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Showing posts sorted by date for query financial instruments. Sort by relevance Show all posts
Showing posts sorted by date for query financial instruments. Sort by relevance Show all posts

Tuesday, July 25, 2017

6 things precious metals naysayers get dead wrong

Answering the Most Common and Current Objections

By Stefan Gleason

Gold attracts its fair share of detractors. But the most common objections to gold as money, and as a safe-haven asset within an investment portfolio, are misplaced. Anti-gold myths are ubiquitous.

Mega billionaire Warren Buffett remarked derisively of gold that it “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility.”

That brings us to the first thing precious metals naysayers get wrong…

Myth #1: “Gold has no utility.”

Warren Buffett is without question one of the world’s greatest investors. But he is not without biases.

Buffett’s primary business interests are in banking and insurance.

He has literally made fortunes off the fiat monetary regime. He took part in (and benefited from) the government bailouts of the financial system. He (along with most other Wall Street and banking titans) supported Hillary Clinton for president.
So maybe, just maybe, Buffett’s hostility to gold has something to do with his deep, symbiotic connections to the political, banking, and monetary establishments!

In any event, the claim that gold has no utility is false. It's been chosen by the market as money because of its many useful features, including fungibility, divisibility, durability, and rarity. Gold also functions as a store of value precisely because it, unlike Federal Reserve notes, has uses beyond that of a currency.

Even if gold weren’t hoarded in vaults, people would still dig it out of the ground at great cost for its uses in electronics, jewelry, art, and architecture. In an economic sense, $50,000 in physical gold is just as useful as a $50,000 sports car – as determined by the market.

Myth #2. “Gold is the money of the past. Digital crypto-currencies are the money of the future.”

Every generation comes up with some new reason to regard gold as a “barbarous relic.” Previously it was the advent of paper money. Then the creation of the Federal Reserve. Now the rise of internet-based crypto-currencies is hailed by some as a technology that will render gold obsolete as money.

The reality is that no paper or electronic or currencies ever have or ever could replicate the unique monetary properties of gold. Central banks continue to accumulate it. And new crypto-currencies actually backed by gold and silver are in the works.

A crypto-currency that combines the convenience of digital transactions with the security of metals backing could ultimately knock Bitcoin off its perch – and be a source of billions of dollars in new demandfor gold and/or silver.

Myth #3. “Precious metals markets can’t go up while the Fed is raising interest rates.”

This persistency of this myth is surprising given how often in market history it has been dispelled. Gold prices hit a major bottom in December 2015 just as the Fed initiated its first interest rate hike. Gold and silver rallied big during the rate hiking campaign from 2014 to 2016. Back in the late 1970s as interest rates rose dramatically into the double digits, gold prices rose in tandem – until, finally, nominal interest rates actually exceeded the inflation rate by 1980.

The direction of the gold price is keyed into real interest rates, not nominal rates. When real rates are negative or inflation expectations are rising, that tends to be bullish for precious metals.

Myth #4. “If the economy crashes, then so will gold.”

Gold is one of the least economically sensitive assets you can hold as an investor. The yellow metal exhibits virtually no long-term correlation with the stock, bond, or housing markets – and a relatively low correlation with industrial commodities such as oil and copper.

When every sector of the stock market including mining stocks crashed in 2008, gold itself managed to eke out a positive gain for the year. Gold isn’t impervious to economic shocks that may affect things like demand for jewelry, but safe-haven buying by investors is often more than enough to pick up the slack.

Myth #5. “Ordinary investors can’t win in gold and silver markets that are manipulated.”

A distinction needs to be made between physical metals markets and manipulated paper markets. Most of the manipulation that occurs in futures (paper) markets is done for short-term technical purposes – to game a few cents on bid/ask spreads, break resistance levels, force options to expire worthless, etc.

Ordinary investors absolutely should not try to trade the paper markets. They won’t beat the big banks and other institutional traders at their own game.

To the extent that paper prices are artificially suppressed, however, that’s actually an advantage for buyers of physical metal.

They can obtain it at a discount.

Meanwhile, artificially low prices serve as a disincentive to new mining production, which makes the long-term supply/demand fundamentals for gold and silver even more favorable.

Myth #6. “Gold pays no interest so it’s therefore a poor investment.”

Warren Buffett’s Berkshire Hathaway shares pay no interest or dividends. Venezuelan junk bonds yield more than 50%. Which is the better investment?

Obviously, the size of the nominal yield doesn’t in itself tell you whether a financial asset is a good investment. Even the “safe” yield provided by U.S. Treasury securities isn’t safe from inflation. Or from taxation.

Since physical precious metals aren’t debt instruments and therefore pay no interest, their inflationary upside potential is all tax-deferred growth. You owe no taxes until you actually sell (or take distributions from a traditional IRA).

Stefan Gleason
Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.

Images: Author owned and licensed

Tuesday, June 9, 2015

Newsletter: Investment financial instruments

Thursday, September 25, 2014

How to save for retirement in later years

Retirement planning tips
Defined contribution plans help supplement Social Security Income in retirement

With capacity and will, planning for retirement in later years should not be impossible. An important thing to realize when planning for retirement in later years is that lack of retirement planning can lead to substantial unwelcome life style adjustments. To minimize these changes in terms of standard of living, a few key principles apply including maximizing safe return on investments, increasing percent of income saved, and eliminating controllable retirement costs.


