Stagflation is the occurrence of both stagnation, which is slowing growth and production levels, and inflation, which is the increase of the average cost of goods. If production costs rise for some reason, such as higher oil prices, it can cause economic growth to slow down and the supply of goods in the market to drop. This is known as stagnation. The weakened supply of goods in the market and the higher production costs of the goods will cause the retail prices of the good in the market to go up. Continue reading...
Commodities are more volatile than most assets. The supply-demand dynamics of commodities are continuously changing, and sometimes very rapidly. Different commodities will have different levels of volatility, of course. Some commodities are extremely volatile. For example, natural gas has had a volatility of almost 45% in some periods, and gold has experienced movements of 20-30% per year lately. Crude oil prices fell some 50% in 2015, as a global supply glut was met with weakening demand, particularly from China. Gold is actually on the less-volatile side of the spectrum for commodities. Silver, Nickel, and crude oil tend to be on the upper end of the spectrum along with exotic metals such as platinum and palladium. Continue reading...
The Energy Sector contains companies that are in the business of discovering, processing, or selling (or all 3) natural resources like oil, natural gas, coal, solar and wind. Oil companies dominate the sector and are the largest players. Energy stocks are also cyclical, meaning that they tend to perform better when demand for energy is high (economic expansions). Companies in the Energy sector are also very sensitive to changes in the price of the underlying natural resource, like oil. For example, as the price of oil rapidly declined in 2015, falling by 50+%, the earnings for virtually every energy company collapsed. Continue reading...
There are some things to keep in mind when investing in commodities and their ETFs. Most commodities trading revolves around who owns a hard asset and when. ETFs occupy a space in the commodities world that is somewhat unique. An ETF such as the Crude Oil Index does not physically buy millions of barrels of oil and store them. It buys financial instruments which theoretically should reflect the price of oil. Continue reading...
Active management is when an investor or money manager attempts to outperform an index or benchmark, using tactical strategies. Many economists and financial professionals believe that the markets are efficient. This means that all available financial information has already been built into the prices of securities, and that you cannot outperform the market by making specific selections of stocks, timing the market, reallocating your assets regularly, following the advice of market pundits, or finding the best portfolio managers. Continue reading...
A strike price names the price of the underlying security in options or derivative contract at which the underlying security will trade at settlement if it is exercised. In a call option, for example, the option would name a strike price, and if the current market price of the underlying security was more than the strike price, an investor who held the call contract would invoke his right to purchase the stock from the issuer/seller of the option at the strike price, which, remember is lower than the prevailing market price in this example, and the investor can turn around and sell it in the market at or near its most recent, and higher, price, for a profit. Continue reading...
There will be a premium paid by investors for the right to establish positions using options. The price of the underlying security must move to a certain point for the options position to become profitable. The strike price of an options contract names the price that an investor can use to buy or sell the underlying security, but the breakeven price will be the strike price plus the amount of the investor’s premium or net debit. Breakeven price can apply to a multi-option strategy such as a spread, or to a single option position. Continue reading...
Option prices are decided by the buyers and sellers in the marketplace, but are tied closely to the amount of risk inherent in the agreed upon expiration date and strike price. Option prices change as the market factors in the relevant information. The main factor is the strike price. The closer an option’s strike price is to the actual market price of a security, the higher it’s price will be. Once it’s in-the-money, it has inherent value that makes it essentially the same price as the market security that underlies it. The expiration date of the contract is also a factor because if the expiration date is closing in, and the strike price is not quite close enough to the market price of the underlying asset, there is little chance that the option will be useful. Continue reading...
Adaptive Price Zone is a volatility-based trading indicator. Similar to traditional Bollinger Bands, Adaptive Price Zone is a recent development by Lee Leibfarth that overlays two indicator bands around a moving average line. It is more adaptive than many previous band indicators, using several short-term exponential moving averages which are double-smoothed and closely hug changes in volatility and price data. Exponential moving averages give more weight to recent data, which helps the lines hug current data. Continue reading...
Arbitrage is the practice of buying a security/product in one market and selling it in another, in an effort to capitalize on price difference. Arbitrage can take many forms in trading: buying a security in one market and selling it in another for a better price (market arbitrage); borrowing money in one currency at a lower interest rate in order to pay off debt in another currency with a higher interest rate (currency arbitrage); buying and selling the same security on different exchanges or between spot prices of a security and its future contract; and so on. Continue reading...
When creating an index, it must be decided what criteria will affect the value of the index, and in the case of a price-weighted index, the only consideration is the price of shares. A price-weighted index is created by adding up the individual price per share of the companies included in the index and dividing by the number of companies. Essentially what you've done is arrived at the average price per share of the companies included in the index. Continue reading...
Contango is when the price of a futures contract is higher than the current spot price of a commodity, and the expected future spot price. Some contango falls within the normal range, but too much is generally unfavorable. Contango means that the price of a futures contract has become inflated beyond the expected price range of a commodity. Backwardation is the word for the opposite of contango, in which futures contracts are being sold for less than the current spot price and below the probable future spot price. Some backwardation and contango is part of life and considered normal, but contango markets can have a particularly negative impact on some ETFs. Continue reading...
Ethereum uses a blockchain that looks very similar to Bitcoin’s until you get into the details. Ethereum is a platform on which transactions can be made using Ether or other tokens which have been made using the protocol, and smart contracts and decentralized applications (Ðapps) can be executed using the distributed computing power of what’s called the Ethereum Virtual Machine. When viewed from different angles, Ethereum is an open-source coding environment, a market upon which to distribute new blockchain-based applications, and a distributed computing machine that processes functions of the blockchain applications across a broad network. Distributed computing itself is not that new, but distributed computing on a blockchain is. Continue reading...
Bonds can be traded on exchanges before their maturity date, but the price might fluctuate based on the current interest rate environment. As the buyer of, say, a $1,000 bond, you should be aware that as long as the company does not go bankrupt, you will receive $1,000 back at the date of maturity. During the life of the bond, however, the price at which you can sell that bond might oscillate depending on the interest rate environment and the perceived financial health of the company. Continue reading...
The Price to Earnings ratio is a company’s stock price relative to its net income per share. A low P/E indicates that a stock is trading at a low premium to earnings, which may indicate that the market thinks low relative growth rates are ahead for the company. A company with a high P/E means investors are willing to pay a premium for growth, perhaps anticipating high future growth rates for the company. The P/E ratio is calculated by dividing the market value per share of a company by its earnings per share. Continue reading...
The Price to Cash Flow Ratio (PCFR) is a valuation measure that looks at a company’s stock price relative to its cash flow per share. Generally speaking, the lower the ratio, the better chance the company is undervalued - it basically means the company produces a lot of cash flow relative to how much it costs to acquire a share on the open market. A very high PCFR indicates that a company is trading at a high price relative to the amount of cash flow it produces. Start-up technology companies, for instance, would generally have high PCFRs because they may not produce high levels of cash flow in early stages, but investors may bid up the price in anticipation of future growth. Continue reading...
Bitcoin price charts may appear different on different sites, but they are generally not much different from technical charts used in other markets. Charts are tools used to reduce vast amounts of data into characteristic parts, in an attempt to illustrate the trajectory, velocity, or potential future of an asset’s price. A single chart may show you 20 different kinds of descriptive data in one picture, by overlaying certain measurements, rates of change, or comparative data directly on top of a chart or in a windowed fashion around it. Many online charts will give you the ability to pick and choose what kinds of data you see and how it is displayed. Once you have played around with it for a few minutes and looked up some information about the different tools available for analysis, you may be able to understand some things about bitcoin that may help you get closer to making trading decisions. That’s the beauty of charts, really, in that, they are intended to be somewhat intuitive. Continue reading...
Yes, if you sell the bond before its maturity, it’s possible that you would have to sell it at a discount. If you bought a $1,000 bond with a 5% coupon, and a year later, the company issued new $1,000 bonds with a 6% coupon, you would not be able to sell your bond to someone else for $1,000 (obviously, because they would rather purchase the new bonds for $1,000 which pay more annual interest than your old one). Continue reading...
The Consumer Price Index (CPI) is a measure of the average change, over time, in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is an important economic indicator, as it’s changes influence the Federal Reserve’s monetary policy decisions and it gives an indication if an economy is experiencing adequate inflation. The most common reading on the CPI is % change from a previous period, with most developed economies generally striving for 2% annualized inflation. Continue reading...
The prime rate is the lowest interest rate that banks will charge on loans at a given time, based on the Federal Funds Rate. Individual banks set their own prime rate, which they may also call their "Reference Rate" or "Base Lending Rate." It is the least they will charge for a loan at a given time, based on the creditworthiness of the customer, and the only clients whose risk of default is low enough to approach the prime rate are very large commercial clients. Continue reading...