2

200-day Moving Average

What is the 200-Day Moving Average?

In major corrections—and even bear markets—the 200-day moving average can be the most valuable moving average of all. 

To understand the 200-day moving average, it’s important to know what, exactly, a moving average is. Moving averages smooth the fluctuations in a stock’s price. To get a moving average, you simply add up all the closing prices for a stock over a certain period (say, 200 days) and then divide by the time (200). You will get the average price at which the stock has closed over that time. Do this calculation every day for the previous 200 days, and that’s how you get the ‘moving’ part.

It’s more common to look at the moving average over 50 days because it’s long enough to allow for corrections but not so long that the trend hasn’t turned down by the time the stock touches it. But there’s an even better reason: great growth stocks tend to find support (meaning that they stop declining) when they reach this moving average. Buying a stock as it’s bouncing off this moving average is often a good strategy. 

That said, there’s no perfect way to use moving averages to your advantage—heck, there’s nothing special or sacrosanct about the 25-, 50- or 200-day moving average. On the buy side, however, moving averages are an easy way to eliminate those tempting story stocks that really aren’t performing. Our chief analyst Mike Cintolo s NEVER bought a stock that’s trading below its 200-day moving average, and has rarely bought one below its 50-day line. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Technical analysis of stock trends helps investors determine how the markets in general, and their stocks in particular, are likely to behave going forward. 

A

ADRs

What are ADRs?

ADRs are foreign stocks that trade on U.S. stock exchanges. These companies must comply with U.S. listing and reporting standards.

ADRs, or American Depositary Receipts, are a way for U.S. investors to own dollar-denominated shares in foreign companies. They trade on U.S. exchanges, are bought and sold with U.S. dollars, and offer the same SEC protections that a U.S. company gets from its pre-listing due diligence by regulators.

Why should you invest in ADRs? While having traditional, U.S. blue-chip stocks in your portfolio may help protect your wealth, you need to think a bit more boldly to actually build wealth. In a world in which faster growth is happening in many places outside U.S. borders, it’s never been more important to have a global portfolio.

If U.S. investors aren't looking at stocks in other countries, they may be missing out on some tremendous opportunities to not only boost their returns, but also add some much-need diversification to their holdings.

The first American Depositary Receipt was issued in 1927 for British retailer Selfridges. Since that time, investors have been turning to them for stability and a much safer method of buying foreign stocks

Buying ADRs can give you access to non-U.S. stocks with excellent stories in markets with enormous potential. The risk is higher too, of course, but that’s always the case with any investment that offers the potential for higher returns.

There are hundreds of ADRs (American Depositary Receipts) that trade in the U.S. but represent ownership of international companies. Perhaps the easiest way into international stocks is through regional, or even single-country, exchange-traded funds. But just like in the U.S., you can also buy shares of individual companies. 

To find out more about making profitable investment decisions, download your FREE copy of our report, How to Find Undervalued Stocks.

After-Hours Trading

What is After-Hours Trading?

After-hours trading, sometimes known as extended trading, is trading undertaken on the electronic market exchanges either before or after regular trading hours.

In the United States, pre-market trading occurs between 8:00 a.m. and 9:30 a.m. Eastern Time (ET), and after-hours trading typically occurs between 4:00 p.m. and 6:30 p.m. ET. Trading that happens during these hours is usually abbreviated on message boards with the acronym AH.

Until recently, trading volume during these early and late hours was relatively low. However, the volume of extended trading has exploded recently, as online trading and related computer technologies have become more prevalent and the markets have grown more international. Once the preserve of big institutional investors who had the confidence to deploy unorthodox methods, after-hours trading is increasingly being adopted by retail investors, who are becoming more comfortable with the interconnected electronic communications networks that make it possible to trade during these unconventional hours. Online trading is less of a novelty and more commonplace, removing much of the mystique of after-hours trading.

Additionally, these extended trading hours allow nimble investors to act quickly to major events that are investment "catalysts," such as sudden corporate misfortune, political turmoil overseas, terrorist attacks, etc. Trading before or after the markets officially open allows instantaneous investment decisions that are pegged to the latest developments. A caveat is that after-hours trading can be subject to the emotional whims and fears of less-seasoned, smaller investors—consequently, veteran pros on Wall Street sometimes derisively refer to after-hours trading as "amateur hour," a play on the AH acronym.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Average Up

Buying more of your best stocks, also called averaging up or pyramiding, is something most great investors through the years have practiced. However, like any tool, it can also be dangerous if misused.

The most important key is to buy smaller and smaller amounts on the way up—hence the term pyramiding, which obviously starts out with a wide bottom (your initial purchase) and gets narrower and narrower toward the top (your follow-up buys). Averaging up in this fashion ensures that your average cost doesn't run up too fast, yet allows you to funnel more money into a potential big winner.

Some investors prefer to average up any time the stock rises a certain amount from their previous purchase price, while others like to wait for specific chart set-ups. There is no one right way to do it, just be sure that whatever strategy you employ, it works for you—you'll be heavily invested in some stocks using this method, which means the upside and downside will be sharper.

B

Bear Market

What is a Bear Market?

A bear market is defined as one in which each successive decline carries the market to new lows. Falling prices and growing pessimism characterize a bear market.

By definition, a bear market is pretty simple. It's when the market indexes fall 20% or more from the highs on a closing basis. One you may be familiar with was in 2008 and 2009 during the financial crisis. That was one of the worst we've ever had, with the S&P 500 falling more than 50%.

Then in March and April of 2020, the S&P500 fell nearly 35%. Those are obvious standouts, but they aren't the only examples.

In fact, since 1926, a bear market has come along an average of about every six or seven years. The average bear market has lasted 1.3 years and with an average loss to the bottom of 38%. And that number factors in the Great Depression. The average bull market has lasted 6.6 years, with an average cumulative total return of 339%. Since 1926, it has been a bull market about 86% of the time.

Within a major uptrend or downtrend, several secondary reactions occur against the trend, lasting for a few days, weeks, or even months. Still, they don't necessarily change the definition of the overall trend.

For example, in the stock market, prices may drop precipitously, even during a powerful bull market, for several weeks at a time. This is known as a "correction." If the uptrend is still in place, a rally will then ensure.

If a rally movement doesn't succeed in breaking through the previous high and the market subsequently declines to fall below a previous low, the movement has switched from a bull market to a bear market.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Benjamin Graham

Who is Benjamin Graham?

Benjamin Graham (May 8, 1894–September 21, 1976) was an American economist and one of the most influential investors of our time.

Benjamin Graham was born in London, graduated from Columbia University at the age of 20, and became Warren Buffett’s teacher in 1950.

Graham is the author of The Intelligent Investor, a seminal book on value investing that Warren Buffett called “by far the best book on investing ever written.” Buffett was just one of Graham’s disciples. Graham also taught or influenced Mario Gabelli, John Neff, Michael Price, and John Bogle.

Graham is widely celebrated as “The Father of Value Investing.” He created the process of evaluating companies to find their intrinsic value. Graham could thereby purchase companies with undervalued stock prices and avoid buying companies with over-inflated prices.

The Cabot Undervalued Stock Advisor recommends stocks based in part on the Benjamin Graham investing system. Graham analyzed every company according to seven factors: profitability, stability, earnings growth, financial position, book value, dividends, and price history. He analyzed every potential investment based on these factors to determine which companies were undervalued.

A key concept of the Benjamin Graham system is the Margin of Safety, which is achieved by buying a stock only when it falls below its maximum buy price. That price is calculated using the metrics that determine the intrinsic value of a company. Strict adherence to the rule of buying only below the maximum buy price will minimize potential losses while maximizing potential profits.

In essence, Graham developed a whole new approach to investing based on measuring a stock’s price versus its intrinsic value. For nearly a full century, that approach has beaten the market. Since 1926, the Benjamin Graham value investing strategy has achieved average annual returns of 20% a year.

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Biotech

What are Biotech Stocks?

Biology plus technology equals biotech. But what does that mean in reality? And is this a good sector to invest in or is it better to avoid it?

Biotechnology uses living things to create and develop healthcare treatments, and includes such new and diverse sciences as genetics, immunology, and the development of pharmaceutical therapies and diagnostic tests. Biotech stocks are, therefore, stocks in companies primarily, though not always, in the healthcare industry.

However, biotech stocks can be a finicky area for investing. The metrics for valuation are entirely different, as you can't necessarily define the success of these companies by earnings. Thus, biotech analysts need to have a deep understanding of drug development and the many different drug candidates in order to put a specific company's growth prospects into perspective.

That said, buying biotech stocks is as good an idea as any—just so long as you pick the right stocks! Always take things on a stock-by-stock basis. Like stocks in other sectors, the drivers of value remain the same, in that a positive clinical trial or a lucrative partnership can add value to a biotech stock.

Similarly, excellent management is the key to biotech investing as the nature of drug development includes a high failure rate. Thus at the end of the day, you want a CEO and management team that can take the drug failures and still keep creating value for their shareholders.

Just beware of biotech and pharmaceutical companies that increase revenue through raising prices. In short, that's bad publicity. Investors will find plenty to like in stocks of companies that are generating revenue growth by selling more drugs, not just charging more for them. Companies with robust pipelines of new drug candidates will also be more resistant to pricing pressure.

And yes, biotech ETFs make it easy to ride a trend and put bets on a group of stocks rather than just one. And the standard wisdom is that spreading your investment around on a group is a lower-risk proposition than buying single stocks. But making a lower-risk investment can also lull you into a false sense of security.

To learn more and start expanding your investing options, download our FREE report, 3 Small-Cap Stocks That Can Work Now Despite COVID-19, right now.

Bond

What is a Bond?

We hear about bond rates and markets in the financial news, but what exactly is a bond, and are they worthy investments?

Stocks and bonds get lumped together all the time, but the truth is, they are very different investments. While you can lose money in stocks or gain nearly unlimited amounts, a bond is usually a fixed-income investment. It is, in essence, a loan with defined terms, including the interest rate and the maturity date.

The most well-known of these are from the U.S. Treasury. Treasury bonds, or T-bills, have two moving parts: the price and the yield. Presumably, an investor can buy a $10,000 T-bill and lock in an interest rate of 3.2%. (We’re using 3.2% as an example. However, the interest rate can change throughout the day.) Once you make your purchase, the price changes a little bit every day, but it’s guaranteed to be worth $10,000 upon maturity. The average investor does not need to stress out over the price fluctuations. If you want a bond, but don’t want to hold it for more than three years, then you just buy a three-year bond. It’s a fairly straightforward transaction.

As you can see, of course, your gains are tied closely to the interest rate. However, some investors use a bond ladder strategy to limit that risk.