A good way to save for retirement in later years is to invest in higher yielding financial instruments that are safe. For example, low-risk time deposits with higher yields can be invested in via international banking services such as the CITI International Personal Bank. Other places to obtain higher return on investment are fixed dividend paying stocks from stable corporations, and credible corporate or government bonds such as Treasury Inflation Protected Securities. 


The Financial Planning Association recommends saving 20 percent of annual income as retirement years approach. This makes sense as later years tend to be higher paying and there is less time until retirement knocks on the door. For late starters, increasing this percentage to save even more, and reach the maximum contribution limit on retirement accounts such as IRAs and 401(k)s helps catch up on missed contributions and increases employer matching when available. 

Tax strategy

Leveraging tax planning to improve retirement planning is also beneficial to later starters. This can be done in a number of ways including tax credits, and retirement plan deductions. For example, by saving or investing via a retirement plan, not only can tax bracket be lowered, but taxable income can also be lowered. Moreover, for low income earners, the Internal Revenue Service allows up to 50 percent credit of retirement contributions into qualified retirement plans. 

Social Security Income

There are a number of ways to maximize social security income before and after retirement. One of those ways to is to work until full retirement age. Another is to continue working after full retirement age is reached. This second method in effect increases retirement income without penalty. Moreover, according to the Social Security Administration, working and continuing to contribute to social security during retirement at a higher income level  increases retirement income even after retiring. 

Real estate

Not having to worry about where you are going to live is a stabilizing factor for any retiree as retirement income can then be used for other things. According to US News,  residential expenses typically account for approximately one third of a working person's income, not having to pay that one third of income after retirement counteracts the drop in income often experienced following retirement. In that sense, paying off a home or downsizing to a smaller one that is paid for can make a big difference to retirement living costs.

Images: American Advisors Group, Retirement calender; CC BY-SA 2.0

Monday, September 1, 2014

Bond buying tips

What to look for when purchasing bonds
U.S. bonds are considered low risk, but often yield less than alternate investments

Bond yields vary considerably, and changes in the bond market can affect the performance of bonds making it a good idea to be aware of smart ways to buy bonds. For example, according to CNN Money, no single bond fund can provide big returns on investment like they used to. For this reason a diversification of bond investing is recommended. Before purchasing any bonds, it is a good idea to learn about them, and for that the Securities Industry and Financial Markets Association or SIFMA provides a helpful guide.


An effective bond buying method should ideally account for inflation, diversification, duration, risk and yield. A good bond buying strategy also helps reach individual investing and financial planning goals. For example, a younger investor seeking an investment less volatile than stocks, but with higher yield than federal bonds may choose to purchase a BRIC bond fund that invests in debt instruments issued by Brazil, Russia, India and China. Moreover, these countries have credit ratings ranging from BBB to AA, and have 10-year bond yields as high as 12 percent per Trading Economics


Key variables that affect bond buying are interest, bond rating, price and the maturity date of the bond. Bond rating agency Morningstar highlights the influence of these variables including how changes in bond interest rates can negatively affect the price of previously issued bonds on the secondary bond market. Furthermore, the affect of bond default risk puts upward pressure on bond yields yet a positive economic outlook can downwardly influence credit risk. As bond prices rise and fall with changes in economic and market conditions, smart bond buyers can determine whether or not those new prices are good based on yield and in comparison to competing bond investments. 


The type of bond product purchased can have a significant impact on return on investment. For instance, according to the Financial Regulatory Authority or FINRA, although international bonds can offer higher yields, they are subject to sovereign risk. FINRA describes sovereign risk as the complete risk that includes currency and interest rate risk. To avoid these risks, international bonds that appreciate against the dollar and have stable or rising yields with reasonably low default risk are more ideal. Other ways to buy bonds are through tax free municipal bond index funds because they can optimize retirement income and be useful in financial planning. Corporate bonds and in some cases, bond trading, also offer investors a range of options.


Bonds can be purchased using a number of mechanisms. Treasury Direct can be used to buy bonds directly from the U.S. Government instead of through a broker. If a broker is used, Investopedia warns that even if a broker does not charge commission, they may increase the bond price instead. In light of this, investors can also use self-guided discount brokerage accounts to lower the cost of purchasing bonds. In some cases a brokerage account is necessary to buy bonds. For example, FINRA states international bonds can be purchased, but usually with the help of a broker. In any case, smart ways to buy bonds factor in the effectiveness of the bond buying mechanism relative to cost, ease of use, and availability of product in terms of overall return.

Image license: US-PDGov

Monday, July 14, 2014

How news about GDP affects the stock market

News about gross domestic product or GDP affects the stock market differently than anticipated GDP. This is because news impacts market psychology differently than fundamental economic data. According to a study published in the Journal of Finance, media does influence short-term investment patterns prior to adjusting to other influences such as actual asset worth. In particular this is noted to occur when news is pessimistic. However, other studies indicate this is not necessarily always the case.


