Stock Investing Advice for Beginners

This stock market investing advice will help you on how to pick stocks Warren Buffet way.

Stock Investing Advices #1: Simple Business Model

It is not just about simplicity, but also something that you can understand. You must clearly define your circle of competence and stay where you are. It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think.

Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Stock Investing Advices #2: Wide Economic Moat

Simply said, the company should serve valuable niche market with price inelastic products or services. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries.

He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power. Meaning, the company can price their products as much as they want. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

Stock Investing Advices #3: Sustainable Growth

Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

Stock Investing Advices #4: Excellent Capital Management

Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore, it is the managements’ duty to utilise the available resources for the highest possible return. To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to create at least $1 value from $1 reinvestment, they should return the capital back to the shareholders by giving dividends or share buybacks.

Stock Investing Advices #5: Effective Management Team

Invest in company that have honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

Stock Investing Advices #6: Superior ROE

Why ROE, and not the other financial ratios? Well, return on equity indicates how effective the management team convert the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

Stock Investing Advices #7: Buy at Discount Price

Once the good stocks have been identified, now is the time to buy them. To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible. In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Thus, he keeps himself buying the stocks when the prices are offered at pre-determined margin of safety. The margin of safety can be as low as 80 per cent discount from the calculated intrinsic value. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.

If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts. Intentionally not following the advice proves that you are not ready for investing; perhaps you are just looking for fast cash.

Tags: Investing Tips, stock trading tips for beginners, Warren Buffet Tips, Warren Buffet Advice, Investing Tips from Warren Buffet

The 6 Rules of Penny Stock Investing

Anyone can make a few bucks in stocks like Google or Microsoft, but to really hit home runs, you need to turn to penny stock investing and look for the unloved, the undiscovered and the misunderstood stocks.

There is no shortage of companies priced under $3 per share, but to successfully take advantage of the abundance of opportunities, you need a penny stock investing plan.

Here are six rules to follow when investing in penny stocks:

Penny Stock Investing Rule #1 — Always Use Limit Orders

By their nature, penny stocks are very thinly traded. As such, the deviation between the bid and the ask can be very large. Investors that use market orders can be manipulated by market makers looking to make a quick buck.

The use of limit orders prevents the market maker from buying or selling at any price. In other words, buy or sell penny stocks on your terms, not the market makers’ terms.

Penny Stock Investing Rule #2 — Trade During Regular Hours

This rule goes hand-in-hand with limit orders. An absence of volume can result in after-hour trades that make little sense and most certainly do not represent an efficient match of buyer and seller.

I’ve seen after-hours trades executed at prices well above or below the closing price in the market. With penny stocks, even a few pennies’ difference can make or break a trade. My advice is to stick to regular trading hours to elicit the most efficient trade.

Penny Stock Investing Rule #3 — Don’t Chase Performance

The biggest mistake I see investors make is to chase a trade. For whatever reason, some investors choose to buy only after a stock moves higher. When a stock takes off, these folks decide that the waters are safe to participate. Nothing could be further from the truth.

In many cases, by the time you decide the water is safe, the opportunity is gone. Losses then follow. This effect can be magnified with penny stocks that can move very quickly one way or the other. In order to avoid this investing mistake, stick to new recommendations and the buy limits that come with them.

Penny Stock Investing Rule #4 — Keep Your Holdings Down to 20-30 Positions

This rule is a golden rule of any investing strategy and one that I believe in without question. Maximum gains can be achieved with a portfolio of 20-30 positions.

Build a portfolio with more than this number, and dilution of returns will be the result. Build a portfolio with less than this amount, and the likely outcome is to be performance that lags significantly. Even worse, buying too few stocks runs the risk of big losses.

With penny stocks, I know for certain 25% of the positions will be poor performers or losers. That might seem like a bunch, but keep in mind that leaves 75% of the portfolio generating significant gains.

What I can’t tell you with certainty is which stock will be in which category. Try to do that guessing on your own, and you are likely to get burned. Stay diversified if you want success.

Penny Stock Investing Rule #5 — Buy and Sell for a Reason

This might be overstating the obvious, but it is surprising how many people buy stocks simply because they are moving. Investors need to understand exactly what it is that they are buying and why they are buying it.

It is OK to own a stock that already has increased in value as long as there is a good reason to do so. I call these reasons “triggers.” A stock without a trigger can never take off. Think of the rocket ship that needs a booster to leave Earth’s atmosphere. The same is true with penny stocks. Without that reason for moving higher, a stock is likely to wander in the wilderness.

Penny Stock Investing Rule #6 — Expect an Average Holding Period of 90 Days

Penny stocks are volatile creatures. They can go up fast, and they can go down fast. In most cases, I am looking for big gains to come in 90 days or less. If that move does not occur, I move on to the next opportunity.

In some cases I might go back and forth on a single stock because of the volatility. There will be no rapid-fire day trading, mind you, but I will not hesitate to sell a stock if I think it will be going down in value and vice versa.

Price to Book Ratio

Another common valuation measure is price to book ratio (P/B), which compares a stock’s market value with the book value (also known as shareholder’s equity or net worth) on the company’s most recent balance sheet. The idea here is that future earnings or cash flows are ephemeral, and all we can really count on is the net value of a firm’s tangible assets in the here-and-now. Legendary value investor Benjamin Graham, one of Warren Buffet’s mentors, was a big advocate of book value and P/B in valuing stocks.

