Quote for the day

"Anxiety and fear are cousins but not twins. Fear sees a threat. Anxiety imagines one." - Max Lucado

Quote for the day

"Order and simplification are the first steps toward the mastery of a subject." - Thomas Mann

There Are 3 Stages In a Typical Bull Market

“Every truth passes through three stages before it is recognized: In the first it is ridiculed; in the second it is opposed; in the third it is regarded as self-evident.” – Schopenhauer

Typical market uptrends go through three main sentiment stages:

1) “What bull market? The fall is right around the corner”

Most of the signs of an uptrend are already here – money is leaving defensive names in order to chase higher yield, breadth is improving, correlation and volatility decline substantially. Despite of that, many people don’t believe the rally and prefer to short “overbought” names, only to get squeezed by the tidal wave of monstrous accumulation.

The fastest price appreciation happens in stage 1 and stage 3.

2) Acceptance stage

More and more people gradually warm up to the idea that we are in an uptrend and the market should be considered “innocent until proven guilty. Stocks have been going up for awhile and the minor dips were short lived.

Between stage 2 and stage 3, there is usually a deeper market pullback, which tests the resilience of the rally, shakes weak hands out and allows for new bases to be formed. The deeper pullback is used as a buying opportunity by institutions, which missed the the initial stages of the rally and their purchases push the market to new highs.

3) Everything will go up forever

During stage one, most people are skeptical, because the market has just come from a high-correlation, mean-reversion environment and most are unwilling to see the ensuing change in market character. In stage two, investors gradually turn bullish for the simple reason that prices have been going up for a while. Analysts and Strategists are also turning bullish in an attempt to manage their career risk. In the third stage, most market participants are ecstatic, not only because prices have been going up for a while, but because they personally have managed to make a lot of money. Everything seems easy, the future looks rosy and complacency takes over proper due diligence.

Edited article from http://ivanhoff.com

Quote for the day

"Creativity is thinking up new things. Innovation is doing new things." - Theodore Levitt

Differences Between Stock Investing and Trading

By Devyani Mishra

A couple of days ago I happened to cross paths with an old acquaintance. The usual pleasantries and small talk eventually landed us on the topic of stock markets. The gentleman couldn’t stop boasting about the insane amount of money he was making and how his returns tripled in a small span.

Starry-eyed, I nodded in appreciation but deep down couldn’t help but feel a bit jealous, desperately fighting back the urge to try my luck… and why not? I mean who knows goddess Lakshmi may bestow upon me her grace and I might just be able to rake in profits too; in fact, I even started fantasizing about the various creature comforts I would be able to afford once I become the next stock market mogul!

Knowing nothing about the stock market I googled “ top stocks to invest in”, and jumped headlong with Rs 10,000. I was in for a rude awakening when my trade halved within a week. Disappointed you ask? I was devastated!

Turns out, there are many in the same boat as me. Millions of retail investors have tried “ trading” in the stock market and lost their money and mojo both. So what is it that I and many others should’ve done differently?

It all boils down to the inherent difference between trading and investment and the various aspects of these approaches. I will cover in detail four differences between investing and stock trading and which approach is better suited to retail investors. 

Read On!

Trading Vs Investing: Difference Based on Approach

Methods: The first difference between trading and investing is in the approach both these methods employ to make money from the stock market. Traders use technical analysis to base their buy and sell decisions where as investors use fundamental analysis.

Fundamental analysis focuses on the company’s finalysis, analysis of the industry in which the company fits in and the general macroeconomic situation in the country.

The analysis consists of studying the financial health of the industry and the company and the future growth prospects whereas technical analysis uses charts instead of annual reports and charts and patterns.

Technical analysis does use the market price of the stock to predict future patterns and analyse historical ones but does not concern itself with analysing factors affecting market price. It studies trends in price, volumes and moving averages over a period of time.

A trader doesn’t concern himself with what the company does, or what the company’s future growth prospects are.

This is a key difference between trading and investing. Trading involves more technical analysis whereas fundamental analysis is more essential in investing.

Trading involves identifying market trends and then quickly buying or selling stocks to book profits. Investing, on the other hand, is based on buying stocks of a company after carefully analyzing the business of a company.

Stock investors select fundamentally strong companies and invest in them for the long haul; as the business grows so does the value of their stock. For a stock market investor, short term market volatility is of no significance. 

Difference Based on Time Horizon

The difference between investment and trading can also be based on time horizon. Let’s understand this with an example. Suppose you have money and you buy a house in a good locality. Within two weeks the price of your property increases and you sell it for a profit.

This is called trading. However, if you purchase a property because you know that it has immense long term appreciation potential since a national highway will be built near it a few years down the line, and hence hold on to it then you are basically investing.

Trading basically means holding stocks for a short period and making a profit by selling stocks as soon as the price touches a high. The period of consideration for traders can range anywhere from a day to weeks to months.

Many traders may buy stocks in the morning and sell by the end of the day even! Market fluctuation has very high importance and influence on the decisions a trader takes. Investing, on the other hand, is done with a long term perspective.

A stock investor selects stocks based on strong fundamentals and once convinced holds on to them for a longer period of time, ranging from a few years to decades, to even more.

