Stock Trading Insight
The reality behind gold and oil investments
The surging gold prices have attracted a lot of media attention lately. The debt crisis has spurred gold prices above $1800. Oil has taken a dramatic drop, well over $25 per barrel, as investors panic over fears of another global recession.
Oil seems to be relatively low in comparison to gold. Crude oil prices under $100 do lack the luster of gold in the $1800 range. Some investors have been led to believe that oil may fall even further should the global economy falter and demand weaken.
Majority of Canadian oil companies, including those involved in the oil sands, are doing quite well even with today’s prices. There is still a good profit margin with $80 per barrel oil. Most analysts see a bright future in the industry with continued increasing oil demand. Consumption is projected to increase by 2% on an annual basis as we head into the next decade.
Financial instability in Europe and U.S. has sent shock waves throughout the world. Investors have been flocking to gold, silver and precious metal mining companies.
Like in many other sectors, there are reputable and successful companies, this include oil, gold and silver. There is opportunity to make money in such companies, providing you do your diligent homework. It’s unfortunate some investors will place their hard earned cash into speculative companies that will never be viable.
Most young investors may not remember the Bre-X Minerals Ltd. scandal in the nineties. It fleeced investors with factitious gold reserves. It is difficult for us to forget this incident; especially if you were one of the unlucky investors.
Gold may have an edge over oil for liquidity. This precious metal is easily converted to any currency or cash. Through history it has served as a standard for wealth, formed the base for most currencies and a hedge against inflation. Unfortunately, gold has very limited industrial uses. High costs add to its low industrial demand.
Lets look back in history. Some 50 years ago, in 1961, the average price for a barrel of crude oil sold at $2.85 and average price for an ounce of gold at that time was $36.27. An ounce of gold bought 12.73 barrels of crude oil then.
Twenty years later, the OPEC oil embargo pushed oil prices to an average of $37.42 and gold prices averaged that year at $615. An ounce of gold sold in 1980 bought 16.4 barrels of oil.
The following years oil and gold prices were on a retreat. In 1990, the price of crude oil backed off to $23.19. Gold dropped to an average price of $383. An ounce of gold bought you 16.4 barrels of oil.
As we entered the turn of the century, oil prices increased to $27.40 per barrel while the price of gold pulled back to an average of $279. An ounce of gold bought 10.2 barrels of oil in the year 2000.
Ten years into the new century, oil prices averaged at $71.21 and gold averaged at $1224.53. An ounce of gold bought 17.2 barrels of crude oil.
The fifty year historic average for crude oil is $21.54 and 50 year average of gold is $316.43. During the past half century an ounce of gold bought 14.7 barrels of crude oil.
There are well over four months left this year and it is difficult to arrive at the average price of gold and oil. Lets assume, gold prices average at $1600 per ounce for 2011 and oil averages at $95 per barrel. An ounce of gold may buy you 16.8 barrels of crude oil if our projections are accurate. This is still in close proximity of the historic ratio.
We can conclude that gold and oil are valued in close proximity. Our charts prove this to be true. It is doubtful that resulting future values should differ greatly from the historic ratio of 1:15.
Gold is a good short term investment through difficult and unsure times. Gold mining companies seldom achieve long term prosperity; most fail soon after a few years of lower gold prices. In comparison, the outlook for reputable and well run oil companies glows with optimism on the road into the future.
By J. Klemchuk
IIROC proposes new trading regulations for Canadian markets
We are about to see new trading regulations implemented in the near future. Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada (IIROC) have released a paper with recommended changes in the operations of stock markets. These changes are to be reviewed by the public, scrutinized and may be subjected to further modification.
If you are an active trader, it is difficult to forget the sudden crash on the afternoon of May 6, 2010. Billions of dollars were lost in a matter of minutes in the stock markets throughout North America. IIROC wants to implement safety circuit breakers and a more visible or transparent trading system in Canada.
Shortly after the May 6th crash, there were rumors that a rogue trader instigated the debacle. Others insisted that there was a computer glitch, or perhaps even a series of electronic errors. It is now apparent that the crash was possibly triggered by ‘dark pool’ or ‘iceberg’ trades.