Bond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bonds with staggered maturity dates. Then, as each security matures, you reinvest the proceeds in a new security at the top of the ladder, which becomes your new longest-dated security. If interest rates are rising, the new investments will have higher coupon rates than the investments rolling off the bottom of the ladder, and your yield will gradually rise.

To learn more, download your FREE report, How to Invest in Stocks and Other Investing Basics, today. This report will help you take the mystery out of investing and give you the information you need to start investing independently.

Bond Ladder

Bond LadderBond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bonds or bond funds with staggered maturity dates. Then, as each security matures, you reinvest the proceeds in a new security at the top of ladder, which becomes your new longest-dated security. If interest rates are rising, the new investments will have higher coupon rates than the investments rolling off the bottom of the ladder, and your yield will gradually rise.

For example, if you wanted to create a bond ladder today, you could buy bonds maturing in 2019, 2020 and 2021. When your 2019 bond matures, you would invest the proceeds in a 2022 bond, which will most likely be offering a higher interest rate than currently-available bonds.

While longer-term bonds yield more, shorter-duration fixed income investments carry less interest rate risk. In other words, if you expect rates to go up soon, you'll want your longest-dated bond to still mature fairly soon (probably within five years) so you're not stuck holding a bunch of very low-yield fixed income investments for a long time.

The most important part of creating a bond ladder that will preserve your capital and work in a rising rate environment is that you only buy individual bonds or defined maturity bond funds. Unlike standard bond funds, bond funds with maturity dates preserve the principal guarantee you get with individual bonds, or the promise that you'll get your original investment back when the security matures. For most investors, Guggenheim's BulletShares ETFs are the simplest way to construct a bond ladder. The ETFs come in both investment-grade and high-yield versions, with maturity dates from 2018 to 2027.

The BulletShares ETFs mature on the last trading day of the year in the name of the fund, at which time Guggenheim distributes the NAV of the fund to shareholders. You can keep your bond ladder intact by reinvesting that cash into a new longest-dated fund. This will maintain your income stream-and if rates are rising, it will grow over time.

Bonds

What are Bonds?

As with any investment, you have to know what to look for in bonds, but once you do, you can achieve the steady and safe income steam you desire.

The U.S. Securities and Exchange Commission describes bonds as "a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time." What this means is that individual bonds give you the promise that you’ll get your original investment back when the security matures, along with any additional funds derived from interest.

Bonds are issued in a variety of ways. There are U.S. Treasury bonds, municipal bonds, and fixed-rate bonds. You can buy baby bonds (they’re called baby because they’re issued in $25 increments so the average investor can buy them), bond funds, short-term bonds, and long-term bonds.

The real question is whether or not they are good additions to your portfolio. Certainly, bonds are a low-risk way to invest. And even investing guru Benjamin Graham believed in the power of bonds, writing in The Intelligent Investor, "“We recommend that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75% with the converse being necessarily true for the common-stock component.”

Aside from fixed-rate bonds, however, most bonds yields can fluctuate significantly as the interest rate rises and falls. And while bonds were once a staple of a retirement portfolio, they just don’t fulfill the needs of retired investors any more. Interest rates are so low they don’t provide enough income to live off of, and most bonds will probably lose value over the next few years.

One way around this issue is to construct a bond ladder.

Bond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bonds or bond funds with staggered maturity dates. Then, as each security matures, you reinvest the proceeds in a new security at the top of the ladder, which becomes your new longest-dated security. If interest rates are rising, the new investments will have higher coupon rates than the investments rolling off the bottom of the ladder, and your yield will gradually rise.

While longer-term bonds yield more, shorter-duration fixed income investments carry less interest-rate risk. In other words, if you expect rates to go up soon, you’ll want your longest-dated bond to still mature fairly soon (probably within five years) so you’re not stuck holding a bunch of very low-yield fixed income investments for a long time.

Another solution is to is to craft a personalized combination of dividend-paying stocks. The hundreds of dividend-paying stocks traded on major exchanges makes it easy it tailor a portfolio to your risk tolerance and income needs. Just take a foundation of 2%- and 3%-yielding blue chips and dividend aristocrats, add some undervalued stocks with temporarily high yields or dividend-growers to boost your yield in the future, and then top off with a sprinkling of riskier but higher-yielding investments.

To learn more about stocks and bonds, download your FREE report, How to Invest in Stocks and Other Investing Basics, today. This report will help you take the mystery out of investing and give you the information you need to start investing on your own.

Bull Market

What is a Bull Market?

A bull market is characterized by rising prices and growing optimism. Here's what that really means.

In technical terms, a bull market is defined as one in which each successive advance of the primary trend peaks higher than the one preceding it. In English, that means the overall market is trending upwards and investors feel generally positive.

A major uptrend can last from several weeks to several months and is otherwise known as a bull market. The converse is true for a major downward, or bear market.

These major trends shouldn't be mistaken for smaller movements, though. Nor should the movement of a few stocks be expected to move the entire market. Again, we're talking about the overall movement of the market here.

Within a major uptrend or downtrend, several secondary reactions occur against the trend, lasting for a few days, weeks or even months, but they don’t necessarily change the definition of the overall trend.

In the stock market, for example, prices may drop precipitously, even during a powerful bull market, for several weeks at a time. This is known as a “correction.” If the uptrend is still in place, a rally will then ensue.

To put this in context, since 1926, a bear market has come along an average of about every six or seven years. The average bear market has lasted 1.3 years and with an average loss to the bottom of 38%. And that number factors in the Great Depression. The average bull market has lasted 6.6 years with an average cumulative total return of 339%. Since 1926, it has been a bull market about 86% of the time.

Regardless of bull or bear markets, strong stocks will always be worth investing in. To learn more, and to start investing yourself, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics.

 

Bull Markets

What are Bull Markets?

A major uptrend can last from several weeks to several months. These bull markets, as they're known, are characterized by rising prices and growing optimism.

The markets are governed by two overarching macrotrends: bull markets and bear markets.  A bull market is defined as continuing as long as each successive advance of the primary trend peaks higher than the one preceding it. The converse is true for a major downward, or bear market.

It is difficult (some would argue impossible) for investors to precisely time these markets. That’s because markets often rise higher than most investors and analysts anticipate—and sometimes fall lower than they could possibly fathom.

For context, since 1926, a bear market has come along an average of about every six or seven years. The average bear market has lasted 1.3 years and with an average loss of 38%. And that number factors in the Great Depression. The average bull market has lasted 6.6 years with an average cumulative total return of 339%. Since 1926, it has been a bull market about 86% of the time.

There's more than just timing, however. Investor sentiment is key—it’s the shift from risk aversion to risk-taking that bolsters stocks. There's also the fear of missing out, or FOMO. In short, in mature bull markets, investors no longer fear losing money; instead, they fear that if they don’t buy an investment, they will miss out on a gain! They confuse lost opportunity with lost money!

Beware, however, that you can lose money even in bull markets. Individual stocks can go with or against the big trends. The two classic ways to lower your risk at the moment of purchase are buying on dips and buying partial positions with the intention of averaging up later. You can find all of this growth investment advice on the Cabot website. 

To learn more, download our free report, 10 Forever Stocks to Buy Now–and How to Find the Best Growth Stocks

Buy And Hold

What Does It Mean to Buy and Hold?

When you buy and hold a stock, you simply hang onto it for a long time while its value increases. That's a lot harder than it sounds. 

For many investors, the ups and downs of the market and individual stocks lead them to buy and sell regularly. Rarely do they buy and hold a stock for the long term as its value steadily climbs over decades. That's unfortunate, because these are the stocks that can make you rich. 

These long-term winners have solid charts with a revolutionary product or service that can sell in a mass market. These are the companies that are still small enough to grow rapidly, but still under the radar of most investors. But perhaps the most important characteristic of a buy and hold stock is that it's trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality, at least on Wall Street.

But when you buy and hold a stock, you have to have patience. It can take years for those exponential returns to roll in. In the meantime, it's important to point out that buy and hold does not mean buy and ignore. 

Some stocks can masquerade as long-term investments when they are anything but that. One only needs to look at Enron as an example of what can happen to a stock, which is precisely why it's important to watch your stocks - even the stocks that seem to have no downside. To find investments that you can hold onto, look for companies that:

  • Enjoy huge (and lasting) advantages over the competition
  • Pay their investors each and every year by dishing out fat dividends
  • Buy back massive amounts of their own stock

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Buy On Stop

A “buy-on-stop” is a trade order used to limit a loss or protect an existing profit. It is a buy order marked to be held until the market price rises to the stop price, then to be entered as a market order to buy at the best available price.

The buy-on-stop price always is set above the existing market price. This type of trade is sometimes called a "suspended market order,” because it remains suspended until a market transaction triggers the stop.

Buy-on-stop orders can be used for long and short positions. For long positions, it allows investors to take advantage of anticipated market upswings, and to minimize risk, without frequently monitoring the investment or the market.

When short selling, the investor can choose implement a buy-on-stop order, as a way to protect against losses if the price shoots too high. When an investor "shorts" a stock, he is betting that the stock price will drop, so he can return the borrowed shares at a lower price (called "covering").

Technically speaking, buy-on-stop orders exemplify a method of engaging in a purchase request for a security that carries the stipulation that the request be held until the current market price for the security is equal to the stop price for that particular asset.

Let's say that for the past several weeks, the price of a stock has risen from 3.00 per share to 5.00, and is now trading within a range of between 4.50-5.00. You've determined that the stock will probably move higher and you'd like to make money on this prediction, but only if the stock actually breaks out of its trading range.

Rather than keeping your eye on the stock every day, you can implement a buy-on-stop order at, say, 5.10. If the stock actually does move higher and break out of its trading range of 4.50-5.00, your order will be triggered once the price reaches 5.10, thereby becoming a market order to buy shares of the stock.

If the stock doesn't break out and move higher and instead starts to drop, your order would not get triggered.

Typically, these orders are used when an investor has determined that the market price for a certain type of security is on the verge of entering a period of growing value. This principle works in reverse, when short-selling. A buy-on-stop order is a risk-hedging strategy that allows you to secure an asset when and if the market price begins to rise, but it obviates the need to continually monitor the security's activity.

C

Call Options

Call options give the buyer the right to buy 100 shares at a fixed price (strike price) before a specified date (expiration date). Likewise, the seller (writer) of a call option is obligated to sell the stock at the strike price if the option is exercised. (Also see: options trading)

Canadian Stocks

Canada often gets overshadowed in the investment world. But there are plenty of reasons to invest in Canadian stocks.

Overall, Canadian stocks have not performed as well as U.S. stocks or many emerging markets in recent years. Nor is its economy growing as fast as America’s, China's or India's, with an average gross domestic product (GDP) growth of less than one percent. But Canada has some unique characteristics that are hard to find in today’s global market.

