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About Profitable Investing Tips

Profitable Investing Tips has been a member since April 20th 2008, and has created 183 posts from scratch.

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Covid-19 Era Investment Risks

There are several issues that investors need to look at when picking investments as we, hopefully, come out of the covid-19 medical and economic crisis. Here are our thoughts on the subject.

Which Growth Stocks Will Grow in the Covid-19 Era?

If you have stayed in the tech stocks like Apple and Microsoft, you have companies with large cash reserves and which are positioned to take advantage of a continued switch to online work and increasing reliance on the internet. And, if you have stuck with basic consumer goods stocks, people will keep buying soap, cleaners, basic foods, and beer but these later stocks are somewhat defensive as they will not double or triple in value but rather protect your wealth during tough times. We looked briefly at pharmaceutical stocks as the covid-19 crisis hit and noted that it will take time for a vaccine or medications and that folks who make masks (like 3M) and sanitizers are better in the short term. Covid-19 era investment risks include expecting growth stocks in areas like hospitality or transportation to come back in the near term as the world will probably be different for quite some time.

How Soon Do You Need Your Investment Capital?

The current economic crisis will not really get better until we get an effective vaccine to inoculate the entire world or an effective and cheap medicine to treat everyone. The earliest any of this will happen is perhaps a year from now and that is not guaranteed. If you are jumping into the market today looking to lock in bargains, you need to make sure that you can let your money sit until things get better. For a prolonged recession that could be years. If you need to have your funds available sooner, you need to consider how to invest without losing any money in the short term. Interest rates are low but if you stay short term with bonds and CDs, your money will not be lost and will be available when you need it.

Beware of Cheap Investments in the Covid-19 Era

The St. Louis Dispatch has a useful article in this regard, Why Penny Stocks Aren’t the Answer to Investing During a Recession.

Penny stocks tend to trade at low valuations because the underlying businesses aren’t in good shape or there’s little visibility into their operations and outlook. It is possible to find companies in the penny-stock category that go on to post strong business performance and great stock returns, but the odds are stacked against you.

Buying penny stocks tends to have more in common with gambling than with principled, well-reasoned investing. Companies in the category often have weak balance sheets, generate little in the way of revenue or earnings, and are typically speculatively valued. These types of companies are especially prone to folding amid the heightened operating pressures created in a recession.

They go on to note that these factors are more important during a recession when it is the weak company who stock goes down while those with strong balance sheets and continued sales do not suffer as much.

The point in all of this is to be careful as you invest your wealth in preparation for a strong economic recovery. New week we will look at covid-19 era investment opportunities.

Does Socially Responsible Investing Make Financial Sense?

When you engage in socially responsible investing you are not only rewarding ethical companies. You are also punishing companies that are not doing the right things. On the other hand, you are investing for retirement and would like for your investments to result in a comfortable retirement. In that regard, does socially responsible investing make financial sense? What are the tradeoffs when you choose ethical investments and which socially responsible investments make the best financial sense? For that matter, how did socially responsible investing begin?

Origins of Socially Responsible Investing

If you go back far enough you find socially responsible investing as part of the Jewish traditions and in the USA the Methodists two hundred years ago practiced putting their money where their beliefs were by using ethical investing practices. More recently, during the 1960s anti-war sentiment led to many taking their money out of investments with defense contractors. As this practice took hold, investors boycotted South African investments to protest and eventually help end Apartheid in South Africa. And, as public concern about the environment rose to the fore, this became an investment focus as well.

oes Socially Responsible Investing Make Financial Sense
Socially Responsible Investing

Socially Responsible Investing – Making a Difference and Making Money

Millennials who want a better world to live in and baby boomers who want to leave a better world for generations to come both are active in socially responsible investing. As more and more investors have sought ethical investments, investments funds emerged that specialized in avoiding companies they believed harmed society. Because these funds (and the investors) wanted investments and not charitable giving, two things happened. The fund managers made it clear to companies that how they acted would affect how much investment they received. And, investment funds and individual investors looked at how ethical companies stacked up in terms of profitability. It turns out that ethical companies are generally well run and well run companies are generally more profitable!

Arguments against Socially Responsible Investing

The primary argument against this approach to investing is that you are foregoing profitable investments as you put your money where your heart is instead of using tools like fundamental analysis when investing in stocks. But, another concern is that you may invest in a company that talks a great environmental and socially responsible story but really does not follow through. Likewise, you may find companies who want to do the right thing but do not have the business sense to make any money! They work to make you feel good about investing in them and feel guilty if you don’t. Being able to sort out which is which is a necessary feature of success investing consistent with your beliefs.