Although price to book ratio still has some utility today, the world has changed since Ben Graham’s day. When the market was dominated by capital-intensive firms that owned factories, land, rail track, and inventory –all of which had some objective tangible worth – it made sense to value firms based on their accounting book value. But now many companies are creating wealth through intangible assets such as processes, brand names, and databases most of which are not directly included in book value.

For service firms in particular Price to book ratio has little meaning. If you used P/B to value eBay, for example, you wouldn’t be according a shred of worth to the firm’s dominant market position, which is the single biggest factor that has made the firm so successful. Price-to-book may also lead you astray for a manufacturing firm such as 3M, which derives much of its value form its brand name and innovative products, not from the size of its factories or the quantity of its inventory.

Another item to be wary of when using P/B to value stocks is goodwill, which can inflate book value to the point that even the most expensive firm looks like a value. When one company buys another, the difference between the target firm’s tangible book value and the purchase price is called goodwill, and its supposed to represent the value of all the intangible assets –smart employees, strong customer relationships, efficient internal processes –that made the target firm worth buying. Be highly skeptical of firms for which goodwill makes up a sizeable portion of their book value.

Price to book ratio is also tied to Return on Equity (equal to net income divided by book value) in the same way that price-to-sales is tied to net margin (equal to net income divided by sales) . Given two companies that are otherwise equal, the one with a higher ROE will have a higher P/B ratio. The reason is clear – the firm that can compound book equity at a much higher rate is worth far more because book value will increase more quickly.

Therefore when you are looking at P/B, make sure you relate it to ROE.

A firm with low P/B relative to its peers or to the market and a high ROE might be a potential bargain, but you will want to do some digging before making that assessment based solely on the P/B.

Although P/B isn’t very useful for service firms, its very good for valuing financial services firms because most financial firms have considerable liquid assets on their balance sheets. The nice thing about financial firms is that many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. (A factory or a piece of land by contrast, is recorded on the balance sheet at whatever value the firm paid for it, which is often very different form the asset’s current value). As long as you make sure that the firm does not have a large number of bad loans on its books, P/B can be a solid way to screen for undervalued financial firms. 

Discounted Cash Flow

Discounted cash flow (DCF) valuation is used to evaluate the investment-worthiness of a stock. If the value derived from DCF valuation is higher than the current market price, the opportunity might be worth considering. Discounted Cash Flow valuation uses future free cash flow streams and discounts them (using a risk free rate + risk premium) to arrive at the present value.

Pat Dorsey, Director of Stock Analysis, Morningstar Inc. in his very useful book - The 5 Rules for Successful Stock Investing - tells us about discounted cash flows (DCF) how we can go about calculating them.

What is a stock worth? Economists Irving Fisher and John Burr Williams answered this question for us more than 60 years ago. The value of a stock is equal to the present value of its future cash flows. No more and no less.

Companies create economic value by investing capital and generating a return. Some of that return pays operating expenses, some get re-invested in the business, and the rest is free cash flow. Remember we care about the free cash flow because that's the amount of money that could be taken out of the business each year without harming its operations. A firm could use free cash flow to benefit shareholders in a number of ways. It can pay a dividend, which essentially converts a portion of each investor's interest in the firm to cash. It can buy back stock, which reduces the number of shares outstanding and thus increases the percentage ownership of each shareholder. Or, the firm can retain the free cash flow and re-invest it in the business.

These free cash flows are what give the firm its investment value. A present value calculation simply adjusts those future cash flows to reflect the fact that money we plan to receive in the future is worth less than money we receive today.

Why are future cash flows worth less than the current ones? First, money that we receive today can be invested to generate some kind of return, whereas we cant invest future cash flows until we receive them. This is the time value of money. Second, there is a chance that we may never receive those future cash flows, and we need to be compensated for that risk, called the risk premium.

The time value of money is essentially the opportunity cost of receiving money in the future versus receiving it today, and is often represented by the interest rates being paid on government bonds. Its pretty certain that the government will be around to pay us our interest in a few years.

Of course, not many cash flows are as certain as those from the government, so we need to take an additional premium to compensate us for the risk that we may never receive the money we have been promised. Add the government bond rate to the risk premium, and we have what's known as a discount rate.

Now you can start to see why stocks with stable, predictable earnings often have such high valuations - investors discount their future cash flows at a lower rate, because they believe that there's a lower risk attached to the likelihood that those future cash flows will actually show up. Conversely a business with an extremely uncertain future should logically have a lower valuation because there is a substantial risk that the potential future cash flows will never materialise.

You can see why a rational investor should be willing to pay more for a company that's profitable now relative to one that promises profitability only at some point in the future. Not only does the latter carry a higher risk (and thus a higher discount rate), but the promised cash flows won't arrive until some years in the future, diminishing their value still further.

Changing discount rates and the timing of cash flows can have a telling effect on present value. In all three examples, below -StableCorp, CycliCorp, and RiskCorp -the sum of the undiscounted cash flows is about $32000.

However, the value of the discounted cash flows is quite different from company to company. In present value terms, CycliCorp is worth about $2700 less than StableCorp. That's because StableCorp is more predictable, which means that investors' discount rate isn't high. CycliCorp's cash flow increases by 20 percent some years and shrinks in some years, so investors perceive it as a riskier investment and use a higher discount rate when they are valuing its shares. As a result the present value of the discounted cash flows is lower.

The difference in the present value of the cash flows is even more acute when you look at RiskCorp, which is worth almost $8300 less than StableCorp. Not only are the bulk of RiskCorp's cash flows far off in the future, bu also, we are less certain that they will come to pass, so we assign an even higher discount rate.

