Tag Archives: Trading

Short Interest and Short Selling

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Short interest provides investors a sense of the degree to which investors are betting on the decline of company’s stock price.

It’s easy for investors to understand that you can make money after buying shares of a stock when the stock price increases (going long).

Traders can also profit from a declining market by using a strategy called shorting stock.

Short selling is when a trader sells shares of a company they do not own, with the hope that the price will fall. Traders make money from short selling if the price of the stock falls and they lose if it rises.

Shorting a stock first involves borrowing the stock you wish to sell at a market-determined interest rate and then selling the borrowed equities to take advantage of a future market decline.

You profit by selling the borrowed stock at a higher price and subsequently buying it back at a lower price if the stock price falls.

The profit consists of the difference between the price at which the trader sold the stock and the price they buy it back at less any borrowing and transaction costs.

To successfully short sell, you need to identify stocks that are likely to decrease in value. Look for companies with weak financials, negative news, or a downtrend in their stock price.

When short selling, market timing is crucial. You want to enter the trade when the stock price is likely to decrease, and exit before it rebounds. Pay attention to technical indicators and price action to make informed decisions.

Why Short Interest Matters

Short interest is the number of shares that have been sold short but have not yet been covered or closed out.

Short interest is important to track because it can act as an indicator of market sentiment towards a particular stock. An increase in short interest can signal that investors have become more bearish, while a decrease in short interest can signal they have become more bullish.

Source:

  1.  https://www.benzinga.com/insights/short-sellers/24/03/38010258/pypl-analyzing-paypal-holdingss-short-interest
  2. https://www.benzinga.com/money/how-to-short-a-stock

Intro to Stock Options

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“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” ~ Warren Buffett

Options are financial contracts whose values are tied to another underlying asset.

Options trading can be an appealing way to build wealth or manage risk, especially if you’re looking beyond just investing in stocks, bonds, and other assets in your portfolio.

But options trading can be a complex and challenging endeavor. The key to success in options trading is understanding the basics, including knowing what options are and the risks and rewards involved.

Options Basics

Options are contracts giving the purchaser the right to buy or sell a security, like a company stock or exchange-traded fund (ETF), at a fixed price within a specific period of time.

Options holders can buy or sell by a certain date at a set price, while sellers have to deliver the underlying asset. Investors can use options if they think an asset’s price will go up or down or to offset risk elsewhere in their portfolio.

Options are financial derivatives because they’re tied to an underlying asset. Other types of derivatives include futures, swaps, and forwards. Options that exist for futures contracts, such as S&P 500 or oil futures, are also popular among traders and investors.

A stock option typically represents 100 shares of the underlying stock. Stock options are common examples and are tied to shares of a single company. Meanwhile, ETF options give the right to buy or sell shares of an exchange-traded fund.

An option is a contract between the holder and the writer. The holder (buyer of the contract) pays the writer (seller of the contract) a price – the premium – for the right to buy or sell the underlying asset.

Option holders can buy or sell the underlying security by a specific date (called expiration date) at a set price (called the strike price). If the option holder exercises the contract on or before the expiration date, the option writers must deliver the underlying asset.

Many investors get interested in options trading because it can be a way to generate income, speculate on the price movements of securities, as well as a way to hedge against losses. However, with these possibilities, they are downsides to options trading too.

Before diving into the world of options contracts and options trading, it’s essential to understand the benefits and risks of this investment strategy.

Some of the main advantages of options trading are:

  • Options give you the chance to make money whether the market is going up, down, or sideways.
  • Options may be an inexpensive way to participate in the market without tying up as many funds as stock or bond trading requires.
  • Options provide investors with leverage, which can help magnify returns.

Some of the main drawbacks of options are:

  • Options trading is a complex and risky strategy and one that requires a great deal of knowledge and experience to succeed.
  • Options involve a great deal of leverage, which can amplify losses if the trade goes against the trader.
  • Options contracts are not always as liquid as other securities, making them harder to buy and sell.

Options are a complex, risky market and may not be suitable for everyone.