If economic forecasts are inaccurate, then the efficient pricing of market instruments such as stocks is more likely to have led to an overvaluation of share prices than had the predictions been correct. In such case, news of GDP performance that does not reflect market expectations is more probable to have an impact on the stock market. For example, in the fourth quarter of 2012 it was widely believed the U.S. economy would grow. When the Bureau of Economic Analysis reported GDP unexpectedly turned negative, stock markets around the world immediately reacted negatively.  


Investor decision making or heuristics is also a relevant factor to how news of GDP affects the stock market. More specifically, cognitive processes detailed in the Financial Services Review reflect an bias in investor reasoning.  Moreover, investors' financial reasoning is overestimated in their own eyes in addition to not being able to match GDP performance as a group. This also corroborates a BNY Mellon Asset Management report that states multiple factors, not just GDP, affect stock prices. 


Statistical tests also show any impact of GDP news is short lived. Specifically,  over a five-year period stock markets do not produce a substantial correlation with GDP. This is evident in results portrayed in The Economist that found in both developed and emerging markets, medium-term market performance did not gainfully match countries' GDP growth. The reasons given for these finding include the stock market being a measure of corporate performance more than economic growth, and that growth is reflected in stock prices before that growth is realized.

Market capitalization to GDP ratio 
Market Capitalization to GDP ratio
Source: Federal Reserve System and U.S. Bureau of Economic Analysis


The aforementioned statistical findings are further supported by additional research about the relationship between GDP and stock prices is discussed in the Pacific-Basin Finance Journal. Furthermore, in one study not only was there no positive between GDP and stock prices, but the correlation that did exist was negative. In other words, economic growth resulted in lower priced shares. The reason this research gives is that corporate dividends do not necessarily rise after GDP rises, and that share prices only go up if efficient valuation of economic performance has not already taken place.   


Another reason why GDP, in addition to news of GDP do not necessarily influence stock prices to a statistically significant level is because aggregate market behavior is not necessarily conducive to it. Moreover, according to research cited by Zero Hedge, investors do not always reinvest their investment income and if they sought to realize capital gains or profits from investments, the result would also under-reflect GDP growth. Thus, in both cases stock prices cannot reflect GDP growth due to this apparent 'catch-22'.

Substantial evidence exists to show over the long-term, GDP does not affect the stock market to the point of statistical correlation. This is not to say, news about GDP has not immediate affect on prices. Rather, what studies have shown is that multiple factors influence investor decisions, and these variables are not always conducive to a simultaneous pricing in of GDP news or data in share prices. This is partially explained by the efficient market hypothesis that points to an early pricing of expected GDP growth rather than directly after news of it. Additional explanations include patterns in financial reasoning and market behavior that at times, supersedes the affect of GDP news.

Image: VectorGrader; Fair Use/US-PDGov

Tuesday, April 1, 2014

5 smart money tips for new startups

By Kelli Cooper

New start ups may have difficulties handling money responsibly. Just because you have a vision and serious drive doesn’t guarantee that you can handle money. Many focused, hungry entrepreneurs go belly up by mismanaging their cash.

Use these tips to build your startup on a stable financial foundation.

Pay yourself

Bootstrapping entrepreneurs make the common mistake of cutting their own costs to finance their cash strapped business. You cannot live on bread and water for months and expect to attack your startup with vim and vigor each day. Figure out a way to pay yourself as you grow your venture. If you find yourself in desperate situations financially because you are spending all of your money on your start up you’re bound to make foolish, irrational business decisions. Pay yourself a salary to avoid this risk.

Manage your cash flow responsibly

Cash drives your new startup. Learn how to manage your cash flow to fuel business growth. Going heavily into debt or using complex financial instruments to raise capital are risky ventures for a bootstrapping startup. Be fiscally responsible. Create a strict budget. Increase the amount of money you’re generating through sales and make sure each business dollar you spend works to expand your venture. Sticking to your budget can help you build your startup on solid ground.

Be cautiously optimistic

Being optimistic yet preparing for the worst helps you to maintain a healthy view of your startup’s prospects. You are bound to run into big obstacles early on as a new entrepreneur. If you can rein in your enthusiasm you are less likely to crash and burn as a start up. Expect the best things to happen for your business. When the road does not seem as smooth as anticipated fall back on the idea of learning how to embrace opportunities amid the appearance of chaos.

Time is your most valuable asset

Spend time wisely because time is ultimately all you have as an entrepreneur. Instead of spending days or even weeks shuttling from country to country for business meetings focus your energies on developing your product and building stronger connections online. Leveraging the power of the internet helps you to create the groundwork for solid and prospering offline relationships. You can talk on Skype or via Google Hangouts with a business associate from halfway around the world without spending serious money on airfare or serious time in traveling to the locale.

Setting clear goals gives you a definite target

Stop over thinking your new, innovative concept. Focus instead of setting clear, actionable, targeted goals to build an effective plan and use your start up funding as wisely as possible. Aiming at something creates a sense of certainty about your entrepreneurial venture. Most startups lack direction. If you move forward without a goal in mind you are unlikely to attract guidance from your intuition or from mentors. Get clear on what goals you want to reach. Stop dreaming and start testing your concept with real world customers. Gain valuable experience. Tweak your plans if necessary but hold your goals front and center or you’re bound to steer off course.

About the author: Kelli Cooper has blogged about all things businss, and particlarly enjoys sharing tips on just starting out.