Dark pools, or invisible trades are far more common in the U.S. and are rapidly expanding. These were set up by large trading institutions to move or buy large blocks of stocks at preferred rates without attracting the attention of the small traders.
The director of Ontario Securities Commission has recently stated that there are two dark pools in operation in Canadian markets. Investment Industry Regulatory Organization of Canada foresees a possible increase in invisible trading and it wants to implement changes to prevent future crash reoccurrences.
Canadian Securities Administrators want stricter regulations governing invisible orders. It wants to see such orders regulated by size and how aggressive they are. Intent or the role of the order must be transparent.
IIROC has proposed parameters as to how much a stock may rise or fall before it is halted. Suspected stocks will be tagged under surveillance and halted if they exceed limitations.
Any TSX listed stock which is suspect of a10% change in a 5 minute period will be halted for ten minutes. If a TSXV, or CSNX stock exceeds a 20% change in 10 minutes, it will be halted for 10 minutes. During the halt IIROC will make manual evaluation and take remedial action.
New securities regulations will be applicable to all securities and even those listed on multiple exchanges. The Intent of the changes is to make a level playing field for all traders, stop sudden volatility and prevent future stock market crashes.
Learning to recognize market distortion
You may have kept watch on a stock that has sat almost motionless for months. Charts show no change. There has been no news or news releases from the company for months. No reported insider buying or selling has been reported for almost six months. It's a good company but you suspect it to be a sleeper, waiting one day to burst with a bang on information that the company has withheld. You continue to keep it on your watch list.
Suddenly the stock you have on your watch list starts to stir. Within the first few hours of trading the volume erupts. Price of this stock begins to move. At days end there has been massive trading. Price of this stock has gained 18%. This company is reported on the TSX to be one of the top twenty gainers for the day. The stock has even caught the attention of Business News Network. The analysts are wondering if a big news release is coming from the company.
The second day of trading almost convinces you should buy in. This is your chance to go on a wild ride. You are still hesitant because the company hasn't released any news yet. The trading for the second day is almost as big as the day before. As afternoon approaches trades are thinning and prices have dropped but the stock still had made good marginal gain of 10%.
The third day starts with a small gain in prices and good volume. Within a few hours there is a sudden sell off. Prices have dropped almost as much as the two days gains. The company still hasn't offered any news. You are now glad that you didn't buy into this company! What could have possibly occurred? While judging by the description, I have a suspicion, but only a careful watch of how the initial day of trading would show some evidence as to why the trading erupted. I do suspect that there may have been some manipulation; it's called 'painting the tape'. Seldom does this happen as this type of activity is in the grey area but there are scammers that can artificially move a stock.
It all may start with a series of coordinated trades at huge volumes. Prices do not necessarily move at the beginning but the stock can make big gains as honest investors join in. After the third day, or possibly sooner the euphoria wears thin. These same scammers may now be shorting the stock. Honest investors realize that there is no news and a few unscrupulous scammers have had them.
Always do your own research and prove to yourself that there is reason for the market reaction. Watch the markets and where the trades are coming and who is doing the selling as well as the buying. It is far too easy to rely on someone's erroneous news. If you join in on a haunch you may get a short and costly ride.
Short selling, or shorting a stock
I do not encourage nor am I particularly found of shorting, or short selling a stock. If many investors participate in this activity it may lead to a needless destruction of a good company. This is legal option but in my opinion unethical. I do, however, believe that everyone should have a complete understanding and knowledge in the fundamentals of shorting.
Shorting a stock, or short selling means you are selling stock in which you do not have ownership. In order to begin you must have a margin account with your broker, or brokerage firm. You will be charged interest on funds that you borrow and you will be given rules that you must abide. You can only short a stock that is being sold and bought on a margin. That excludes most penny stocks. You can only use this action if prices of the particular stock are holding or dropping. Your broker or brokerage must have or find available shares that you can borrow in order for you to sell on the market.