Here are five that particularly stand out:

Economic stability. What Canada lacks in economic growth it makes up for in reliability. Canada’s banking system is one of the soundest in the world. Its budget deficit is relatively modest compared to America’s, and especially when compared to sovereign debt-ridden Europe. Canada’s economy was less impacted by the 2008-09 recession, and thus didn’t have nearly as steep a recovery. And with a solid monetary policy, Canada faces less inflation risk than most countries.

Trusted banks. Moody’s Investors Services ranks Canada’s banking system No. 1 in the world for financial strength and safety. The World Economic Forum has dubbed Canada’s banking system the best in the world for seven years running. Look no further than the global financial crisis for proof of Canadian banks’ strength. During that time, no Canadian bank or insurance company failed or required a bailout. Canada’s banks operate an oligopoly, leading to higher profit margins and more government protection in times of financial drop-off.

Low volatility. Like its banks, Canadian stocks didn’t experience the same kind of drop-off the other G-7 countries experienced in the wake of the global recession. By early 2011, Canadian stocks were back trading near their pre-recession levels. Though Canadian stocks haven’t risen as fast as U.S. stocks since then, there haven’t been many big dips, either. Absent the huge gains of the U.S. and other emerging-market stocks in recent years, Canadian stocks trade at comparatively fair values.

Cheap currency. The Canadian dollar, also known as the Loonie, is historically cheaper than the U.S. dollar, thus inflating the value of Canadian exports by making them more affordable to U.S. – and other – customers. Combine that with a strong manufacturing sector and budding export presence, and there are plenty of Canadian companies that are – and will be – in strong demand globally for years to come.

Low tax rate. At just 17%, Canada boasts by far the lowest tax rate on new business investment among the G-7. That’s about half the effective tax rate of the U.S. Its corporate tax rates are also low, typically in the 26% to 27% range, depending on the province. America’s corporate tax rate is 35%. That makes Canada attractive to outside companies hoping to cut costs by relocating their operations to countries with lower tax rates. Burger King did just that when it merged with Canadian coffee-and-doughnut giant Tim Hortons in part to achieve a less cumbersome tax bill. Canada’s lower tax rates have an even larger impact on the companies that are actually based there, and less of an obstacle toward profitability.

You wouldn’t want a portfolio full of Canadian stocks. There’s better growth in other parts of the world, including the U.S. But in today’s uncertain global economy, countries with reliable banking systems and stable economies are safe places to invest.

Canadian stocks might not deliver the same returns as China or India. But they’re also less likely to go belly up if another financial crisis strikes. Cabot's Benjamin Graham Value Investor has a section on recommended Canadian stocks.

Charts

What are Stock Charts?

You're probably familiar with the price chart of stocks, but those aren't the only charts that offer lots of valuable information about stocks.

Learning how to read stock charts is a skill that all investors can benefit from. For example, we measure a stock’s momentum by examining its Relative Performance (RP) line. The RP line compares the stock’s price to a market index. You can chart moving averages, market volatility, and volume, among other things. 

The best thing about these charts is that they are all related. They offer insight into what's happening in the market as a whole, in specific industries, and individual stocks. The bad news? It can get a little overwhelming. It doesn't need to be, though. 

When you're learning about stock charts and technical analysis, focus primarily on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.

These charts give you the price of a stock, both current and historical, as well as volume, which tells you how much investors are buying and selling. The moving average can give you longer-term trends for a stock. Great growth stocks, for example, tend to find support (meaning that they stop declining) when they reach this moving average. Buying a stock as it’s bouncing off this moving average is often a good strategy. Any stock you’re considering for purchase should have stayed above its 50-day moving average for most of the time over the past few months.

In truth, though, you can make even more simple than that, especially to start with. What counts most is price and volume; just using these two inputs, you should be able to identify good buy and sell points.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Chinese Stocks

When seeking better-than-average growth, many investors flock to emerging markets. In emerging markets investing, Chinese stocks are your best bet.

Emerging-market economies are growing faster than the U.S. economy. Thus, investing in the companies based in those emerging markets – or the ones that derive a large portion of their revenue from emerging market sales – is a good way to earn market-beating returns.

But there’s a catch. You don’t want to invest in just any emerging market. After all, these markets are still “emerging” for a reason. In reality, the word “emerging” is a euphemism for “underdeveloped.” Anytime you invest in an underdeveloped nation, you take on an increased measure of risk – more than you would investing in an American blue-chip company.

Chinese stocks are perhaps the safest way to invest in emerging markets.

The so-called “BRIC” countries – Brazil, Russia, India and China – are considered the most powerful emerging market nations. All four have enormous (and growing) populations, stable governments and fast-expanding economies. Of that group, China has proven to be the most reliable.

China enjoyed more than a decade of double-digit economic growth based on cheap labor and massive exports, and its huge population of industrious people, directed by a powerful central government, has created a booming middle class eager to achieve the prosperity of developed nations. The country has made major investments in infrastructure and looks ready to deliver GDP growth of close to 7% (or more) for the foreseeable future.

Amid China’s economic boom, Chinese stocks have soared. Among the BRICs, only India has posted bigger gains in the last decade. India’s potential in the coming years is undoubtedly immense. However, India suffers from a political system that is chronically susceptible to gridlock, thus making its stocks less predictable – and more volatile – than Chinese stocks.

To be sure, China’s economic growth has slowed. From 2000-2010, China averaged 10% annual GDP growth. The 7% annual growth expected over the next decade-plus amounts to a fairly substantial step back. But no economy – even an emerging one – can grow at 10% a year forever. Besides, 7% is a much faster growth rate than the U.S. economy, which is expected to grow in the low single digits annually over the next 10 years.

Plus, there’s one other thing Chinese stocks have going for them. Many of them have struggled in recent years. From July 2009 until April 2014, Chinese stocks – as measured by the benchmark Shanghai Stock Exchange (SSE) – actually declined 40%, or more than 8% a year. In the long term, the pullback may have been a good thing.

D

Derivatives

A derivative is a financial instrument—or, simply put, a contractual agreement between two parties—that has a value, based on the expected future price movements of the "underlying asset" to which it is linked. The underlying asset can be a stock, bond, currency or commodity. Strictly speaking, a derivative has no value of its own. It is not an asset; it is a contract. There are myriad kinds of derivatives; the most common are options and futures.

Dividend

What is a Dividend?

Want to get paid for investing? Look for a stock that offers a dividend.

Outside of your job, you probably don't get paid for most of the things you do. But investing in a stock that pays a dividend is one of the exceptions. When you buy a dividend stock, the company will pay you for owning it. And that's outside any increase (or decrease) in overall stock price.

But what is a dividend? A dividend is a bonus. An extra. It's a portion of earnings that the company pays to investors on a quarterly or yearly basis.

Here's the thing about dividend stocks, though. Some people say dividend stocks aren’t sexy. They bore the bejesus out of people. People get turned off by a boring dividend stock.

They shouldn’t. Over time, dividend stocks vastly outperform stocks that don’t pay dividends. When you buy a dividend stock, you know for sure that you’ll receive a steady stream of income. If the market crashes and the share price begins to fall, you at least have a nice 3% or 4% yield (or higher) to soften the blow.

In fact, the best dividend-paying stocks can help you reach a variety of investment goals, including protecting your wealth, generating income and reaping capital gains. Let's break that down.

Buying a stock that doesn’t pay a dividend can only reward you in one way: share price appreciation. Dividend investing, however, grows your wealth in three ways.

First, like with any stock, your portfolio increases as the price of the stock appreciates. Second, you will receive an income stream of dividend payments, which you can collect in cash or reinvest to further boost your holdings. Lastly, many companies increase their dividends over time, providing an income stream that often outpaces inflation, and greatly increasing the yield the longer you hold the investment. (Your yield is how much you earn in income every year as a percentage of your investment.)

Furthermore, companies that have the cash flow to pay regular dividends typically make safer, more reliable investments. The best dividend-paying stocks are high-quality, long-lived companies with predictable business models—they aren’t going to suddenly crash due to a lousy quarter or an adverse news event.

Bear in mind, however, that the first thing to consider regarding a high dividend, or any dividend for that matter, is whether it is safe and sustainable. Often times, a yield becomes high because the stock price has fallen considerably. A stock price usually falls because of poor operational performance, which imperils its ability to sustain the dividend.

It is generally not wise to be allured by a 8%, 9% or 10% yield on a stock that will have difficulty maintaining the dividend and is less likely to grow it. Over time, you should fare much better with a more modest high yield on a company that can sustain the payout and likely grow it over time.

To learn more about investing in dividend stocks, be sure to download your FREE copy of our report, Cabot's 5 Best Dividend Stocks.

 

 

Dividend Aristocrats

Dividend Aristocrats are companies that have raised their dividend rates at least once every year, for a minimum of the previous 25 years.

More precisely, they constitute the S&P High Yield Dividend Aristocrats Index, an official index of the 50 highest dividend stocks in the S&P Composite 1500.

Investors can track the performance of the Dividend Aristocrats online, via the Standard & Poor’s Dividend Aristocrats page. Also, an Exchange Traded Fund (ETF) exists—the SPDR S&P Dividend ETF—that's designed to mirror the behavior of the S&P Dividend Aristocrats Index. It trades under the symbol SDY.

Income investors seeking safety and a steady stream of income gravitate toward Dividend Aristocrats. However, these stocks can't be bought and blindly maintained on automatic pilot, because extreme events can cause even the aristocrats to fall out of favor.

For example, during the Great Recession of 2008-09, many financial institutions once considered to be rock-solid dividend plays were dumped from the list. If a company fails to increase its dividends from the previous year, it is removed. This is what happened during the recent economic downturn and financial meltdown, when brand-name companies ordinarily associated with dividend stability were cut, notably Bank of America.

Typically, a so-called Dividend Aristocrat is, by its very nature, a large and relatively stable blue-chip company with a healthy balance sheet. Dividend Aristocrats are considered the "gold standard" for dividend-generating stocks and, as such, income investors seek them out. Many of the companies on the list are household names with storied pasts and ubiquitous brands, such as McDonald's (MCD) and Coca-Cola (KO).

Dividend Growth

What is Dividend Growth?

Dividend growth can help you reach various investment goals, including protecting your wealth, generating income, and reaping capital gains.

Dividend growth stocks are those stocks that increase their earnings each year, have positive technical momentum, and increases their dividend payouts every year. To understand dividend growth, however, it’s important to understand what a dividend is. 

A dividend is a portion of earnings that the company pays to investors on a quarterly or yearly basis. Dividend investing grows your wealth in three ways:

  1. Like with any stock, your portfolio increases as the price of the stock appreciates.
  2. You will receive an income stream of dividend payments, which you can collect in cash or reinvest to further boost your holdings.
  3. Many companies increase their dividends over time, providing an income stream that often outpaces inflation. 

Dividend growth investors are primarily concerned with buying high-quality stocks that can raise their dividends over time. The best dividend-paying stocks are high-quality, long-lived companies with predictable business models—they aren’t going to suddenly crash due to a lousy quarter or an adverse news event. 

And while it’s not true of every dividend stock, many of them are household names. They’re sitting in plain sight. They’ve been paying a dividend for decades, often growing that payment every year. 

Three factors determine a stock’s potential for dividend growth:

  1. Dividend history – The best dividend growth stocks make increasing dividends a priority in good years and bad, and you can easily check on that by looking at their history of dividend increases. 
  2. Cash flow – The most important factor is cash flow growth. If the money coming in isn’t increasing, the money going out can’t increase.
  3. Payout ratio – Also important is the company’s payout ratio. That’s the amount of free cash flow that they pay out as dividends. A lower payout ratio means more room for growth.

To learn more about investing in dividend stocks, be sure to download your FREE copy of our report, Cabot’s 5 Best Dividend Stocks.

Dividend Reinvestment Plans

Dividend reinvestment plans, otherwise known as "DRIPs", are a way for income investors to build long-lasting wealth.

Offered by some dividend stocks, dividend reinvestment plans allow you to have your quarterly dividend payments allocated toward buying more shares (or fractions of shares) of that stock instead of being paid directly to you in the form of a check. Thus, the amount of shares you own in a given stock automatically expands every quarter when you enroll in a DRIP, so long as that company keeps paying a dividend.

You’d be amazed at how fast your money accumulates when you reinvest your dividends —especially when dividends and share prices increase over time. Consequently, DRIPs are tailor-made for the long-term investor.

Dividend Stocks

What are Dividend Stocks?

Investing in dividend stocks is more than speculation. It’s a good way to build long-term wealth.

You can have a very good reason to believe that a stock is going to rise. But ultimately, the market is unpredictable. Dividend stocks, however, aren’t solely dependent on their share price rising or falling. When you buy a dividend stock, you know for sure that you’ll receive a steady stream of income—generally on a quarterly basis. If the market crashes and the share price begins to fall, you at least have a nice 3% or 4% yield (or higher) to soften the blow.

More often than not, you can trust a company that pays a dividend. Dividends are a measure of a company’s success and its commitment to shareholders, and the companies that consistently grow their dividends are the ones whose sales and earnings are also growing. Companies that lose money or fail to grow are unable to consistently pay a dividend.

Paying a dividend is also a savvy way to attract investors, which is why the share prices of dividend stocks typically appreciate over time.

Dividend stocks aren’t going to make you rich overnight. But they can significantly build up your nest egg if you buy and hold them for years, or even decades. Dividend stocks become more powerful, and usually make up a larger part of your annual return, the longer you hold on to them.

Be aware, though, that not all dividend payers build wealth. You need to search for investments with timelessness and longevity—companies that are sure to not only be around 20 or 30 years from now, but still thriving. 

When buying dividend payers, you have two options. You can either collect the quarterly income or reinvest it to buy more shares. The latter is called a dividend reinvestment, and is an easy way to increase the value of your position without having to do much. You can always start collecting the dividends down the road when you need the income.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Dividend Yield

What is Dividend Yield?

If you’re serious about making money in the market, dividend stocks are your answer. But do they need to have a high dividend yield?

Before we can answer the question of dividend yield, it's important to clarify what a dividend is. When you buy a stock, you're buying a share or percentage of a company. The value of that share goes up and down, depending on factors that range widely, from the general state of the economy to company news and anything in between.

Some companies pay a dividend on those shares. That is, they pay you to own their stocks by sharing a small percentage of their profits with you, beyond what may be happening with the stock price. In addition to this benefit, most companies that pay dividends tend to be safer, more reliable investments.

So dividend yield is, plainly speaking, how much a company pays its shareholders over the course of a year of ownership, divided by its current stock price. When you buy a dividend stock, you’ll receive a steady stream of income—generally on a quarterly basis. If the market crashes and the share price begins to fall, the nice 3% or 4% dividend yield (or higher) will soften the blow.

Be aware, however, that not all dividend-paying stocks are created equal, and an extraordinarily high dividend yield is likely not sustainable. Typically, yields only rise above the low teens temporarily. If you’re looking for a sustainable high dividend yield, make sure the investment has a good track record of doing just that.

It is generally not wise to be allured by a 8%, 9% or 10% dividend yield on a stock that will have difficulty maintaining the dividend and is less likely to grow it. Over time, you should fare much better with a more modest yield on a company that can sustain the payout and likely grow it over time.

To find out more about investing in dividend stocks, download your copy of our FREE report, Cabot's 5 Best Dividend Stocks, today.

Dividends

What are Dividends?

Like free money? Dividends are about as close as you can get, and it's as easy as investing in the right stock.

When you invest in a stock, you buy a small portion of a company. The value of your stock rises and falls in conjunction with the performance of that company. But when you buy stocks that pay dividends, you get a little bonus. When these stocks earns a profit, it shares some of that profit with stockholders.

What do you need to do to get in on that action? Nothing. As long as you own the stock, you are eligible for monthly, quarterly, or yearly dividend payments. While dividends aren't guaranteed, most companies are reluctant to cut them as that sends a troubling signal to investors. That makes investing in dividend stocks a low-risk, steady way to bring regular income into your portfolio.

When a company pays a dividend—and especially if it makes an effort to increase that payment every year—it shows that it cares about rewarding shareholders. These payments are also a savvy way to attract investors, which is why their share prices typically appreciate over time.

What do these stocks look like? They tend to be household names like Target Corp. (TGT), CVS Health Corp. (CVS), and Best Buy Co. (BBY).  But you'll also find a number of lesser known companies that have paid consistent dividends for years.

To find these stocks, search for investments with timelessness and longevity—companies that are sure to not only be around 20 or 30 years from now, but still thriving. Dividend stocks become more powerful, and usually make up a larger part of your annual return, the longer you hold on to them.

To learn more and find out how to invest in the best dividend stocks, download our FREE report, Cabot's 5 Best Dividend Stocks. It's your guide to finding the investments that will fund your future.

Double Bottom

What is a Double Bottom?

In technical analysis of stocks, a double bottom chart pattern could signal a prime buying opportunity–if you’re careful.

The technical analysis of stocks can yield lots of helpful information. Basic technical analysis includes those factors we look at regularly, such as moving averages, trading volume, and momentum. However, when you really dig in, you can start analyzing things like double top or double bottom patterns, earnings gaps, and much more. 

A double bottom describes the fall in the price of a stock or index, followed by a rebound, then another drop to a level that’s roughly similar to the initial drop, and finally, another rebound. Consequently, the double bottom chart pattern resembles the letter “W.”

You can find double bottom patterns within charts that are intra-day, daily, weekly, monthly, yearly, and longer-term. The two lows should be distinct. According to technical analysts or “chartists,” the second bottom can be rounded while the first should be precise and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is termed the confirmation point.

What does this movement mean for investors? The second low suggests that there's enough support for the stock that it's unlikely to sink any lower. It's already "bottomed" twice, and is poised to move upward.

This comes with a very large caveat, though. It's easy to get anxious and jump in or out of a stock too soon (or too late). Managing risk at this point is crucial. It's amazingly easy to misread the chart and lose a lot of money quickly. 

That said, investors who don't mind some risk and feel comfortable managing that risk could take some quick profits. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Double Bottom Chart

A double bottom chart pattern is a chart pattern used in technical stock analysis to describe the fall in price of a stock or index, followed by a rebound, then another drop to a level that's roughly similar to the original drop, and finally another rebound. Consequently, the double bottom chart pattern resembles the letter "W".

This "W" pattern forms when prices register two distinct lows on a chart. However, the definition of a true double bottom is only achieved when prices rise above the high end of the point that formed the secondary low.

Put another way, the double bottom is a "reversal pattern" in an equity price's downward trend. The price drops to a floor—a "support level"—before rallying, pulling back up, and then falling to the support level again, before rising. A double bottom is characterized by two well-defined lows at roughly the same price level. Double bottoms are among the most commonly occurring chart patterns.

Double bottom patterns can be discerned within charts that are intra-day, daily, weekly, monthly, yearly and longer-term. The two lows should be distinct. According to technical analysts or "chartists," the second bottom can be rounded while the first should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is termed the confirmation point.

Typically, a double bottom's volume is greater on the left of the bottom than on the right. Volume usually is downward as the pattern forms and accelerates as the pattern hits its lows. Volume increases again when the pattern completes, punching through the confirmation point.

If accurately identified, the double bottom can signal a fortunate entry point for investors. To chartists, the double bottom formation indicates that the stock has reached a crucial support level and is encountering difficulty moving lower. That implies the stock has formed a low and is now positioned for an upward move.

Dow

What is the Dow?

The Dow Jones Industrial Average tracks the 30 largest companies trading on the New York Stock Exchange.

The Dow Jones Industrial Average began life in 1896 as a simplified way for the average American to understand the health of the U.S. economy. The Dow is calculated using the 30 largest companies that trade on the New York Stock Exchange.

These companies:

  • Must be members of the S&P 500 index.
  • Must be domiciled in the U.S.
  • Cannot be classified in the transportation or utilities sectors.
  • The Dow 30 committee prefers that the price of new stocks not be more than ten times higher than the lowest-priced stock in the index.
  • The Dow 30 committee prefers that new entrants pay a dividend.

Though it may be one of the most frequently referenced indexes, the Dow is also a questionable proxy for the health of the total U.S. stock market. Its total concentration on Blue Chips (very large, stable, mostly dividend-paying companies) makes it too conservative to be a true representation of the broad market.

Additionally, the make up of the index can change. For example, on June 19, 2018, investors learned of the historic news that General Electric (GE) stock has lost its position among the 30 corporate heavyweights that make up the Dow Jones Industrial Average stock market index. GE stock was a proud member of the Dow for 111 uninterrupted years.

A variety of factors contributed to this stunning change of events, including the Dow’s lower emphasis on manufacturing companies, GE’s struggling finances, and its very low share price. The Dow is a price-weighted index, meaning that a low-priced stock like GE cannot contribute meaningfully to the index’s value.

By replacing GE with a much higher-priced stock, the value of the index can rise more than it would by continuing to hold any low-priced stock, whether that stock belongs to GE or a rapidly growing company. With regard to the index’s price-weighting, a writer for the Financial Times stated, “I have long contended that [the DJIA] is a pointless and mathematically unsound index that measures nothing in particular.”

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

E

Earnings

What are Earnings?

If the stock market was a race, earnings season would be an obstacle course.

