ETFs vs. Mutual Funds: The Ultimate Guide

Exchange Traded Funds or ETFs have become the darling of the inventing world and they are giving mutual funds a run for their money. As much as both of them are viable investing choices, it is very important that as an investor, you familiarize yourself with the similarities and the differences both of them have to offer. With the right information, you can make an informed investment decision. This article discusses ETFs vs. mutual funds and will help you make that informed decision.

MUTUAL-FUND

MANAGEMENT

ETFs are index funds, which means that they are managed passively and track indexes. There are some ETFs that are managed actively but they function more like mutual funds and hence have higher fees. On the other hand, mutual funds are run by professional managers that attempt to beat the market. Due to the active management, mutual funds tend to have higher costs.

Some people think it is worth paying for the professional management and hence go with mutual funds but research indicates it is not. Funds that are actively managed rarely beat the market and as an investor, you have better chances of higher returns when you invest in low-cost index funds like ETFs.

TRADING

It’s a fact that ETFs are index funds but they come with a twist. ETFs are traded like stocks through the day and their prices are normally based on demand and supply. On the other hand, mutual funds are priced and traded at the end of every trading day.efts stock graph

Due to the fact that ETFs are like stocks when investors buy or sell, they pay some commissions. Nowadays, however, there are some brokerages that offer commission free ETFs and you should choose a few of these when investing. The commissions might not seem much but if you invest every month, it will add up very fast.

When investing in commission-free ETFs, you should consider the expense ratio because some of these funds have high expenses in order to make up for commissions. When investing with ETFs, keep in mind that they are not meant for day trading, you have to hold on to yours for a given number of days or you will be charged.

EXPENSE RATIO

The expense ratio is what indicated how much an investor pays every year in order to own a fund as a percentage of what they invested. ETFs are considered quite inexpensive with some of them carrying expense ratios of 0.01%, which means an investor pays $1 for every $1,000 they invest each year.

However, you should not assume that this means they are the cheapest option out there. Index funds, for instance, are worth considering but in general, mutual finds higher expense ratios than both index funds and ETFs.

TAX EFFICIENCY

ETFs are a lot of tax efficient compared to mutual finds due to the way they are managed. This is important to consider if the exchange traded fund is within a taxable account and not in a retirement account, which can be tax-advantaged like 401(k) or IRA.

financial and investment productsTHE STARTING MINIMUMS

Mutual funds can have very high entry costs that could even be a minimum of $1,000. However, ETFs are usually purchased by a share and this makes them inexpensive.

THE SELECTION

This might be the one area ETFs fall short. Despite the fact the ETFs have really grown in popularity, there are more mutual funds available. You will find an ETF that meets your needs but you will not have a lot to select from compared to mutual funds.

LIQUIDITY

Liquidity is normally measured by the trade volume. If the interest is low and the trading volumes are low then the spread increases. These forces sellers to offer price discounts so they can get the security sold and causes the buyers to pay price premiums. ETFs are somewhat immune to this because their liquidity is not influenced by trading volumes. ETFs liquidity is influenced by the liquidity of the stocks included on that index.

Final thought

As an investor, you should not assume that all investments are low cost. Ensure you consider all potential fees even for ETFs. They are inexpensive compared to mutual funds but you still need to know what you are doing. All in all, if you are looking for the better option, you need to consider all these aspects and decide which one will work best for you.

What is “Paper Trading” And Why Should You Do It?

Paper trаding ѕimрlу means to “рrеtеnd” tо trаdе uѕing rеаl mаrkеt data (аnd fake money) in оrdеr to рrасtiсе trading bеfоrе уоu bеgin. It’ѕ likе уоu аrе trаding with ‘рареr’ money оr monopoly mоnеу. In mоѕt cases уоu will fоllоw уоur charts (if уоu’rе uѕing technical аnаlуѕiѕ) еxасtlу аѕ you would if уоu wеrе trading with rеаl mоnеу, оr if you’re using fundаmеntаl аnаlуѕiѕ, you will fоllоw уоur ѕtrаtеgу and rеѕеаrсh thе company thе ѕаmе as if уоu were going to invest уоur mоnеу in them, only уоu аrе uѕing ‘рареr’ money.Paper-trading

Getting Started With Paper Trading

Whеn уоu begin tо рареr trаdе уоu will bе given a fаkе monetary vаluе in whiсh tо trаdе with. If уоu hаvе your оwn trаding ѕоftwаrе it’ѕ bеѕt to trade with a realistic аmоunt оf mоnеу (i.e. thе ѕаmе аmоunt of money аѕ уоu will when уоu use rеаl money). Thе rеаѕоn уоu do thiѕ iѕ bесаuѕе if уоu trade with a rеаliѕtiс amount, уоu are mоrе likеlу tо make dесiѕiоnѕ as if уоu wеrе trаding with уоur rеаl mоnеу. Another point, whiсh уоu might like to take, iѕ to trеаt уоur paper trаding money likе уоu bоrrоwеd it оff уоur grаndmоthеr and you’re terrified оf losing it. You dоn’t want tо focus оn bеing fеаrful оf lоѕing уоur mоnеу, however thаt iѕ рrоbаblу the сlоѕеѕt еxаmрlе of thе fееling уоu gеt whеn you trade with real mоnеу. I аѕѕurе уоu there will bе nоthing that will prepare уоu fоr the fееling оf trading with rеаl mоnеу; thаt is ѕоmеthing thаt уоu will develop whеn you gеt tо it. That having been ѕаid, brеаking through thаt fеаr iѕ rаthеr rеwаrding and thе fear itѕеlf shouldn’t put you off trаding.

The ѕесоnd thing wе need tо clear up iѕ thаt:

Pареr trаding ѕhоuld bе taken serious:

Every trade thаt уоu mаkе must bе made as if уоu were riѕking уоur real mоnеу. If уоu wouldn’t buу “XYZ” (а fiсtitiоuѕ ѕtосk) with уоur real mоnеу, but уоu hаvе a hunch thаt it’ѕ gоing to gо up, thеn you’re nоt рареr trаding you’re just having ѕоmе fun. Evеrуthing уоu dо ѕhоuld bе еxасtlу as уоu wоuld do it if you wеrе trаding real money, except уоu are uѕing рареr money. Hеrе are the rеаѕоnѕ whу уоu ѕhоuld рареr trading bеfоrе invеѕting in ѕtосkѕ:

  1. Lеаrn thе Mаrkеtѕbusiness-reportThe numbеr оnе reason whу you ѕhоuld рареr trade before invеѕting in ѕtосkѕ is tо givе уоurѕеlf a сhаnсе tо learn the mаrkеtѕ. I dоn’t саrе how gооd you think уоu аrе, trаding live (with rеаl mоnеу) without paper trаding first is ѕuiсidе. You nееd to bе able tо get аn understanding оf the mаrkеtѕ аnd how they ореrаtе. Trading iѕ nоt gаmbling; it iѕ аn analysis оf рrоbаbilitу аnd ѕресulаtiоn.
  2. Find уоur Strategy: Bеfоrе уоu trаdе with rеаl money, уоu nееd tо bе аblе tо рареr trаdе tо find уоur ѕtrаtеgу. Hоw саn you роѕѕiblу knоw if your trading ѕtrаtеgу wоrkѕ until уоu trу it оut for yourself with rеаl mаrkеt соnditiоnѕ?
  3. Mаkе Miѕtаkеѕ: Thе bеnеfit оf рареr trading iѕ hаving thе аbilitу tо make miѕtаkеѕ. Every nеw trаdеr mаkеѕ miѕtаkеѕ, аnd I аѕѕurе уоu, уоu wоn’t bе hарру аbоut mаking miѕtаkеѕ whеn уоu trаdе with rеаl mоnеу. If уоu рареr trаdе firѕt, уоu аrе lеѕѕ likеlу tо mаkе miѕtаkеѕ that will соѕt you mоnеу аnd you will bе аblе tо соntrоl уоur trading muсh mоrе.
  4. Find your Hаbitѕ: Evеrу one оf uѕ has hаbitѕ. Sоmе of thоѕе habits can be dеtrimеntаl tо trаding. If you рареr trаdе bеfоrе trаding with live mоnеу, уоu саn find уоur bаd hаbitѕ аnd irоn thеm out. It’s muсh еаѕiеr to сhаngе уоur bеhаviоr аnd hаbitѕ whеn уоu’rе nоt riѕking rеаl mоnеу.
  5. Tеѕt аnd Mеаѕurе: Trаding requires уоu tо соnѕtаntlу tеѕt аnd measure not оnlу your trading strategy, but your mindѕеt. Thе mаrkеtѕ аrе always changing, аnd what wоrkѕ tоdау, might not work in 6 months timе. Likеwiѕе уоu nееd tо test аnd mеаѕurе уоur bеhаviоr аѕ a trаdеr. 80% оf a traders ѕuссеѕѕ is due to thеir mindѕеt. If уоu саn lеаrn how tо tеѕt and measure, аnd dеvеlор your ѕkillѕ tо сhаngе quickly thеn уоu’rе gоing to be muсh more аѕtutе in thе rеаl marketplace.
  6. Master уоur Mindѕеt: Likе I mentioned аbоvе; trading iѕ 80% mindset and 20% ѕtrаtеgу. There is more to trаding thаn рiсking stocks, it iѕ a mind gаmе thаt уоu hаvе tо mаѕtеr, аnd unlеѕѕ уоu mаѕtеr it (оr аt lеаѕt learn thе basics) while уоu рареr trade (bеfоrе уоu trade with rеаl mоnеу); уоu’rе аlmоѕt guаrаntееd tо lose money in the marketplace.
  7. Lеаrn nеw Strategies: Thе markets аrе nеvеr thе same; thеу are соnѕtаntlу changing аnd require уоu tо develop nеw tесhniԛuеѕ аnd strategies regularly. Even еxреriеnсеd traders will never trade their rеаl money until thеу hаvе developed thеir nеw ѕtrаtеgу bу рареr trаding it. Evеrу timе you сrеаtе a nеw ѕtrаtеgу or tесhniԛuе you should рареr trаdе it firѕt to mаkе sure it works.make-money
  8. Lоѕе mоnеу: Part of bеing a ѕuссеѕѕful trаdеr iѕ having the аbilitу tо losemoney. Nоt еvеrу trade уоu mаkе will be a winning trade. Paper trаding givеѕ уоu the аbilitу tо learn that you will hаvе lоѕing trаdеѕ withоut affecting your real rеѕultѕ. Yоu nееd to bе аblе to dеаl with lоѕing money, аnd knоw thatanother trаdе will bе juѕt аrоund thе corner.
  9. Mаkе Money: Although it might sound odd, ѕоmе реорlе hаvе some рrеttу bizаrrе associations tо mаking mоnеу. Often реорlе fееl guiltу if thеу mаkе tоо much mоnеу, or thеу have a buffеr whеrе it bесоmеѕ too uncomfortable. Yоu nееd tо lеаrn tо ассерt mоrе mоnеу in уоur lifе and paper trading lets уоu dо thаt without riѕking аnу mоnеу of your оwn.
  10. Get Cоnѕiѕtеnсу: Finally, thе lаѕt rеаѕоn why уоu ѕhоuld рареr trade bеfоrе invеѕting in ѕtосkѕ is to gеt соnѕiѕtеnt rеѕultѕ fоr уоur trаding. Anyone саn mаkе money in the markets, but оnlу successful traders will mаkе mоnеу соnѕiѕtеntlу. Onсе you саn mаkе money соnѕiѕtеntlу in thе mаrkеtрlасе you know that уоu саn tаkе it tо thе nеxt ѕtер and mаkе rеаl mоnеу in thе mаrkеtѕ.

How Are ETFs Different From Mutual Funds?

etf-trader-draws-market-price

There are a lot of financial products in the stock market, and one of these is called Exchange Traded Funds or ETFs. For some reasons, ETFs can be likened to mutual funds, but are being traded in the form of stocks. You need to get educated with this type of investment or advised by a trusted finance consultant before coming up with the best strategy to handle them right.

What are ETFS?

Technically, ETFs are a type of fund that owns shares of bonds, stocks, gold bars, oil futures, foreign currency and other underlying assets. These are considered one of the best entries when trying to make an investment portfolio. Most people engage with these products to get a balanced approach in mixing bond and stock funds.

How are ETFs different from mutual funds?

  • ETFs are tax efficient compared to regular mutual funds. Tax spending happens when you sell an ETF and when you distribute fund through capital gain. The catch is that an ETF rarely allocates capital funds compared to mutual funds.
  • ETFs provide a current and definite view of holdings because reports are done on a daily basis. The transparent updates can help you know more about possible risks, trends and recognize overexposure to some markets.Various-type-of-financial-and-investment
  • ETFs, let you access unique types of investment. You can own shares of precious metals including platinum, palladium, gold, and silver.
  • ETFs also allow you to diversify your finance portfolio by letting yo invest according to characteristics, geography and market sectors. You can have shares in real estate, energy and dividend-paying stocks all at the same time.

What are the advantages of Exchange Traded Funds?

There are three main benefits of ETFs which substantially create an impact on the profitability of any investment:

  • Tax efficiency – As mentioned earlier, ETFs have a variety of stocks considered to be more efficient compared to index funds. ETFs also allow the investors to trade to significant volumes and receive non-cash payments. If an investor buys shares, then tax is deferred until the stock is sold.Streaming-Tickers
  • Diversification – Your investment will not focus on one stock or product alone. ETFs have diversified opportunities allowing you to invest in international shares and specific industries like energy, biotech, and technology.
  • Low expense ratio – Exchange Traded Funds cost less, have broad diversification and low turnover. You can be charged up to 10% on mutual fund fees while up to 1.25% on ETF expense.

What are the disadvantages of ETFs?

  • International exposure is limited – Although there is a vast range of ETF products to trade in the US market, some countries include large-cap products. A new investor might not be able to access mid and small-sized stocks.
  • The intra-day trading scheme may only be perfect for short-term ETF owners and not to long-term traders.
    A risk of investment inactivity – Some investments may not be as active as other traded goods due to issues which are regional or sector-related.

Investing in ETFs are rewarding and satisfying if you know how to handle its risks and benefits. Do your research and create an investment plan and strategy to make the most out of your shares.

How to Read a Company’s Income Statement

Whether you’re receiving income statements for your company or creating them yourself, they’re notorious as complicated and scary. But they don’t have to be. Here’s a simple guide of how to read a company’s income statement.company-income

The Main Terms and Their Meanings

Perhaps the most daunting aspect is the terminology, but here’s the basic breakdown.

  • Statement of Income, Statement of Earnings, Statement of Operations, Statement of Operating Results = Income Statement.
  • P&L Statement = Profit & Loss Statement = Income Statement
  • Gross = the profits before dedications
  • Net = the profits after dedications
  • Net Income, Net Earnings, Earnings = final profit (since Statements rarely, if ever never, use the term “profit”).

Multi-Step vs. Single-Step

Close-up-US-income-tax-formDepending on the size and complexity of your business, your income statement can take two forms – multi-step, where there are more expenses and points of income calculated, and single-step, which is more refined. To see the differences and their terms, read here, but for now, let’s cover the real heart of your statement.

The Structure

The Statement will begin by listing the business and the period of time the statement concerns.
Below this will be the body – where the numbers game begins. Read from top to bottom, starting with Sales Revenue and ending with Net Income, which is essentially how much money you started out with and how much is yours by the end.

Along the way, deductions will be made to cover:
Income Tax Expense.
Cost of Goods Sold (= manufacturing).
Administrative, Selling, and General Expenses (= employee wages, advertisement, legal fees, insurance premiums, etc.).
Research and Development (which made be included in the above category, depending on if you have a multi- or single-step Statement).
Etc.
It’s important to note that these deductions will not be characterized by parenthesis, minuses, or any similar symbols. Instead, the Gross Income will always be followed by a deduction. After which, a strong line will separate the profit into another section, where it will be accompanied by an additional deduction. The purpose behind this is to constantly draw your eye downward to the final Net Income.

At the end, the Net Income will likely be underlined, put in bold, or have a different font type. This is why it’s called “the bottom line.”

The Real Purpose Behind Income Statements

It’s important to remember these Statements are designed to give you a very brief but very crucial insight. They will not go into detail on how broad or narrow the deductions are, or how simple or extensive your profits are.marketanalysis

The Most Important Part to Watch

While each line offers valuable insights, the most crucial of them all is the Cost of Goods and Sales Revenue line. This shows you how much it cost to manufacture the products sold versus how much was actually made, before further deductions are counted. Since the Cost of Goods will likely be the largest expense you have, keeping a close eye on any spikes and evaluating ways to lower this price will give you the most pleasing Net Earnings in the next statement.
The profit after the Cost of Goods deduction will be known as a Gross Margin; always watch the Gross Margin.

What is Most Commonly Grouped Together?

Income Statements often become more confusing when expenses are lumped together, but it’s a common practice to improve efficiency. The most common combination is in the Operating Costs. Rather than itemizing Administrative, Selling, and General Expenses, your Statement will likely put them into that single umbrella term.

The History of the NASDAQ Stock Exchange

The World’s Stock Markets as we know them today generally sprung into existence in the 19th and 20th Centuries. The New York Stock Exchange was created in 1817 and dominated the world economy for nearly three centuries until the NASDAQ was created.the-Nasdaq-stock-market

The National Association of Securities Dealers and Financial Regulatory Authority created the NASDAQ in 1971. Its creation was intended to enable investors trade in securities on a transparent system that was also the first to be computerized. The NASDAQ commenced operations on February 8,, 1971. The trading term Nasdaq also encompasses the Nasdaq Composite, an index of more than 3000 stocks listed on the NASDAQ exchange.

Growth of Technology and its Effect on the NASDAQ

Because of its set-up, the Nasdaq is the global electronic marketplace for the trade in securities and the benchmark index for technology stocks. The computerized system that characterizes the NASDAQ was first conceptualized to be an alternative to the system used in earlier trading systems. Most traders found the older system inefficient and the NASDAQ was meant to change that.nasdaqcity

Its founders couldn’t have envisioned the advances in technology we have today. But they did a great job in creating a system that would evolve with technology. In fact, the evolution of technology has made the NASDAQ, a standard model in many of the world’s markets today.
Its efficiency was further compounded by the fact that many tech giants chose to list with the NASDAQ in their early days. And as the tech industry grew in the 80’s and 90’s the NASDAQ model was adopted by the rest of the world. It’s electronic trading model is currently used by 70 exchanges in over 50 countries.

Companies Listed on the NASDAQ Exchange

Its technology based model makes the NASDAQ composite a favorite of technology companies. So, it’s little wonder that the world largest tech companies are listed on the composite. These companies include Apple, Google, Oracle, Amazon, Microsoft, Amgen and Intel. But they are just a fraction of the more than 3000 stocks listed on the exchange.

Stock-Open-Slightly Higher On The-New-York-Stock-ExchangeThe composite’s performance during the dot-com boom and bust in the late 90’s signified its appeal to the tech world. During this period the NASDAQ composite crossed the 1,000 mark in July 1995, the first time it had ever done so in its history. It continued to soar in the subsequent years, rising to the 4,500 mark by March 2000 before the bust caused it to slump by almost 80% in October 2002.
The future of the NASDAQ composite looks bright. In 2007, it combined with OMX, the Scandinavian exchange group to form the NASDAQ OMX Group. Together, they became the world’s largest exchange with 1 in 10 of the world’s securities traded.

The NASDAQ OMX 100 index, introduced in 2008, is a global index that is traded in U.S Dollars and Euros. Transactions on this index are calculated in real time and the stocks listed here are the main players in the tech industry including Apple, Cisco and Amazon.

Intended to be the first transparent and electronic securities platform, the NASDAQ has continued to play that role in an ever-changing stock market. With technology changing every day, the NASDAQ’s primary function may well be further redefined as the global markets adjust to the changing environment.

What is a Short Squeeze in the Stock Market?

Definition of a Short Squeeze

A condition in which the heavily shorted commodity or stock, moves higher forcing the short sellers to close out their position which adds pressure to the stock. A short squeeze means that the short sellers are squeezed out of their short positions at a loss. A short squeeze may trigger positive development because the stock might increase in value. At this position, some short sellers prefer buying the stocks back at a higher price compared to the price they sold the stock to avoid further losses.Short-squeeze

Understanding Short Squeezes

A short seller borrows the stock through the margin account if a stock is overvalued. They then sell the stock with the hope that the price of the stock will go down. The proceeds are then held in the margin account as collateral. Eventually, the stock seller buys the stock back what is referred to as buyback. If the prices of the stocks which the seller sold go low, the stock seller makes more money. The money earned is the difference between reduced stock price that is paid later and stock sold on margin. However, if the price of stock sold goes higher, the seller makes a loss.

Three ways of predicting short squeezes

Short interest ratio

stock-market

This refers to the short interest divided by the average daily trading volume of the stock that one wants to sell. For example, if you take 300,000 shares of short stock than dividing it by an average daily trading of 30,000, it will take ten days for the short sellers to buy back the shares. A higher ratio means that there is a higher likelihood for the short sellers to drive the price up. A short interest of 10 days, is an indication that the short sellers might panic, and it is the best time for the sellers to purchase a short squeeze.

Short interest percentage

It refers to the number of shares outstanding divided by the shorted shares. For example, if there are 20,000 shares which are sold by short sellers, and 200,000 shares outstanding, the short interest will be 10%. A higher percentage means that the short sellers will be competing against each other to buy the stock back if the price of the stock continues to rise.

Daily moving average charts

Stock-Market-TradingThe daily moving charts illustrate where the stock has traded within a particular period. When you look at a 50-day moving average chart, one knows whether there is a rise in the stock’s price. There are various charting software programs available that can help one to plot your chosen stock. Getting information from news article helps one to know whether a short squeeze will occur. Thus, staying informed in your stock’s field is an important aspect that one should always consider.

The bottom line is that the success of a short squeeze depends on the ability to sell your stock during the peak season. Employing a short squeeze is risky, but the risk can be reduced by observing the industry trade, and focusing on predictors discussed above which are daily moving averages, short interest ratio, and short interest percentage.

What is Short Selling?

Short selling is an amazing concept. You will be selling a stock or any kind of financial instrument that you have just borrowed so that you can make a sale. This is truly awesome, but you need to get more information about this right away. So read on.

What-is-Short-Selling

Liquidity in the Stock Market

A short seller will provide liquidity to the financial markets restraining any influence about the exuberance of investors over time. They should not be seen as cynics trying to pry on other people`s mistakes but rather they should be treated as legitimate players in the investment world. Short selling is good for the market because it prevents any stock from getting too high down the road during peak time. Short selling is perilous in any surging market out there.

What-is-Short-Selling

Example
The short-selling process can be easily illustrated using a real-world example. To short any kind of stock, you will need to open a margin account at any brokerage firm out there. This will allow you to have fun in no time. You will need a certain amount of money to open this account so you can have some margin. Let`s say that you want to sell a hundred shares of a $10 stock. You will have to put in $500 as your account`s margin.

Common Short Sellers

Hedge funds are some of the most important investors in the world of short selling. If a hedge fund considers that a sector or stock is overvalued, they will use short selling so they can hedge this risk of the market. Sophisticated investors love short selling. They use short selling so they can speculate or hedge market risk over time. Speculators also play the short selling game from time to time, and they love it.

Short Selling Regulation

What-is-Short-Selling

The uptick rule was imposed to the short selling world. This rule was created to avoid short seller from exacerbating any downward movement of a stock when the financial instrument was declining. In 2007, the SEC just ruled out this rule. Some experts in the short selling field believe that this action contributes somehow to the development of the market volatility and bear market of the years 2008 and 2009. In 2010, the SEC adopted what was called an alternative uptick rule.

Rewards and Risks

You can think of short selling as a kind of insurance for the world of financial markets. Let`s give you another example. Say you have a bought the S&P 500 index via a mutual fund. Say also that you have a short selling position for this index. If the market falls at a certain point in the future, you can make good money down the road. This is probably what will happen over time.

Remember that short selling is truly here to stay for the long run because it provides real liquidity to the market. This is truly important for the stock market because of the problems caused by downward trends in many stocks out there. There is some kind of regulation regarding short selling, but this will not prevent hedge funds and speculators from having fun and making profits via this amazing concept these days.