While this may sound as a very simple procedure it is far more complicated and attracts more risks than simple buy or sell. Although not all stock exchanges follow this rule, there are times when you are not allowed to sell. Generally you cannot sell shorted stocks into a falling market. This rule prevents short sellers from causing further market declines. Risks in shorting a stock are unlimited. Remember these are borrowed shares and the lender may ask for them at anytime.
If you purchase shares in a company that pays dividends you may have to pay back to the lender the amount that was dispersed to the stockholders as a dividend. If the trades of this particular company are sparse you may end up waiting to purchase shares as replacements to your lender. Should the stock you have shorted take an unexpected upturn you are obligated to buy back replacement shares if requested by the lender.
There are several reasons why some traders chose to short a stock. Stocks tend to drop faster on negative news than rise on positive company releases. Unlike regular trading, shorting may bring large gains in a very short time. As with margin buying you don't need the full immediate payment at the time of purchase.
Savvy to be speculative
New investors should be aware of the age-old maxim of investment "the more risk, the greater the potential return." Novice investors have a tendency to be easily convinced into highly speculative stock. I suggest waiting, gaining knowledge, and slowly dabbling to get experience. Even if you are well experienced still be cautious and careful what you buy and how much of your total investment dollars that you are risking. This is area that requires extensive research and knowledge before you make your bid.
The factors to consider in value investing include earnings, sales, growth, and debt levels. These are not taken into consideration in speculative investing. The common strategy of buy and hold works well with value investing but may get you into a disaster in speculative investing.
“Why people make speculative investments?” This is because speculative stocks, or investments offer something that blue chip stock cannot. Speculative stocks may produce rapid price growth and huge gains in a very short time frame. Blue chip stocks are reliable and dependable investments. They are slow and sure over an extended period of time. Speculative stocks may show explosive increase in value and suddenly stop or even rapidly reverse its value.
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Honing an investor’s edge
Investing in the stock market today is not simple as in the past. The atmosphere is much different and markets more volatile. High potential companies are a rare find but…. there are still good performing companies. The single big issue is finding them; there is no easy way. It takes time and some serious digging.
Peter Lynch a famous investment manager summarized why most average investors fail in the stock market. “No wonder people make money in the real estate market and lose money in the stock market. They spend months on choosing their houses and minutes choosing their stocks.”
Lynch’s advice is now more pertinent than it ever was. There are many companies to choose from. A sprinkling of companies may be excellent performers. There are some that fall into the good category but there are also those still struggling to survive. A wrong pick can be a very costly decision and turn you off of the stock markets.
Do not rely on hot stock recommendations, be it a professional pick or someone you know unless you did a thorough research of the prospect. Be always on a look out, choose companies of interest, do a thorough research and you will succeed finding your own good picks.
It may be wise to get a notebook and jot down prospects that catch your eye. Keep your records handy and keep up with the updates. These may include notes on news releases or relevant articles. Write down the company’s symbol, stock price and from there keep a watchful eye. Do comprehensive research of the company if you feel it has potential.
Follow a potential investment as long as you feel necessary to get all your information and your confidence in the company. Look at the stock price history charts closely and find out why stock prices reacted suddenly. Find out the reason for its behavior, be it positive or negative.
Stay away from companies that are beginning, reveal little information, fudge their news or are in a sector that is difficult to understand. Check to see which exchange the stock is listed on and whether the company has had a suspension.
You should exercise caution and follow a routine of due diligence at every level to limit your risk. A history check of a company is imperative. Understanding the basics in reading financial reports cannot be overemphasized. Don’t handicap yourself by skipping vital financial information which shows corporate direction.
A company that continues to exhibit losses and high debt spells serious trouble. Always take into consideration the debt factor. Debt level determines whether a company will survive or sink into bankruptcy.
A company which rarely updates its operations for its investors may be deliberately hiding vital information from its stockholders. Beware of companies which use stock consolidation and name changes. There is usually a good reason for this tactic; in many cases, a company is diverting attention from a review by the stock exchange. Such a company may be in a bad financial situation and trying to stay afloat. It is really another way of postponing the inevitable insolvency.
A profitable company will buy back shares to increase stockholder’s value. Companies that frequently allocate large private or public placements and warrants are bound to bite the bullet. Placements are not always used for acquisitions or operations. Some companies in dire straits use this means for sustenance or for its immediate payroll. This adds no value to the company but merely devalues the company’s net worth.
A company which has a small number of shares is bound to have faster market performance than a company with countless loads of shares. Over stocked companies require high volume trading to move markets. Stock prices may be lethargic. Most inexperienced investors are attracted by their cheap shares and occasional high trading volumes. Beware as these trading volumes may be short term.
Company’s history in insider trading is important to examine and consider. Board members and employees will buy into a company during prosperity and sell off before a company enters troubling times. This is frequently a good indicator of the company’s health. Insiders are the first to be aware of any perils. They are also, the first to recognize potential success.
Contrary to most beliefs, an individual’s chances may be far superior to a commercial investment firm. You do not need a diversity of stocks in various sectors to succeed with your investments. Concentrate on a few successful companies rather than a hoard of potentials in various sectors.
Do not invest like an institution. It is much too difficult to be diverse. This will overburden your resources. Familiarizing yourself with many sectors is difficult and is a time consuming procedure. Keeping daily tabs may become overwhelming if you are tracking multiple sectors which are affected in many different ways.
A one or two day top gainer is not indicative of a good investment. Traders may be reacting to speculation or finding it an opportune time to sell. Some institutional investors dump their shares prior to dire company news. Occasional high trading volumes are acceptable but low trading volumes could spell trouble ahead. You may have difficulty in selling your shares should the need arise.
Reading news summaries is indeed helpful and keeps you informed. You can spot a potential winner by a company’s news releases, its increasing market capitalization and the numbers of outstanding shares. Frequent news means that it is concerned about their shareholders and keeps them informed.
Start a list of companies which you have found to be interesting and possibly have a potential. Keep track of these and watch their progress. A new company with high market activity is not necessarily a winner. Only time will tell how good of an investment this company will make... don’t rush into an unproven prodigy.
If you have found a possible investment, watch the market trading and who is buying and selling. Are the stock-trades mostly institutional, individual or a mix? There are times when companies have not been discovered and the trading is mostly individual. This may be a great investment to make before an institutional discovery is made and stocks make a big surge.
Investing in the oil industry is easy if you take the time to understand this industry. It is not difficult but it is easy to predict the general direction if you keep tab on oil prices, global demand and health of notable economies. Several isolated nations in financial trouble are not indicative of a global recession but if they are part of a larger union, the outcome may have large reverberations.
The more knowledge you gain, the more likely that you will succeed. Exercise care and caution; the stock market is not a casino – don’t take wild chances on the unknown. Reduce every possible risk and do not fall a victim of over confidence. Keep tabs on the company and the sector.
Remember, success is more than a matter of good luck; there is a lot of hard work behind it.
Insight into rights, options and warrants
Companies may issue rights and warrants as a means of raising capital. Rights provide the stockholder of a company with the right, but not the obligation, to buy a company's common stock at a predetermined subscription price. The right is good only until its expiry date which may be anywhere from four to six weeks. If the rights are not exercised they cease to exist and end up valueless. Rights may be offered to the shareholders to raise capital for expansion, new costly projects, or even acquisition of other companies. Rights are offered on one per share basis.
The price of a right is usually lower than the going market price of the stock. Rights are not traded on the stock market but only hold a theoretical value. Once they are exercised they may be converted into common stock and can be traded on the stock market.
If you have come across a stock symbol followed by a '.WT', this signifies a warrant. Warrants can be purchased by anyone whether you hold companies common stock or not. They can be sold or purchased on the stock market. The company may have a series of warrants with a designation number or letter following the .WT'.
Warrants, and options are the futures of stocks; they derive their value pending share value and stock performance of the company that releases them. Options and warrants give an investor the right but not the obligation to buy or sell a stock, or a commodity. The investor does not have to carry out the transaction or exercise the option.
In order for you to gain the right to buy or sell particular assets or shares you will have to purchase that right. This transaction is called a premium to the seller of the warrant. If you exercise that option to purchase, it is deducted from your purchase price. If you happened to walk away you loose the premium.
