Appendix A: FAQ Placeholder

 

Who regulates the US/EU Financial Markets?

See Section “Business Helicopter View”. 

Is a high EPS good?

High EPS is considered good from the point of investors, but you should compare it with the benchmark rate of the industry. Also, a high EPS can be a result of a lesser number of shares (e.g. share buyback).

What the heck is Risk Shifting (RS)?

RS is the process of transferring the risk to another company in exchange of certain compensation with a third party’s consent. For example, the risk can be shifted from a client to the insurance company by paying a premium every year. In future if the asset (property, car, etc.) gets damaged then the client can retain the money from the insurance company. 

What is a Balance Sheet?

A balance sheet is a financial statement that shows all of a company's assets, liabilities and owner's equity [1]. A balance sheet helps you make decisions regarding investments. Balance sheets help you calculate Debt-to-Equity Ratios (DERs), which indicate the viability of a business paying its debts with equity.

Are Penny Stocks Worth It ?

According to the SEC, the penny stock definition is any security trading under $5.00 per share [24]. They are listed on a major exchange like the NYSE or NASDAQ. This is a placeholders for SME’s with a small market cap that haven’t established a track record as successful businesses. Penny stocks are cheap which means you don’t need a ton of capital to put on a large position and they regularly have huge runs over a 100% or more in just one day! Traditional penny stocks are priced between 1-99 cents. There are a handful of penny stocks that make big moves.  The trick is learning to find those stocks before they make the big move. However, penny stocks are so volatile, unpredictable, and subject to market manipulation, that being an investor is nearly impossible. You need to have a short term outlook in order to survive, and you need to be one of the first traders to get in and the first traders to get out with profit. Important trade safety tips are listed below:

1.       Avoid over the counter (OTC)/Pink Sheet-Listed Penny Stocks

Stocks on the OTC market are highly susceptible to manipulation and fraud.

2.       Don’t Fall for the Promotional Pumps!

Many OTC penny stocks become promoted. The reality is, the next Apple is not likely to come from the penny stock world.

1.       Only Trade Penny Stocks with Volume

Most penny stocks trade only a few thousand shares a day. The goal is to achieve 5 million shares of volume on a big day.

2.       The Hit and Run Approach

Occasionally you’ll get into a penny stock and get a big winner, but as a trader, you should look for many small wins.

3.       Making a Living 1 Trade at a Time

The focus is making a living by trading, rather than investing in penny stocks.

What is the Financial Risk Ratio Number One for Beginners?

That is all about creating a savings and spending plan that involves taking the golden rule of money management into account:

E/I Ratio Value

Score

<1

 

1

 

>1

 

 

Here, E and I mean Expenses and Income, respectively (cf. TLS criteria). 

What are the Risks Associated with Investments?

Here is the summary of the risks associated with your investments:

No

Risk

Comment

1

Price

Related to the price of your product, the value could drop.

2

Market

Volatility = rapid market swings due to mood changes.

3

Concentration

A lack of portfolio diversification when you have only a few types of investments

4

Default

This is for bonds only: the lower their credit rating, the higher the interest will be.

5

Currency

Currency exchange rates have a great impact on the dollar value of your product.

6

Interest

If interest rates rise, share prices or fixed-rate bond prices will drop.

7

Liquidity

It might be difficult to sell your shares because of low demand.

8

Politics

Government measures* can decrease the value of your products

9

Inflation

The dollar value of your investment will decrease with non-zero inflation

10

Reinvestment

This is for bonds only: you may be unable to reinvest your product in a bond with similar features.

11

Unforeseen

events

Terror attacks, pandemics and drastic changes to legislation* can decrease the value of your product.

*Brexit, the Biden era, GDPR, etc.

How to Reduce Risks of My Investments?

The best-practice approach consists of the following steps [1,3,16]:

1.       Define your investment goals versus above mentioned risks involved.

2.       Diversify your portfolio to minimize the concentration risk.

3.       Read this book and related materials (see Resources) to gain experience.

4.       You should understand the product’s Key Information Document (KID) and your legal rights.

Should I use the Investment Services at My Bank?

Many banks offer investment services to their customers. They are similar to those a financial adviser would provide. Depending on your accounts and the bank’s policies, you may pay an hourly rate for these services. Your bank may also offer these services to you without a fee, which means that the financial planner isn’t working on commission. Even though you can  use your bank to invest, your money is not guaranteed against market losses when you invest it. But your investments are still protected in case your bank becomes troubled (under SIPC in the US). You may want to make your own decisions by receiving support from your bank in the form of market/product monitoring tools, portals and knowledge sharing (Self-Directed Investing). Guided Investing services can help you make highly tailored choices for you. You may delegate your portfolio management to the Investment Advisor with a risk profile that suits you. You might like their free promotional items, but it is quite important to dive into all visible/invisible investment fees [26].  Finding the right broker/bank can make a difference as fees can eat into your returns. In addition to the brokerage fees outlined above, there are various other charges you may encounter: you pay service costs to your bank (often without VAT) and also to others such as transaction costs and ongoing charges. So you should differentiate between the costs you pay to your bank and costs related to the product itself. The typical investment adviser charges about 1.0% per year. This cost may be higher or lower depending on the portfolio being managed.  

Do I need Financial Advisors?

