you can afford to take in your investments. Markets move in cycles, pulling down stock markets and pushing them up, sometimes for several years at a time. If you are about to retire therefore, you cannot afford your last economic cycle as an investor to be a downturn. A young professional however can afford to be more long term, watching investments ride out numerous market ups and downs.

What are my personal plans?

Be clear about how a change in circumstances will change your priorities as well as your ability to achieve your goals. If you plan to have children, for example, you may want to start investing for their education. You may however find you have less money to invest as the costs of a bigger home and childcare erode your income. If you plan to divorce, you could see your costs/income rise or fall, depending on the settlement.

Risk and your portfolio type

Risk is a crucial concept in investing. It refers to the possibility of losing some or all of your original investment and varies widely depending on asset classes, share sectors, company size and market conditions.

Very volatile shares that have a high risk of falling in value usually also have a higher than average chance of rising in value. Very stable shares that represent a lower risk of falling in value also represent a smaller opportunity in terms of probable growth.

Share portfolios can be broadly categorised in terms of how much risk they expose you to as well as the nature of their potential rewards. The following will outline the common types of portfolios:

Growth portfolio

A so-called growth portfolio is right for you if you want to see the value of your investment rise fast but to achieve this you are also prepared to face the risk that it might fall in value. This kind of portfolio will include a greater proportion of higher-risk shares – for example in small-cap or cyclical companies – which also have a greater chance of experiencing big increases in value.

Income portfolio

An income portfolio conversely is one that is tailored to include very little risk. It is the right type for you if you are more interested in taking a steady income from your investment than watching it grow, but are not prepared to see it lose any of its value. It will be mostly made up of very stable companies whose shares prices may only grow very slowly but which are very unlikely to fall in value and which pay good, regular dividends.

Conservative portfolio

A conservative growth portfolio – the type that we will show you how to build in this module – is right for you if protecting the value of your investment is very important for you but you are prepared to take on a little risk to help drive moderate growth too.

The building blocks - growth, income, defensive, cyclical and speculative stocks

The different kind of portfolios outlined above achieve their targeted risk and reward by carefully tailoring the proportion of so-called 'growth' and 'value' stocks they contain as well as the mix of 'cyclical', 'defensive' and 'speculative' stocks.

Growth stocks

Growth stocks are those that are expected to see their value rise faster than the rest of the stock market, based on their historical performance. They expose you to more risk over time, but usually offer greater rewards in the end.

Income stocks

Income or 'value' stocks are those that pay better dividends than other companies in the stock market.

Defensive companies are those whose products and services remain in demand whether an economy is expanding or contracting. These include pharmaceutical companies, utility companies and many food and beverage companies. They are considered a safe, stable investment.

Cyclical companies

Cyclical companies are those that perform very well when the economy is expanding and perform badly when it is contracting. These include banks, airlines and construction companies. They are considered a risky investment but one that can drive excellent growth when the market conditions are right.

Speculative stocks

Speculative stocks are those of young companies whose future is unknown but who could surge in value if things go well – for example an energy explorer hoping to strike oil. They are considered very high risk.

Diversification

Regardless of whether you invest in a growth, income or conservative growth portfolio, it should always include shares in a decent number of different companies – preferably at least 15.

Investing in a wide range of stocks that give you exposure to different kinds of industry sectors spreads your risk across the market and should help your portfolio grow steadily regardless of market conditions.

Medium-term trading: a balanced approach

If you would like to trade stocks in the medium term – holding positions for anything from a day to a couple of weeks – you will need to conduct slightly more in-depth analysis than that of a shorter time span.

This will involve examining the historical and anticipated performance of the shortlist of companies you have already compiled.

To do this, you will spend time reading their quarterly earnings reports, following the outcome of any shareholder meetings and preparing for any upcoming events such as a product launch or acquisition.

Step 1: gather your information

To compare companies in your shortlist you will need to gather information on the following:

Performance

• Use a price chart to follow a company's share price over the past 12 months and see if it has decreased or increased over that period.
• Compare any movements in the share price of the company you are analysing with moves in the price of the index on which it is listed – this will tell you whether it is outperforming or under performing its sector and/or the overall stock market.