When the earnings race begins, some companies trip and fall right out of the gate. Other companies get bogged down in the mud pit. Others climb the rock wall like they're out for a leisurely Sunday stroll. And some are sitting in their lawn chairs at the finish line, sipping a victory drink like they do this every day.

But what exactly are earnings? And what is earnings season? Earnings season is the name given to the period after the end of a calendar quarter when many companies let everyone know how they’ve been doing in the past three months. During the three earnings seasons that begin in April, July and October, public companies must report to the Securities and Exchange Commission, detailing their sales, cash flow, earnings per share, expenses, cash on hand and other interesting numbers.

For most companies, these (usually) unaudited earnings reports come a week or two after the current quarter ends.

Earnings reports are among the great unknowns of investing. Will company XYZ’s quarterly profits top analysts’ expectations? Will its revenues come in line? Are there any other important inputs in its business that could make the stock move violently in either direction?

In truth, the whole pageant of quarterly earnings is pretty artificial, and often delivers deceptive results. There’s nothing sacred about what analysts think, and especially about an average of what they think, without the supporting analysis.

As a result, you can’t really prepare for earnings season because you can’t predict earnings— a stock’s reaction is mostly a roll of the dice. And that uncertainty has resulted in earnings season being one big festival of gaps up and down. Of course, with volatility comes opportunity, for both profit and loss.

Despite this volatility, there are a some rules for earnings season we do take note of.

  1. Be consistent. The most important thing at earnings season (and really, at any time in the stock market) is to have a plan and follow it.
  2. DON’T buy a “full” position of a stock within a few days of its earnings report. This is just logical risk management. If you want to gamble, hit the craps table or, if you must, dabble in some cheap call options.
  3. Big earnings gaps are generally buyable. Stocks with large earnings gaps (10% or more for most stocks; 7% or more for mega-cap names) tend to continue in that direction in the intermediate-term (next four to 12 weeks).
  4. When your stock gaps down, continue to follow your sell plan. While upside gaps often provide buying opportunities in new leading stocks, downside gaps should be placed in context with the stock’s chart and overall action.
  5. If a stock takes a big fall, you MUST wait at least three trading days before even thinking about putting on a bullish position.The rationale behind The Three-Day Rule is that if a large hedge fund or institution owns millions of shares of a stock, it won’t be able to sell out of its entire position in a day or two without causing the stock to fall. Instead, the institution will parcel out its sales over a couple of days, so they don’t depress the stock and can sell at better prices.

To find out more about stocks that are well-positioned to thrive and do well through earnings season, download your FREE copy of our report, Cabot's 5 Best Dividend Stocks

Earnings Season

What is Earnings Season?

Earnings season happens every quarter, and it’s make-it or break-it time for many companies.

The weeks following the end of every fiscal quarter are known by investors as earnings season. This is when companies release their financial reports for the previous three months, and when investors get to see a company’s earnings. 

You can’t really prepare for earnings season because you can’t predict earnings— a stock’s reaction is mostly a roll of the dice. That’s led to lots of surprises and lots of big stock gaps both up and down. Of course, with volatility comes opportunity, for both profit and loss.

The way earnings season works is that investors compare companies’ results with the “consensus numbers” (an average of the estimates of all the analysts who are following that company). If a company is supposed to make a nickel per share but makes six cents, that’s a beat. Everyone’s happy. If revenue was supposed to top $200 million but the report says $199 million, that’s a miss. Nobody’s happy.

There are a few ways you can handle earnings season:

  1. Ignore earnings reports, and just buy and sell as you normally do. In the long run, this is likely to produce your best results, as good companies in good market environments will, more often than not, react well to their earnings.
  2. Sell part of every growth stock you own before it reports earnings. Believe it or not, this is a decent half-way measure … if you’re running a concentrated portfolio. 
  3. Sell most or all of the shares of a stock you don’t have much profit cushion in.

One last option on the buying side is to stay away from volatile stocks during earnings season. That’s more like gambling than investing.

To learn more and to find out which stocks are most likely to help you weather the market without too much stress, download our free report, 10 Forever Stocks to Buy Now - and How to Find the Best Growth Stocks.

Emerging Market

What is an Emerging Market?

An investment in any emerging market is not without some risk, but may also come with the chance for big rewards.

Of the 190 countries in the world, only 50 of them are considered “developed.” These are countries like Germany, Britain, Japan, Canada, the U.S., and so on. Invest in companies located in any of the remaining 140 countries, and you are investing in an emerging market. 

An emerging market investment comes with a lot of promise, and there are plenty of good reasons to hold these stocks in your portfolio. These economies tend to grow faster than the economies of developed countries, and are thus fertile ground for fast-growing companies and investments.

Brazil, Russia, India, and China—the so-called “BRIC” nations—garner the most attention. But you can find good stocks in other, less populous corners of the globe, including South Korea, Mexico, Turkey, Saudi Arabia, and South Africa. The options are numerous for investors willing to explore outside their American bubble.

These markets aren’t all speculative, either. Emerging market blue-chip stocks have the same talented management and steady dividends that traditional blue chips offer.

Beware, however, that many emerging markets are plagued by political instability, inferior infrastructure, volatile currencies and limited equity opportunities. In addition, some of the largest companies in emerging markets are either state-run or private. There are simply more unknowns when investing in a market that is still developing. And the less you know about a company, the more risk you take on when you invest in it.

One way to curb the risk is to invest in American Depository Receipts (ADRs) traded on U.S. exchanges, which subjects the stocks to strict U.S. requirements.

To find out more about making profitable investment decisions, download your FREE copy of our report, How to Find Undervalued Stocks.

Emerging Markets

What are emerging markets?

Emerging markets are economies whose gross domestic product (GDP) is growing at a much faster rate than more developed markets such as the U.S., Germany and Japan.

Stocks in emerging markets often grow at a faster clip than the average stock in a more mature market. Brazil, Russia, India and China—the so-called “BRIC” nations—garner the most attention. But good stocks can be found in other, less populous corners of the globe, including South Korea, Mexico, Turkey, Saudi Arabia and South Africa. The options are numerous for investors willing to explore outside their American bubble.

There are myriad reasons to do so. Investing in emerging markets allows you to invest in countries with double-digit GDP growth—or close to it. At a time when America’s economy is expanding in the low single digits, Japan’s economy is struggling and much of Europe is still buried under a mountain of sovereign debt, emerging markets hold more appeal than ever.

Of course, all these markets come with their fair share of risk. The term emerging is really a euphemism for “underdeveloped.”

Many of these global markets are plagued by political instability, inferior infrastructure, volatile currencies and limited equity opportunities. In addition, some of the largest companies in emerging markets are either state-run or private. There are simply more unknowns when investing in a market that is still developing. And the less you know about a company, the more risk you take on when you invest in it.

One way to curb the risk is to invest in American Depository Receipts (ADRs) traded on U.S. exchanges, which subjects the stocks to strict U.S. requirements.

For some, emerging markets are simply too risky. But for many, the potential for massive rewards is worth the extra risk.

To find out more about making profitable investment decisions, download your FREE copy of our report, How to Find Undervalued Stocks.

Energy Stocks

What are Energy Stocks?

From solar to wind to fracking and mining, energy stocks include a wide range of technologies and companies.

If you look through our archives, you'll see that energy stocks are in the headlines quite a bit. You'll also see that the analysis is seemingly all over the place. You can find commentary like this: "By far the worst-performing sector in recent years has been the energy sector." And you can also read this: "In the United States, we are in the middle of a massive energy boom. It is a global economic phenomenon of staggering proportions, and if you’re an investor of energy stocks, or want to be, you have a lot to gain."

Do we really disagree that much? It's enough to make your investing head spin. But let's step back. 

Energy stocks are shares in companies that sell, distribute, or manufacture technology used to produce energy, whether it’s fracking, or windmills. Some companies may be levered to the price of oil and gas, while others are not exposed to commodity prices, but instead, collect a fee for the transport and storage of oil and gas.

Due to these differences, investing in the energy sector is not one size fits all. The good news about investing in energy stocks is that they aren't widely owned, and therefore even the best ones are exceedingly undervalued. 

Be aware, however, that selectivity is critical in choosing these stocks. Some are no more than value traps, in which the stocks appear inexpensive but where decaying fundamentals will eventually threaten the company’s future. Energy sector stocks are heavily exposed to this risk. 

To find out more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

 

Etf

What is an ETF?

An ETF, or Exchange-Traded Fund, holds dozens and even hundreds of stocks, commodities, or bonds, giving you the safety of diversification and exposure to many different types of investments.

Like most investments, an ETF comes with advantages and disadvantages for any given investor. ETFs allow small investors to buy a piece of their favorite asset groups more cheaply and with less hassle than buying a traditional mutual fund or multiple stocks. ETFs can also be used to track the progress of the leading indexes, which is why even professional traders and hedge fund managers have come to prefer them over individual stocks and commodities.

Like stocks, an ETF can also be aggressive, defensive, growth-oriented, or based around different sectors like clean energy or dividend investments. ETFs also offer investors another key advantage: they make it easier to see at a glance which industries are outperforming and which ones are underperforming the broad market. 

When you’re trying to decide which ETFs are likely to return a worthwhile profit, one of the best things you can do is perform a quick relative performance check. This is done by comparing the fund’s recent price performance against the performance of a benchmark index, such as the S&P 500. 

But there are downsides to ETF investing. Anyone who was investing in stocks in 2008 can probably remember the deepening feeling in the pit of their stomach as the market continued the free-fall that began in earnest in January 2008 and would continue through March 2009. During that time, the S&P 500 Index fell nearly 58% in the most popular broad market index in the U.S. If you were holding index ETFs, you really suffered.

There are some instances when investing in ETFs makes sense—whether it be gaining maximum exposure to a red-hot sector, gaining access to an entire country’s stock market, or simply taking advantage of a bull market. In general, however, we don’t recommend buying and holding ETFs the way you would stocks with long-term growth potential.

For stocks that you can buy and hold onto, download our FREE report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks, today.

 

Etfs

What are ETFs?

Exchange-traded funds, or ETFs, for short, are investment funds that trade on a public stock exchange just like a stock.

Unlike individual stocks, however, ETFs hold dozens and even hundreds of stocks, commodities, or bonds, so you get the safety of diversification. In that way, they're like mutual funds.

Previously, investors looking for a basket of securities had to opt for mutual funds. While mutual funds provide diversification, they often carry excessive annual fees, sometimes above 1%-2% per year. In addition, many mutual funds also have front-end or back-end fees that investors have to pay when making their initial investment, or when selling their investment.

ETFs, on the other hand, are popular with investors because they typically carry much lower fees, particularly as it pertains to index funds. The other key advantage of ETFs versus mutual funds is liquidity. Mutual funds are priced and traded only once per day, after the market close, whereas ETFs are traded all day. This provides greater liquidity for ETF investors.

