Knowing when to Sell

09-Nov-2009 | Reggie | Market Strategies

In many ways, knowing when and why to purchase a stock is a lot easier than knowing when to sell.  If a stock takes a down turn, it may be time to buy.  If good news is expected in the future, it may be a good time to buy.  If the stock market is in a long-term uptrend and companies earnings are growing, it may be a good time to buy.  But when is it a good time to sell?

When a price target is reached

When an analyst follows a company, he or she will probably come up with a price target that reflects what they think the stock is worth.  Using a wide range of inputs like earnings, valuations, ratios, and comparisons to peers, the analyst comes up with an educated guess of what they think the stock is worth.  Barring any news that would cause the target to being increased, it may be a good time to sell when the stock reaches that target.  Along a similar line, some investors believe in using percentage based price targets.  If a stock was to say decline by 25%, that would be the investors maximum loss threshold and they would sell the stock.  The opposite could hold true as well if there goal was to get a 25% gain.

When you get your initial investment back

This solution is a nice one to utilize.  If a stock doubles or more, it mean selling off the original value of the investment and letting the profits ride out.  This is an excellent way to lock in some profits, while keeping exposure for any possible future upside.

When Bad news comes out

Some believe that when 1 piece of bad news comes it, it means that more is on the way.  For example, if a company misses a target, it may lead some to believe that there is an underlying problem and more bad news might be on the way.  An investor using this method would likely take a loss from whatever the stock was trading at, but also miss any future declines in the stock price.

Buying and selling stocks certainly isn’t a science.  There is of course, no clear cut explanation or method that has proven the best technique but general rules of thumb like these are rooted in investing styles that have worked for many throughout the years.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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Retail investors now able to trade derivatives

26-Oct-2009 | Reggie | Canadian Investing Commodities Currency Market Strategies New Announcements The Wise Investor

Regulators in Ontario and Quebec have finally agreed to allow smaller retail investors to trade in risky derivatives.  The way derivatives work, is by allowing the investor to place speculative bets on the direction of something like a currency, commodity, or index without ever taking ownership of the asset.  They are called Contracts for Differences (CFD) and almost always are associated with extremely high leverage.  Prior to this, only accredited investors were able to use these instruments.

Leveraged derivatives have been a disaster many times in the past and can be extremely unforgiving to even the most sophisticated and experienced investors.  Lets take a look at some of the biggest and baddest derivative blow-ups as a reminder of the dangers to anyone considering making a foray into CFDs.

In the mid 90’s Nick Leeson was appointed as the general manager for futures markets for Barings bank.  In 1992, he was able to make Barings an estimated £10 million in profits, which accounted for 10% of Barings total income for the year.  His luck would not hold up for long, and by 1994, his losses ballooned to £208 million pounds.  The nail in the coffin occurred in January of 1995 when Leeson made a bet that the Singapore and Japan indices would be flat.  The next day a major earthquake occurred sending the indices in to a downward spiral.  In an effort to recoup his losses, he made a series of bets that continued to be wrong and eventually landed Barings total losses of £827 billion pounds.  Leeson fled the country leaving a note saying “I’m Sorry.”  Barings bank was declared insolvent a month later.

Calgarian, Brian Hunter became the co-head of hedge fund, Amaranth Advisors energy desk in 2005.  Using 8:1 leverage, Hunter made Amaranth a huge sum of money by betting that natural gas prices would rise.  When Hurricane Katrina hit, Hunter had hit the metaphorical jackpot for Amaranth earning them record revenues.  He made a similar bet the following year in hopes that a similar scenario would unfold again.  However, there were no storms to help Hunter.  Amaranth, was soon faced with losses of US $6.5 billion.  Prior to the huge loss, Amaranth was worth nearly US$9 billion.  Its remaining assets were liquidated in October of 2006.