Image license: FreeDigitalPhotos.net

Tuesday, January 21, 2014

A guide to different types of loans

 photo home_equity_loan_zpsc3903492.jpg
Suitable loans match borrowing requirements
By Jocelyn Williams

There are a lot of different situations where you may need to borrow money for things that you are not able to afford to pay for immediately. When this happens to you, you will need to think carefully about the type of loan that you decide to take on.  

There are many different loan types, all with different terms and conditions and all of which have different advantages and disadvantages.  You’ll need to choose the loan that makes sense and that provides you with the financial resources you need in the short-term and with a payment plan you can afford over time.

Different types of loans

Here are the few of the different types of loans that you can consider when you need to borrow money.
  • Mortgage loans
A first mortgage or a primary mortgage is given for a specific purpose only: to buy a house.  SF Gate provides a comprehensive list of the advantages and disadvantages of a mortgage loan. The basic fact, though, is that almost everyone who buys a house needs to take a mortgage loan since there are very few people who could afford to pay 100 percent in cash for their home.

Mortgages or home loans are secured debt, which means that there is an asset that acts as collateral to guarantee the loan. The home is the secured asset. If you do not pay your mortgage loan, the lender can foreclosure on the house and resell the home to get the money to repay the debts that you owe.  Because a mortgage loan is secured, it is not very risky for a lender to loan money for a mortgage.  As such, mortgage loan rates are usually relatively low for qualified buyers and a mortgage is generally the lowest cost type of loan you can take. Mortgage loans also provide the benefit of being tax-deductible.
  • Home equity loans
Home equity loans allow you to tap into the equity in your home, and you can use the money for pretty much whatever you want (in most cases). To take out a home equity loan, you need to owe less on your house than your home is worth and you need to convince the lender to allow you to qualify for the home equity loan. Once you have borrowed the money, you can use it to pay down debt, start a business or accomplish other goals.

Home equity loans usually have a relatively low interest rate and the interest is tax deductible under certain circumstances. However, there are some significant downsides associated with home equity loans. One problem is that you may have a difficult time qualifying for a loan as lenders have tightened standards for approving home equity loans. Another big issue is that you put your home at risk when you take on a home equity loan. If you take out this type of loan and you later cannot pay your bills, you could end up losing the home. With other types of unsecured debts, your home is not usually in danger of being lost if you cannot pay.
  • Personal loans
Personal loans are loans that you apply for from a bank or lender. You can use the money to do whatever you want to. There is no collateral for a personal loan, so banks are going to be willing to lend you the money only if they are fairly sure you are going to be able to pay it back (this determination is made based on your credit score and other factors). Personal loan rates are also going to be higher than loan rates for other kinds of debts like mortgages and home equity loans since there is a bigger risk for lenders.
  • Credit cards
A credit card is actually a type of loan, although it is different from a personal loan or a mortgage. A credit card is revolving debt, as you are given a maximum amount that you are allowed to borrow but you don’t have to max out the credit limit and borrow the full amount. Credit cards usually have a higher interest rate than mortgages, personal loans and home equity loans. They are unsecured debt so there is no collateral for lenders to take if you don’t pay, and you generally need to have pretty good credit to get a credit card.
  • Payday loans
 photo payday_loan_zpse2d8c4ab.jpg
Payday loans are state regulated financial instruments
Payday loans are available much more quickly than other types of loans, through services like Instaloan.com. These are also a short-term loan option (one of the few that exists) and an option for people with bad credit, making them a good choice when you need money right away.

That’s it. A guide to the most common type of loans. Hopefully it helps you make an informed decision!

About the author: Jocelyn Williams knows money. She can make it, invest it and give you advice on what to do with yours. And she also happens to love to write.

Thursday, January 16, 2014

How the Federal Reserve regulates check writing

Check writing is regulated by the U.S. Federal Reserve. The laws that underlie these banking regulations are codified in Title 12 of the U.S. Code of Federal Regulations. The U.S. Code is a compilation of numerous pieces of legislation that also include Title 26 or the U.S. Tax Code. Several specific rules pertaining to financial instruments such as checks are implemented through the Federal Reserve system. The diagram below demonstrates just how involved with banking the Federal Reserve is.

The Federal Reserve risk mitigation and compliance process 

Federal Reserve oversight process diagram
Banking efficiency is enhanced through a multi-purpose regulatory process

The Federal Reserve letters its legislative derived regulations. An example of such regulations that apply to check processing is Regulation CC. Moreover, “The Expedited Funds Availability Act”, is the legal basis upon which rules within Regulation CC are founded. For example, it limits hold times on checks deposited in financial institutions. Other rules determine how banks communicate in regard to notice of nonpayment and in what way returned checks are handled.


Another important area of check regulation is check endorsements. Checks are endorsed in many different ways, so in order to avoid confusion regarding payments, the Federal Reserve issues rules illustrating exactly how checks must be endorsed for specific purposes. For instance, a check payable to a third party is endorsed by writing the words “Pay to the order of” on the reverse side of the check along with other payee details.


Maintaining strict security standards that include the safety of check information is an important concern of the Federal Reserve. Moreover, checks are financial instruments, and because the central bank is the part of the federal government that creates monetary policy and supervises banking regulation, ensuring sensitive financial data is not stolen is a key role. This is done by the monitoring and involvement of bank compliance with inter-agency security guidelines.


Check clearing is a part of the check deposit transaction governed by the “Check Clearing for the 21st Century Act”, which is also called Check 21. The Federal Reserve lists the rules associated with this law on its website and helps financial institutions understand and carry out proper check clearing procedures. Additional examples of regulations pertaining to check transactions include rules about using substitute checks and how checks obtained from an online checks order can be used for electronic transfer of funds.


Another important set of rules regarding checks is liability. If a financial institution fails to carry out its legal obligations to maintain security and follow check handling safeguards, then it may be liable for loss due to check fraud. These losses potentially extend to check owners, third parties, depository banks and depository bank customers. These kinds of check regulations serve to protect banks and banking clients rather than limit their banking freedoms.

Without a formal regulatory body, the banking industry would likely be less standardized across the nation. Furthermore, many of the rules overseen by the Federal Reserve maintain or improve efficiency in banking practices such as check processing and payment procedures. This in turn helps ensure the financial system as a whole is functional and beneficial to the broader economy.

Image source: FederalReserve Compliance Handbook

Wednesday, January 1, 2014

5 gap trading tips for beginners

Gap trading
Four trading techniques are used in gap trading
The first piece of advice for getting started in gap trading is that this does not require a degree in rocket science to do once you learn the basic terminology, know the amount of capital you have to work with and take appropriate action. 

Although in the beginning some decisions will not reap large profits and may result in some loss, bear in mind that nothing ventured definitely results in nothing gained. Day traders regard gap trading as an invaluable tool with the capacity to indicate when to move and in which direction.

According to information at Investopedia, the gap is often referred to as the gray area or space that exists as no price rise or fall occurs during a period of no trading activity. Obviously there are two options involving financial instruments, an up trend happens when the market opens for a particular instrument wherein the opening price is higher than the previous day's close. A down trend occurs when the previous day's close is lower than the previous day's highest price.

The four categories of gaps are: breakaway, exhaustion, common/measuring and continuation. Breakaway is the space between the price pattern ending and the beginning of a new movement trend. At the end of the pattern, exhaustion occurs. At this point an attempt must be made to find the space between the new high and low price. The common/measuring gap occurs when the movement does not fit or fall within any pattern. To some experts, the space between the measuring gap and the exhaustion is regarded as an iffy zone. At this juncture, it is paramount to pay attention to activity volume as a clue to when the next exhaustion gap is likely to occur.

Continuation happens somewhere near the middle of a price pattern. This event is characterized by a frantic period of purchase and sales activity most often said to stem from hunches and/or suggested analytical predictions relative to price movement.

During a trading day, gaps are said to be filled when the price is equal to the pre-gap activity level. Serious gap traders focus on cash flow statements to predict when sales will drop in the direction of the previous day price close at which point the gap is said to be filled.

Once your comfort zone of knowing what gaps are and basically how they work exists, it is time to follow five basic gap trading guidelines for beginners: 
Step 1. Select a stock or other financial instrument and focus you total concentration on all things pertinent to that instrument.

Step 2. Watch that stock's activity for one hour, preferably at opening of the traditional market day, to zero in on the rise and fall movement. Adopt one of two options, long position or short position. For long position, it is advisable to set your exit at eight percent below the purchase price. In short position, set the exit buy-to-cover price at four percent above the price paid. A price drop indicates the time to reset the stop at four percent above that figure.

Step 3. Analyze the range and set exit positions. Full Open Gap (long) indicates that if the open price is higher than the previous high, long-stop should be set two ticks or points above that price. Applying this same rule to Short Up Gap, the stop should be set two ticks beneath the open price. Many regard the Full Gap Down as a “Dead Cat Bounce,” because the price should lie beneath the current day's close and beneath the previous day's low. The best option in this case is to set the stop two ticks under the first hour's low.

Step 4. Caution flags must be considered when the open is above the prior day's high. This activity should be watched for two days because demand is high and orders are still left unfilled. Floor agents have been known to make big price alterations in this situation. While a partial gap creates less demand, a small alteration can trigger heightened buy/sell activity.

Step 5. Visit this site for additional tips on gap trading. In the beginning, many traders wait too long to sell when the price is moving upward, to buy when the price is descending and above all to cancel all no-fill orders before the market opens for the day.

Tuesday, December 10, 2013

Why 401(k) plans with index funds can benefit employees

 401(k) retirement plans that do not offer a selection of index funds may not afford employees the same financial advantages as 401(k) plans that do. According to the Securities and Exchange Commission, index funds are mutual funds designed to track and match the performance of an index such as the Dow Jones Industrial Average. These indexes are designed and selected by financial companies such as Dow Jones to provide market performance benchmarks that can be used to monitor industry and economic performance over time. Several reasons exist as to why mutual funds that track these market benchmark monitors should be used in 401(k) defined contribution retirement plans.

• Lower cost

401(k) plans that offer index funds give employees the opportunity to invest in financial instruments at a lower cost. This is because index funds are 'passively managed' meaning the capital in the index fund is invested in such a way that costs are not incurred as much as with a non-indexed mutual fund. For example, also per the Securities and Exchange Commission, index funds are less likely to realize capital gains and therefore have lower tax related costs. There are also additional costs incurred when a non-indexed mutual fund actively invests mutual fund assets. 

• Pre-defined

Since index funds follow indexes by investing in similar financial products, the objective of the fund is pre-defined and fixed. In effect the company that creates the index does the research and the index mutual fund uses that research to base its investment decision on. Mutual funds that do not track indexes are not necessarily pre-defined and may change investments frequently. This means the 401(k) owner must stay up to date with the mutual fund's financial reports in order to better assess what the fund is investing in and how well it is managed. This is made evident in a Bureau of Labor Statistics report that quotes as few as 39 percent of 401(k) owners know how their 401k money is apportioned.

• Investment flexibility

Another reason why 401(k)s should offer index funds is because other financial products offered through the 401(k) may not suit the individual employees retirement planning goals. To illustrate, an employee in their 20s or 30s is more likely to be able to invest in a small-cap index fund than someone in their 60s because these are riskier companies to invest in. Moreover, higher risk funds have a greater chance of leveling out risk over time, and younger investors have more time to regain losses if the investment loses value. Better yet, if the index fund is an 'enhanced index fund', then it might even perform better than the index itself.

• Higher returns

When lower cost is combined with greater average performance overall, index funds offer 401(k) owners a greater opportunity to increase their retirement savings. Not only can they benefit from 401(k) employer matching which is bonus money from an employer, but that yield itself can be compounded via investment in a well chosen index fund. Moreover, according to Ron Lieber of the New York Times, the majority of other mutual funds have not performed as well as index funds over a two decade time period ending in December, 2011.

.• Hedging and diversification

Index funds can also serve the purpose of hedging investment risk and are structurally diversified by design. In other words, an index fund in a 401(k) plan may be able to balance out declines in value by investing in counter cyclical index funds. To illustrate, during an economic down cycle that is also accompanied by a high level of currency devaluation, a precious metal index fund may perform better than other types of diversified mutual funds.

Monday, September 2, 2013

How the commodity channel index works

The commodity channel index (CCI) is one of many financial techniques that have been developed by mathematicians, economists, and financial analysts within the last few decades. The commodity channel index is used to assist with predicting stock price and other financial instruments movement. The Commodity Channel Index (CCI) is one such technique and was first introduced in 1980 by a man named Donald Lambert. 

The CCI is a mathematical indicator that measures price oscillations around an average stock price and uses a range from -100 through +100. Prices closer to +100 in the range indicate more buying of a commodity and prices closer to the -100 point in the CCI range indicate more selling has taken place.

Why the commodity channel index is useful

The commodity channel index is useful for day traders because they can monitor the stock price in relation to the commodity channel index to see if prices suitably positioned for a possible trade. In any given day of trading a stock price may move into and out various points within the commodity channel index range which helps the trader navigate price movements. The CCI is considered beneficial in the following ways:

• Can be used across securities markets including stocks, commodities, and foreign exchange.
• Is readily available in software applications and presented in graphical format.
• Indicates where a securities price stands in relation to CCI range.
• Helps traders determine possible entry and exit points for trading.
• Points out where a stock, commodity or other security may be overbought or oversold.
• Provides an ongoing measurement throughout the trading day.

How the commodity channel index is used

The commodity channel index is used by calculating 2-3 equations on an ongoing basis. These equations are the moving average, and 1-2 long term commodity channel index equations. The moving average is used in determining an average security price over a period of time and the commodity channel index is used to both establish a range of high, low and middle points for the securities price and where within the range a current stock or commodity price is. The results of these equations are often presented in the form of line graphs alongside the actual historical price movement of a security.

Calculating the commodity channel index

If one's computer, spreadsheet application or technical analysis software is not working one may find themselves in the position of having to calculate the CCI manually. Performing the manual calculations may also assist in understanding the concepts and reasoning behind the commodity channel index. The calculations are as follows:

The commodity channel index uses three sub equations in the main equation. Those equations are 1) average daily price, 2) moving average daily price and 3) mean deviation of price from the moving average daily price.

1. An average daily price is calculated using different price points in a day such as open, close and midday or high, low or close or high, low or open. All these values could also be used and it depends on which numbers one things are more accurate. The following is an example of the calculation. Open $25.00+Midday 24.50 +Close 24.75=74.25/3=$24.75. Thus $24.75 is the average price for a day using open, midday and closing prices.

2. The moving average is determined by calculating the average daily price for a given number of days such as 60 days. These daily averages are then added and averaged themselves. For example, daily average day 1+ daily average day 2etc/ number of days=60. If the total of daily averages was 1650 then divided by 60 would yield a moving average number of $27.50.

3. Price Mean deviation is the difference in a stock or commodities price from the moving average. Like the previous two calculations this is also an average but the numbers being averaged are the difference of a daily price average from the moving daily average. For example, if in 60 days this difference adds up to $10.20, divided by 60=0.17 making the mean price deviation .17 cents.

4. Last the CCI is calculated by using #1 , #2 and #3 above by subtracting the moving average daily price from an average price on a particular day for which the trader wants the indicator for. This value is then divided by .015 multiplied by the mean deviation. Using our examples above we get the following using $28.00 as our latest average day price.