At Cabot Wealth Network, we are stock pickers at heart. That said, there are some instances when investing in ETFs makes sense—whether it be gaining maximum exposure to a red-hot sector, gaining access to an entire country's stock market, or simply taking advantage of a bull market. 

You can invest very specifically, as well. For instance, you can invest in ETFs that focus on environmental or social issues. Others hold only dividend-paying stocks. 

In general, we don't recommend buying and holding ETFs the way you would a stock with long-term growth potential. But if you time it right, there is money to be made.

To learn more, download your FREE report, How to Invest in Stocks and Other Investing Basics, today. This report will help you take the mystery out of investing and give you the information you need to start investing independently.

Ex-dividend Date

It’s important for investors who buy dividend-paying stocks to understand what “ex-dividend” means and how the various dates related to dividend payments really work.

The Ex-Dividend Date is the first day the stock trades without its dividend, thus ex-dividend. It's the date by which you have to own the stock to get the payment. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend.

The day before the ex-dividend date is really the all-important date for investors to know.

So if a stock’s ex-dividend date is February 28, only those who own it on February 27 will receive the dividend.

But there are a few other dividend-related dates you should know.

The Record Date is the day the company announces when a dividend will be paid to “shareholders of record as of” some date. Because it takes two days to reliably become a shareholder of record, the ex-dividend date falls two days before this day declared by the company.

The Payment Date is the day the dividend will actually be transferred into your brokerage account. It’s usually about a month after the ex-dividend date, although for some funds, it’s as little as two days after the ex- date. When a stock is trading ex-dividend that means its ex-dividend date has already passed but the dividend payment has not been made yet.

F

Financial Stocks

What are Financial Stocks?

Financial stocks are stocks of companies involved in banking, credit cards, insurance, and financial management.

There are, at least, two types of financial stocks: There are the older, traditional banks and financial institutions, then there are fintech stocks that merge finance and technology. Traditional financial and bank stocks can be very cyclical since their profits are so closely tied to the interest rate and the general state of the economy. That’s because as interest rates rise, so does the rate at which they lend to businesses and consumers, which means fatter profit margins for financial stocks.

However, bank stocks have been major market laggards for over a decade, dating back to the end of the 2008-09 financial crisis. Though most of the big banks have recovered nicely since the Great Recession, they’re not growing the way the technology, healthcare, or even retail sectors are. 

In the meantime, tech stocks have been on a tear, and fintech stocks can give investors the security that comes with large financial stocks, as well as the growth that modern technology brings. This emerging technology is driving the evolution of traditional financial services as companies and countries attempt to adapt to evolving consumer expectations. 

Increasingly, banks and other financial services companies will need to acquire new customers and interact with ongoing customers through digital ecosystems, requiring new approaches to branding and relationship management as well as changes in business models and technology.

Remember, too, that whether you're looking at bank stocks or stocks in any other sector, individual stocks may perform very differently than the majority of their peers. So always keep your eyes open to investments that have promising trajectories.

Successful investing involves much more than just stock selection, however, so we urge you to read the tips in How to Invest in Stocks and Other Investing Basics. This free report can help you make investment decisions that go beyond guessing and use tested strategies proven to work.

Fixed Income

What is Fixed Income?

We often associate fixed income with pensions and retirees, but what does it mean in the world of investing? Let's find out.

If we've learned anything since the turn of the century, it's that even though the stock market goes up over time, there can be some pretty jarring periods where it seems like every stock you own is about to go bankrupt. Needless to say, that's not much fun for an investor, and if you're close to or already in retirement, it can be disastrous. That's why most investing strategies suggest a few safe, fixed-income investments.

Fixed-income investments come in the form of bonds and preferred stocks.

Despite its name, a preferred stock doesn’t represent or confer ownership—it’s debt, like a bond or loan. Also like bonds, preferreds have fixed distribution rates. So you’d only buy a preferred for steady fixed income, not capital gains.

That said, preferred stock can generate yields that are usually between 4% and 8%. And preferred shareholders are usually better protected—both in and out of bankruptcy—than common stock holders.

Bonds have historically been recommended for investors who want to preserve their capital above all else. However, the low interest rates that have prevailed since the 2008 financial crisis have driven yields down across the board so that many bonds now yield barely enough to keep up with inflation.

In general, the safer and shorter-duration a bond, the less it yields. Today, the safest treasury bonds aren’t even yielding enough to cover inflation. Many investors and institutions are responding by taking on greater risk, buying lower-quality bonds in search of decent yields. You should be cautious about this strategy; it can get you in a lot of trouble.

Strong stocks will always be worth investing in. To learn more, and to start investing yourself, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics

 

Forever Stocks

The word “forever” is often hyperbole.

What do you say if you’ve been waiting a long time in line at the DMV or on hold with your cable provider? “I’ve been waiting forever!”

The term “forever stocks” is a similar exaggeration. You don’t necessarily hold on to these stocks “forever.” But you do hold onto them at least until retirement.

Forever stocks are stocks that are fairly evergreen. Typically they are industry leaders that have been growing for a while and should continue to grow for decades to come. They're stocks you can count on to be viable not only today, but 20 or 30 years from now.
There are five key attributes you want in forever stocks:
  1. A product or service or business model that is revolutionary.
  2. A mass market.
  3. A company that’s still small enough to grow rapidly.
  4. A company that is not respected—perhaps not even known—by the majority.
  5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality, at least on Wall Street.

Forever stocks aren’t synonymous with safety stocks or even dividend stocks, necessarily. You’re not searching for the next Procter & Gamble (PG) or Johnson & Johnson (JNJ)—reliable, low-beta dividend growers that will deliver a steady stream of income and decent, if unspectacular, returns. Their purpose is to make you rich.

You want to find the next Apple (AAPL), Google (GOOG) or Amazon (AMZN)—stocks that if you had bought them 10 years ago (or more), you would have earned 10, 20, even 100 times your initial investment. Those are life-changing investments. And that’s what forever stocks are supposed to be.

Not every forever stock will deliver those kinds of returns, of course. In fact, you’ll be lucky to find a single buy-and-hold stock that will provide the same kind of return as you would have gotten by investing early in Apple or Amazon. But if one or two of these stocks can gain half the long-term return of an Apple or an Amazon, you can position yourself for a nice financial windfall by the time you retire.

Futures

Futures are contracts to buy or sell stocks or bonds, or commodities, at a stated price at a stated time in the future. These commodities include pork bellies, gold, currency, corn, wheat, orange juice, etc.

Most commodity futures contracts come due within three or six months. You can buy and sell single stock futures or stock index futures, which are contracts based on the performance of a broad index such as the Standard & Poor's 500.

When you purchase or sell a stock future, you're not buying or selling the underlying stock. You never really own the stock. You're engaging in a futures contract, which is an agreement to buy or sell the stock certificate on a certain date at a fixed price.

A futures contract essentially entails one of two positions: long or short.

If you've entered into a long position, you've agreed to purchase the stock when the contract expires. A short position stipulates the inverse: you've agreed to sell the stock when the contract expires. So, if you're convinced that the price of your stock will be higher in three months than it is today, you take a long position. If you think the stock price will be lower in three months, you choose to go short.

Futures contracts are traded in freewheeling "trading pits" at exchanges worldwide. It's in these frenetic environments where traders determine futures prices, which change from moment to moment. Established in 1848, the Chicago Board of Trade (CBOT) is the world's oldest futures and options exchange. More than 3,600 CBOT members trade in excess of 50 different futures and options contracts.

Most commodity and currency futures have a margin of 5%, which means to make a trade, you only have to put up 5% of the contract value. That's a small stake, because prices can easily and quickly move by much more than 5% in only a day's time.

However, a leveraged bet of 5% is much smaller than the margin debt with which you're allowed to buy stocks. A percentage that small doesn’t allow you to ride out ephemeral fluctuations. It's possible to bet hideously wrong.

As with options, a futures contract uses leverage that can turn a small bet into a very large win or loss. In fact, futures are even riskier than options, because with the latter, an options buyer's worst-case scenario is losing the original investment. An investor in the futures market can lose a lot more. Then again, a single futures contract can rise in value by several thousands of dollars each day.

G

GDP

What is GDP?

The U.S. Gross Domestic Product, or GDP, represents the total value of all the goods and services produced by the economy as a whole.

GDP is usually considered the best single-number reflection of how fast the economy is growing. It’s a snapshot of economic indicators like business activity, household purchasing, and activity in the labor market. 

GDP helps us determine the health of the overall economy. For example, a recession is defined by two successive quarters of declining GDP. A recession can include other characteristics, such as rising unemployment, rising inflation, falling stock market, etc. However, declining GDP is the lynchpin. Of course, we all hope that doesn’t happen. 

For stock investors, getting evidence of a healthy economy is always welcome. When more money is changing hands, businesses are competing for slices of a bigger pie, increasing successful companies’ revenue growth and giving laggards more revenue to finance the changes they need to make to climb the ladder. Ultimately, if the economy stays strong and stock markets remain robust, more young companies will come public and enter the competition for investors’ money. Similarly, established companies often enjoy rising stock prices. 

However, GDP doesn’t always impact stock prices as much as we may think. Famed investor Peter Lynch doesn’t spend much time worrying about the forecast for GDP growth or interest rates. He prefers to identify companies that are growing rapidly but trade at reasonable valuations.

Bear in mind, too, that the U.S. isn’t the only country with a GDP. In fact, it’s not unusual for emerging markets to have faster growing economies than the U.S. has. 

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Growth Investing

What is Growth Investing?

Growth investing comes with a greater degree of volatility than dividend investing or even value investing. But it also has the potential for much bigger rewards.

Growth investing typically involves investing in less established, but fast-growing companies. In searching for growth stocks, you generally want to invest in companies that are growing – or projected to grow – earnings at a faster rate than the overall market. Companies growing at triple-digit rates, 100% or better, are among our favorites. (In fact, triple-digit growth has been a factor in most big winning stocks over the years).

That kind of rapid growth can overcome a number of smaller deficiencies: inexperienced management, competition, weak patent positions, etc. Furthermore, fast growth typically attracts the attention of institutional investors, who push share prices higher as they buy their way in.

Of course, the risk in growth investing is that you’re buying less mature companies that usually don’t pay a dividend. If the share price declines, you don’t have a quarterly dividend payment to cushion the fall. And these stocks can very volatile, especially during earnings season.

While fast-growing companies have a good chance to outpace the market—sometimes by a considerable amount—they also have the potential to fall flat. Some high-growth companies are so under the radar or so misunderstood that the share price appreciation doesn’t match the financial growth.

The key to successful growth investing is identifying fast-growing companies before the masses do. That can be tricky, since some of the best growth-stock candidates are relatively obscure. There’s a reason, after all, that the market hasn’t fully discovered them yet.

But keep things simple. Look for companies with accelerating sales, better-than-average earnings growth, and healthy profit margins. More often than not, the combination of those three characteristics eventually grabs the market’s attention. When it does, the rewards can be astonishing.

To learn more and get everything you need to know about investing in growth stocks, download our FREE Special Report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks.

Growth Investor

What is a Growth Investor?

A growth investor looks for fast-growing companies that offer great potential returns, even though that potential comes with volatility.

For a growth investor, the rewards of investing in less mature, more risky stocks are far outweighed by the possibility of an investment that far outpaces the overall market. But this kind of investing takes a keen eye and a steady nerve. And you have to be a little bit ruthless in remaining detached from your investments and focusing on the numbers

There are a few characteristics that every successful growth investor shares: 

  • They invest in fast-growing companies that have yet to reach the point of peak perception. 
  • They are patient, because frequently stocks don’t go up as fast as you might want them to.
  • They hold diversified portfolios, because you should never have all your eggs in one basket when growth investing
  • They cut losses short —the key for a growth investor to ensure they retain enough capital to stay in the game.
  • They sell winning stocks when they lose positive momentum. 

The best growth stocks include a revolutionary product or service, mass markets, high barriers to competition, excellent and innovative management, high profit margins, triple-digit revenue growth, and accelerating earnings growth.

Does a growth investor always invest in stocks that climb? No. No one picks winners all the time. Sometimes your stocks will go down right after you buy them. If they do, you should get out of them, keeping your losses small. On the other hand, you should hold your winners as long as they are doing well, cultivating them with the hope of holding on for the enormous profits that can develop over several years.

To learn more and get everything you need to know about investing in growth stocks, download our FREE Special Report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks.

Growth Investors

What are Growth Investors?

Growth investors like gambling on volatile stocks for the hope of a big payoff.

Growth investors love a good gamble. Growth stocks often outpace the market, and the best ones can earn triple-digit returns in a short amount of time. The caveat to being in growth investing is that the companies you invest in are less mature, have smaller margins, and sometimes don’t pay a dividend. Thus, the stocks can be very volatile, especially around earnings season. But for a growth investor, the risks of investing in these stocks are worth the potential rewards.

Growth investors of the past likely took risks on stocks like Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX)—all of whom started off as less mature, much smaller growth stocks before they became some of the best-performing and most coveted growth stocks on the market. Those who got in early earned triple-digit, even quadruple-digit, returns.

Get everything you need to know about investing in growth stocks in our FREE Special Report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks.

Then if you still want to become a growth investor, a great first step is subscribing to Cabot Growth Investor. Cabot Growth Investor has become one of the most respected, trusted, and profitable investment advisories in America. In a world where hundreds of financial investing advisories come and go yearly, Cabot Growth Investor has stood the test of time.

Growth Stock

What is a Growth Stock?

Finding a good growth stock is exciting and potentially lucrative. But you could be in for a bumpy ride.

A growth stock is, by definition, a stock that outpaces the market. Some of the best ones could earn triple-digit returns in a short amount of time. Of course, fast growth like that goes hand-in-hand with volatility and risk.

However, finding the right early-stage growth stock can help investors achieve their long-term investing goals. Here's what to look for:

  • Capable of multiplying its earnings rapidly
  • A revolutionary product or service that has mass market potential
  • A good business model
  • Limited competition
  • Triple-digit revenue growth
  • High profit margins

It may take a little work on your part to dig into the details, but it could be well worth it. And don't expect that every growth stock will come without risk. Even so, for many investors, the risks are worth the potential rewards.

Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX)—all of them started off as growth stocks before they became some of the market’s most coveted stocks. Those who got in early earned triple-digit, even quadruple-digit, returns.

Bear in mind, too, that no one picks winners all the time. Sometimes your stocks will go down right after you buy them. If they do, get out of them, keeping your losses small. On the other hand, you should hold your winners as long as they are doing well, cultivating them with the hope of holding on for the huge profits that can develop over several years time.

In general, we feel we’ve done a good job if 60% of our stock picks end up as winners. The key to success is letting the profits in your winners get larger while keeping your losses small.

To learn more and discover how you can find the right stocks for your portfolio, download our free report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons, right now.

Growth Stocks

What are Growth Stocks?

Growth stocks are the glamor investments on Wall Street. But unlike time-tested dividend growers or bargain-basement value plays, growth stocks carry plenty of risk.

They are the reason all those talking heads on CNBC have jobs, and what makes Jim Cramer ramble on as if he’s just chugged five Red Bulls (maybe he has). Growth stocks often outpace the market, and the best ones can earn triple-digit returns in a short amount of time. So it’s no surprise they generate so much excitement and endless chatter.

Of course, there’s a caveat to investing in growth stocks. The companies are less mature, often are subject to greater potential competition, and typically don’t pay a dividend. Thus, the stocks can be very volatile, especially around earnings season.

For many investors, however, the risks of investing in growth stocks are worth the potential rewards. Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX)—all of them started off as growth stocks before they became some of the market’s most coveted stocks. Those who got in early earned triple-digit, even quadruple-digit, returns.

There are several keys to finding the right growth stocks:

  • Invest in fast-growing companies. It’s a rather obvious prerequisite, but it’s important to know what fast-growing means. It means investing in fast-growing industries, where revolutionary ideas and services are being created. Any little-known stock that provides a product that is essential to that budding industry makes for a good growth stock. Rapid sales and earning growth is seen among most big winners before their stocks take off.
  • Buy stocks that are outperforming the market. Companies can promise all kinds of financial growth, but is that growth potential translating to a rising share price? The best investing tips come from the performance of the stocks themselves; a rising stock tells you the smart money is accumulating shares.
  • Use market timing. Never underestimate the power of the market to move stocks. You don’t want to invest in a growth stock just as the market is topping out, as three out of four growth stocks will follow the trend of the overall market. If you’re in a bull market, you can afford to be aggressive in buying stocks that are more speculative.
  • Be patient. Not every growth stock will advance exactly when you want it to. Very few will, in fact. Even Apple had plenty of fits and starts on its way to becoming the most valuable company in the U.S. In the investment world, time is your friend. If you get out of a stock too early, you may miss out on some big gains months down the road.

Investing in growth stocks can be tricky. Finding a hidden gem that has yet to be fully discovered by the market is exciting, but requires lots of discipline to handle it correctly. Look for up-trending earnings growth, improving profit margins, and booming industries. If done right, investing in growth stocks can be both highly satisfying and highly profitable.

To learn more, download your complimentary copy of our report, How to Find Undervalued Stocks, and learn the secrets of some of the most successful investors of all time.

I

Income Investors

What are Income Investors?

Are income investors the rock stars of the investing world?

If investing were music, you could argue that income investors are The Rolling Stones. No matter how long it's been since they recorded (I Can't Get No) Satisfaction, they continue to get royalty checks because the song is in regular rotation on every classic rock radio station in the country, and will show up on every new live album and box set release for decades to come.

Similarly, income investors buy an investment, and that investment continues to reward them with cash just for that one-time purchase. Of course, there's a little more to it than that, but the general idea is that income investors are devoted to finding top-quality investments that generate steady and secure cash flow with minimal risk.

Saving for retirement is the tired old idea that you spend your working life filling up a bucket of money and then start ladling it out slowly when you retire. But any money that you have in an actual savings account is pretty much wasted, since your rate of return on a bank savings account guarantees that your money will be constantly losing purchasing power as inflation eats away at it.

By contrast, income investors have an eye toward building wealth for retirement through strategic investments. There are a variety of income investment types, including dividend stocks, real estate investment trusts (REITs), master limited partnerships (MLPs), business development companies (BDCs) and bonds. Regardless of which income-generating vehicle they choose, most income investors work to minimize risk and protect their portfolio against huge losses.

But even many investors who turn to the stock market for income ignore 1% or 2% yielding stocks because their yields are “too low.” Stocks in these brackets, however, are often the best long-term income investments because they have greater ability to grow their dividends over time.

The most successful income investors who want yield without (too much) risk have successfully found it using high dividend blue chip stocks. And though a high yield may be risky in some cases, not all of the highest paying dividend stocks are high risk.

For even greater income, income investors take advantage of dividend reinvestment plans. You’ve probably heard it said that compound interest is the most powerful force in the universe (a quote attributed to Einstein, almost certainly erroneously), and dividend reinvestment plans (i.e. DRIPs, or DRIP plans, as many redundantly refer to them) take advantage of some of the same forces—namely time and compounding.

As an income investor with a portfolio full of dividend-paying stocks, it can be tough to keep track of when your next dividend payment might arrive. If you’re retired and relying on that income to live on, it makes sense to spread those dividend payments out. That’s where an ex-dividend date calendar can come in handy—an ex-dividend calendar tells you the date that each stock in your portfolio (or stocks you’re considering buying) will pay its dividend. The key is finding stocks with ex-dividend dates in different months. That way you can have a portfolio in which you have at least one dividend payment in all 12 months, so that you always have a steady stream of dividend income.

The ultimate goal of an income investor is to create an income stream that's reliable, and not price-dependent. The best income-generating investments keep paying investors to own them regardless of what’s happening to their stock price.

If you want to dip your toes into investing, download our FREE report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.

Individual Stocks

What are Individual Stocks? 

Individual stocks, unlike an ETF or Mutual Fund, require more attention, but offer the opportunity for greater rewards.

Most people don't think very much about individual stocks. Financial pundits talk about the market as a whole. We look at our 401k to see if it's gone up (or down), and if there's some big IPO, you'll hear about it for a while, then the excitement will die down. 

That makes sense, largely because most 401k plans are tied to the major indexes like the Dow or Nasdaq through ETFs or mutual funds. You can think of ETFs and mutual funds as baskets full of different stocks. Many will have a bundle of stocks that are weighted similarly to a major index, which is why your 401k goes up and down with the market.

By contrast, individual stocks are stocks in... you guessed it: individual companies. They might be major blue-chip corporations or micro-cap startups. Some of them may very well be included in your ETF, but they're also available on the market to any investor. So rather than have an ETF which might include Stocks A-Z, an investor could just buy shares of Stocks A, D, K, L, and Y. 

There are, of course, pros and cons to investing in individual stocks. Because ETFs and mutual funds have so many stocks in them, there's less risk that you will lose a lot of money if one or two of those stocks really sink. On the other hand, if one of your five or six stocks drops by 20%, you could potentially lose a large sum. 

The inverse is true, too. A large gain in a few stocks won't make a huge difference when your investments are divided up in an ETF, whereas a 30% gain in one stock out of five or six can substantially boost your portfolio. 