This is the basic principle behind a discounted cash flow model. Value is determined by the amount, timing, and riskiness of a firm's future cash flows, and these are the three items you should always be thinking about when deciding how much to pay for a stock. That's all it really boils down to. 

Price to Earning (P/E) Ratio

Now we come to the most popular valuation measure- the Price to earnings ratio or the PE ratio, which can take you pretty far as long as you are aware of its limitations. The nice thing about P/E is that accounting earnings are a much better proxy for cash flow than sales, and they are more up-to-date than book value. Moreover earnings per share results (and estimates) are easily available from just about any financial data source imaginable, so it’s an easy ratio to calculate.

The easiest way to use a PE ratio is to compare it to a benchmark, such as another company in the same industry, the entire market, the industry average, or the same company at a different point in time. Each of these approaches has some value, as long as you know the limitations. A company that’s trading at a lower P/E than its industry peers could be a good value, but remember that even firms in the same industry can have very different capital structures, risk levels and growth rates, all of which effect the Price to earnings ratio. All else equal, it makes sense to pay a higher P/E for a firm that’s growing faster, has less debt, and has lower capital re-investment needs.

You can also compare a stocks P/E to the average P/E of the entire market. However the same limitations of industry comparisons apply to this process as well. The stock you are investigating might be growing faster (or slower) than the average stock, or it might be riskier (or less risky). In general, comparing a company’s P/E with industry peers or with the market has some value, but these aren’t approaches that you should rely on to make a final buy or sell decision.

However comparing a stock’s current P/E with its historical Price to earnings ratios can be useful, especially for stable firms that haven’t undergone major shifts in their business. If you see a solid company that’s growing at roughly the same rate with roughly the same business prospects as in the past, but it’s trading at a lower P/E than its long-term average, you should start getting interested. It’s entirely possible that the company’s risk level or business outlook has changed, in which case a lower P/E is warranted, but it’s also possible that the market is simply pricing the shares at an irrationally low level.

This method works generally with more stable, established firms than with young companies with more uncertain business prospects. Firms that are growing rapidly are changing a great deal from year to year, which means their current P/Es are less comparable to their historical P/Es.

P/E drawbacks

Relative P/Es have one huge drawback. A PE ratio of 12, for example, is neither good nor bad in a vacuum. Using PE ratios only on a relative basis means that your analysis can be skewed by the benchmark you are using. (peer, industry, market).

So, let’s try to look at the PE ratio on an absolute level. What factors would cause a firm to deserve a higher PE ratio? Because risk, growth, and capital needs are all fundamental determinants of a stock’s PE ratio, higher growth firms should have higher PE ratios, higher risk firms should have lower P/E, and firms with higher capital needs should have lower P/E. We can see why this is true, intuitively.

Firms that have to shovel in large amounts of capital to generate their earnings run the risk of needing to tap additional funding, either through debt (which increases the risk level of the company) or through additional equity offerings (which may dilute the value of current shareholders’ stake). Either way, its rational to pay less for firms with high reinvestment needs because each dollar of earnings requires more of shareholders’ capital to produce it.

Meanwhile, a firm that’s expected to grow quickly will likely have a larger stream of future cash flows than one that’s growing slowly, so all else equal, it’s rational to pay more for the shares (thus the higher Price to earnings ratio). On the flip side, a firm that’s riskier –maybe it has high debt, maybe it’s highly cyclical, or maybe it’s still developing its first product –has a good chance of having lower future cash flows than we originally expected, so it’s rational to pay less for the stock.

When you are using the Price to earnings ratio, remember that firms with an abundance of free cash flow are likely to have low reinvestment needs, which means that a reasonable PE ratio will be somewhat higher than for a run-of-the mill company. The same goes for firms with higher growth rates, as long as that growth isn’t being generated using too much risk.

Some other aspects that can distort PE ratios

A few other things can distort a PE ratio. Keep these questions in the back of your mind when looking at P/E, and you’ll be less likely to misuse them.

Has the firm sold a Business or an Asset recently?

If a firm has recently sold off a business or perhaps a stake in another firm, it’s going to have artificially inflated earnings, and thus a lower P/E. Because you don’t want to value the firm base don one-time gains such as this, you need to strip out the proceeds from the sale before calculating the P/E.

Has the firm taken a big charge recently?

If a firm is restructuring or closing down plants, earnings could be artificially depressed, which would push the P/E up. For valuation purposes, its useful to add back the charge to get a sense of the firm’s normalized P/E.

Is the firm cyclical?

Firms that go through boom and bust cycles –commodity companies, auto manufacturers are good examples –require a bit more care. Although you will typically think of a firm with a very low trailing P/E as cheap, this is precisely the wrong time to buy a cyclical firm because it means earnings have been very high in the recent past, which in turn means they are likely to fall off soon.

Does the firm Capitalise or Expense its Cash flow generating assets?

A firm that makes money by inventing new products –drug firms are the classic example- has to expense all of its spending on research and development every year. Arguably, it’s that spending on R&D that’s really creating value for shareholders. Therefore, the firm that expenses assets will have lower earnings –and thus a higher P/E- in any given year than a firm that capitalizes assets. On the other hand, a firm that makes money by building factories and making products gets to spread the expense over many years by depreciating them bit by bit. 

Current Ratio

The current ratio simply tells you how much liquidity a firm has - in other words, how much cash it could raise if it absolutely had to pay off its liabilities all at once. A low ratio means the company may not be able to source enough cash to meet near-term liabilities, which would force it to seek outside financing or to divert operating income to pay off those liabilities.

