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In this final article on finance we’re going to review some finance theories. There are plenty of them to go around.

Finance theories themselves are the foundations for understanding the role of finance in markets. It is a way of measuring investment value and risk and return on investment. Some of the theories include foreign currency transactions, value at risk and portfolio theory, which is the basis of investment analysis. An example of investment analysis is the CAPM model.

CAPM stands for Capital Asset Pricing Model. This is fundamental to all finance theory. The CAPM model tries to explain the relationship between risk and return on investment. This risk includes both systematic and unsystematic risk.

Systematic risk is the risk factor common to the whole economy and the risk associated with investments in general. These are also non diversified risks, meaning they are invested in one area.

Unsystematic risk is the unique risk associated with a company such as bad management, strike or disaster and with diversification, can be eliminated or at least lessened.

Only systematic risk is compensated for in regard to the investor.

Here is the CAPM formula for you mathematicians out there.

re = rf beta (rm – rf)

rf is the risk free rate. This is the rate that the investor gets for no risk. rm is the risk of the market as a whole in general. re is the expected return incorporating the risk free rate, market risk and beta value.

In the ideal world you want to maximize your re while minimizing the risk factor. Sometimes this is not always easy or possible. But this is what you shoot for.

Then there is the SML or Security Market Line.

How does this relate to the CAPM formula? Actually, the SML is a graphical representation of the CAPM. This tells us that if a security is priced accurately the expected return of the security will meet the security beta at the securities market line. However, if it falls below the line then that means Read more…

Investors often find it difficult to decide on the right time to invest. There is a tendency to invest when everyone else is investing. Mutual funds have devised a very sensible solution for investors to deal with the issue of timing ? The Systematic Investment Plan. In SIP the investor buys units every month for a specific amount so his investments accumulate over time, and he is able to participate in the market regularly without worrying about the right timing.

Many investors seem to invest purely because the debt markets have under delivered in the last two years. If this is the reason for shifting into equities, then this reasoning is clearly flawed. Every investor must seek to practice asset allocation ? whether equity or debt. It would be a good idea to be in both and investors who can?t determine the ideal asset mix, may want to see a financial planner.

Investors should also a being taken in by Credit as it could lead to investing in the right products at the wrong time. Investors should always try to keep a balance, instead of investing all the funds into one product. It is a good idea to have a core investment Read more…

VIX

This is the Chicago Board Options Exchange volatility index, one of the most closely watched of all market indicators.

It is used to gauge overall market sentiment via activity in the options market. Option traders also use the VIX as a tool to measure the market?s current assessment of risk.

Simply put, the VIX rises and falls to reflect the fear or complacency of investors. A high number, say 30 and over, indicates a great amount of concern and the likelihood that investors will sell their shares. A low number, say 20 and under, indicates a happy investor who is likely to hang onto his shares and probably add more.

Savvy investors and even day traders check the VIX to help them better time their entry into and exit from positions.

This year there are three big changes in the VIX. First, the exchange, the CBOE, will no longer use the S

There are two types of stops that you will use constantly as a trader, protective stops and trailing stops. When looking at your options online trading cost, generally, positions start out with protective stops to guard your investment, and move to trailing stops when the trade becomes profitable. But the best way to familiarize yourself with stops, and how to set them is to consider them being used in a trade.

Let`s say you take a long position in a stock in anticipation of its earnings announcement. It had traded at around $13 for many weeks, but last week it ran up to $16, as the first sign of its earnings run. It then slowly dropped to $14.40 over the course of two days and stabilized there for a day and a half. Today it`s started to slowly move up again, and you think it`ll keep going. You decide to buy, and put in a limit buy order at $14.8 which executes at $14.76. Since it isn`t the strongest company and the market has been flat, you decide to set a reasonably tight protective stop. You don`t want to set it too tightly, though, since the stock isn`t very volatile and the time frame for your trade is about five days. To work this tip effectively and cut your options online trading cost, it`s important to set protective stops below support levels, so you look to see where the stock has support.

There are two support levels: $13, where it traded for weeks, and $14.40, where it stabilized recently. Its resistance level is $16. If the stock moves down from where you bought it, it will almost certainly bounce at $14.40. If the stock then drops below $14.40, you would assume it isn`t ready to move up yet, and you`d be better off stopping out there and buying again later. For this reason, you also determine there`s no reason to let the stock move all the way down to $13.

