How do Stock Splits Work?

Corporations have a lot of power over their stocks and can manipulate them to make them more desirable to investors and traders. One such move that a corporation can do is perform a stock split on their shares. This is a common move performed by big companies in the hope that it will make the shares seem more interesting to investors of all sizes, big or small. The concept behind a stock split is very simple and is not different to understand. As a day trader, they may never really affect but they can indicate when it is time to invest in a stock, as stock splits can act as strong predictors.stock-spilits

If you are not sure what a stock split is and why you should be bothered about them, continue to read on. It is important to familiarize yourself with these terms as you may come across them in later in your trading career

What is Stock Split?

A stock split is very similar to splitting a $20 note into two tens. The overall value of the money you’re holding has not changed by you now have two notes. So why does this matter? Well, in stocks, this can happen with individual shares.

A stock split is essentially when a company decides to split their shares to give them less value. The actual price of the stock doesn’t change but the price of individual shares does. There are a range of different splits that can occur and the most common is a 2-for-1 split, which cuts the shares by 50%. Current shareholders will get an additional share for each one they own and individuals looking to invest will now have to option to select cheaper shares. As I have stated, the overall market capitalization doesn’t budge because the overall price hasn’t changed.

You can even have a reverse-split. This is where the opposite happens where a corporation merges their shares together. For example, you could have a 1-for-10, where 10 shares are not added to produce one share. This, of course, raises price of shares 10x.

So what’s the Point of Stock Splits?

There are a range of reasons why a company might authorize a stock split. One of the most common reasons is for investor psychology. This is particularly true when the corporation is very large and their share price is very high. The high share price will deter investors from buying so my splitting the shares, it gives the impression that there is less money spent and less risk. In addition, current shareholders will feel happy that they now have more shares and will have more to trade if prices go up.what-is-stock-spilit

The benefit of a stock split is also that is increases the liquidity of the stock. This will increase with the number of shares and this can make the stock more stable. Some companies that have never split have large ask/bid price ranges because their shares are worth so much and because there is so little of them.

Conclusion

If you ask any professional or teacher in the stock market industry, they will tell you stock splits are a waste of time. They don’t really change a lot and benefit the corporations more than the investors and traders. However, a stock split can have some effect on your psychology of a stock. Just because there are cheaper shares, it doesn’t mean you should invest. However, saying this, if a company is splitting, it could indicate they’re doing well and they may be a company you want to invest in.  

ETF’s versus Mutual Funds – Which Is Best for You

Exchange Traded Funds (ETFs) and Mutual Funds are two popular types of investment options available to investors. However, many investors wonder whether they should invest through an ETF or through a mutual fund. The answer is that it really depends on your particular circumstances and what your investment goals are since each type has advantages as well as disadvantages.

Exchange Traded Funds

etf-vs-mutual-fundAn Exchange Traded Fund is a fund into which an investor invests along with other investors. Investors become shareholders and acquire shares in proportion to their investment. The fund usually tracks the performance of an index, a commodity such as oil or gold, bonds etc. An ETF trades on the stock exchange just like stocks do. But the risk is spread across several different asset classes unlike pure stock trading. It is relatively inexpensive to invest in ETFs since the fees are lower. Other advantages of ETFs include diversification, and the ability to buy and sell shares as desired. Since ETFs trade on the stock exchange, the value varies moment by moment as investors buy and sell shares throughout the day. Whenever profits are made, it is divided among the investors.

Mutual Funds

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A mutual fund is a pool of funds that are contributed by several different investors. The aim of the fund is to outperform a benchmark such as an index. Unlike ETFs, mutual funds are not traded on the stock exchange. Therefore, they may only be redeemed once daily at a single price known as the Net Asset Value (NAV). A Portfolio manager usually oversees a mutual fund and charges a fee for this service. This fee makes it relatively expensive when compared to ETFs. An advantage of mutual funds is that you may invest with as little as $2500 and sometimes less. Diversification is also an advantage.

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.

How Are ETFs Different From Mutual Funds?

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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.

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

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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.

Traders like Tim Sykes have popularized short selling, but new traders don’t always know how to get started.

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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.

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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

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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.