A warrant or an option only gives you an opportunity to profit from price movements of shares or a commodity for a small fraction of the cost of the actual share price.
There is much less risk in options and warrants than future trading. You are given that opportunity to profit from stock price or commodity movements for a lot less money than if you would have invested in the shares of that company or a commodity.
Both warrants and options have an expiry date. This all depends on the warrant or options issuer. Some expiry dates may be as long as 18 months.
The price at which you have the right to buy or sell an option or a warrant is called "strike price'. The date by which you must buy or sell is called the 'expiry date'.
As the price of company shares or commodity rises, the value of the rights, options or warrants increases. Once the share price rises above the "strike price' you're said to be 'in the money'. If you exercise your rights, options or your warrants and sell your shares at market value you will make a profit.
Try to remember that rights must be exercised before they can be converted to common stock. Warrants may be purchased or sold on the stock market like shares or stocks. Options may be traded on the futures market or over the counter between buyers and sellers
Canadian Income Trusts
During the past decade there has been an increasing number of companies converting to income trusts. In particular many Western Canadian oil companies discovered a new way to escape revenue taxation. Investors love the trusts as the energy sector soared so did the yield on most trusts.
The previous Liberal Government decided to tax this area. Later the Liberals withdrew their unpopular decision. An ensuing scandal developed as select few investors knew of policy changes and profiteered from sudden policy changes.
The Conservative government on their election platform stated that they would refrain from taxing income trusts. After being elected, the new Conservative government made an about faced and Finance Minister Flaherty announced on October 31, 2006 a special tax to stymie the growth of trusts. This special tax that would eventually bring a billion dollars of escaped revenue to the government coffers.
While this tax takes effect in a series of stages, Canadian income trusts are still here and are still popular investments. Existing trusts have a four-year transition period and will not face new rules until 2011. Real estate income trusts will be exempt from these changes.
So what are income trusts? How do they work and where do you purchase them? An income trust is an investment syndicate that pools its money to buy a cash flow generating asset. This produces a steady cash flow after expenses and the revenue is returned back to the investors. The company escapes from paying any revenue income tax as all revenue is distributed amongst the investors.
The trust does not engage in exploration, development, or construction. Trusts only focus on generating revenue and dispersing income to the investors. The purpose of trust is to generate a steady income for the investors or unit holders.
You can buy trusts like any shares or warrants on the stock market. If you see a symbol end with '.UN' this is a trust unit. Like any stock there are bids and asks and prices vary from day to day. In anticipation of rising income prices they may rise and drop if income is expected to be lower.
To continue, oil trusts must replace depleted oil reserves and will offer rights to unit holders to raise capital. Although this does dilute unit values, this is the only way in which the trust can continue to generate income. It must purchase properties with undeleted reserves as time progresses.
Over the past 10 years Canadian income trusts have averaged about 20% revenue annually. Like stocks, there are good and bad income trusts. Care and caution should be exercised.
Never take things for granted or at someone else's word. Treat all companies as suspect of being in difficulty. A problem spotted before you purchase your stock in a company near financial disaster may save your earnings from disappearing.
Sizing your stock portfolio
Some investors believe that it is important to have a diversified portfolio with many different companies. Others may even strive for as many as 10 to 15 companies in the same industry. While diversification in different sectors makes sense, don't hold stocks in too many companies. Quality of your stocks is far more important than quantity.
Recently I listened to a radio talk show on investments. A notable fund manager was the guest. One person phoned in to ask him what amount represented the perfect number in a personal stock portfolio. Some listeners were surprised. Here is what he said, "Don't look for a big number of holdings. You should not buy just for the sheer numbers. Look for quality and companies that have a good potential. Even if you have a million dollars to invest, there is no need to hold stocks in more than five companies. It's self-defeating. You are averaging down possible large gains of a few good companies with some that may be slow gainers or losers. Invest in a good mutual fund if that is what your intentions are."
Some stockholders may feel more secure if they hold a variety in their portfolio even though they all are in the same sector. If the bottom drops out of this sector, few if any of these stocks may hold their value. Look at the markets now. Oil prices remain high but not all companies are doing well. The rising Canadian dollar seems to be dipping into the profits especially some small starting companies. Conventional oil exploration costs are escalating at a rapid pace.
