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What are hedge funds?
Like mutual funds, hedge funds pool investors’ money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.
Unlike mutual funds, however, hedge funds are not required to register with the SEC. Hedge funds typically issue securities in “private offerings” that are not registered with the SEC under the Securities Act of 1933. In addition, hedge funds are not required to make periodic reports under the Securities Exchange Act of 1934. But hedge funds are subject to the same prohibitions against fraud as are other stock market participants, and their managers have the same fiduciary duties as other investment advisers.
What are “funds of hedge funds?”
A fund of hedge funds is an investment company that invests in hedge funds — rather than investing in individual securities. Some funds of hedge funds register their securities with the SEC. These funds of hedge funds must provide investors with a prospectus and must file certain reports quarterly with the SEC.
Note: Not all funds of hedge funds register with the SEC.
Many registered funds of hedge funds have much lower investment minimums (e.g., $25,000) than individual hedge funds. Thus, some investors that would be unable to invest in a hedge fund directly may be able to purchase shares of registered funds of hedge funds.
What protections do I have if I purchase a hedge fund?
Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most registered investments. For example, you won’t get the same level of disclosures from a hedge fund that you’ll get from registered investments. Without the disclosures that the securities laws require for most registered investments, it can be quite difficult to verify representations you may receive from a hedge fund. You should also be aware that, while the SEC may conduct examinations of any hedge fund manager that is registered as an investment adviser under the Investment Advisers Act, the SEC and other securities regulators generally have limited ability to check routinely on hedge fund activities.
The SEC can take action against a hedge fund that defrauds investors, and we have brought a number of fraud cases involving hedge funds. Commonly in these cases, hedge fund advisers misrepresented their experience and the fund’s track record. Other cases were classic “Ponzi schemes,” where early investors were paid off to make the scheme look legitimate. In some of the cases we have brought, the hedge funds sent phony account statements to investors to camouflage the fact that their money had been stolen. That’s why it is extremely important to thoroughly check out every aspect of any hedge fund you might consider as an investment.
Some mutual funds that charge front-end sales loads will charge lower sales loads for larger investments. For example, a fund might charge a 5% front-end sales load for investments up to $25,000, but charge a load of 4% for investments between $25,000 and $50,000 and 3% for investments exceeding $50,000. The investment levels required to obtain a reduced sales load are commonly referred to as “breakpoints.” In this example, the breakpoints were $25,000 and $50,000. Funds that offer breakpoints can set them at their discretion.
The SEC does not require a fund to offer breakpoints in the fund’s sales load. If breakpoints exist, the fund must disclose them. In addition, a brokerage firm that is a member of FINRA should not sell you shares of a fund in an amount that is “just below” the fund’s sales load breakpoint simply to earn a higher commission.
Each fund company establishes its own formula for how they will calculate whether an investor is entitled to receive a breakpoint. For that reason, it is important to seek out breakpoint information from your financial advisor or fund. You’ll need to ask how a particular fund establishes eligibility for breakpoint discounts, as well as what the fund’s breakpoint amounts are.
Some funds base eligibility for a breakpoint discount upon the investments of all of the individuals within a household and, in some instances, may include multiple accounts of an individual within the household. Others look only at the total amount you personally have invested. Keep in mind that you may be entitled to aggregate investments made in all of your accounts to calculate whether you may receive a breakpoint. These might include brokerage accounts you or other members of your household have at different firms, college savings accounts (so-called “529 plans”) and retirement accounts. You might be able to aggregate purchases in different funds within a fund family or aggregate different classes of shares of the same fund.
You may be entitled to combine your previous fund purchase amounts to obtain a breakpoint discount upon a purchase you make today. Or, you might be able to obtain a breakpoint discount for an investment today if you agree to make additional purchases in the future. In such case, you would sign a “letter of intent” to make additional purchases in the future. Be aware, though, that if you don’t carry through with your promised future purchases, the firm may retroactively collect a higher fee.
Always check to make sure that you have been credited the breakpoint discounts to which you are entitled. If you think you should have gotten the benefit of a breakpoint but did not, first contact your broker (or the fund if you did not use a broker) and ask that you be given the discount. If you aren’t happy with the answer, or if you don’t understand what you’re told, write a letter to your broker or mutual fund and ask for a written reply.
Before a potential investment there are several points which the growth investor must take into account. Does the company which he has zeroed on in, possess a stable management and whether its finance credibility is positioned for sustained growth. Then he must check whether the present economic environment will benefit the particular industry of which the company is a part? And above all, the value of the stock is very important.
To determine a sound entry price for a strong growth stock can be a difficult task. But to determine the success of an investment, it is the most important factor. An investor would ideally be inclined to buy into a growth company very early, because he would naturally like to garner enough profit from its persistent growth. But at the same time it is very important for the investor not to place a huge chunk of his premium on his apprehension of the company’s growth potential. For, doing so might limit his future profits from another possible sector.
At the starting point the investor needs to decide about his own investment preference. He can either be a ‘value’ or a ‘growth’ investor or he can be both. But it is always advisable to choose a primary focus. It’s important to note that growth and value investment are not contradictory options but are rather two different approaches to an identical situation.
An investor can decide his own inclination regarding which strategy appears the most appealing. Given below are the basic characteristics of growth stock investment :
- The average growth rates in revenue and earning of these companies are higher in comparison to the other companies.
- These companies cater to such industrial sectors which are continuously expanding. They are smoothly sailing through the current demographic and economic cycle.
- These companies do not pay dividends.
- These companies are characterized by such high growths that they often end up beyond the earning estimates.
- The continued growth of the company determines the holding period.
Growth investment is all about estimating and predicting the future. It is constantly in the investor’s thought that whether the respective company would maintain the same steady pace in the stock market . He must be extremely concerned about the company plans and policies like revenue, earnings, and sales and so on. He needs to keep an eye on the industry and the level of participation of the company in that growth. Some attentive reading done online and the financial press can immensely help the growth stock investor. Another notable feature of the growth stock is that it belongs to growth industries. A growth industry is usually related to some kind of technology. Next, the growth stocks belong to companies that are small to mid-sized. In fact a wide range of factors keep the large companies away from maintaining a steady growth rate.
Stock trading software is one of the more common ways for investors to make trades. If you did a search on any of the search engines, you would find hundreds of options to choose from. Stock trading software helps an investor to make investment analysis decisions without having manually to do the technical analysis. Nearly all data is provided to you, as well as analysis of it, so you can make decisions faster and easier. It is especially helpful to those that are looking to make more decisions on investments themselves. It works well for just about all traders including short and long-term investors, day traders or those who are just starting out.
How to do you select the right type of software? There are several things to keep in mind when doing so, including:
1. Choosing stock software that you are comfortable with using. Some programs give you free trials while others provide you with ample training tutorials. Gather this information and use the software program. Being comfortable in using the software means, you will be more confident in your decisions.
2. Looking for more established software trading software companies instead of going with the newest product launched. Those that have stuck around long term have had to keep up with the trends, and at the same time, they are often more proven machines.
3. Avoiding the hype. Any software program that promises to make you rich overnight or to do all the work for you is one that you really cannot trust in. Rather, you want to find a company that can provide you with quality and respectable use. If a program’s promises like this were true, wouldn’t all programs be offering it?
4. Multifunctional software programs which are better equipped to provide you with more use. Look for these programs instead of using those that are one dimensional. For example, many offer real time stock quotes. That is fine, but others will provide you with a more all in one package.
5. Do not be afraid to move. If you simply do not like what you have, move to another program. You are not tied down.
Stock trading software is an excellent tool to have, but remember that you are still responsible for every facet of your trading skill and strategy. These will not make the decisions for you, but they will give you the investment tools to make those decisions.
The combination of those words: cheap and good, may make the average stock investor’s mouth water. After all, this describes the place to go to start seeing returns on your investment. The problem with cheap stocks is that they are often not good stocks. These stocks have very low prices because, in most cases, the companies are facing problems such as a shrinking market share, slow earnings or they may be seeing problems with growth. If you purchase a penny stock with these traits, you risk losing money.
On the other hand, if you are an investor such as Warren Buffett, then you also know that there are some key investments to be made when buying cheap stocks. Mr. Buffett is a prime example of a person that has made a fortune for himself buying cheap stocks. The key question for you to be asking right now is how to make the right decisions on these stocks. Where should you be going with your investments?
First, be sure you are buying into a business, not just purchasing stock. You should understand the business and be able to have faith in it. What are the challenges that this company faces into the future and is there room for it to grow? You definitely need to do your homework, but making these investments could be one of the best routes to take.
Another avenue that you can work on is purchasing growth stocks from companies with a record of accomplishment. You may not have realized it, but many of the most established companies do go through periods of difficulties, and getting in at a down level most certainly brings you to the top again. Look for companies that have a long history of providing a good return on investment and a free cash flow growth rate.
Also, look for a company that has strength it in and some level of protection. A good brand name for example is something that is going to be around for some time. Does the company has a trademark or patent that is in demand that they will hold for some time? These are protections the company has, which can push it into the future.
These stocks are often good stocks, but you will have to monitor them to find good entry points. Get to know those stocks that offer a cheap way in and find out what about them you can get behind.
A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.
Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholders’ equity.
A company’s balance sheet is set up like the basic accounting equation shown above. On the left side of the balance sheet, companies list their assets. On the right side, they list their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the bottom.
Assets are generally listed based on how quickly they will be converted into cash. Current assets are things a company expects to convert to cash within one year. A good example is inventory. Most companies expect to sell their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert to cash within one year or that would take longer than one year to sell. Noncurrent assets include fixed assets. Fixed assets are those assets used to operate the business but that are not available for sale, such as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.
A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period. This is a small introduction into company’s balance sheets in order to make a proper growth stock analysis and stock market research.
As an investor, you have a few options on how you choose the growth stock to invest into. You could go with your gut, a particular favorite of those who have deep pockets and like taking risks. You could go with the information that other investors and forecasters are providing you, after all, they should know what they are talking about. Alternatively, you could do your own homework to be sure that you fully understand what you are putting your money into and what it is likely to bring to you in the long term. This last method may take you a bit more time, but it also makes you an informed investor. And, being informed can lead to further stock returns. The value of growth stocks is one of the many things every investor should know how to determine.
Stock prices will move up or down based on the company’s earnings as well as the forecast for that company which is based on other facts. Stock prices and knowing where they are heading is the one key tools you must have if you want to make money. Growth stock picks should be made based on the company’s earnings as well as their ability either to keep this level or to increase it. What key information do you need to know?
Companies release their earnings quarterly, which generally happens in January, April, July and October. These reports give you an inside view into the company’s movements and allow you to see what is likely to happen during the months ahead. Statistics you need to take into consideration include the company’s earnings per share as well as the net income reports.
One important figure you need to keep in mind is what the earnings per share equal. As a mathematical formula, the earnings per share are equal to the Net income minus the dividends on preferred stock divided by the average outstanding shares. Another formula you should know is the P/E Ratio (Price to Earnings Ratio). This is equal to the current growth stock price over the annual earnings per share. Yet another formula to use to help you calculate the forecasted earnings of a company is the Forward Price to Earnings Ratio or F P/E ratio. This is the current stock price divided by the forecasted annual earnings per share. That will give you an overall growth stock analysis of your stock pick.
Once you know these details, you can clearly see where stock prices are moving and where your potential profit lies. Do not do all the work yourself, if you do not want to, but have a good idea where the numbers you see are coming from.
Because it is sometimes hard for investors to become experts on various businesses—for example, what are the best steel, automobile, or telephone companies—investors often depend on professionals who are trained to investigate companies and recommend companies that are likely to succeed.
Since it takes work to make excellent growth stock pick of the companies that have the best chance to do well in the future, many investors choose to invest in mutual funds.
What is a mutual fund?
A mutual fund is a pool of money run by a professional or group of professionals called the “investment adviser.” In a managed mutual fund, after investigating the prospects of many companies, the fund’s investment adviser will perform an investment analysis and pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall.
Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
Even small fees can and do add up and eat into a significant chunk of the returns a mutual fund is likely to produce, so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares. If two funds are similar in every way except that one charges a higher fee than the other, you’ll make more money by choosing the fund with the lower annual costs.
Mutual Funds Without Active Management
One way that investors can obtain for themselves nearly the full returns of the stock market is to invest in an “index fund.” This is a mutual fund that does not attempt to pick and choose stocks of individual companies based upon the research of the mutual fund managers or to try to time the market’s movements. An index fund seeks to equal the returns of a major stock index, such as the Standard & Poor 500, the Wilshire 5000, or the Russell 3000. Through computer programmed buying and selling, an index fund tracks the holdings of a chosen index, and so shows the same returns as an index minus, of course, the annual fees involved in running the fund. The fees for index mutual funds generally are much lower than the fees for managed mutual funds.
Historical data shows that index funds have, primarily because of their lower fees, enjoyed higher returns than the average managed mutual fund. But, like any investment, index funds involve risk.
Watch “Turnover” to Avoid Paying Excess Taxes
To maximize your mutual fund returns, or any investment returns, know the effect that taxes can have on what actually ends up in your pocket. Mutual funds that trade quickly in and out of stocks will have what is known as “high turnover.” While selling a stock that has moved up in price does lock in a profit for the fund, this is a profit for which taxes have to be paid. Turnover in a fund creates taxable capital gains, which are paid by the mutual fund shareholders.
The SEC requires all mutual funds to show both their before- and after-tax returns. The differences between what a fund is reportedly earning, and what a fund is earning after taxes are paid on the dividends and capital gains, can be quite striking. If you plan to hold mutual funds in a taxable account, be sure to check out these historical returns in the mutual fund prospectus to see what kind of taxes you might be likely to incur.
Whenever you want to buy a stock, trade it or invest in it, you always want to get a stock pick that performs well. You want a high-flyer, a sky-shooter. Right?
Well, most of the traders out there try to find the “best” stocks and after having found them they want to know the “best” entry point. This entry point is another issue traders are most interested in.
The secret is: You don’t need any of these. You don’t need to search for the best stock, because you don’t know in advance which stock will perform best, you can only guess based on certain criteria you have chosen for yourself.
Finding excellent entry points is something professional traders are least worried about. Some even say that you can choose an entry system based on chance. They know that for succeeding in stock trading other matters are much more important.
These are:
- You: why do you want to trade?
- Enter: What is your entering signal and what is your concept?
- Protection: When shall you close your trade with a loss?
- Exit: When do you have to exit your trade?
- Position Size: How much of your capital should you invest?
The last point “Position Sizing” is the most important factor for success and it’s the part of the system few people pay attention to.
But first let’s just try to explain why the “You” is very important.
1. The “You” part of the system
Now, don’t think that you can just skip this section. I told you that this is a part crucial for your success. You must know yourself before you should begin to trade any market.
What should you know about yourself? You must find clear answers to the following questions:
1. Why do you want to trade or invest?
The answer should not just be “to earn money”. It must be a little bit more precise. You have to know if you need this extra earned money for survival or if you just want additional money. If the first is the case then you should know that the capital you have must be protected by all means.
2. How much money do you need per year?
If you need $30,000 per year and have $30,000 to invest, then you must make 100% every year to just fulfil your needs. 100% per year is, of course, astronomical. Additionally, this would not give you the chance to increase your initial capital.
3. What are your strengths and weaknesses?
Are you disciplined enough to follow a set trading system (which you will learn in the later chapters) even if it sometimes doesn’t show the results you want? Can you stick to your system without letting yourself get influenced by others or the media? How do you cope with consecutive losses?
4. How much are you expecting to profit annually on a percentage basis?
Do you want to earn 20%, 50% or even 100% per year and….
5. How much risk would you think is bearable to get these profits?
It’s quite clear that you cannot expect to win 100% with only accepting a 20% loss probability. A good trading system can show a 200% return with a loss probability of 50%. But how would you feel if you lost 50% of all your money? Could you endure this easily? Note that you would have to make 100% in order to even up after having lost 50% !
6. How much time can you spend for your trading?
This would deal with the matter of having the possibility to trade (much time) or to invest (less time).
7. What is the highest daily price fluctuation you can stand?
If daily price movements of 10% to the up or down or even higher are too nerve-wracking then you should stay away from small capitalization (cap) stocks and concentrate on mid and big caps (like Microsoft or IBM).
Take your time in answering these questions, don’t just reply to them in your mind, write the answers down. If you don’t want to do it now, its ok, but then you shouldn’t begin to enter any stock market, because knowing yourself is the foundation for your trading system.
Some traders even say that this is half of your trading system, so take it very seriously.