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” ~ Alexander Elder

References:

  1. https://www.sofi.com/options-trading-101/
  2. https://www.sofi.com/learn/content/how-to-trade-options/

ARK’s Cathie Wood

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“Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

Investing in transformative technologies that are going to change the world

Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

Conservative philosophy

The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

References:

  1. https://www.barrons.com/articles/arks-cathie-wood-disrupted-investment-management-shes-not-done-yet-51614992508
  2. https://www.bloomberg.com/news/features/2021-05-27/cathie-wood-is-a-believer-from-bitcoin-to-tesla-even-as-arkk-fund-stumbles
  3. https://www.barrons.com/articles/tesla-telehealth-and-the-genomics-revolution-power-ark-funds-51603450802

Investing is a marathon

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Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial

Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.

Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:

  • Individuals prefer current consumption over future consumption: delayed gratification is hard for most people and, all things being equal, we would rather have things now than wait for them.
  • Inflation: When the money supply increases, prices also often increase. Consequently, the purchasing power of fiat currency decreases over time.
  • Risk: The future is uncertain, and there is always a chance that future cash delivery may not occur.

To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.

The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.

Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.

“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.

Invest in stocks.

Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.

Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.

Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.

The power of compounding

Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

Purchasing power protection

Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.

In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.

Invest for the long term.

Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.

Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.

References:

  1. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html
  2. https://smartasset.com/investing/long-term-investment
  3. https://www.bankrate.com/investing/steps-to-building-wealth/
  4. https://www.cnbc.com/2021/02/04/how-we-increased-our-net-worth-by-1-million-in-6-years-and-retired-early.html

Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc. 

Option Investing 101 | Fidelity

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From Fidelity Investments

Learn the fundamentals of options trading. This introduction to trading option contracts is all about getting to know the basics of options investing and trading; learning the key terms and concepts essential for a new or novice options trader.

Put/Call Ratio

High put/call (P/C) levels are a sign of fear (bullish from a contrarian view), while low P/C levels are a sign of complacency (bearish from a contrarian view). The trend of P/Cs is more important than absolute levels. When the intermediate- to longer-term trend of P/Cs is lower, it is bullish for stocks. When the trend is higher, it is bearish for stocks from an intermediate-/longer-term basis.

Trading vs. Investing

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Trading and investing are two approaches to participating in the stock market. Each approach brings its own opportunities and risks

  • Investing involves buying an asset you expect will rise in value over the long term, with the goal of long-term gains.
  • Trading, on the other hand, is about timing market short term moves and buying and selling stocks within a short period for quick returns.

With trading, you’re hoping to earn quick returns based on short-term fluctuations in the market and stock price. Long-term investors, in contrast, tend to build diversified portfolios of assets and stay in them for the long term through the ups and downs (volatility) of the market.

Investing basics

Investing is geared towards managing and growing wealth in the market over a longer period of time like years or even decades. This means buying securities with a long-term outlook in mind and holding them through both market ups and downs until you reach your financial goal or are near the end of your investment time horizon.

Investing involves putting money into a financial asset (stocks, bonds, mutual or exchange-traded fund, etc). that you expect will rise in value over time. Investors generally have a long time horizon and predominantly look to build wealth through gradual appreciation and compound interest.

Diversification (owning a mix of investments) is important for investors as it can reduce their risk — mainly by mitigating the effects of volatility.

Trading basics

Trading is all about making frequent, short-term transactions with the goal of “beating the market,” or generating greater returns than you’d expect to receive by buying and holding over a longer time frame.

Trading involves buying and selling stocks or other securities in a short period of time with the goal of making quick profits. While investors typically measure their time horizon in years, traders think in terms of weeks, days, or even minutes.  

Two of the most common forms of trading are day trading and swing trading. Day traders buy and sell a security within the same trading day; positions are never held overnight. Swing traders, on the other hand, buy assets that they expect will rise in value over a matter of days or weeks.

Trading can be a risky endeavor for the uneducated and unskilled trader. If a trade goes against you, you can lose a lot of money in a short period of time. If you have a low risk tolerance and want to avoid volatility, investing will be the way to go. But if you’re more of a risk-taker and would like the chance to earn bigger returns, trading could be appealing.

https://twitter.com/jrdorkin/status/1332382094048202753?s=21

Takeaway

Although the terms — trading and investing — are often used interchangeably: trading focuses on short-term buying and selling, while investing involves buying and holding securities for an extended period of time.

If you’re comfortable with the risks, trading a portion of your money can be rewarding and could lead to higher returns. If reducing risk and volatility are your main goals, then you’ll want to stick with long-term investing to build wealth.