Difference Based on Risks Involved

Whether you trade or invest, your capital is at the mercy of markets and hence there is a risk-return tradeoff you should be aware of. However when it comes to investing vs trading on the basis of risk, trading ranks higher.

The simple reason why trading is riskier is that trading involves taking super quick short-sighted decisions, which may go well and go horribly wrong as well.

A trader does not base his decisions on how promising the growth prospects of a business are. He may buy a scrip based on external influence and lose money when the prices hit a low which can also make it riskier.

Needless to say, trading can oscillate between highs and lows quite rapidly. On the other hand, Investing as a habit takes time to develop and reaps results in long term.

The risks are lower and comparatively the returns are lower when the period of holding is less, however, if stocks are held for a long time, your investment can fetch higher returns due to compounding effect of interest and dividends.

If the stock you have invested in is fundamentally strong, the daily market fluctuations will have negligible to no impact on your investment. 

Difference Based on Attitudes

The final difference lies between the personality or wealth creation attitude of an investor and a trader. Let’s see the main differences below:-

Which is Better Suited for a Retail Investor?

If you look at the difference between trading and investment you will be able to see that investing approach is more suited to retail investors who want extra exposure to equities.

The advantages that accompany a stock investing mindset are numerous. All you have to do is base your bets on a business that is strong in its core offerings, is constantly innovating and adapting to customer requirements and has a solid management team backing it.

Once you are sure of this, you just need to “ buy right and sit tight”. When it comes to investing vs trading none of them have a guaranteed formula for making money in the stock market.

An investment approach will ensure success in a longer period of time. It will also allow you the much-needed peace of mind that traders never get in there attempts to time the market.

So analyze a company fundamentally, invest in the business, remain unperturbed by the market noise and stay invested to reap long term benefits.

Happy Investing!

Source: https://groww.in/

Quote for the day

"All truths are easy to understand once they are discovered; the point is to discover them." - Galileo Galilei

6 Types of Financial Fraud and Manipulation

History has taught us one thing: as long as companies are managed by human beings, fraud and manipulation will occur. However, as corporations become larger, so does the financial and social impact of such avarice. 

The boom years of the 1990s raised the need to exceed analysts' expectations and boost shareholder value to unprecedented levels. 

As a result, corporate managers went to great lengths to deceive Wall Street, investors, and the government. Through elaborate schemes involving sales skimming, misappropriation of funds, improper revenue recognition, overstatement of assets, and understatement of liabilities, corporation managers created paper wealth of untold proportions. 

And as the web of deception unraveled, a costly price was paid by the stock market and the overall economy. If any good came of this, it was the painful reminder that each and every one of us should understand the basics of financial analysis and, more important, know the ways to detect corporate fraud.

Types of Fraud

Most types of fraud can be assigned to one of the six areas detailed below.

Money Laundering

Money laundering is essentially taking money from illegal sources and passing it through another business to make the money appear legitimate. For example, an organized crime syndicate involved in the drug trade might create a chain of dry cleaners to pass through money from drug sales in an effort to “wash” those funds. Generally speaking, money laundering tends to be a relatively low priority for the IRS. Could it be that they are more likely to collect taxes when the funds are washed and declared? For the FBI, in contrast, it is a different story.

Sales Skimming

Sales skimming involves the deliberate omission of revenue to lower taxable income. This could very well be the case with small businesses that only accept cash, as it would be difficult to track their sales receipts. It becomes a much larger issue when we are talking about Fortune 500 companies that use creative methods to defer revenue or simply hide revenue, as was the case in many of the recent corporate fraud scandals.

Overstating Expenses

This type of fraud often takes the form of running personal expenses through a business to lower taxable income. This is something that might occur in small private companies, and generally it goes unnoticed when done on a small scale. It becomes a larger concern in publicly traded companies, in which a CEO might decide to expense his private art collection to the company.

Bribes and Payoffs

Often committed by large businesses seeking to fix prices or land contracts, this is the type of thing that occurs when a large company is seeking to capture a portion of an international market to secure a large account. Usually some type of bribe or payoff is offered to local government officials or business leaders to gain their approval. In my naive younger days, while I was working as a financial advisor in Latin America, I found it a strange coincidence that when a lucrative privatization contract was awarded to a foreign bank, it seemed to coincide with the minister of commerce’s purchase of a brand-new Hummer.

Shifting Sales and Expenses between Businesses and Operating Subsidiaries

Often large corporations will shift expenses from a less profitable unit to a more profitable unit. This allows for a smoother distribution of profits, and in some cases it can reduce the overall tax burden. For example, the more profitable unit may be facing an excessive tax bill. When expenses are added to its income statement, that burden may ease.

Phony Off-Balance-Sheet Financing Schemes

Overall, off-balance-sheet entities are not considered to be inherently deceptive. However, a combination of creative accounting and lax observance of ownership rules has created an opportunity to hide liabilities in them. A special-purpose entity is created to take on the debt of a parent company, and in the process, the liability essentially is hidden. The perception is that the holding company has a much stronger balance sheet, something that analysts and investors prefer.
Source: www.makemoneyprofit.com