Therefore, you set a protective stop at $13.75. You don`t want to set it right at $14.40, since the stock will bounce near $14.40 and then either start back up or continue down. For the same reason, you don`t set the stop above $14.40. But $13.75 seems a good place to stop, since no support level is absolute, and the stock could bounce off $14.30, or $14.50, as easily as it could bounce off $14.40. If the stock gets as low as $13.75, though, that would suggest that the stock will actually break through support. The rule is that a clear break of support is dictated by where a stock closes, not by intraday swings.

Let`s say you`ve made a good trade, and the same stock rises to $15.10, stays there for a period of time, dips sharply to $14.43, and then picks up volume and rises rapidly. It breaks through its new resistance at $15 and starts the climb to $16. The market is rallying. Now is the time to start to think about using trailing stops to protect your profit. You`re starting to accumulate a nice one. At $15.50, you`ve made 5%, and if the stock hits $16.24, your profit will be 10%. You decide that the stock should stay above its old resistance Read more…

You can draw some useful parallels between running a business and Day Trading, Forex or Currencies trading. For instance, most successful businesses keep statistics on everything from their conversion rate, to their average dollar sale, to the number of people that come in the door. Businesses do this to keep on top of how they are doing on a day to day basis and businesses must first take score before begining to improve on that score. Using a Day Trading, Forex or Currencies back testing plan in your trading works exactly the same way.

Now that you`re looking at Day Trading, Forex or Currencies trading as a business, you need to learn some valuable statistics about your system so you can improve it`s performance. You would use a Day Trading, Forex or Currencies back testing method. You can`t improve your system unless you have something to measure it against. How could you expect to improve your trading unless you knew what it was you were looking to improve? You can discover these measurements and other valuable information about your trading system, by using a Day Trading, Forex or Currencies back testing plan.

There are two ways that you can use a Day Trading, Forex or Currencies back testing plan to back test a system. You can do it manually, which can be a drawn out and labour intensive process, or you can do it with the aid of some software packages. Unfortunately, I recommend you do it by hand when you first start out. You`ll get a much better feel for your system, and you`ll understand exactly how using a Day Trading, Forex or Currencies back testing plan works in all its intricacies. Once you have the Day Trading, Forex or Currencies back testing plan and the in depth knowledge, you could look at finding a software package that does it for you.

There are a few major statistics on your Day Trading, Forex or Currencies back testing plan that you need that you will uncover through back testing. The first statistic you need to become familiar with is the R multiple principal. R stands for risk, the risk you take on any trade when you enter the market. The R multiple of a trade is the ratio of the profit or loss compared to the amount of money risked to make the profit or loss.

Therefore, if you risk $200 dollars in your initial purchase, and you make a profit of $1,000, you have made five times the amount you risked in the trade. You have an R multiple of five. This statistic gives you a good idea of the relative size of your profits to your losses. You can compare the average size of your winning trades with the average size of your losing trades.

The next statistic you`ll find useful is your win to loss ratio. This is how many times you get a winning trade in proportion to how many times you get a losing trade. For example, if you had ten trades, four of those trades were winners, and six were losers, your win to loss ratio is simply four to six. This is your hit rate; you`ll get 40% of your trades correct.

With these two simple statistics, you can calculate the average size of your profits and of your losses, multiply these figures with your win to loss ratio, and calculate on average how much money you make with every dollar you risk.

For those of you who think this sounds like a too much work, particularly using a Day Trading, Forex or Currencies back testing plan that you need to do to uncover these statistics, consider this scenario: Imagine yourself trading a system that you knew had a win to loss ratio of 60/40. You made profit on every six trades Read more…

Investing can be confusing, especially for the beginner. Getting some basic tips can help a beginning investor to make informed choices that fit their needs. Each person has a different goal when investing and that plays a big impact on how you invest. The following list explains some things beginners should know before investing.

1. Understand that there are no set rules for investing. There are no guarantees and no perfect way to invest.

2. Make informed choices. Before investing in any way you should completely understand how your investment will work and all of the details of the transaction.

3. Make a simple plan to determine your goals and needs. This will help you to determine what investments to make and how much money to invest.

These three tips are great for general investing, but many people are looking to invest in the fast paced world of the stock market. The above tips are a good beginning, but the following tips will further help those interested in investing in stocks.

1. Look at the value of the stock instead of the price. Low cost stocks may be low for a reason. Look at the whole picture. See why the price is low and if there is a possibility it may rise.

2. Check the companies return on net worth. This is the profit after taxes divided Read more…

It matters not what lines, numbers, indices, or gurus you worship, you just can’t know where the stock market is going or when it will change direction. Too much investor time and analytical effort is wasted trying to predict course corrections? even more is squandered comparing portfolio Market Values with a handful of unrelated indices and averages. If we reconcile in our minds that we can?t predict the future (or change the past), we can move through the uncertainty more productively. Let’s simplify portfolio performance evaluation by using information that we don?t have to speculate about, and which is related to our own personal investment programs.