Difference between Impact Investing and Socially Responsible Investing

Investing your heart generally has to do with effects on social issues, the environment, or governance. There are two ways that investors approach this subject. One is that they invest in or avoid companies because of a checklist of reasons. This is socially responsible investing. Many times it has as much to do with avoiding investments as with choosing them. Another approach is that the investor wants to make a difference, have an impact. This is impact investing in which one chooses based with a specific goal in mind. Examples typically include things like investing in companies working toward clean energy solutions, toxic waste cleanup, or ways to provide economical solutions for public transportation, clean water, or healthy food.

Solar Energy: Does Socially Responsible Investing Make Financial Sense
Solar Farm

Socially Responsible Investing and Portfolio Diversification

Portfolio diversification is a tried and true way to protect your investments against horrific loss and also lock in possibilities for impressive gains. The traditional thinking is that when one sector goes does down, others may rise as investors move their money around. This approach applies to socially responsible investing as well. In fact, many investors may choose socially neutral investments as part of their portfolio in order to ensure price stability while investing in socially responsible investments with the rest of their portfolio. For many this is a safe and responsible trade off.

Socially Responsible Investment and Sustainability

As the world of socially responsible investing has matured this has come with a widespread realization that humankind is depleting many natural resources. The apparent trend to a hotter and hotter climate causes many to worry about the sustainability of the human race. Thus, a good portion of this sort of investing is now going to things like renewable energy, desalinization and other water purification projects, and products that are biodegradable unlike plastics that hang around for centuries.

Socially Responsible Investment Products

Although many investors want to invest in socially responsible companies, it can be quite a bit a work finding specific companies that fit your needs. However, there are several investing platforms in which you can invest and have your money go into areas that you support. Each has its own unique features.

Motif

These folks allow you to purchase individual stocks. They provide information that you can use to make your selections, protect your securities up to $500,000, and don’t have any hidden fees. Choose you category of good corporate behavior, fair labor, or sustainable planet and invest with dollar amounts. Their minimum investment is $250.

OpenInvest

This is a public benefit corporation that has a well-diversified portfolio that can be used for direct investing or an IRA. Is a passive approach in which you fund your brokerage account and they handle your funds. They charge a 0.5% management fee. Their minimum investment is $100.

EarthFolio

These folks offer an automatic service dedicated to investing in funds which they label as responsible and sustainable. They describe their service as providing time-efficient, low cost, smart investing. You can use them for direct investing for your IRA, 401 (k), and other tax-deferred investments. They have a 0.5% annual fee and require a $25,000 minimum investment.

Hedgeable

If you like lots of choices, you will like these folks. They have a great deal of diversification and customization to their investing platform. Their minimum investment is $1 and their options include venture capital, bitcoin, and other alternative asset classes as well as impact causes. Their fee is 0.75% per year for accounts up to $50,000 and as low as 0.3% on accounts over $1,000,000. Other asset class fees are 1.5% or an IRA, 3.4% for a mutual fund, and 4.87% for hedge fund management.

Ellevest

Women may prefer this platform as they take the likely lifetime salary curve of a woman into account. They determine financial targets to meet your investing goals and factor in expected lifespan. There is no minimum investment amount or investment balance. Their management fee is 0.25% for the stand plan and 0.5% for a dedicated financial advisor.

Wunder Capital

These folks focus on investment in solar energy projects in the USA. They are an impact investment opportunity and aim to fund large and eco-friendly solar projects. When you gain a profit it is deposited directly into your bank account. They work with partners in solar energy, generally large outfits and actively manage their investments. Their minimum investment is $1,000 and their annual fee is 0.25%.

And, if you would like to add a few socially responsible investments to your portfolio, there are a whole host of apps that will let you screen for appropriate options.

All Option Trading Strategies

Those who buy and sell options do so in order to hedge their risk, lock in opportunities or both. In doing so, traders employ any and all option trading strategies. Your choice of one or all option trading strategies will depend on your purpose in trading, the market, and current market conditions. To help our readers sort out the reasons for using one approach versus another we offer a few useful suggestions.

What Is Difference between Options and Futures Trading?

Futures and options are similar as trading products in that they give investors the opportunity to hedge their investments and make money. But, they differ in terms of absolute risk. When you purchase an options contract you obtain the right to buy or sell shares on or before a specific date called the expiration date. However, you are under no obligation to do so. You are simply paying to have that option. The seller, on the other hand, is obligated to sell if the buyer executes the contract. Futures contracts confer the right to purchase on or before the expiration date and these contracts are not optional.

Dispersion Trading Using Options

Dispersion trading using options takes advantage of two facts. There is always a difference between implied and realized volatility when trading. And, this difference is always greater between index options as opposed to individual stocks. In this method of trading one will either buy individual stock options and sell options on an index or buy options on the index and sell individual stock options. Dispersion trading works the best, obviously, when there is low correlation between individual stocks and works poorly when correlation is high. A good example might be today’s stressed market in which the broader market rises and falls with good or bad news but individual stocks continue to perform based on their intrinsic stock value.