CCI=Latest average price-Moving average price/ .015 * Mean deviation.
Note: (The .015 was included by Lambert in the calculation to allow for proximity to the 200 point scale so a majority of price values would fall within it.)

CCI=$28.00-$27.50/.015 *.17=.50/.00255=196.07
Thus our commodity channel index number is well over +100 indicating a potentially overbought position!

The Commodity Channel Index is one of many financial analysis tools available to day traders. This being the case it is often used alongside other useful indicators such as volume indicators, candlestick analysis, relative strength indicator and the zero line cross indicator. To use the CCI alone may not provide an adequate description of the price movement pattern that is being observed and therefore may at times if not often, be insufficient as price momentum indicator. Nevertheless,


http://www.asx.com.au/research/charting/library/commodi ty_channel_index.htm
http://www.investopedia.com/term s/c/commoditychannelindex.asp
http://stockcharts.com/ school/doku.php?id=chart_school:technical_indicators :commodity_channel_index_cci
http://en.wikipedia.org/ wiki/Commodity_Channel_Index

Saturday, July 27, 2013

Banking services: More than just checking and loans

Long-term savings instruments are also offered by financial institutions
Financial institutions offer retirement planning advice
 By Kendall Moore

If you asked your parents what a bank is good for, they probably told you that it was a place to save some money, cash checks, write checks and apply for loans. All of these things are correct, but that is a very narrow view of the things that a financial institution can do for its customers. The best financial institutions have a variety of services that they provide and can help their customers navigate through the many different stages of life.

Retirement planning

Since 2008 Americans have seen the value of their retirement plans plummet, and even though there has been some recovery, there is still a lot of uncertainty about what the future might bring. It is important to save for retirement, as many estimates suggest that people will need well over a million dollars in assets to live comfortably after retirement because of the increased cost of healthcare and longer life spans. A financial institution can offer you retirement planning advice, such as how to open an IRA and how to roll over a 401(k) if you change jobs or lose your job. This protects the money that you already have set aside for retirement, because IRAs are usually not tied to the volatility of the stock market, and it gives you the best chance to have a good life when you finally get ready to stop working.

Long-term savings

A savings account is a good way to teach a child about how to save money, but the interest on those accounts is small compared to some other investment options. Sometimes you will want to invest some money for the long-term, but you want to make sure that money is safe, and available in a dire emergency. A financial institution has just what you need to invest in long-term savings. Certificates of Deposit, or CDs, are variable length savings programs that will let you put money aside and gain a higher interest rate than it would in a savings account. After the CD matures you will get the money back that you invested, plus the interest. At that point you can renew the CD if you do not need the money right away. This is great way to build a down payment for a home or other large purchase.

Financial services

Finally, there are advanced financial services that a financial institution can provide that you might have gone to other places to have done. They can wire money instantly from one place to another, putting money directly into the recipient’s account, instead of forcing them to go to a Western Union location to pick up the money. The financial institution can also issue traveler’s checks when you travel, and they can print cashier’s checks when you need to make a purchase with certified funds. 

Too often these services are overlooked, and if you are going to another vendor to get any of these financial services, you are paying far more than your bank would charge to do the exact same thing. By using your financial institution for advanced financial services you will get the most from your banking experience. The financial institution exists to serve its customers, and it is wise to see what the institution can do for you before you start seeking help from the outside.

About the author: I am Kendall Moore and I am a financial services advisor for EACU. All too often I hear people complain that they cannot find a company that can provide the banking or financial services that they want, and they are shocked to learn that EACU has all of these advanced services. For more information about what EACU can offer, visit http://www.eacu.org.

* Image license: Micromoth; RGBStock.com royalty free

Wednesday, July 17, 2013

Should we trust S&P and Moody's in the future?

Historical failures have some questioning credit rating agencies
Three ratings agencies control 95% of ratings
By Jim Friedman

Standard & Poor's (S&P) and Moody's are credit rating agencies. These companies assign credit ratings to debt instruments, after considering and taking into account factors like the debtor's ability to repay the principle as well as probability of default. 

These ratings are given to many institutions that take on large amounts of debt, including companies and governments, and their rating affects the costs that are associated with their borrowing. By assigning a lower credit rating to a company or country, the credit agency increases their cost of borrowing, since lenders will want a higher interest to compensate them for their higher risk.

S&P and Moody's in particular are often singled out as representative of credit rating agencies in general because so they possess so much of the market share for credit ratings. Moody's and S&P take up almost 80% of the market share globally, and when combined with Fitch Ratings, these three credit ratings firms form the Big Three and control about 95% of ratings.

Failure of credit agencies

The legitimacy, reputation and reliability of these credit rating agencies have been seriously negatively affected by the credit crisis of 2007. The credit rating agencies gave billions of securities the highest possible debt rating during the financial crisis without fully understanding the underlying assets and risk. These debt instruments and derivatives were subsequently downgraded from their perfect score all the way down to junk, as investors who previously thought that they were investing in a safe instrument were left with a small fraction of their original investment.

The Financial Crisis Inquiry Commission, formed by the United States government to investigate the underlying causes of the financial crisis, found that the ratings agencies were "essential cogs in the wheel of financial destruction." This is because the assumption that their ratings meant low risk of their investment were essential to the sub-prime mortgages being marketed as debt which is virtually risk-free because of their triple-A rating from the credit rating agencies.

History of failure

Critics of credit rating agencies suggest that such agencies have had a long history of failure when it comes to downgrading securities only after the crisis has developed. This includes past events such as the 1997 Asian financial crisis, 1998 Russian financial crisis, Enron and Freddie Mac, among other notable financial disasters.

Cause of inaccuracy

There are numerous underlying causes for the inability of securities issuers to accurately judge the quality of debt instruments. The first is the symbiotic relationship that has developed between financial institutions and credit rating agencies. Unlike personal credit rating agencies like Equifax or Transunion, investment credit rating agencies are primarily dependent on business from the entities which are being rated, and the security issuers were found to even openly threaten to take their businesses to other firms in the Big Three. This indicates a fundamental conflict of interest in credit rating agencies.

Credit ratings firms have also been accused of threatening to downgrade to compel businesses to pay them their fees, as well as being criticized for the power and inaccuracy of their ratings when grading sovereign debt. Their downgrade of sovereign debt can cause economic collapse in the countries and spur a vicious cycle, as seen in various European countries that underwent sovereign debt crises.

Overall, it seems that S&P and Moody's have become untrustworthy as institutions that determine the underlying risk of debt instruments. Their past history of failure, as well as their relationship with financial institutions and conflict of interest, shows an organization whose core interests have shifted towards generating internal revenue rather than providing the most accurate credit rating possible.

About the author: Visit Jim Friedman's site http://getreasonablywelloffslowly.com for more articles on personal finance and general thoughts on the economy.

* Image license: Royalty free Smart Photo Stock

Wednesday, July 10, 2013

How to invest in international bonds

Bond funds help diversify yield and risk
ETFs and mutual funds invest in a range of international bonds
Yields on international bonds vary substantially, and this makes the option to buy the ones that offer higher return on investment more advantageous. To illustrate, 10-year bonds from United States currently yield about 2.63 percent, whereas 10-year bonds from Australia yield closer to 3.87 percent. Furthermore, after calculating yield to maturity in terms of cost, duration and inflation, being able to choose from a wider range of bonds helps market participants acquire more competitive returns on investment.

Direct from government

For Americans, buying bonds from the U.S. Treasury is possible via its website Treasury Direct. However, purchasing bonds directly from foreign governments is not so easy. This is because the bond market is not as liquid as either the foreign exchange market or the equities market according to an investigation by Jeffrey R. Kosnett of Kiplinger. Moreover, according to Kosnett, only high net worth individuals have access to the bond market due to the large minimum purchase amounts.

Brokerage services

Some brokerage services such as do offer bond purchase services, however many investors will only be able to do so through alternate financial instruments rather than directly. Although purchasing international bonds this ways involves a middle man, the return on investment can still outweigh a direct purchase of domestic bonds of similar or equal risk. An added benefit of this method is the peace of mind attained from knowing a regulated financial institution is facilitating the bond purchase agreement.

Exchange Traded Funds (ETFs)

One of the easiest ways to buy bonds is via exchange traded funds. Exchange traded funds are financial products bought by asset managers and that are resold in the stock market. Moreover, since there are multiple bond ETFs, investors have the flexibility to choose when they buy shares of the ETF, at what price they purchase and they specific type of bond ETF they are interested in purchasing. Examples of bond ETFs include the Vanguard Total International Bond Fund (BNDX) and the PIMCO Australia Bond Index Fund (AUD).

Mutual funds

Another way to purchase international bonds is through shares of international bond mutual fund. The PIMCO Foreign Bond Fund (PFOAX) and GMO Global Bond Fund (GMGBX) are both international bond mutual funds. Mutual funds tend to be more expensive to purchase bonds through because of the way they are managed and how they are purchased; this is reflected in free structure. To illustrate, the PIMCO Foreign Bond Fund has a front load expense of 3.75 percent and total expense ratio of .9 percent, however the PIMCO Australia Bond Index Fund has no front load expense and total expense ratio of .45 percent.

Retirement plans

Retirement plans such as 401(k) accounts do offer bond funds, however the fees involved with 401(k)s are known to be exorbitant. This is evident in the highly cited Frontline investigation called “The Retirement Gamble” that aired on PBS on April 23, 2013. Furthermore, due to the multi-layered management and custody of employer retirement plans, up to a dozen kinds of fees including retirement plan administrative fees, trading fees, asset management fees, record keeping fees and marketing fees have been found in 401(k)s. These costs erode the return on investment offered by higher yielding international bonds.

Offshore account

Individuals are also able to purchase bonds using offshore accounts. This option is more ideal for high net worth individuals seeking financially savvy and advanced financial planning methods to further protect, maximize and hedge investment capital. Several offshore financial jurisdictions and institutions offer financial services that enable investors to purchase bonds. For instance, Panama allows International Business Company Formations that enable investors to privately purchase bonds in a way that protects assets from creditors.

Investing in international bonds is considered a means of investment diversification. Bonds, especially those from institutions and governments with high credit ratings, offer investors and financial planners a method to lessen risk and optimize asset management returns. The method used to purchase international bonds does not necessarily matter as much as the decision to buy them and the choice of bonds purchased whether it be direct or indirectly through a financial intermediary. 

* Image attribution: Barunpatro: RGBStock license