References:

  1. https://www.ally.com/do-it-right/amp/investing/trading-vs-investing/?__twitter_impression=true
  2. https://www.businessinsider.com/trading-vs-investing

It’s a Stock Market Bubble | Barron’s

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Excerpts from Barron’s article entitled:Yes, It’s a Stock Market Bubble. That Doesn’t Mean Trouble for Investors Just Yet.

By Ben Levisohn, September 12, 2020

“Every stock market bubble begins with a story.”

“”The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.”

“Now, get ready for the plot twist: Good investment ideas can stop being good ideas if the story goes on for too long. The tech trade—including tech companies that aren’t officially labeled as such—went too far before correcting suddenly in the past two weeks.”

“The forces that drove stocks such as Apple and Amazon.com to astonishing heights remain firmly in place. They include the companies’ continued growth, the Federal Reserve’s determination to do whatever it takes to keep the economy afloat, retail investors’ newfound interest in trading, and maybe even a bit of fiscal largess.”

Stocks will remain volatile, but the tech bubble will continue to inflate.

“For an investment bubble to occur, there has to be a widespread belief that a new paradigm has taken hold requiring an adjustment in valuations far beyond what previous fundamentals would imply. This belief needs to engage the imagination of investors beyond Wall Street, and there must be plenty of capital available to chase stock prices higher. The Covid-19 crisis has unlocked all three prerequisites.”

“Consider how the world has changed in the past six months. Social distancing is now the rule, and working from home is encouraged, when possible. Movie theaters are half-empty, and attending school now means opening a laptop at home for many students.”

“Companies that bring us a taste of our previous lives—such as Zoom Video Communications (ZM) and Peloton Interactive (PTON)—have seen their share prices soar. Shares of tech titans Apple, Microsoft (MSFT), Amazon, Alphabet (GOOGL), and Facebook (FB) have risen because the businesses are growing far more than most, and investors know that bigger is better in today’s world.”

“Some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks.”

“At the same time, near-zero interest rates have encouraged investors to pay up for growth, while some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks, trading through online brokers like it’s 1999.”

“As a result, Apple, Amazon, Microsoft, Alphabet, and Facebook now account for nearly a quarter of the value of the S&P 500 index, a level of concentration rarely seen in the benchmark. And that might understate the influence of Big Tech. Add Amazon and the S&P Information Technology and Communication Services sectors constitute 45% of the benchmark index, according to J.P. Morgan data, compared with 40% during the dot-com bubble.”

“Even as the biggest tech names have seen market caps swell, some formerly small companies have graduated to the big leagues. Zoom, for one, jumped 41% in a single day after reporting sales that more than quadrupled the previous year’s, a consequence of the video service’s widespread adoption beyond a business audience. Zoom stock, having zoomed 465% in 2020, is now worth more than $100 billion. Peloton has a market cap of $25 billion after gaining 209% this year, as its stationary bikes replaced gym memberships.”

“Zoom trades for 50 times 2020 sales, and Peloton, 9.3 times. Both are priced as if future growth is unlimited—a risky bet, especially if the postvirus world looks not all that different from the previrus world.”

The Fed has pumped trillions of dollars into the economy

“Behind the scenes, meanwhile, the Fed is operating the bubble-making machinery. It has pumped trillions of dollars into the economy, expanding its own balance sheet to more than $7 trillion from $4.1 trillion at the start of 2020. This time around, its asset purchases have included not only Treasuries and mortgage-backed securities but also investment-grade and high-yield bonds. All of this demand has served to lower interest rates to near zero.”

“The Fed typically has burst past bubbles, including the dot-com bubble of the late 1990s and the housing bubble of the mid-2000s, by raising interest rates. Don’t count on that now, or at least not yet. Fed Chairman Jerome Powell has effectively promised to keep rates low for years, which means there should be plenty of cash sloshing around to keep the bubble growing.”

“Perhaps the biggest reason to keep betting on tech—and the stock market—is that things aren’t nearly as frothy now as they were during, say, the dot-com bubble. Even in August, the market never reached the sustained frenzy that characterized the late 1990s, when the major indexes went parabolic and stayed that way for months, says Katie Stockton, managing partner of Fairlead Strategies. Stockton thinks the market’s recent pullback will create another buying opportunity, “A bubble would be characterized by prolonged upside momentum,” she says. “The market doesn’t have that.””

To read more: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Source: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv