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What is “adding to a loser”?
“Adding to a loser” describes continuing investment in a stock or fund that has continued to decline. Continuing to invest when it is going down in value can be a solid play up to a point. If you remain bullish on the company or fund, you may be getting a great deal on the shares that you purchase. When the price rebounds, you will have full participation in the upside with more shares than you would have otherwise. Continue reading...
What is a Breakeven Price?
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...
What is a strike price?
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...
What is adaptive price zone?
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...
How are option prices computed?
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...
What is a price-weighted index?
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...
What Happens to the Price of a Bond After I Buy It?
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...
What is the Price to Earnings Ratio (P/E Ratio)?
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...
What is the Price to Cash Flow Ratio (PCFR)?
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...
What is the “Life with Period Certain” Option?
In a “life with period certain” annuity payout option, the insurance company will pay the annuitant a set income for as long as the annuitant lives. If the annuitant dies before the “period certain” expires, the company will continue to pay the income to the beneficiaries until the period certain expires. If the period certain is 20 years, it would be called a “Life with 20 Years Certain” payout option. Continue reading...
How Do You Read Bitcoin Price Charts?
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...
What is a Stop Limit Order?
A Stop-Limit Order basically automates the preferences of an investor or trader, to reduce exposure to price uncertainty even after a trade ticket is entered, by stipulating a price at which the search for a bid/ask price is to begin, but limiting the range of prices at which an order can actually be entered or executed. A Stop-Limit Order has two parts: the Stop Price and the Limit Price. The stop price is like an amendment or contract rider on a security that is held which stipulates that if the price of the security crosses the Stop price, the search for an agreeable price begins. Continue reading...
Can You Sell a Bond for Less Than the Price You Paid For It?
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...
What is the Consumer Price Index (CPI)?
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...
What is the Prime Rate
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...
What is the Price to Sales Ratio (P/S Ratio)?
The Price to Sales Ratio, also known as the PSR, is a valuation metric that looks at a stock’s market price versus its per share revenue. Alternatively, you can calculate it by dividing a company’s total market capitalization by its total revenue in the most recent fiscal year. The ratio indicates how much value (how much investors are willing to pay) is placed on each dollar of revenue generated by the company. Continue reading...
How is the Consumer Price Index (CPI) Calculated?
The Consumer Price Index (CPI) is calculated using prices of sample goods from predetermined urban areas. According to the Bureau of Labor Statistics (BLS), the CPI is a product of a series of interrelated samples. First, using data from the 1990 Census of Population, BLS selected the urban areas from which data on prices were collected and chose the housing units within each area that were eligible for use in the shelter component of the CPI. The Census of Population also provided data on the number of consumers represented by each area selected as a CPI price collection area. Continue reading...
What is a foreign tax credit?
A foreign tax credit (or deduction) allows a citizen who earned income in another country to reduce the amount of domestic income taxes owed if the foreign government has already taxed the income abroad. Workers who earn income in a foreign country may be entitled to a credit or deduction on their domestic income taxes if they show that this income was already taxed by the foreign government where the income was earned. In the US, there are at least three types of foreign income tax exemptions, with a foreign tax credit being one of them. Continue reading...
What does “Buy the Dips” Mean?
“Buying the dips” is a bullish description of investing in stocks whose prices have gone down. We say this is a bullish sentiment because a bearish investor would be more likely to interpret the downturn as a sign of impending doom, or might prefer to play it safe. A “dip” can be loosely defined as a downtrend without much momentum or evidence to support a bearish outlook. Another way of interpreting a dip would be as an oversold condition, where investor sentiment has caused the price of a quality stock to fall. Bullish investors could maximize their gains in such a scenario by buying low and selling when the stock has recovered and pushed on to new highs. Technical analysis indicators such as Bollinger Bands can be used to identify favorable buying conditions. Continue reading...
What are Resistance and Support Levels?
In technical analysis, a level of resistance is an imaginary barrier that keeps the price of a security from rising beyond a certain level. Conversely, a level of support is an imaginary barrier that keeps the price of a security from falling beyond a certain level. A resistance line can be thought of as the theoretical glass ceiling that a security price has difficulty breaking through. Resistance lines (along with moving averages, standard deviation, and similar calculations) are used to put a range of probability on the expected movement of a security price, with the resistance line representing the top of that range. Continue reading...