The long-range outlook is encouraging in the heavy oil industry, particularly the Canadian tar sands. If you are an American how can you not be excited about the renewed developing oil shale and the new oil shale technology? This in itself may give additional opportunity to invest.
There are many companies throughout a variety of sectors that are doing quite well. Various mining stocks and alternative forms of energy are showing promise. Don't overlook potential developing companies. While I am not suggesting that you place loads of money into venture stocks, there is huge growth potential here.
Some analysts are predicting big gains in silver and uranium. Gold may have possibly reached it's potential but platinum is a very desired precious metal and the outlook is good. While copper prices have somewhat stabilized, Chinese markets may change this very suddenly. Coal, oilseeds and grains sector is once again rising from obscurity.
The diamond mining industry is struggling as the western economy is learning to adjust with high-energy costs. Jewellery is not on everyone's shopping list if the times are tough. Automobiles fall into the same general area; unless you desperately are in need of a new vehicle you may postpone buying it. While the North American automotive sector is restructuring, I would be hesitant to hold or secure stocks in these two sectors.
So how many stocks should I hold? You should only have as many as you can vigilantly keep track of on a daily basis. This could possibly be only a handful or even less. Always watch how the sectors are doing. A faltering sector may be your warning sign if you hold stocks or have intentions to buy.
Whether you hold a significant amount of money or just starting, there is no need to have a large variety of stocks. Keep things simple and manageable. Unless you have countless hours of time for researching and tracking, you may be self-defeating your intentions. Managing a fund requires more than one capable individual.
Expecting to find a ten bagger?
Every stock trader looks forward to finding that big one. The one that yields ten times your investment. Fiction? No. Keep your nose to the stock markets and you will eventually find it. Such a stock may rise so quickly that you may have to scramble to buy it.
Three years ago I kept an eye on Exall Resources. I knew it was a very undervalued company. It held a variety of mining and petroleum properties. Shares floundered in 15 to 20 cent range for months on end. I was too busy to keep a close tab on the markets, and instructed our second eldest daughter, Allana, to watch the markets. She was a grade eleven student on her summer holidays, and she was very bored with Canadian summer months. I thought that this would be an excellent opportunity to get her acquainted with the stock market.
“Dad, what is a reasonable entry level on Exall?" To which I replied, "About 18 to 20 cents." I guess I should have said, "Get it at current market price." Allana kept asking me if she should buy in. "No, there will be a pullback, sometimes soon." Tick, tick, tick the prices started to go higher. There were no news releases. Insiders were constantly buying. Prices kept going up!
Summer was over. Allana and I watched this company triple in value. Thirty months later Exall Resources was bought out at $7.80. Even if my daughter would have bought in at 25 cents, we could have possibly had a thirty bagger. Neither Allana nor I will ever forget this miss.
Another experience I share with a close trading friend, who decided to end his day job and strictly do stock trades. Connacher Oil and Gas traded in the low twenty-cent range. I knew Richard Gusella, President & CEO from a previous company he nurtured and blossomed into a vibrant company. Later that company was sold for a tidy some.
Richard Gusella knows how to find the right property and the right personnel to work for him. We both loaded up on Connacher. I bought in the mid-twenties and my friend in the mid-fifty cents range. We sold out at 90 cents and the share value bounced around for almost a year and started to pull back months later.
I knew that the South American properties were huge and Petrolifera was now the new operating company. Starting prices opened at $1.50. There were modest amount of trading until company announced ambitious drilling plans. The company hit a gusher at 3000 barrels per day. Shortly there after a second similar big strike moved the stock with a furor. If you waited for a pullback it never came. Prices of that stock rocketed to a high of $25 last October.
Even if you had a very small investment and you just held this stock without making further trades, you would have done very well. A good stock does not mean a high priced stock. There are some stocks that are high priced and may be a bad stock. If a company that was worth $212 and a company that was worth 10 cents goes bankrupt you still lose all the money that you had invested.