When Do Spy Options Stop Trading?

The SPY refers to the ETF or exchange traded fund that tracks performance of the S&P 500. You can trade options on this index during the day until 4:15 pm the settlements are based on the 4 pm market closure. Depending on the broker, you have until as late as 5 pm to get out of an option contract that has passed from being profitable to being a loser. You can trade SPY options after hours but the rules are different and liquidity goes way down. You cannot place market orders but need to place limit orders. This means you are not guaranteed an option contact. And, you had better pay close attention to your trades as positions can change more quickly and less fluidly that during the day!

Option Trading Buy Call

A call option is a good first step for new options traders. Sadly, many potential options traders are deterred by the common misconception about nine out of ten options expiring worthless. If this were true you would predictably lose money (your payment for the option on 90% of trades. However, the fact is that while three out of four options expire worthless, six out of ten are either closed by creating an offsetting position or traded out. In the end, one in ten call options is exercised. The reason for buying a call option without any other actions is that you believe the stock or other equity will go up in value between when you make your purchase and when you exercise the option. For this approach to be profitable over time you need to analyze your potential trades sufficiently well so that your total gains exceed the costs of all of the options contracts that you buy.

Calls Among All Option Trading Strategies

Trading Low Volume Options

One of the pitfalls in trading options is buying an option contract for an equity with low trading volume. If the stock trades at low volume, the price of the option contract may be irregular and hard to predict. And, if the options contracts trade at low volume you may find yourself trapped in a trade when you want to get out! Additionally, higher trading volume gives you a better sense of the movement of an equity. This is, of course, why options traders purchase options as they seek to profit from swings in price due to both fundamental and technical factors. Many traders rely on a big increase in trading volume as an indication that a large price move is in the offing while they look at a drop in volume as an indication that their trade will probably be a loser.

All Option Trading Strategies with Low Volume

Trading Options on Ninjatrader

If you want to be active in trading options it is best to use a trading platform. The Ninja Trader platform has been available since 2003 offering both brokerage services and trading software. Many traders use its free market analysis, charting, and live trading functions as well as simulation trading functions. This is a very functional setup at the basic (and free) level but if you want special features like automated trading, back testing, and advanced order types you need to pay on one-time fee of about $1,000 or a monthly leasing fee of about $60. The point of using the advanced features is that these tools can make your trading more successful and profitable, but you need to learn them and use them regularly.

Best Books about Trading Options

Options trading can be quite profitable but you need to learn the necessary skills. There are three books that we recommend that will help demystify this pursuit.

Option Trading and Pricing by Sheldon Natenberg is at the top of almost everyone’s list of best books about trading options.

This book is great for beginners and pros as it outlines practical trading strategies that reduce risk as well as more advanced hedging techniques. It even tells you how tax laws affect your option trading profits!

Fundamentals of Futures and Options Markets by John Hull is our second choice.

This a good book for active option traders as it contains lots of actionable advice from an authority on risk management in trading derivatives.

Option as a Strategic Investment by Lawrence McMillan is ranked first by many experts, but we place it third.

This author provides a ton of useful information but our take is that it may be a little too much for beginners who need to start with basics and then advance to more advanced trading techniques before getting into the philosophy of options.

An often overlooked but excellent set of training tools for options trading with Japanese Candlestick Trading Signals is Stephen Bigalow’s series of options training videos on his website’s store pages.

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Best Bargain Investments Today

The coronavirus pandemic has thrown the economy and the markets into a tailspin. The decade-long bull market collapsed and, despite a partial recovery, is still pretty grim. No one can say for certain when and if the pandemic will ease up, when there might be a vaccine, or if there will ever be an effective cure. With many fearing a ten year recession or worse we have arrived at a metaphorical equivalent to Baron Rothschild’s “blood in the streets” reason for the best time to invest. If this is the case and we are bottoming out, what are the best bargains today to ensure the vitality of your portfolio for years to come?

Best Bargain Investments Today

The ideal investment in times such as these is a stock that has virtually collapsed but a company with sound intrinsic stock value. In other words, we are looking for companies whose fortunes seem grime to most investors but which have a strong margin of safety and are likely to keep making money through this crisis and surge to huge profits in the future. What are some examples?

The Motley Fool suggests three possibilities of stocks to buy on sale. These are H&R Block, Capital One Financial, and United Airlines.

Hundreds of individual stocks are still marked down 30% (or more) off the prices they fetched at the beginning of this year. The “sale,” in fact, is far from over. And here are three top stocks you can still buy on sale today.

