Dividends - What You Need To Know

Dividends are essentially pay outs that companies make to shareholders as a means of rewarding them for their continued investment. They are an ongoing incentive for investors to remain with the firm, fostering a sense of loyalty to the business. These dividends are of course made possible through the firm obtaining a net profit, from which they can choose to re-distribute funds among shareholders.

Pay Out or Invest In? When companies find themselves with an excess of capital following the payment of operating costs, they have a choice to make. They can either keep the flow of income within the business, or elect for a certain portion of it to form a dividend. How this decision is made really depends on the nature of the business and where it is at in its perceived development.

An Eye towards the Future If a company is relatively new, or looking to grow and expand a great deal in the near future, they will often forgo paying high levels of dividends. The idea behind this is that it will free up profits to be re-invested into growing the business. Entering into a foreign market, creating a new product offering, or generally increasing ones market presence, costs money; therefore a company with a long term focus may elect to cut back on dividends as a way of fast-tracking future goals.

Look to Stay Balanced The percentage of profits paid out as dividends will differ between firms; this calculation forms the 'payout ratio' of that company. For instance, if a company used all of its available profit margin for making dividend payments they would have a payout ratio of 100%. In most cases it is advisable to find some sort of balance between internal investment and looking after your shareholders. In effect the two concepts are related, as the more you invest in growing your business, the greater the opportunity for steady, long-term dividends.

Know What it is You Want While there are times when investors will be willing to take a risk on short term gains, owning shares is ostensibly a long term project. In order for your portfolio to grow (without assuming too much risk), you must allow your chosen companies to experience growth of their own. If this means giving up the prospect of higher immediate dividends, then so be it. As the story goes; give a man a fish and you feed him for that day, teach a man to fish and he'll never go hungry again. Learn to fish for the most rewarding long term prospects and you give yourself the best chance at prosperity.

Investment Advisers And The Art Of Being Wrong

No one person is right all the time, and we all make our fair share of mistakes. This is never truer than in the world of investing, which is little comfort for those who have just made a regrettable investment. Thankfully there are ways around this, not in terms of never being wrong, but in limiting the impact of a wrong turn within your overall portfolio. Using examples, and through an analysis of risk management procedures, you should be able to ensure that you never end up relying on any one investment to decide your financial fate.

Appreciate Your 'Wrongness'

One of the most important lessons you can learn as an investor is that there will inevitably come a time when you are wrong about an investment. The sooner you understand this, the easier it will be to avoid trouble when you eventually run into it, as any good Investment Adviser will tell you. When looking at a new investment, always plan for the worst case scenario. What is going to happen if things don't go smoothly? Will you be in a position to recover, and how do you plan on doing this? If you can engineer the sort of situation where an investment bust would be more of an inconvenience than a crippling blow, you are doing well.

Don't be Afraid to Ask for Help

Investment Advisers are an invaluable source of information for those looking to hedge their bets on the market. Bringing in an outside perspective will allow you to diversify more effectively, essentially spreading your wealth out across a range of investments. For example, say you want to invest in the local property market; an Investment Adviser will not only be able to discuss the relative merits of doing so, but can also offer up suitable alternatives for diversification.

Diversify in More Ways Than One

Finding new investment opportunities while managing your risk involves more than simply choosing a series of unrelated industries to invest in. Sure, if you already have money in property, buying stock in electronics or textiles could be a good move to mitigate risk, but there is more to it than that. Diversification is also about balancing riskier propositions with safer bets. For example if you did end up going ahead and investing in property, it would be advisable to find a couple of low risk alternatives (well established companies) to balance things out. This allows you to take a chance on a more volatile investment with higher potential returns without jeopardising your financial future in the process.

Want to Make More Money in the Market?

I often hear traders tell me how they lose: they increase their expectations from, say 8% to 15% as the trade starts heading their way. They analyze trades and see a preponderance in higher returns, some well over 50% some days. "Why can't I have some of that action?", they ask.