Phil Town explains whether or not you actually need a financial advisor [28]. Financial advisors serve more as a paid coach that restrict your freedom. Their fees are not based on your return. Instead, learn to invest on your own by buying great companies at a fair price explained in this book.  

Should I Invest into Gold?

For large fluctuations, the correlation between gold and currency markets is around -20% on average. This result indicates the capability of gold to act as a hedge and safe haven against currency market movements.

 

Spot gold rose 47% to $1789.25 (12/01/2021) over the past 5Y (cf. $1215.45 on 08/01/2018).

Gold prices are rising due to the soaring global inflation, weak US data, rising industrial demand for gold and silver and investment demand for bullion.

            Is It Worth Investing in Commodity Markets?

A commodity market trades in raw or primary products rather than manufactured products [1,33]. Soft commodities are agricultural products such as wheat, livestock, coffee, cocoa, and sugar. Hard commodities are mined or extracted, such as gold, rubber, natural gas, and oil. More recently developed commodities markets include those for emissions, electricity, and cell phone minutes. Generally, commodities are a poor investment for most long-term investors, but there are some cases when investing in commodities might make sense [33]. For example, some commodities, such as gold discussed above, may be reflecting increased inflation concerns with the US/EU economy flush with fiscal and monetary stimulus.

According to PwC, the increasing volatility of prices and complexity of commodity markets make risk an especially critical factor of their performance than ever before. However, investing in commodities can provide investors with diversification, a hedge against inflation, and excess positive returns. Investors may experience volatility when their investments track a single commodity or one sector of the economy. Supply, demand, and geopolitics all affect commodity prices.

If you are interested in commodities as an inflation hedge, you may want to consider the following ways to invest in commodities:

1.      Buy stocks/bonds of commodities producers (XOM, Albermarle, etc.)

2.      Buy a commodity ETF (GDX, BAR, SLV, etc.)

3.      Buy physical commodities such as previous metals (gold, silver and platinum)

The Bottom Line: you don’t put all your eggs in one basket.

What About Day Trading?

Day trading has become a popular hobby in the past year as investors around the world were faced with economic shutdowns and social distancing measures.

But while day trading may seem like a fun way to make some supplemental income or even a potential way to earn a living, studies suggest the average day trader tends to do more harm than good to their investment portfolio. A study of eToro day traders found nearly 80% of them had lost money over a 12-month period, and the median loss was 36%.

What is the Best Currency for my Investment?

Firstly, this is related to the gold prices discussed above:

Date

Gold Price in EUR

Gold Price in USD

Gold Price in GBP

01-Aug-18

1043.46

1219

929.12

01-Dec-21

1576.51

1789.25

1340.69

Ratio

1.51

1.47

1.44

Rank

I

II

III

 

Secondly, exchange rates, defined as the domestic currency price of a foreign currency, matter in terms of their volatility. A domestic currency can depreciate, meaning that its value declines w.r.t. the value of a foreign currency.  

Finally, remember that you can be one of those traders who bet movements of currencies relative to each other within the forex market [1]. However, investing in currencies involves risk, especially during volatile economic times.

What is a Dividend Stock?

A stock dividend is a dividend paid to shareholders in the form of additional shares in the company, rather than as cash [1,32,42,43]. Dividend stocks are a good component of the long-term investment portfolios (green flag). 

You can look at the dividend yield, payout ratios, and dividend growth as the key financial metrics to find the best dividend stocks [32]. The payout ratio (the ratio of the dividend to the company’s profits) of a dividend stock is its dividend divided by the company’s EPS. The total return of a dividend stock is a combination of the dividends that are paid and the share price appreciation. The formula for finding the total return of a dividend stock is as follows [32]:

Total Stock Return= (P1 – P0 + D ) / P0

Here, P0 = Initial price of the stock, P1 = Ending price of the stock for period one and D = Dividends.

Further, consistent EPS growth is a good indication that a dividend stock is healthy. The P/E ratio can be used to figure out the relative value of a particular stock. It is also a good idea to look at a company’s dividend growth rate versus its yield. The dividend growth of a dividend stock is the annualized percentage rate of growth that the dividend undergoes over a specific period of time. The dividend yield formula is a company’s annual dividend divided by its share price. The dividend yield formula can be expressed as follows:

DY = Annual dividend / Current share price

In general, high-yield stocks are less volatile and may provide stability. Stocks with a high dividend growth rate can help your portfolio to keep pace with the markets and inflation over time. The dividend growth model can help you to arrive at a valuation of the stock.

The debt-to-equity (D/E) ratio can be determined by dividing the total liabilities of a company by its shareholder equity. You can find these numbers on the financial statements for a company that have been filed with the SEC. You may want to avoid companies that have high D/E ratios (red flag) and select companies that show a strong potential for net income growth.

You may grab at least a 5% yield in these highest dividend-paying stocks in the S&P 500 index: IRM, XOM, WMB, OKE, PPL, KMI, MO, T, LUMN, etc. You should look at companies that have consistently paid dividends every year while avoiding companies that have cyclical profits and cash flow at least in the past 5Y (red flag). Unfortunately, you will need a substantial amount of money invested in order to make sufficient income from dividends. Keep in mind that you can always reinvest your dividends so that your earnings can greatly increase.  You may search for the best deals using SEC data, Dividend.com, FinViz, and SureDividend. The M1 Finance investment platform can make investing understandable and accessible to you.  

 

 

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