Every December, with visions of sugarplums dancing in their heads, investors begin to scrutinize their performance, formulate coulda?s and shoulda?s, and determine what to try next year. It?s an annual, masochistic, rite of passage. My year-end vision is different. I see a bunch of Wall Street fat cats, ROTF and LOL, while investors (and their alphabetically correct advisors) determine what to change, sell, buy, re-allocate, or adjust to make the next twelve months behave better financially than the last. What happened to that old fashioned emphasis on long-term progress toward specific goals?

The use of Issue Breadth and 52-week High/Low statistics for navigation; and cyclical analysis (Peak to Peak, etc.) and economic realities as performance expectation barometers makes a lot more personal sense. And when did it become vogue to think of Investment Portfolios as sprinters in a twelve-month race with a nebulous array of indices and averages? Why are the masters of the universe rolling on the floor in laughter? They can visualize your annual performance agitation ritual producing fee generating transactions in all conceivable directions. An unhappy investor is Wall Street?s best friend, and by emphasizing short-term results and creating a superbowlesque environment, they guarantee that the vast majority of investors will be unhappy about something, all of the time.

Your portfolio should be as unique as you are, and I contend that a portfolio of individual securities rather than a shopping cart full of one-size-fits-all consumer products is much easier to understand and to manage. You just need to focus on two longer-range objectives: (1) growing productive Working Capital, and (2) increasing Base Income. Neither objective is directly related to the market averages, interest rate movements, or the calendar year. Thus, they protect investors from short-term, anxiety causing, events or trends while facilitating objective based performance analysis that is less frantic, less competitive, and more constructive than conventional methods.

Briefly, Working Capital is the total cost basis of the securities and cash in the portfolio, and Base Income is the dividends and interest the portfolio produces. Deposits and withdrawals, capital gains and losses, each directly impact the Working Capital number, and indirectly affect Base Income growth. Securities become non-productive when they fall below Investment Grade Quality (fundamentals only, please) and/or no longer produce income. Good sense management can minimize these unpleasant experiences.

Let?s develop an “all you need to know” chart that will help you manage your way to investment success (goal achievement) in a low failure rate, unemotional, environment. The chart will have four data lines, and your portfolio management objective will be to keep three of them moving upward through time. Note that a separate record of deposits and withdrawals should be maintained. If you are paying fees or commissions separately from your transactions, consider them withdrawals of Working Capital. If you don?t have specific selection criteria and profit taking guidelines, develop them.

Line One is labeled ?Working Capital?, and an average annual growth rate between 5% and 12% would be a reasonable target, depending on Asset Allocation. [An average cannot be determined until after the end of the second year, and a longer period is recommended to allow for compounding.] This upward only line (Did you raise an eyebrow?) is increased by dividends, interest, deposits, and ?realized? capital gains and decreased by withdrawals and ?realized? capital losses. A new look at some widely accepted year-end behaviors might be helpful at this point. Offsetting capital gains with losses on good quality companies becomes suspect because it always results in a larger deduction from Working Capital than the tax payment itself. Similarly, avoiding securities that pay dividends is at about the same level of absurdity as marching into your boss?s office and demanding a pay cut. There are two basic truths at the bottom of this: (1) You just can?t make too much money, and (2) there?s no such thing as a bad profit. Don?t pay anyone who recommends loss taking on high quality securities. Tell them that you are helping to reduce their tax burden.

Line Two reflects “Base Income”, and it too will always move upward if you are managing your Asset Allocation properly. The only exception would be a 100% Equity Allocation, where the emphasis is on a more variable source of Base Income? the dividends on a constantly changing stock portfolio. Line Three reflects historical trading results and is labeled ?Net Realized Capital Gains?. This total is most important during the early years of portfolio building and it will directly reflect both the security selection criteria you use, and the profit taking rules you employ. If you build a portfolio of Investment Grade securities, and apply a 5% diversification rule (always use cost basis), you will rarely have a downturn in this monitor of both your selection criteria and your profit taking discipline. Any profit is always better than any loss and, unless your selection criteria is really too conservative, there will always be something out there worth buying with the proceeds. Three 8% singles will produce a larger number than one 25% home run, and which is easier to obtain? Obviously, the growth in Line Three should accelerate in rising markets (measured by issue breadth numbers). The Base Income just keeps growing because Asset Allocation is also based on the cost basis of each security class! [Note that an unrealized gain or loss is as meaningless as the quarter-to-quarter movement of a market index. This is a decision model, and good decisions should produce net realized income.]