Seems like a logical question. But the reality is that very few traders actually take massive run ups with a huge gain on the one day. If you bought in at the low of the day or sold at the high, you likely struck it lucky. If you got both the low and the high of the day, congratulations on being one very fortunate trader! Don't count on it happening again. Therefore, do not think you are good; you simply got lucky. Big difference.

The danger in getting lucky is that traders tend to think it can easily be replicated. Trying it again proves futile and they end up losing. It's important to recognize the difference between intelligent, well calculated trading and getting lucky.

The secret to making more money is to take a small piece of the action in the direction of the move. By taking smaller chunks along the way, you spread out the risk and exponentially increase your chances for long term wealth. It is much easier to reach 8% than a 15% gain. You may also score 10 times for a 5% profit than once shooting for a 50% target. In trying to obtain those huge returns, you run the risk of the stock turning against you.

Maintain that respectable but reasonable percentage in all your trades. If you trade trends, in all likelihood, the trend has already been established and there may not even be much left in the trade.

Everyone would like to make more money. Fair enough. The best way is to keep your percentages the same - maybe even lower them - but trade more contracts. If you make 8% on $1,000, that's $80. A gain of 8% on $10,000 is $800. But if you're trading $10,000 and are satisfied with earning $500 that day, just aim for 5%. It's much easier and faster to reach. Earning $500 a day is $125,000 a year if you trade once a day. That's well over twice the average wage earner in the United States.

Want more money? Trade more contracts.

Books That Value Investors Like

Warren Buffet has been inspired by several books and amongst his favorites are Security Analysis, A guide to Intelligent Investor and The Wealth of Nations. These three books are renowned within the world of investment and offer sound advice on investment. The principles enshrined in these books are also reflected in the investment strategy adopted by famous value investors.

"A guide to Intelligent Investor" is written by none other than Benjamin Graham who is considered to be the mentor of Buffet. The principles laid in this book focused on reducing the common mistakes made by investors and highlighted the two different types of investors. The enterprising investor strategy is the one adopted by Buffet whereby the investment portfolio is based on rigorous study and research. The book highlights that an enterprising investor must base his investment on research and this principle is repeatedly highlighted by Warren Buffet who invest in companies that he has analyzed in depth. Furthermore, the "Mr. Market" concept introduced in the book is also applied by Warren Buffet when undertaking investment as he believes that a person must not follow the market trends and norms. Rather he believes that an in depth analysis must be done and irrespective of continuous volatility of the market price, an investor must continue to retain stocks if he believes that they would provide sufficient gains over a period of time.

Another book that has greatly shaped Warren Buffet's investment strategy is "Security Analysis" which is once again written by the mentor and idol of Buffet namely Benjamin Graham. Security Analysis focuses on valuing the stocks based on the ability of the firm to generate the cash and the book is famous for its concept "the margin of safety". These concepts are once again reflected in the investment strategy adopted by Warren Buffet as he calculates the intrinsic value of the stock through the net present value of the cash inflows over the period of investment. The book states that an investor must keep a certain margin of safety and therefore invest in undervalued stocks. This principle is at the core heart of the investment strategy adopted by Warren Buffet whereby he believes that an investor must always invest in stocks that are undervalued so that gains could be realized when the market value truly reflects the real value of stocks.

"The Wealth of Nations" is another favorite book of Warren Buffet that is largely based on economic theory and the pursuit of freedom. The principles within these books are not directly reflected in the investment strategy adopted by Buffet but they are nevertheless present in some form or the other. For example, freedom of choice is highlighted by the author and this is reflected in the investment strategy adopted by Warren Buffet. Warren Buffet states that a person must not come under peer pressure or any other influence when making his investment decisions and must be free to pursue the investment that is regarded as sound by self study.

Are Declining Oil Prices Predicting A Stock Market Decline?

When the economy slowed in the summer of 2010 and the Fed launched QE2, commodity prices took off like a SpaceX rocket. The price of crude oil reversed to the upside along with the stock market, surging up 64%, from $70 a barrel to $114 a barrel eight months later in April, 2011.

When the economy began to slow again in the spring of 2011, the stock market declined again and oil prices fell back to $75 a barrel by October. The Fed then launched 'operation twist', again adding liquidity to the financial system, and the price of oil reversed to the upside, along with the stock market, oil reaching $109 a barrel six months later in March of this year.