Rough benchmarks for evaluating a stock's Current Ratio

As a very general rule, a current ratio of 1.5 or more means the firm should be able to meet operating needs without much trouble. However when you find a company with current ratios of 3 or 4, you may want to be concerned. A number this high might also mean that management has so much cash on hand, they may be doing a poor job of investing it. It is always useful to compare companies within the same industry therefore, to get a better picture.

Unfortunately, some current assets - such as inventories - may be worth less than their value on the balance sheet. (Imagine trying to sell old PCs or last year's fashions to generate cash - you would be unlikely to receive anything close to what you paid for them).

If you see ratios around or below 1, should only be for companies those have inventories that can immediately be converted into cash (e.g. McDonalds). If this is not the case and a company's number is low, that would be cause for concern.

Because of the general illiquid nature of inventories, there's an even more conservative test of a company's liquidity, the Quick Ratio

Debt to Equity Ratio

Debt to Equity ratio is just what it sounds like - Total Liabilities divided by Shareholders' equity. It's a little like the financial leverage ratio, except that it is more narrowly focused on how much long-term debt the firm has per Dollar of Equity.

A high debt equity ratio for a firm indicates it has been aggressively financing its growth with debt. Due to the the additional interest expenses that have to be borne by the firm, this can result in volatile earnings.

A firm could potentially generate more earnings If a lot of debt is used to finance increased operations (high debt to equity) than it would have if it did not have access to this external financing. Shareholders would benefit if this resulted in increased earnings by an amount greater than the debt cost (interest). However, the cost of this debt financing may become too much for the company to handle, especially if earnings are cyclical and volatile, and outweigh the return that the company generates on the debt.

The debt equity ratio also varies depending on the industry in which a firm operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt equity ratio above 2, while software companies have a debt equity ratio of under 0.5.

Rough benchmarks for analysing a stock's Debt to Equity

The lower the better. Companies with Debt to equity less than 1 are conservatively financed.

Interest Coverage Ratio

Times Interest Earned is also known as "Interest Coverage" ratio. Look up pretax earnings, and add back interest expense- this gives earnings before interest and taxes (EBIT). Divide EBIT by interest expense, and you will know how many times the company could have paid the interest expense on its debt. The more times the company can pay its interest expense, the less likely that it will run into difficulty if earnings should fall unexpectedly.

Rough benchmarks for analysing a firms' Interest Coverage

It is tough to say how low this metric can go before you should be concerned -but higher is definitely better. You want to see higher Interest coverage for a company with a more volatile business than for a firm in a more stable industry. Be sure to look at the trend in Interest coverage over time as well. Calculate the ratio for the past 5 years, and you will be able to see the company is becoming riskier -Interest coverage is falling - or, whether its financial health is improving.

Free Cash Flow

Free cash flow (FCF) is calculated by subtracting Capital expenditures from Operating cash flow. Cash Flow from Operations measures how much cash a company generates. It is the true touchstone of corporate value creation because it shows how much cash a company is generating from year to year. As useful as the Cash Flow statement is, it does not take into account the money that a firm has to spend on maintaining and expanding its business. To do this, we need to subtract Capital Expenditures, which is money used to buy fixed assets.

Free Cash Flow =Cash Flow from Operations - Capital Expenditure

Free Cash Flow enables us to separate out businesses that are net users of Capital - ones that spend more than they take in- from businesses that are net producers of Capital, because its only that excess cash that really belongs to shareholders.

Free Cash Flow is sometimes referred to as "Owners Earnings" because that's exactly what it is: the amount of money the owner of a company could withdraw from the treasury without harming the company's ongoing business.

A firm that generates a great deal of FCF can do all sorts of things with the money - save it for future investment opportunities, use it for acquisitions, buy back shares, and so forth. Positive FCF gives financial flexibility because the firm isn't relying on the capital markets to fund its expansion. Firms that have negative FCF have to take out loans or sell additional shares to keep things going, and can thus become a risky proposition if the market becomes unsettled at a critical time for for the company.

There is a view that most analysts myopically focus on earnings while ignoring the real cash that a firm generates. While earnings can often be clouded by accounting tricks, it's much tougher to fake cash flow. For this reason, seasoned investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits).

Rough benchmarks for analysing a firm's Free Cash Flow

As with ROE it’s tough to generalise how much FCF is enough. However its reasonable to say that any firm that is able to convert more than 10% of Sales to FCF (just divide FCF by Sales to get this percentage) is doing a solid job at generating excess Cash.

Using Free Cash Flow ratio while analysing stocks

I tend to think positive FCF companies will always have low levels of business risk than those with negative FCF. It's also extremely useful to draw a direct correlation between FCF and RoE.

I like to see companies with high FCF coupled with high RoEs, this is the sweet spot - excess cash and the ability to earn a high return on it. Companies with these characteristics tend to be the cream of the crop and have a low level of business risk. 

Negative FCF is not necessarily a bad thing. Because, you can always find companies that are re-investing all of their cash in business expansion but are still able to generate a high RoE. These firms have profitable reinvestment opportunities, and they should be spending all the cash they generate on expansion. These expansion efforts may pay off in the form of fat profits in the future. 

Apart from identifying the "cream" to form the Core of my portfolio, and separating excellent businesses from the rest, I have learnt not to give too much importance to FCF while stockpicking - especially multibagger prospects, except to check that the trend is improving. For these kind of companies in their early growth stages with nice RoE levels, I rather check that Operating Cash Flow should be positive and increasing. If Operating Cash Flow is negative and/or shows a declining trend over a number of years, that's a red herring (warning sign) for me, leading me to pass up on them. 

Forex Trading Tips

Forex Trading Tips – 3 Simple Ones to Increase your Gains Dramatically!

These tips don’t take long to do and can be implemented in any forex trading strategy and they will cut risk and increase profits so lets look at these 3 simple forex tips in more detail.

1) Cut Your Trading Frequency

Most traders simply trade too much - they think the more they trade the more chance they will have of making money. Others think if there not in the market they may miss a move and finally, they try trading intra-day which is simply never gong to work.

In forex trading you don’t get rewarded for how often you trade - you earn your money for being RIGHT – That’s the only criteria to judge your trading performance on and most traders forget this

Consider this:

Trading is a game of odds and the really good risk/reward trades simply don’t come around that often and in forex trading you should only concentrate on them.

To give you an example of how powerful cutting your trading can - I know several traders who trade only a few times a year and clear 100 – 200% in profits!

If you cut your trading frequency down, you can then add in the next tip to make huge gains.

2) Risk More

You will hear a lot of Forex traders tell you that you should risk no more than 2% per trade – RUBBISH!

If you are trading a small account you will never make any money doing this.

Let’s say you are trading $10,000 - 2% is just $200!

Well, if you consider risk goes with reward, you are not likely to make much risking that. Don’t forget the fact you risk 2% on low odds trades, give you less chance of success than if you risk 20% on a good high odds trade.

Many people think their taking low risks - but in reality they are setting themselves up to lose longer term.

Risk is related to the odds not how much you risk.

Keep in mind you are taking a calculated risk at the right time and risking more, is simply the only way you will win big. So how much should you risk of your account size? As rule of thumb do 10 – 20% of your total account.

3) One At a Time

Diversification is another buzz word that is supposed to restrict risk - but if you spread your trades around, you simply dilute your profit potential. Don’t fall into this trap.Pick the best trade you have and load it up with as much as you can afford and hit it hard.

BUT

You are probably thinking that the above is not commonly accepted wisdom and that’s correct – but keep in mind the majority make no real money, so being in the minority is no bad thing here!

Today, there are many who will tell you that you can trade forex with low risk – no you can’t. If you restrict risk to much you have no chance of winning. It’s an investment fact:The bigger the risk the bigger the reward.

If you learn to take calculated risks when the odds are in your favor you can pile up huge gains longer term and that’s what most people want from forex trading.

Finally, the above is very time effective: You are trading only great high odds trades so you are not trading everyday or monitoring levels constantly 15 – 30 minutes are all you need to build huge profits!

Stock Trading Tips for Great ROI

Trading in the stock market can be overwhelming at first if you are not aware of what it entails. There are certain strategies that you want to look at in order to recognize the most profit for your investment. Making sure that you incorporate all of the stock trading tips available to you into your market initiatives will ensure a great Return on Investment percentage.

The first suggestion for new stock market investors is to look at the stocks that you are potentially interested in and determine how much profit is available to be made. This may sound like a rudimentary idea, but it cannot be stressed enough. As time passes, you will learn how to effectively project future ROI numbers as well as being able to forecast what a particular stock will do in the marketplace. If the company is presently in danger of becoming insolvent, or if they have suffered a similar fate in the past, you want to stay far away. These types of companies are not structured well, and any gains that you do make from these stocks will me be minimal at best. Take your time and listen to different stock trading insights that are given to you by those who have been doing it successfully for multiple years.

Another common rule to abide by is to make an attempt to limit the amount of risk that you have out in the market by only investing in those companies that are well-established and who have good leadership. While it might take some due diligence to identify these businesses, it will pay off in the end, as you will not have to worry about losing all of your investment money in the marketplace. Keeping detailed notes on those stocks that you find yourself interested in is also a good rule to abide by. This will keep you from having to constantly compare and contrast the different stocks that you are interested in.

It is also a valid idea to have a good system in place for how your stock investing career will go. Some investors like to invest in those companies that show a high propensity for growth in their industry. The belief is that they will continue to grow well into the future and are less risky. If you are focused solely on bringing in income and not on the overall potential that the stock has for exorbitant returns, you will want to look into those stocks that come from large corporations that consistently rule the marketplace. Finally, you could search out those stocks which no very few other people have invested in. These usually include over-the-counter stocks as well as penny stocks. These provide great opportunity because there not as high profile and thus, they are less susceptible to large fluctuations.

One final tip is to not be scared to take a loss but also don’t get yourself caught up in too large of a loss because you stubbornly believed that your projection was on the money. Admit to yourself that you made a mistake and move on to your next stock purchase or sale. The stock market can be very cruel sometimes, but by sufficiently preparing yourself for problems that might arise, you are taking the first step toward more successful stock trading.

Investing Secrets of Warren Buffet

If you are interested in the stock market, there isn’t a chance that you haven’t heard of Warren Buffet. He is one of the famous investor of all time, he is the founder and CEO of Berkshire Hathaway, a holding company which owns subsidiaries that engage in  diverse business activities. When it comes to investing in companies, Warren Buffett is THE MAN!  

Although super rich, Warren lives a “simple” life. He still drives himself to work every day and dines at Gorat’s, a local steakhouse (which is NOT an expensive restaurant) in Omaha. He is widely known for  being courteous, personable, and humble. Obviously, Warren Buffett is a genius when it comes to  investing and in life, so it pays to listen to his words. Here is the e-Book, which talks about Investing Secrets  of Warren Buffet that we can learn a ton from .The following book is a gist of some of his secret investing techniques that an investor can apply while selecting stocks in any kind of market.

Download Warren Buffet Investing Secrets e-Book here  ---- DOWNLOAD HERE

How to Prepare for the CFA Level I Exam ?