Prior earnings reports

• Collect data on the company's last full-year earnings report and its last four quarterly reports.
• Examine the company's profit, sales, debt, price to earnings ratio and any dividends it plans to pay.
• Compare these with figures from a year earlier to see if its performance is weakening or strengthening.
• Pay attention to the company's own prediction for the coming quarter and year – these will give you an idea of its possible future performance.
• Read comments from the company's management on why its results were as good or bad as they were and what the company plans to do to rectify or further improve its performance.
• Read summaries of market risks that the company is currently facing and any legal proceedings its is involved in.

Forward looking estimates

• Find out the companies' own forecast for what earnings, revenue, etc it expects to report in its upcoming earnings release.
• This will give you a view of the company's own confidence in its future performance, as well as telling you what expectations have already been priced into its shares by other traders.
• When the company actually reports its results, its share price will move if figures are different than what the market expected – up if they're better, down if they're worse – so make sure you know exactly when a company's next earnings report is due.

Analyst estimates

• Read analyst predictions for a company's next earnings report – analysts use complex models to determine whether a stock is undervalued or overvalued and can help you gauge market sentiment.
• Be aware however that analysts too can also get their predictions wrong. Also, forecasts by very well known analysts may already be priced into a company's share price.

Step 2: tie it all together

You should now be left with the following:

• The performance of the company's shares over a 12-month period, also compared to the index it is listed on.
• Information on its profit, sales, debt, price to earnings ratio and any dividends it plans to pay.
• Comparisons of its most recent trading data with previous periods and with predictions for the coming year.
• Forward estimates of a company's earnings per share, revenue, net income and general outlook.
• Information on any upcoming key events for the company that could drive its share price.
• Analyst forecasts of how well the company might perform.

You now have a moderately detailed collection of research on the stock that taken altogether will give you a rounded view of the company and its prospects.

Step 3: use historical price charts to build a roadmap

• Look at a price chart of the company's stock over the past 12 months.
• Look back over your collection of research on the company and pay particular attention to any times that earnings reports were published, predictions were released and announcements were made.
• Compare the two, looking to see how the company's share price reacted at all these important times – for example, if the company issued results last May that beat analyst expectations, pay attention to how much the share price moved and in which direction.

By mapping important events against historical price data, you have a historical map covering its last 12 months of performance – this will help you build a future roadmap for possible future price moves when similar events occur.

This research will also give you a more in-depth knowledge of what has been driving a company's share price over the previous 12 months.

Step 4: consider different scenarios

Your next step is to sit down and work out a range of different scenarios that could occur in the future. This will help you respond quickly if such outcomes do materialise.

Ask yourself the following:

• What sort of expectations are priced into the company share price?
• What is the most likely outcome regarding events/news?
• What has the market potentially priced in?
• What would be unexpected?

This will help you understand what expectations have already been priced into the company's shares. Thinking in advance through a range of possible outcomes – both in line with forecasts and total surprises – will help you form a view on whether they would cause the company's share price to lift or fall. You are therefore mentally prepared to trade.

Example

Consider the following:

Company A is about to release its quarterly earnings report.

The last earnings report that was issued, stated that its profit was weak, but in line with forecasts made over the prior 12 months. When the last earnings report was released, the share price did not move much, because the expectation of weak profit had already been priced in. It has just issued a negative outlook for the coming year. Following release of this negative announcement, its shares fell 10%.

Overall, analysts are not expecting the new earnings report to be positive and expect weak profit again.

This is what you can deduct:

• The company has forecast weak profit.
• The negative outlook was a new development that had not been fully priced in – this was probably responsible for moving the share price down 10%.
• That negative outlook has, however, now been priced in (by the 10% fall) so there is little reason to believe that its shares will fall further or become very volatile.

From this, you know that if the earnings report comes out better than expected, the share price could increase. This is a scenario that you have built and you know what to do if this scenario happens.

Step 5: technical analysis

After you have completed your analysis of the companies that you wish to trade, go straight to your price charts and use technical analysis to find possible entry and exit points.