One other important detail No matter how conservative Read more…

The aging of the population and the potential failing of social security has brought the subject of saving for retirement to the forefront for many people. There are many avenues available to acquire the nest egg that we will need to survive on during our golden years. IRA?s, mutual funds, annuities and 401(k)?s are just some of the options to research as we prepare for our future.

With all of these choices, the 401(k) is the most popular. The popularity of the 401(k) is due in a large part to the fact that many employers not only offer this option, they also match a certain percentage of your contribution. The amount that employers will match varies from as little as 25% to as much as 100%, although the number of employers that do not match at all is, unfortunately on the rise. Another outstanding benefit a 401(k) offers is that the contributions made by you as an employee are made with pre-tax monies.

A 401(k) plan is also very flexible, giving you choices in regards to your investment strategy. There are some tried and true methods for investing in a 401(k) that depend upon your age at any given time. For example, a young person investing in a 401(k), whether the employer matches or not, has time on their side. This person can invest aggressively, if they feel comfortable doing so. The market will have ups and downs, but the younger the investor the more time is available to ride out these fluctuations in the stock market. As the investor nears retirement, it would be prudent to change the investment strategy to a more conservative approach. This will, in theory make investing money “safer.” but still more profitable than a traditional savings account.

In the past, only larger companies were able to offer their employees a 401(k) plan for retirement. A 401(k) retirement plan was simply not an option for the self-employed person. Thankfully, this is not the case in today?s marketplace. Today there is a plan called Solo 401(k) or individual 401(k). These plans allow business owners with no employees, with only partners or a spouse to set up retirement plans that are very similar to the traditional 401(k) offered by larger, more established companies.

If you leave an employer that you have a 401(k) plan with, you don?t need to leave your retirement Read more…

This is a common question that I get. People come to me and say. ?Brad, I?m ready to get started investing but there are just so many options for places to invest. How do I choose the best county to start in??

Maybe you?ve asked yourself or others the same question. To be quite honest, without a way of narrowing down the choices, it can be a daunting task. Luckily, if you?ve done your homework and you?ve learned everything you can about the business through our home study course ? you can have success in any county you settle on.

Step #1 ? Do you want to invest in tax liens or tax deeds?

By now you should know the difference between tax liens and tax deeds. You may have already made up your mind as to which you prefer. If you like the idea of owning real property and being creative with your sales then tax deeds are probably for you. If you would prefer to sit back and just wait for your guaranteed returns then tax liens are for you. You make the choice. Here is a tool that gives you a quick picture of all the states: http://www.wealthfusion.com/taxlienmap.html

Step #2 Read more…

What exactly does a formula do? A complete detailed explanation can be as vast and complex as each individual investor and is beyond the scope of this article but a brief summary of a formula’s usefulness would include the two primary functions it fulfills.

First, over a full market cycle, it will improve your investment profits without the application of any thought whatsoever on your part. A good thing for most investors, because the less emotion they inject into their investment decisions – the better off they are. Because there are many investors who don’t believe that the market will ever go through a full cycle again – that the direction of the market is in a permanently upward movement, except for temporary, minor dips. It might be worthwhile to point out – without seeming to be pessimistic – that there are some good arguments against an indefinite continuation of bull markets? as the past few years have shown.

The second purpose of a formula – apart from the question of profiting from complete market cycles – is to provide a means of profiting from more minor fluctuations. It is undeniable that the market will continue to fluctuate and a formula allows the investor to benefit from these fluctuations by specifying conservative investment policies when the market is relatively high, and more aggressive policies when it is relatively low.

For many, formulas appear rather complicated and so the obvious question that comes to mind is “Can the small investor profitably use them?” and the answer is resounding yes. True, some formulas are so complex that they are unsuitable for most investors but most formulas do not fall into this category. The most widely used formulas today, in fact, are based on extremely simple principles and can be used by anyone with a rough knowledge of elementary school math. Special measures to adapt formulas to the needs of small investors are necessary, at times but it is worth noting that small investors are just as likely to want to improve their profit performance in the market as are the larger investors. And what’s nice about formula’s, is that there is no particular disadvantage in having a small portfolio when using them.

Security or Uncertainty
All investors, both large and small find themselves in the same basic quandary. All would like to be sure of what is going to happen next to their capital and so they are inclined to appreciate the features of fixed-income Read more…