With a historic average pass rate of 50 percent, the Chartered Financial Analyst, or CFA, Level 1 exam poses a challenge for most students. CFA charter-holders are sought-after by financial institutions globally, and must complete all the three levels of the CFA Program in order to attain charter-holder status. You can overcome the challenges that you experience in completing Level 1 of the CFA exam with a variety of preparation techniques, such as setting a study timetable, studying extensively, completing practice exams and gaining peer feedback.

Set a Study Timetable

According to the CFA Institute, you must devote at least 250 hours of dedicated study to properly prepare for the Level 1 exams. Since the Level 1 exams are held twice a year, you should start studying six months in advance of your exam. Assign approximately 20 hours each week for 18 weeks to cover the 18 study sessions included in the curriculum. In this way, you will be prepared to answer all the 240 questions presented in the six-hour long Level 1 exam.

Study Extensively

Ensure that you focus on the important Level 1 topics of investment valuation and portfolio management, as well as understand how these processes fit within the guidelines of the CFA Institute code of ethics and professional standards. While self-study is necessary, you should consider joining a reliable Level 1 training course that offers a choice of weekly classroom programs, online training and short-term immersion courses. You should also purchase third-party study material such as Schweser and Stella which are concise and easier to assimilate than the official CFA Level 1 textbook.

Practice Tests

You should complete practice tests every week, well in advance of your Level 1 exams. Answer the questions and mock exams that are available in the CFA textbooks, and also purchase Level 1 question banks. Use online resources to search for the previous year’s Level 1 exam questions and answer them. As most of the test questions are algorithmic, you can only master them by solving the algorithmic problems. Avoid making the mistake of memorizing the practice problem answers; instead work them out as diagnostic solutions.

Get Peer Feedback

Speak to your seniors for tips on how to clear the Level 1 exam. All CFA charter-holders are invited to be part of the grading process and can provide you with valuable tips on what areas you need to work on. Learn from the experiences of your peers by joining online forums that are focused on completing the CFA exams. Understand the learning strategies used by CFA charter-holders and your fellow candidates to help you successfully clear the CFA Level 1 exam.  Other feedback you may obtain online is how online Finance MBA degrees are also another option to advance your career, unlike CFA exams, obtaining an MBA is considered more broad-based and has a wider variety of opportunities.

By Esperance Barretto

What's in Store for the Price of Gold in 2013?

Gold functions as a speculative instrument, a safe haven, inflation hedge and as a commercial product. Gold has a central role in relation to currencies and as an economic indicator. Perceived economic/political uncertainty, inflation and money supply all have an effect on gold prices. 

In 2013, several variables will be important: Government spending and accompanying loose monetary policy, inflation, and some chart indications that gold prices are behaving like an asset bubble. A summary ties together these various factors to conclude that gold is likely, but never certain, to drop in price over 2013.

Entrenched Entitlement Spending, Fed Actions
Entitlement spending programs are very entrenched in US politics and culture. Spending on welfare, Medicare and the military feeds too many local economies. Whoever drastically cuts entitlement spending will face wrath in the public arena and the voting booth. It is extremely difficult to see this trend reversing in 2013. In addition, the Fed will likely maintain its goal of a weaker dollar. Spending patterns and Federal Reserve actions favoring a weaker dollar are two variables that hint at a continued gold price increase during 2013. Increasing the debt ceiling and creating rounds of quantitative easing is far easier politically than insisting on a strict adherence to a strong currency. Since currency strength and gold tend to move in opposite directions, a weaker dollar implies higher gold prices.

Inflation
The price of gold is complicated by the fact that gold is considered an inflation hedge, a currency in itself and a commodity. Low inflation will exert downward price pressure on gold while high inflation will very likely push gold prices above inflation rate. Without inflation or other financial uncertainty to hedge against, gold price tends to decrease.

Apparent Asset Bubble
In recent years, gold has spiked. Some have called it a bubble, with recent price swings hinting that the bubble may have popped. Consider that in 2007, the closing price of gold was $836.50 per ounce. In 2012, the closing gold price was $1664.00. This is an increase of nearly 99% in five years. A similar increase occurred between 1975 and 1980, with gold price going from $151 at the close of 1975 to $615 at the end of 1980. This earlier spike corresponded to over 300% price increase over five years. The bubble popped, with gold clocking in $400 per ounce at the close of 1981; a 35% loss during 1981. Though the recent gold bubble seems milder in percentage terms than the 1980 price spike, a similar technical dynamic seems to be developing.

Summary

Gold can be bought from brokers like Bullionvault  and UKBullion.  Despite trends towards continued spending and a weaker dollar, a technical perspective gives weight to the claim that gold prices will decrease in 2013. Gold jumped to roughly $1900 per ounce in 2011 and has been stuck between $1600 and $1800 during 2012. Though gold prices increased about 8% in 2012, a longer-term gold price chart indicates there is some uncertainty as to whether or not the gold rally will continue. Remember that asset bubbles are not rational in the sense that asset price accurately reflects underlying value. Asset bubbles are speculations based on investors counting on the "bigger fool" principle. A foolish investor may buy an overpriced asset in hopes that its continued price increase will entice a bigger fool to buy it from him in hopes of his own gains from an even bigger fool, et cetera. At some point, the foolishness stops. Prices stalled since the last few months of 2011. Unless sudden inflation or other economic/political uncertainty spooks investors, gold prices will likely decline by the close of 2013. 

