Benefiting from market selloffs: A Low-Cost, Low-Risk Bear Market Trade

In hindsight, we all know it was a good idea to short internet stocks in the first quarter of 2000. Shorting a stock involves selling it without owning it. You borrow shares from your broker. Eventually you’ll need to buy the shares to repay the loan. If the price drops before then, you are buying at a lower price than you sold at and you earn a profit. The idea of short selling is essentially the same as with any other trade. You want to buy low and sell high. With short selling, the selling comes first. Short sellers can make a lot of money in bear markets and many investors noticed the i...
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Nobel Prize Winning Ideas Can Help You Become a Better Investor

Finance and economics professors have spent years trying to explain how stock markets work. One of the most popular theories, the Efficient Market Hypothesis (EMH), starts with the assumption that investors are rational and they rationally set prices using all of the information that is available. This theory fails to explain market crashes like the one that occurred in October 1987. There was no news to justify a one-day, 22% selloff in the Dow Jones Industrial Average. If investors are rational, there was no need for selling. In fact, they should have been buying under the EMH since p...
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Stocks at a Discount: Call Options for Traders

Based on its growth prospects, Alphabet Inc. (Nasdaq: GOOGL) appears to be an attractive stock. Amazon.com, Inc. (Nasdaq: AMZN) also appears to be attractive. The problem for many individual investors is their price with both stocks trading above $700 for much of the past year. For a small investor, one with an account of $5,000 or even less, these stocks can be out of reach. One share could represent 15% of the account or more. High-priced stocks present small investors with a problem. There are about 60 stocks priced at more than $200 a share and some of these stocks are among the mar...
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Intermarket Trading Strategies: An Overview of How Other Markets Impact Stocks

It seems obvious to state that markets are connected and moves in one market are often related to moves in other markets. But in 1991, this was a new idea. In that year, John Murphy published Intermarket Technical Analysis Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets to provide the first explanation of the relationships between markets. First, let’s look at Murphy’s ideas and then we can develop trading strategies based on intermarket relationships. Many traders believe intermarket relationships can define the best time to buy and sell asset classes. For ex...
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An Introduction to Options

Options are among the most versatile investments available to individual investors. They also might be among the most misunderstood. Options are low-priced derivative contracts that can help improve investment results or they can help reduce risks. Options can also be used to generate income. Unfortunately, many individual investors believe options are too risky for them. The truth is, when used properly, options can be a low risk way to increase and protect wealth. In future articles, we will explain specific trading strategies for options. This article will provide an overview of the trad...
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What Risk Means

Risk is part of investing. It is unavoidable and it’s even sought after. Risk is clearly related to potential rewards. To achieve the largest possible returns, investors have to accept higher than average risk. Low risk is associated with low returns. While these basic principles are well understood, the meaning of risk is less well understood. Professionals almost always tend to define risk in terms of standard deviations. This is frustrating because the idea of a standard deviation means nothing to most of us. If a financial adviser tells a client that portfolio risk is two standard devia...
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What’s a Stock Worth?

Identifying what a stock is worth is the one of the most challenging problems an investor faces. A stock’s worth determines whether it’s a buy or a sell. If a stock is trading its worth, or below its fair value, the stock has the potential to deliver a gain as the price moves towards fair value. Stocks trading above fair value carry risk that the market price will fall. Finding a stock’s fair value is the question Warren Buffett’s mentor, Ben Graham, set out to answer in his classic book, Security Analysis. Writing with his partner David Dodd in 1934, Graham laid out techniques for valuing st...
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Four Gold Stocks That Could Double in Value

Gold means different things to different investors. For some investors, gold is a hedge against disaster. This type of investor tends to believe economic disaster is imminent and may prefer holding physical gold. Other investors view gold as part of a long-term investment plan. These investors often point to studies showing an allocation to gold helps manage risk and volatility through diversification. These studies are often produced by an industry group known as the World Gold Council which notes, “Whether investors are based in the U.S., the U.K., continental Europe, or Japan, adding 2% to ...
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Amazon Founder Cashes Out, Does That Mean You Should Too?

The headline is dramatic – “Amazon Founder Sells $671 Million Worth of Stock.” Other headlines pointed out this is the largest stock sale Amazon CEO Jeff Bezos has ever completed. Speculation mounted after the news broke. Is Bezos worried that Amazon can’t make enough money as a company to justify its high stock price? Does this mean Amazon’s stock price has topped? Although we don’t know exactly what Bezos was thinking, we can be fairly certain he doesn’t believe this is the end of Amazon. While $671 million is a big sale, it represents just 1% of the shares Bezos holds. Bezos still...
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Three Cheap Income Stocks in the Energy Sector

Oil is among the most volatile markets in recent weeks with crude oil futures declining more than 15% in July. After dropping more than 25% from its June high, oil is officially back into a bear market. Analysts generally define a bear market as a decline of 20% or more. Despite the fact that the new bear market has only just begun according to some analysts, there might not be much downside risk for oil. Based on futures prices, it’s likely oil is in a trading range and prices could move between $40 and $50 a barrel for some time. Trading ranges, and other chart patterns, should be conside...
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