Many people don’t have the time to sit down, shop around and research what the latest opportunities are. With the current pandemic, This is a great time to do a self review and compare what you have to the best options available out there. This series is about tackling this as painless and clear as possible. Today's topic provides a brief introduction in defining the Stock Market without making your head explode.
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges which operate under a defined set of regulations.
Significance of the Stock Market
The stock market is one of the most vital components of a free-market economy.
It allows companies to raise money by offering stock shares and corporate bonds. It lets common investors participate in the financial achievements of the companies, make profits through capital gains, and earn money through dividends, although losses are also possible. While institutional investors and professional money managers do enjoy some privileges owing to their deep pockets, better knowledge and higher risk taking abilities. The stock market attempts to offer a level playing field to common individuals.
The stock market works as a platform through which savings and investments of individuals are channelized into the productive investment proposals. In the long term, it helps in capital formation & economic growth for the country.
https://www.investopedia.com/terms/s/stockmarket.asp
In Short;
The stock market allows ANYONE to invest money into a (publicly traded) company and earn or lose money when the company increases or decreases in value .
The market is always on a slow incline growth pattern as indicated by the chart above. S & P 500 is a representative weighted index of the 500 largest traded stocks on the NYSE (New York stock exchange; US stock market); making it the standard for measuring the US market.
Some stocks can go up higher or lower than others; (dependent on their individual factors) but generally they all follow an upline trend .
Financial strategists such as Warren Buffet are based on conservatively buying into stocks that produce tangible necessities for day to day life under the premise that they are always needed and that the market will always go up (also understand opportune factors like recessions provide GREAT buy opportunities for the market.).
Other strategists such as Soros, believe in investing upon the edge of innovation and trail blazing. Higher risk and higher returns [ Example: Tech stocks, new niche markets, etc… Amazon, Netflix ; both are up 23000~+% since launch].
Ways to Utilize The Market
There are different methods to approach investing into the market
• Buying/Selling stocks
◦ Borrowing or Owning a share and profiting on its difference in stock value from acquisition to exit
• Writing Call/Put Options
◦ Writing a contract for the right to buy or sell a stock at the contract (strike) price upon expiry. Needs to be done in sets of 100 . Can be exercised or sold
• Buying Calls/Puts
◦ Buying a contract for the right to buy or sell a stock at the contract (strike) price upon expiry.
• ETF
◦ An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
▪ A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.
◦ An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
◦ ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes.
◦ ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
▪ ETFs are a more conservative and secure investment than buying individual stocks.
How To: Buy/Sell Stocks
First off you need a trading broker! There are many different brokers and services available depending on your country/region.
Americans should use Fidelity over Robinhood
Canadians should use WealthSimple for 0 Tsx fees, and QuestTrade or Interactive Brokers for more complex options as well as the lowest NYSE trading fees.
Market Buy/sell:
Buy/sell at current price. !! Not recommended as you’ll lose optimizing your entry with typical market volatility !!!
Limit Buy/Sell
Choose the price you are willing to buy/sell. Recommended way to buy/sell.
Stop Limit Buy/Sell
Wait for the stock to hit a certain price point and then apply a buy/sell order. Good for stop losses’ or buys on dips without tying your assets in. ( Pending orders will hold the stock (selling) or money (buying) in use until completed or canceled. )
Financial Strategy
Risk Assesment and Diversification are big components to having a healthy portfolio.
Risk Assesment: how accurate/fair is its valuation(under/overvalued), stop loss, growth potential (financial/performance reports, future plans)
Factors to consider:
• A profit or loss is only realized after exiting an investment.
• Understand the level of risk.
• Handle risk;
◦ Know what you are prepared to lose/walk away from, and how dynamic the change can be based on how secure or volatile a stock is and what the trends are.
◦ Example: if you are currently at a loss
▪ you can sell if you think the company will be be performing worse in the short term future;
▪ or you can hold for the longer term when it will readjust and grow along with the standard market trend.
◦ In either of those cases you can lower your average cost of share by buying when its low and that way upon a re-correct, or as it eventually should increase in value you would have gained more by lowering your initial entry price via dollar cost averaging and now enjoying the higher current share price towards an exit price or continuing to hold.
• Performance reports (eg. Earnings released Quarterly), How long a company has been in business, what work contracts its acquiring or has, future planning etc..
• Diversify with different industries, at different levels of risk
◦ Invest in portions of your portfolio of 1-10% at a time eg ( $1000 to invest, $10-100 per company/ round of buying)
◦ Sell off at different points ( random example: buy 10 shares at $10. Sell 5 shares when the stock is $20 so you exit with $100 and essentially have 5 shares free. They can go to zero or fluctuate without a loss. But should gain in value over time)
Indicators & Strategy
There are many different indicators which can be applied to a company to infer its future trend. Some are:
• 52 week High Low:
◦ Where does the current price sit towards?
▪ Why? Is there any political issues? Yes, are they on top of it?Will it ruin them? No-→ BUY for the discount!!
▪ Performance Reports? Under or Over performing? Do they have debt?Is it good or bad debt? Ex: used as funding for infrastructure so they don’t have much cash flow or even earnings.
• Growth Projections
◦ Where is the Company expected to be in the next few years?
• Crossover signal: % Moving Day averages
◦ Can be used to determine when to buy or sell before trends affect price.