H&R Block is down about 30% this year and has a business that should not be adversely affected by the pandemic or recession over the long term. They seem to fit our formula for stocks that have been somewhat unfairly discounted in this market and which will likely survive and prosper.

Capital One Financial is down 40% for the year but some of the “bad news” has to do with their taking a $5 billion accounting write off for debts they believe will not be paid. This sort of solid preparation for the future is a good sign for things to come instead of a devastating blow. Their credit card operations are likely to do well in a world where social distancing will still be the norm for some time to come.

United Airlines has taken the biggest hit with a 75% loss in stock price this year. These folks may be the ones most strongly affected by how the pandemic changes the economy. With evidence now showing that the coronavirus hangs in the air for as long as 8 minutes in enclosed spaces, such as airplane cabins, restrictions on air travel and hesitancy of folks to fly will likely continue for some time. On the other hand, there will be a complete housecleaning of the airline industry as this crisis plays out. Someone will survive and betting a little of your portfolio on United may not be such a bad idea.

Kiplinger looks at energy stocks to “ride out the crisis” and for long term investment opportunities. As we noted last month, this may be a great opportunity to buy energy stocks for the long term. Most these are greatly depressed in price and the world will still need energy when the virus recedes. The key will be picking the survivors from currently depressed energy stocks.

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Stochastic Trend

Stochastics has been a useful tool in predicting stock prices since it was developed by George Lane 75 years ago. This tool assesses how closing price and price range relate or a given time frame. Stock investors and traders can use a stochastic trend to determine if they should buy or sell their securities. This tool is always used in conjunction with methods like important moving averages in determining when is the best time to buy or sell.

What “Stochastic” Means

The dictionary definition of stochastic is something that has a pattern or distribution which is random, cannot be predicted exactly, but can be analyzed using statistics. In stock investing and trading, stochastics help make sense of what often appear to be random movements in individual equity and market prices. This is similar to so called chaos theory in which seemingly chaotic events can be, to a degree predicted and prepared for. In stock trading the stochastic approach is generally used to determine overbought and oversold situations in order to guide purchases and sales.

Stochastic Forecasting Models

All stochastic forecasting models look at data sequences as they unfold over time. Point is to draw useful conclusions from the process. In general, stochastic processes are considered stationary or non-stationary. The three types of models are auto-regressive processes, moving averages, and combinations of moving averages and auto-regressive processes. Auto-regressive simply means that post information is used to predict future events such as when a stock trend is going up and you predict that the trend will continue.

Stochastic Trading

The approach used most commonly in stochastic trading is called a stochastic oscillator. This tool indicates momentum by comparing trading ranges and closing prices within a defined timeframe. By using moving averages and adjusting time frames, it is possible to make this indicator more or less sensitive and more or less reliable. The goal is always to decide if an equity or market is overbought or oversold in order to make profitable decisions about when to buy or sell. There will always be a tradeoff between making the most timely (and most profitable) trade.

Stochastic Cross

A full stochastic oscillator uses two lines on a trading chart. One, called the %K line, notes the current price (typically a closing price). The other line, called the %D line, notes a calculation based on the moving average. The first is also called the fast line while the second is also called the slow line. What traders look out for is when line crosses over the other in a stochastic cross or crossover. When the fast or K line passes below the slow or D line it is considered a signal to sell the equity and when the fast or K line passes above the slow or D line, it is a signal to buy.

Nifty Stochastic Chart

The National Index Fifty is the weighted average of fifty stocks in the Indian national stock exchange. The Nifty stochastic chart is one of two primary stock indices used for the Indian exchange. This index is managed and owned by India Index Services and Products and is the largest Indian financial product. It includes both offshore and onshore exchange traded funds. It is the most actively traded contract in the world covering thirteen sectors. The most heavily weighted sectors are financials, energy, and consumer goods.

Ichimoku Stochastic Strategy

This is a scalping strategy used in trading Forex. It uses an Ichimoku medium setting and a dot MSS oscillator as its indicators. It was created for high-low binary options but also works in non-binary settings. Ichimoku refers to the Ichimoku cloud, a set of technical indicators designed to demonstrate levels of support and resistance. Use this method for intraday scalping with as many as ten charts open at the same time and set to five and ten minute intervals. The medium Ichimoku settings are eight, twenty-five, and forty-eight.

An Ichimoku stochastic trend can be very effective in scalping Forex trades.
Ichimoku Stochastic Trend

Backward Stochastic Differential Equation

Backward and forward equations generally refer to differential equations that predict probability density in a stochastic process. A backward stochastic differential equation is solved backward in time. Stochastic differential equations are those for which 1 or more of the terms involve a stochastic process. Thus, the solution is also a stochastic process. This approach is used to model stock prices as well as heat-related physical systems. The point is to make sense of and be able to predict future behavior of the system (stock prices) in a seemingly random environment.

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