Jerome Kerviel traded derivaties for the giant French bank, Societel Generale.  Playing mostly European equity indices, Kerviel made handsome profits for SA.  These trades were however, outside of Kerviel’s credit limit, and unknown to his supervisors.  When SA discovered this they immediately unwound his positions during a downturn in the European markets and were faced with a loss of €4.9 billion.  Fortunately for SA, they had the market cap to survive the loss, but it left a major impact in their bottom line for the year.

Using derivatives and leverage can have quite the allure when investors consider the possible profits.  With the extreme volatility and leverage required to make these products work for you, the risk of using them goes through the roof.  If these pros were not able to make them work for their own companies trading accounts, individual investors might want to exercise extreme caution if they are going anywhere near these things.  Plus, there are plenty of other far less risky ways to make a few bucks.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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The Weekend Effect

09-Oct-2009 | kate | Investment Tools Market Strategies Market Theories The Wise Investor

The weekend effect is a noted stock market phenomenon that results in significantly lower prices on Monday than those of Friday, the previous trading day. According to the Federal Reserve, that prior to 1987 there was a significant negative return over the weekend which returned in 1998 and prevails today, but why?

Well some people might joke that it is probably caused by traders taking an extra long weekend on Fridays; there are some debated theories that try to explain the effect such as the timing of news releases, fading optimism and short selling.

A study done by J Clay Singleton, John R Wingender Jr for the Journal of Business and Economics found that information that there is a strong occurrence of  bad new being release after trading hours on Friday, over the weekend and early Mondays’ (vs other days of the week)  that is so strongly negative it results in negative return for the company/market.  They found that the increase occurrence of bad news release from Friday afternoon into Monday is a factor that influences the Weekend effect and believe that economic and physiological beliefs influence the Weekend Effect.

Related to new releases, the theory of fading optimism plays a part in the Weekend Effect. Now for those seriously interested in economics, they will instantly be debating this theory, since we have the theory of efficient market, as well. Efficient markets, should in theory, have prices that reflect the availability of all information and should only move when new information emerges, ie not all bad news will be concentrated on Mondays. However, since there is a heavily selling of shares on Monday, this theory believes the market is not timely in receiving the news. This idea is consistent with the view that weekends are when individuals give most thought to their investments. They read in newspapers that the market has fallen on Friday, press releases and economic updates. As a result they call their brokers and sell their shares first thing on Monday. The authors of the study that reached this conclusion cure for the Weekend Effect was to make weekend business journals carry a warning: “Never sell shares before lunch on Monday: when you get back to the office, things may look totally different.”

In 2003 researchers Chen and Singal proposed that short selling may explain a significant part of the weekend effect. They believed that “the inability to trade over the weekend tends to make many short sellers close their speculative positions at the end of the week and reopen them at the beginning of the following week leading to the weekend effect, where the stock prices rise on Fridays as short sellers cover their positions and fall on Mondays as short sellers re-establish new short positions”. What Chan and Singal discover was a positive association between short shares and the stocks weekend effect, but the association was not strong enough to conclude for the entire phenomenon.  Chan and Singal concluded their paper with the notion that the weekend effect persists as an unexplained anomaly.

Finally and interesting theory regarding the Weekend effect studies the cash flow of the individual investor. It suggests that liquidity selling by individual investors may be the reason. If individual’s trade for liquidity and liquidity is cyclical, individuals’ liquidity trading pattern might by cyclical, too. Given that a lot of employees are paid on Friday, they tend to buy on pay day. Interestingly, the researchers found that individuals often have bills near the middle of the week, resulting in the liquidity needs of individuals to intensify on Mondays.

Well no one has been able to prove the exact cause of the weekend effect their are some interesting theories that help to explain some of the variation in the returns on Mondays compared to other weekdays. Keep in mind that while the weekend effect has been proven to exist, it does not occur every Friday and Monday, and should not be your only trading strategy. For example it has been shown that a market experience a down turn pose a strong weekend effect than bull markets as identified by Jaffe et al., 1989.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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