401(k) Plan

401(k) and Qualified Plans: Introduction 

Retirees normally receive their income from one of the following three main sources:
Benefits from the social security system
Their regular savings account
A retirement plan (for example, IRAs or employer-sponsored plans)

In some cases, employers will establish a “qualified plan” which is the mechanism that handles the retirement benefits for their employees and their families. Whereas SEP and SIMPLE IRSs are linked to the IRA, a qualified plan has no connection to the IRA and therefore it does not need to abide by the same regulations regarding contributions and distributions. Businesses can choose to set up a qualified plan or an IRA-based plan. This decision will generally be made based upon how much the business is prepared to contribute and if they want and have the capacity to administer the plan. Qualified plans are more difficult to administer than SIMPLE IRAs or SEP. Qualified plans can be defined either by their benefits or contributions. Employers receive tax deductions in return for the contributions that they make to the plan. Employees are generally not required to pay taxes on the assets in the plan until after distribution. Another advantage is that earnings are tax deferred with qualified plans. For a plan to have “qualified” status, it is required to comply with the requirements set out in the Internal Revenue Code (IRC), the Employee Retirement Income Security Act 1974 (also known as ERISA) and the Department of Labor (DOL).

Defined-Benefit Plans 

A defined-benefit plan is a qualified plan in which the retirement benefits that an employee receives are based on their personal characteristics, such as their compensation, age and years of service. An example of this is a plan that says that when an employee retires, his or her benefits will be 1% of the average salary that they received in the last five years with the company for the same period of time as their length of service. Another option is that the plan may state the exact amount (for example, $200 a month) of the benefit.

EXAMPLE: John spent 10 years working for ABC Company. He earned $65,000 in 2004, $70,000 in 2005, $80,000 in 2006, $90,000 in 2007 and 100,000 in 2008. This means that his average salary for his last five years was $81,000. In turn, that means that 1% of his last five years average salary is $810. According to the plan, John is entitled to receive $810 for the same number of years that he worked for the company, that is, for 10 years.

This is the predetermined retirement benefit and the employer is required to make contributions to equal this amount. In making these contributions they will use actuarial assumptions that take into account the expected investment growth. When the investments made by the plan fail to perform and do not reach the required amount, the employer must contribute more to make up the balance. Contribution limits are much higher for defined-benefit plans than defined-contribution plans. Operating a defined-benefit plan will usually require actuarial assistance as it is based on formulas and actuarial assumptions.

Defined-Contribution Plans 

With a defined-contribution plan, the specific amount that the employee will receive when they retire is not promised. Employees, employers or (in some cases) both make contributions to these plans. The contribution is usually a percentage of the employee’s compensation package. The employer contributions may be compulsory or discretionary, depending on the type of plan used. The plan will invest the contributions on behalf of the employee. The benefit that they will receive upon retirement is based on the contributions that were made and the investment results (earnings or loss). In these types of plans, employers don’t have to compensate for the possible loss on the investments. These plans may take the form of a profit-sharing plan, a 401(k) plan, an ESOP (employee stock ownership plan) or a money-purchase pension plan.

Plan Definitions 

Profit-Sharing or Stock-Bonus Plans 

As the name suggests, a profit sharing plan is used by businesses to share profits with their employees. Employers are able to make these types of contributions whether or not the business actually profited during the year. These contributions will usually be discretionary, meaning that the employer decides whether or not they want to contribute to the plan in a particular year. Although this may seem a very flexible system, the employer cannot let too many years pass without making a contribution. The IRS doesn’t exactly specify the number of years that are allowed, but there are requirements that the contributions must be recurring and substantial.

With a stock-bonus plan the employer will use stock in the company to make contributions or distributions. These types of plans cannot be used by sole proprietorships or partnerships.

Profit-sharing plans and stock-bonus plans can have a 401(k) feature. These plans are well suited for newly established employers who are unable to accurately predict their future profit levels or who would like their contributions requirements to be flexible.

Money-Purchase Pension Plan 

Generally speaking, money-purchase and defined-benefit plans have less flexible contribution requirements than profit-sharing plans. Money-purchase plans have fixed contribution levels that are not related to the profits of the business. For example, if the plan says that members will receive 10% of their compensation, then the employer must contribute that amount regardless of the company’s profits. These types of plans suit employers that have a clear picture of their profit trends and who don’t mind making compulsory annual contributions.

401(k) Profit-Sharing Plan 

In a 401(k) plan employees can defer receiving a portion of their compensation and elect to have that amount put into their plan. This is also commonly known as CODA, which stands for “cash or deferred arrangement”. The deferred contributions (also known as “elective deferrals”) are usually made to the plan before tax. Employers will choose the type of plan that they use and it could either be a stand-alone 401 (k) plan or a plan that combines profit-sharing with 401(k). The employer will also choose whether they want to make additional contributions to the plan. 401(k) plans are designed for employers that want their employees to help with the plan funding.

Age-Weighted Plans 

An age-weighted feature can also be added to retirement plan. This basically means that an increased proportion of the plan contributions will be allocated to older employees. This is based on the assumption that these older employees are going to retire sooner and have less time to build their savings. These plans suit situations where the business owners are much older than the employees and they have not yet accumulated sufficient retirement savings.

Employee Stock Ownership Plans (ESOPs) 

ESOPs are a type of defined-contribution plan which involves investments primarily in stock of the company. These plans were authorized by Congress in order to encourage increased employee involvement in corporate ownership.

Why Establish a Qualified Plan? 

Choosing the most suitable retirement plan is a business decision with huge financial implications. The plan needs to suit the immediate needs of the employer and to be consistent with their business and financial profile. Qualified plans benefit both employers and employees.