This year as the economy slowed yet again, oil plunged back to a low of $75 a barrel in June. This time, as hopes grew that the Fed would come to the rescue again, neither oil nor the stock market waited, but began rallying again purely on the hopes for Fed action. The price of crude oil reached $100.40 a barrel two weeks ago.

When the Fed did indeed announce its QE3 program, it was widely expected that commodity prices, including oil prices, would surge higher as they did after QE2 and 'operation twist'.

But it didn't happen, at least not yet.

Instead, over the last two weeks the CRB Index of Commodity Prices has declined 5.5%, and oil has plunged 11%, from $100.40 a barrel two weeks ago to $89 a barrel this week.

It has traders scratching their heads.

Is it that the Fed's action was already factored into oil prices this time in the rally on hope from the June low? Or maybe that global economies are in such slides that the Fed action (and that of the European Central Bank) is too little too late to prevent a global recession?

Meanwhile, is the plunge in the price of oil an ominous sign for the stock market? I ask since the price of oil seems to track very closely with the stock market, as well as with economic slowdowns and recoveries.

In any event, this week's economic reports seem to answer the question of what the Fed saw coming when it decided to provide an aggressive QE3 stimulus effort in spite of signs of improvement in the housing industry.

The week's reports include that the Chicago Fed's National Business Index, calculated from 85 individual economic reports, plunged further in August. Its three-month moving average, considered a recession indicator, fell from -0.26 in July to -0.47 in August. That was its 6th straight negative reading. And 2nd quarter GDP growth was unexpectedly revised down to just 1.3% from the previously reported dismal 1.7%. And Durable Goods Orders plunged 13.2% in August. Providing a more recent picture, the Chicago PMI Index fell below the 50 level that marks expansion and contraction in September, coming in at 49.7, its lowest level in three years.

Combined with the ominous decline in oil prices, indicating QE3 may not have the same positive impact as QE2 and operation twist, this week's additional dismal economic reports are providing a warning to investors that October may be a difficult month this year.

Those inverse etf's against the market, PSQ, DOG, SH, and RWM are looking attractive again.

Building A Stock Trading Plan

Building a solid stock trading plan is one of the most important things you can do before you actually start trading. This isn't something you can impulsively jump into and expect to achieve success. A solid plan can help guide you. It can help you make difficult choices, help you make decisions quickly when needed and it can help keep you grounded so you don't start gambling instead of trading. This may not sound like an exciting part of the process, but it is a vital one if you want to find greater success. Fortunately there are some tools to help you create the right plan for you.

Research

In this case I'm not referring to research of companies or specific stocks. I'm referring to different styles, strategies and other aspects that will impact the way you trade.

While the term research may not sound very fun, this can be a really fascinating part of the process of developing your stock trading plan. Read about areas that influence how and why people trade. This should include reading about risk management, money management, market psychology and technical analysis. Start with entry-level books and see if a particular area interests you. Once you gain some insight on a variety of areas you can fine tune particular interests and start developing a plan that will fit your own personal style, budget and interests. Whether numbers and ratios or human behavior are your core interest you can use what you learn about these aspects to your advantage.

Back Testing

As you are building your plan you can use back testing to fine tune it. You can change and adjust the contents like the amount of risk you are willing to take on any trade, or the go and no go points. This is a good time to experiment with different parts of your plan to see how they hold up in the market.

To get the most use out of back testing try not to add too many factors. Stick with three or less or you may not make the best use of this tool as you may end up finding results that will never come true in real life.

Practice Trading

Practice trading allows you to practice your trading plan to see how it performs without actually investing any money. Keep in mind you want to make note of everything when practice trading. Track all the fees as well as any gains or loses so you get a true picture of how you would do if you were investing real money. You may also want to follow stocks you decided not to pick for your practice trades to see how they perform as well.

Experiment now and use this time to refine your trading plan. You want to be confident about your trading plan before you actually start executing real trades.

Building a strong stock trading plan can help you stay on course and make difficult decisions when needed to help you achieve greater success.