RISK AWARE INVESTMENT GUIDE FOR EVERYONE

  The previous Section addressed the scientific aspect of financial fundamentals in a quantitative way that is easy to follow. This aspect of finance is a solid place to start and should not be ignored. In addition, you can read books, articles, blogs or take an in-depth investment course that deals with advanced financial ideas beyond the scope of this guide (see Resources). Once you know what works in the market, let’s come up with a simple portfolio plan implemented as a roadmap and checklist that work for you. Warren Buffett once said that “An idiot with a plan can beat a genius without a plan”, and so the ultimate goal of this guide is to outline a sequence of key steps to get ready to invest by developing a financially attractive and risk aware investment plan. This leads to the following 1-week sequence of steps: Day 1: Preparation Phase ( Workspace Setup) This is about selecting the appropriate investment platform and exploring investor online databases, stock APIs and rela...

  Let’s consider the Bid-Ask Spread (BAS) as the de facto  measure of market liquidity [1]. It is typically the difference between ask (offer/sell) price and bid (purchase/buy) price of a stock. Ask price is the value point at which the seller is ready to sell and bid price is the point at which a buyer is ready to buy. When the two value points match in a marketplace, i.e. when a buyer and a seller agree to the prices being offered by each other, a trade takes place. These prices are determined by two market forces -- demand and supply, and the gap between these two forces defines the spread between buy-sell prices. The larger the gap, the greater the spread! BAS can be expressed in absolute as well as percentage terms. When the market is highly liquid, BAS values can be very small, but when the market is illiquid or less liquid, they can be large. T o calculate the bid-ask spread percentage, simply take the bid-ask spread and divide it by the sale price . For instance, a $10...

  Let’s dive in liquidity of stocks [1,52-54] and related BI indicators such as the Average Daily Traded Volume (ADTV) and Share Turnover (SHT),   Depth of Market (DOM), Bid-Ask Spread (BAS) and optional Variance Ratio (VR).    Liquidity refers to the efficiency or ease with which an asset can be converted into ready cash without affecting its market price. The easier it is to buy and sell an asset, the more liquid it is. Liquidity applies to any financial market, from stocks to precious metals, but some are more liquid than others.   The most liquid asset of all is cash itself. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Most securities, such as stocks, ETFs, mutual funds, bonds and commodities are liquid assets. The most liquid market in the world is forex [53].   Generally, stocks of companies with the largest MC are quite liquid (Green). If a stock cannot be sold easily without a considerable loss, it i...

   At the end of the day, we are interested in measuring the probability of gaining max(Reward) from an investment. In doing so, we calculate Return on Investment (ROI) as follows [1,3]: ROI=[(Net Return)/Cost]*100%= (Capital Gains)-Commission+(Dividend Yield) and Annualized ROI = [(1+ROI)**(1/n)-1]*100%, where n is the number of investment years.   It is clear that the negative values ROI<0 mean that total costs are greater than returns (red score), whereas positive values ROI>0 indicate that net returns are positive because total returns are greater than any associated costs (green/amber). Even though ROI is a direct measure of profitability, it does not adjust for risk. Both ROI and Return On Equity (ROE) are popular measures of financial performance and profitability [1]. While ROI is total profit divided by your initial investment ,  ROE, on the other hand, measures how much profit a company generates when compared to its shareholders' equity.   Becau...

  Credit ratings  of companies and countries are most popular universal tools for helping investors to gain insight into different investment environments and to understand the risks and advantages these environments pose [1]. Globally, there are three main ratings agencies that provide credit ratings: Moody’s, S&P, and Fitch. Figure 1 gives an idea of the different rating symbols that Moody's and Standard & Poor's issue [1]. These ratings are considered to be investment grades consistent with the TLS Red “Junk”, Amber BBB and Green (A, AA and AAA) scores. For completeness, it is worth mentioning the monthly Zacks Stock Rank [18] that will help you find the best mutual funds to outperform the market. The Zacks Industry Rank is the average Zacks Rank  for all companies within a specific industry group. Most risk ratings determine the enterprise risk which consists of the business risk (volatility of cash flows) and the financial risk of the capital structure. A fir...