Benefits for Employers
Some plans offer employers tax deductions when they make contributions
It may enable the employer to attract and retain the best employees. A qualified plan may be the factor that makes a sought after employee select one company over another.
In some situations the employer can claim a tax credit to cover part of the costs of establishing the plan. This is only possible if the expenses were incurred after December 31, 2001. The maximum credit available is $500 for the initial three years of the plans operation. This covers 50% of the establishment, administration and employee education expenses.

Benefits for Employees
Employees have peace of mind from some guarantee of their financial security in retirement.
Where the plan involves a salary-deferral feature, the employee can defer paying tax on the amount of compensation that they contribute to the plan until it is distributed. At this time their tax bracket will probably be lower so overall they will pay less tax.
In some plans employees are permitted to take out loans from the plan. Interest on the loan is credited to the employee’s account. This makes it a better option that loans from a financial institution where the interest goes to that institution.

401(k) and Qualified Plans: Eligibility Requirements 

Any type of business can set up an establishment plan. It doesn’t matter if the business is a sole proprietorship, a partnership, or corporation of a government entity. Employees cannot set up a qualified plan. The plan must be established by the employer.

Establishing a Qualified Plan

A qualified plan normally is made up of two documents: 1) the adoption agreement and 2) the plan document. The plan document sets out the provisions of the plans operation. The plan is formally adopted when the employer passes a resolution which says that they are adopting the plan. They will then complete the adoption agreement and issue a summary plan description (SPD) to employees. The SPD is required to be written in plain language so that all employees are able to understand it clearly. The SPD must include the following information:
the plans location and identification number
how the plan will operate and what it will provide for employees
when it will commence
how the benefits and length of employee service will be calculated under the plan
when the employee will be entitled to their benefits
when and how employees will receive their benefits
how benefits should be requested
possible situations where employees could be denied or lose their benefits
rights of the employee under ERISA

It is important that employees read the SPD so that they are aware of the provisions of the plan that apply to them. When the plan’s provisions change, the employer must issue a revised SPD or a new document known as a summary of material modifications (SMM).

Choosing a Plan Provider

Employers have the option of establishing their own plan that is specifically designed for their business or choosing a plan designed by a sponsoring organization that has been approved by the IRS.

Individually Designed Plans 

The point of an individually designed plan is to meet the specific needs of a particular employer. No other employers are permitted to use this document. These types of plans are typically used by large companies that have certain specifications in mind for their plan that they can’t get from a prototype. Individually designed plans are not required to be approved in advance by the IRS ,, however, the employer can apply for IRS approval if they want to be assured that the plan satisfies the regulations. They will need to pay a fee and ask for a determination letter. Lawyers and tax professionals are normally involved in drafting new plans and their fees will vary.

Master or Prototype Plans 

Small businesses are often attracted to master or prototype plans that have already been approved by the IRS so there is no need to apply and pay for a determination letter. These types of plans can be used by more than one employer. In master plans, the operator will set up one trust or custodial account that will be used by all employers that adopt the plan. In prototype plans, separate trusts or accounts are set up for each employer. Several different types of organizations can sponsor master or prototype plans including:
banks (this includes certain approved federally insured credit unions and savings and loan associations)
trade unions or professional organizations
mutual fund or insurance companies
attorneys, financial planners or accountants

Establishment Deadline 

Qualified plans are required to be established before the final day of the employer’s tax year. The employer is required to make contributions for that year and all subsequent years according to the provisions in the plan.

Eligibility Requirements for Employees (Plan Participants) 

There are specific requirements that employees must meet in order to participate in the plan. It is important that business owners don’t implement requirements that would mean that they cannot participate in the plan. For example, if a business owner is 19 years old then a requirement that plan participants be over 21 would mean that he or she is excluded. Qualified plans will generally have the following eligibility requirements for employees:

The employee is over age 21. The minimum age of a plan cannot be more than 21 and employees under this age can be excluded. Maximum age limits are not permitted, meaning employees cannot be excluded for reaching an upper age limit.

The employee has been working for the company for at least one year. For plans other than 401(k) plans, this requirement is increased to two years of service. These plans also provide that after service of less than two years the contributions will be vested and the employee will have a non-forfeitable right to the total of his or her benefit. According to a qualified plan, one year of service is usually equivalent to 1,000 hours of service per plan year. Employees who don’t work 1,000 hours in a year are not considered to have worked for one year even if they worked over a 12 month period.

Exceptions to these eligibility requirements may be implemented by employers (for example, they may reduce the minimum age or change the required hours of service). There are some eligibility criteria though that must conform to the regulations governing qualified plans. Employers must consult with a lawyer regarding eligibility requirements that haven’t been approved by the IRS before implementing the plan.

Excludable Employees 

Employers are permitted to exclude certain employees from the plan, for example those who are unionized or nonresident aliens.

Vesting - Employees Non-Forfeitable Rights to Employer Contributions 

The term “vesting” refers to the process whereby the employee becomes entitled to a non-forfeitable right to access the benefits that their employer has contributed. Vesting schedules have been set up to meet regulatory requirements and qualified plans need to abide by these requirements. Employees will always have vesting rights in relation to the contributions that they make to the plan. There are two different type of vesting schedules that an employer can choose from. They are:

Cliff Vesting. With a cliff-vesting schedule the employee is required to stay with the company for three years of service before the employer contributions will be considered vested. Following three years, these contributions will be 100% vested.

GradedVesting. With graded-vesting schedules, the employer contributions will become 20% vested after the employee has completed two years of service. The vesting then increases by 20% in each subsequent year until it gets to 100%. This will occur following six years of employee service.