What is a Rate Swap?
A rate swap is the exchange of cash flows on underlying principals which are not exchanged. It is an over-the-counter contract between two institutions to trade the cash flows on two comparable principal amounts, but not to exchange the actual principal amounts. Institutions might prefer this arrangement because they only have access to floating interest rates or are overweight in them and would prefer to have some fixed rate interest cash flow, or vice versa. These swaps might occur between banks on opposite sides of the world to take advantage of rates elsewhere or to simply diversify their risks. Continue reading...
Where Can I Get Help With My IRA Investments?
There are several sources of information and help that you can tap into for your IRA. Your IRA is a vital component of your future retirement assets. The decision on how to invest is entirely yours: you might want to manage the assets on your own, or look for professional help. The choice of Financial Advisor who would help manage your IRA is similar to the choice of any other professional. For more, see “How Can I Get Help With My IRA Investments?” Continue reading...
What is the “efficient frontier”?
The “Efficient Frontier” is a modern portfolio theory tool, which demonstrates to investors the best possible returns they can expect from their portfolios, relative to the amount of risk they’re willing to accept. For investors that find themselves below the “Efficient Frontier,” it means their strategy is not providing enough return for the level of risk assumed. The opposite is true as well. What the theory means to communicate is that investors would be wise to include some higher growth, higher risk securities in their portfolios, but combine them in a strategic way so as to gain risk/reward value that comes with diversification. Continue reading...
What is Return on Net Assets?
Return on Net Assets is a calculation used to determine how well a company performs, relative to its resources. Return on Net Assets gives investors an idea of how well a company uses its resources to generate profits. Net assets includes not only fixed, tangible assets, but also the net working capital of a business. Working capital is defined as Current Assets minus the Current Liabilities of the business. The net profits for a period are divided by the net assets to arrive at the Return on Net Assets. Continue reading...
What is Dividend Enhanced Convertible Stock (DECS)?
This is a type of automatically convertible security that comes in the form of preferred stock shares, which function basically like bonds, that experience a mandatory conversion to common stock at some point. The dividend enhancement is a higher yield payout than other share classes are offered, to compensate the investor for the lack of control he or she has, since the shares will be converted at a predetermined time by the company. Mandatory convertible shares will offer a higher yield than their counterparts, but it will only last as long as the issuing company has determined. Continue reading...
What is a Dividend Rollover Plan?
Dividend rollover plan is another, rarely used way to refer to a Dividend Reinvestment Plan (DRIP). Unfortunately just reinvesting dividends in a systematic way will not get you out of any tax implication associated with the dividends attributed to your account. An automatic dividend reinvestment plan (DRIP) is an option in some investment accounts and financial products. Any dividends paid out will be reinvested in the same mutual fund, ETF, or stock at the earliest possible opportunity. Continue reading...
What is an Earnings Multiplier?
The earnings multiplier is more commonly known as the P/E ratio (price/earnings ratio). By putting the price of a stock over the earnings per share, you have a proportion that can be compared across various securities with different price points. It may be common for a company in one industry to have a different-size P/E than another, but comparing a company to its peers will prove helpful. Analysts use the P/E ratio to determine whether a stock is overpriced or underpriced, and the same goes for the market as a whole. When the average P/E for all of the stocks in an index is found and compared to historical levels, investors can get clues about whether the current price can be supported for long by fundamentals. Continue reading...
What is the Inverted Cup-and-Handle (Bearish) Pattern?
The Inverted Cup-and-Handle (sometimes called Inverted Cup-and-Holder) pattern forms when prices rise then decline to create an upside-down “U”like shape (1, 2, 3, also known as the Cup), followed by a shorter relatively straight price increase that bounces from the right lip (from 3 to 4, creating the Handle). The rising handle forms as a result of mounting buying pressure created when the pair retests a low at the right lip of the cup. Once the buyers give up, sellers take over and the pair has the potential to decline rapidly. Continue reading...
What is the Symmetrical Triangle Top (Bearish) Pattern?
The Symmetrical Triangle Top pattern forms when the price of a pair fails to retest a high or low and ultimately forms two narrowing trend lines. The price is expected to move up or down past the triangle depending on which line is broken first. This pattern is commonly associated with directionless markets, since the contraction (narrowing) of the market range signals that neither bulls nor bears are in control. However, there is a distinct possibility that market participants will either pour in or sell out, and the price can move up or down with big volumes (leading up to the breakout). The price movement inside the triangle should fill the shape with some uniformity, without leaving large blank areas. Continue reading...
What is a market-with-protection order?
A market-with-protection order starts out as a regular market order to buy or sell at the market price. This kind of order will cancel the remainder of the order if the price moves before the entire order is filled, and it is immediately re-entered as a limit order with a price just above or below the market price. A market-with-protection order allows investors to hedge against the change that prices will move unexpectedly before their entire order is filled at the desired price. So an investor would submit an order to be executed at the current market price, and then, if the price moved, the order would automatically cancel the rest of the order and resubmit it as a limit order. Continue reading...