◦ Two moving averages can also be used in combination to generate what is perceived by many traders as a powerful "crossover" trading signal. The crossover method involves buying or selling when a shorter moving average crosses a longer moving average.
▪ A sell signal is generated when a short moving average crosses below a long moving average. This "death cross" would occur if a 50-day moving average crossed below a 200-day moving average. The last death cross occurred in mid-March. It is worth noting that this crossover signal was not prescient, as most of the S&P 500's COVID-19 losses had already occurred by this time.
▪ A buy signal is generated when a shorter-term moving average crosses above a longer-term moving average. For example, the "golden cross" occurs when the 50-day exponential moving average crosses above a 200-day moving average. The thinking among chart users is that this price action illustrates a change in sentiment from bearish to bullish. This signal can be generated on an individual stock or on a broad market index, like the S&P 500.
• MACD :
◦ Moving average convergence divergence (MACD) is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
◦ MACD triggers technical signals when it crosses above (to buy) or below (to sell) its signal line.
◦ The speed of crossovers is also taken as a signal of a market is overbought or oversold.
◦ MACD helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
• RSI:
◦ Moving average convergence divergence (MACD) is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
◦ MACD triggers technical signals when it crosses above (to buy) or below (to sell) its signal line.
◦ The speed of crossovers is also taken as a signal of a market is overbought or oversold.
◦ MACD helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
Portfolio Diversity
Consider planning your portfolio such like
40-60% ETF’s
• SPY is an ETF mimicking the S&P 500 so that will be an excellent start. That in conjunction with a stop loss for any market panic/recessions/negative factors (Stop Loss applies if you want some liquidity. We may be forced to take a small loss but in the short term can reallocate or bench the funds to prevent bigger losses. Otherwise we will be forced to let the funds sit until the market re-corrects; which eats up time and perhaps funds could be better used elsewhere(Typically stable ETF’s are one of the most secure market investments aside from bonds {Extremely low returns}).
10-15% Bonds.
• Very slow gains but guaranteed.
20-40% Personal picks based on research
• Can be faster gains than conservative picks if using a medium like public forum to dissect stock values & trends {study on reddit outperforming S&P 500 (“due diligence & technical analysis”) }
• Can be challenging for some people to filter/understand the information on those forums. Some information can be misleading if not looked further or not understood if written in “internet meme slang”
10-30% Cryptocurrency
• Decentralized, Secure, More Privacy
• Huge potential (see btc pennies-→ $63k growth per coin)
• Some other coins are good candidates as well; some arent
• ETH BTC DOGE MONERO STELLAR BNB recommended to look at
• Volatile and advised as a long term hold (years)
• Can be “mined” with some equipment setups netting a 3-8month return
◦ Parts currently really hard to find because of demand
• Recently hit all time highs.
RECOMMENDED WEBSITES
• Yahoo works great for news and basic live charts
• Tradingview : We want to look at the hollow candle charts for more information. Great source for live trades – look at realtime bid/ask of stock (what people are willing to buy vs what people are willing to sell their stock at)
◦ Like Reddit, Tradingview offers insight from people writing theories based on indicators and stats. These theories are less vetted, and thus should be tread upon carefully.
• Binance or Kucoin have great crypto charts with an orderbook (live buy/sell order )
Advice on Sources:
Following the advice of people who are highly skilled (in the financial scope) and are staking their personal assets/livelihood ( via the medium of the internet; its possible to vet someone’s knowledge [which a basic Canadian Securities Course{CSC}; 3-6 months of study ]) is sufficient to understand better opportunities for stock performance vs the S&P and typical news outlets (news outlets are prone to misinformation and not recorrecting/citing sources/”fast news/vested interests” {insert source}). Thus it is viable to have a portion of portfolio allocated towards a viewpoint akin to Soros to propagate generational wealth and have significant returns either short or long. Stocks are always tied to the S&P general pull {example factors like recession } which in the long term will gravitate upwards but in the short term can drop and rise.
Article : “Wall Street Bets traders are more skilled and responsible than they get credit for, a new academic study finds”
real-world data suggests the users of the [reddit] forum post serious due diligence reports and are actually quite skilled, according to a new research study.
"Despite the conventional view that the platform primarily attracts uninformed investors, we find no systematic evidence of this," the research authors wrote.
Place Your Bets? The market consequences of investment advice on Reddit's Wallstreetbets by researchers Daniel Bradley, Jan Hanousek, Russell Jame, and Zicheng Xiao found that the average buy recommendations posted to the forum delivered two-day returns of 1.1%, with a subsequent 2% return over the next month and 5% return over the next quarter.
Further, the buying activity in the stocks that are the subject of a WallStreetBets due diligence reports is usually driven by retail investors, with volumes increasing sharply in the intraday window following publication, the study found.
"We find that due diligence reports contain investment value," the study said, adding that retail investors are able to discern the quality of the reports.
"In sharp contrast to regulators' concerns that WSB investment advice is harming retail traders, our findings suggest that both WSB posters and users are skilled...[and] are likely to benefit from the recommendations on the site," the paper concluded.
The researchers scraped all posts from WallStreetBets from 2018 to 2020, sorted for due diligence posts with clear buy or sell recommendations, and then manually reviewed the ticker symbols and associated recommendations.
Decision making
Taking in news factors, risk, financial reports and stock indicators into account, we weigh those factors and make a decision whether it will be a profitable asset to own and what value should we invest at.
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