Investing in individual stocks is fun and rewarding, but you do have to pay attention to what's going on. If you'd rather "set it and forget it," you may be better off with ETFs.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Inflation

What is Inflation?

You may remember from Economics 101 that inflation is basically defined as “too much money chasing too few goods and services.” Here's what that means for investors.

At its most basic, inflation means it costs more money to buy goods and services. It means that dollar bill in your pocket isn't worth as much right now as it was ten years ago. 

For investors, inflation is widely believed to be detrimental to bonds, but there are conflicting opinions on how it influences stocks. In a nutshell, the positive impact of inflation on the top line is nullified by various associated costs, resulting in a neutral bottom line. So the equity side of the balance sheet faces almost no impact from inflation, resulting in a neutral return on equity but a higher debt-to-equity ratio.

It's worth pointing out, however, that inflation is intimately tied to interest rates. Inflation is the number-one driver of higher interest rates, and that's controlled to some extent by the Federal Reserve. 

Throughout its history, the Fed’s priorities have evolved to reflect changes in the economy. Prior to World War II, its role generally remained limited to maintaining financial market stability and preserving the value of the dollar. With the arrival of the war, the Fed’s policy shifted to help keep interest rates low to facilitate the government’s war borrowings. In the decades after the war, the Fed’s primary objective was to keep inflation tamped down – occasionally raising interest rates to “remove the punch bowl just as the party was getting started.” 

In short, forecasting the dollar’s trend is a notoriously difficult task due to the myriad of variables involved. For investors, the overall economy is worth keeping an eye on, however, the answer to the “what to do with your money” question is obviously to invest it.

Investing puts your money to work for you and offers the possibility of outpacing inflation and even multiplying it over time.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Interest Rates

What are Interest Rates?

Interest rates get a lot of press, but what do they actually mean to investors? Probably not as much as we are led to believe.

The Fed cut interest rates. The Fed raised interest rates. Up and down it seems, and it's often made out to be a big deal. But what do rising or falling interest rates mean when we're talking about an investment portfolio? That's up for debate.

The interest rate is the cost of borrowing. So if a business were to borrow $100,000 at a rate of 2%, they would need to pay back an additional $2,000 above what they borrowed. For obvious reasons, a lower interest rate would, theoretically, encourage businesses to borrow more money which they would then use to expand or grow. In fact, the Fed typically cuts interest rates to stimulate the economy and pull the country out of recession, or in rare cases fend one off.

The Fed? Interest rates are set by The Federal Reserve, which we refer to most often as “the Fed.” The Fed was established back in 1913 to create a financial system that could stabilize price levels and maintain interest rates. It’s America’s central bank.

But do interest rates impact investing portfolios to any great degree?

High interest rates aren’t usually a good sign for investments (with some exceptions). But it’s never worth a panic, because though interest rates will rise, increases are usually moderate, occur over time, and rarely go as far as most people expect. So while it’s important to keep in mind the impact higher rates have on your holdings, it’s also important to remember that at the end of the day, not that much is going to change. A high quality company that earns reliable income and passes it on to investors is always going to be a good investment, regardless of interest rates.

To learn more about investing, download our free report, How to Invest in Stocks and Other Investing Basics

Invest

How do you Invest?

Wondering how to invest? Here are the basics so your money can start working for you right away.

The big question that almost every new would-be investor has is not what to invest in or how much money you should spend; although these questions do come hot on the tail of the first one. But even before that, you have to actually know how to get started. Where do you go? What do you look for? 

You can always go with a stock broker or investment advisor when you start investing. Some people prefer this route and don't mind paying for the service. And of course, if you have a retirement account through your employer, that's another hands-off investing outlet. But we really believe that it doesn't require a lot of effort to invest on your own, especially with the advent of so many online investment services like T.D. Ameritrade, E*TRADE, and so on. Most of these services don't have any commissions on trades and there is no minimum account requirement, so they're ideal for starting out on your own. 

In most cases, you just need to set up an account, which isn't anything beyond what you might expect. You'll need to provide your banking information or some way to add money to your account. It may take a few days for the company to verify your account information, but then you can start investing. However....

Don't just go willy nilly into throwing your money at every opportunity that looks promising. That's a great way to lose a lot of money very quickly. Instead, take it slow and start with some safe investments to get your feet wet. 

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Investing

What is Investing?

The first step to investing in stocks is to find out what it actually means. And learning how to get started without getting in over your head.

The Merriam-Webster dictionary defines investing as a verb, meaning "to commit (money) in order to earn a financial return." There are a few key points here, not the least of which is that investing is a verb. That means you have to take action.

For many investors, that translates to dedicating a portion of each paycheck to a 401k or some other retirement plan. Many of us don't even think about it, since it's such a passive action. You automatically turn your money over to a financial manager and they do everything for you.

Here at Cabot, we're big proponents of investing on your own. And thanks to online brokerage companies like TD Ameritrade (AMTD) or Charles Schwab (SCHW), you can invest with small amounts of money – literally less than it would cost you to go out for a nice dinner.

You can set up your account, deposit money, and start buying stocks right away. Although, before you jump in, it's fair to say there are a lot of ways you can lose your money quickly. There are also plenty of ways to play it safe, and practically guarantee that you can make money over time.

The nice thing is that, despite its image as a boring and staid arena, investing is really fun. It can be anything from a hobby to a lifelong obsession. It’s interactive, happens in real time, has a huge fan base and can even reward its players with wealth if they follow the rules. If that’s not fun, we don’t know what is.

To learn more, and to start investing yourself, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics.

Investment

What is an Investment?

An investment is time or money you put into something with the hope of a future gain.

College is an investment in your future. Training is an investment in long-term success. Cities invest in quality-of-life projects and a business might make an investment in product or service improvements.

The bigger question, however, is around what makes a good investment. And that answer is simple, in one way. If you get out more than you put in, that's probably a good investment. The difficulty comes when you look at the stock market and see hundreds of stocks, along with ETFs, bonds, options, mutual funds, and index funds. You hear about large-caps, small-caps, blue chips, IPOs, and the pink sheets. And then there is value investing, growth investing, aggressive and conservative investing. It's all so much. Where is an investor to begin?

First, take a deep breath. There are a lot of place you can get good investing advice. Here at Cabot we offer free advice on our website, through our daily investment emails, and through free reports that touch on subjects of interest to beginning and experienced investors alike. We also have membership options where you can get premium research, insights, and advice in the form of exclusive market reviews and summaries, as well as 14 different advisories.

But back to the topic at hand, what is a good investment? That's a big question. What might be a great stock for one investor might not be a good stock for you.

For example, finding stocks that pay steady dividends is a great way to invest if you want to reduce risk, particularly if you can be confident that the dividends will not only continue but increase over time. Alternatively, if you’re chasing high returns and are comfortable with high risk, you can follow a momentum strategy. However, even a good momentum stock can drop like a stone on a bad day.

At its most basic, however, good investments have some things in common. If a business is fundamentally strong (i.e. it actually makes money), has a diversified product line, and is in a solid position in its market, you are 90% of the way to finding a good investment. The remaining 10% is just a matter of looking at a few parameters – no matter what the company does – to determine if it’s the best stock for your investment dollars.

And don’t forget that the objective is to make money, not to own every good-looking stock in the market. Historically, most successful investors have concentrated their investment portfolios in a few great stocks, and ridden those winners to big profits. That doesn’t mean you should put all your eggs in one basket. Our advice is that, when fully invested, you should own no fewer than five stocks, but put an upper limit at 12 or 15 stocks. There are three main benefits of good portfolio management.

  • First, you can keep up with all your stocks, and track what’s happening at the companies.
  • Second, you’ll get more bang for your buck.
  • third benefit of a concentrated stock portfolio: You can get in and out of the market more quickly at turning points.

To learn more about making good investment decisions, download our FREE report, How to Invest in Stocks and Other Investing Basics, today.

Investments

What are Good Investments?

Being in control of your investments can bring great financial rewards. But first things first. You don’t just step up to the plate and start hitting home runs.

Investments can be anything you put money, time, or energy toward with the hope of getting back more than what you put in. In the case of investing, that's pretty much limited to money, since most stocks don't accept your time in exchange for stocks.

Of course, stock market investing comes with more risk than a safe, low-yield savings account. Inevitably, not all of your investments will be winners. However, investing in the stock market is one of the few viable ways to have your money work for you these days.

You can choose to invest in just one or two stocks; that’s all some people can afford, and that’s fine. But for those who can afford it, an ideal portfolio consists of about eight to 12 stocks from a variety of industries (technology, banks, housing, retail, energy, etc.). It also makes sense to invest in different types of stocks—growth stocks, value stocks, dividend-paying stocks, emerging market stocks.

However you spread out your investments, the goal is to put together a portfolio that’s diversified enough that you aren’t overly susceptible to a collapse in any one industry.

One of the best things you can do to pick good investments, however, is to study the market and look deeply into stocks before you invest in them. Similarly, take time to learn from some of the best investors in history, like Benjamin Graham and Warren Buffett.

And don't forget, if you want to learn more, and get an introduction to investing on your own, download and read your FREE copy of our report, How to Invest in Stocks, and Other Investing Basics today. 

 

Investors

What are Investors?

There are two types of investors. And the most successful all have something in common.

Would it be fair to say that the most skillful investors have taken to heart a famous line from J.R.R. Tolkien's The Hobbit? True, tales of dragons and wizards have little to do with the stock market. There is, however, a quote from the book that exemplifies the investing approach of some of the world's greatest investors.

“The world is indeed full of peril and in it there are many dark places. But still there is much that is fair." 

More to the point, investors may face volatility, downturns, recessions, depressions, and bear markets. Smart investors take this all in stride. They plan carefully, and they seek out the bargains and the promising stocks that push their portfolios ever upward. In short, no matter what approach an investor takes, the most successful of them seek out the "much that is fair."

As for the two types?

Value investors identify companies whose stocks are selling at low valuations, and hold them until they are substantially higher. Value investors believe that buying a stock is comparable to buying a portion of the business. Thus, a value investor is not concerned about short-term changes in the stock price as much as the long-term business performance such as earnings growth, competitive positioning, etc.

Growth investors like to put their money into stocks that are going up. Growth investing involves investing in fast-growing companies that are typically less established than blue-chip companies such as Qualcomm (QCOM), Google (GOOGL) and Exxon (XOM). Those global behemoths were once growth stocks themselves, but their period of rapid growth is behind them. The best growth stocks are smaller companies whose best is ahead of them.

The point isn’t that any of these built-in preferences for different kinds of stocks is wrong. Low-priced stocks are more volatile than higher-priced stocks, and they can make very satisfying gains very quickly. (Of course they can go down just as quickly, but let’s leave that out for now.) Similarly, value stocks, while they may take a long time to get back to fair value, do have lower downside risk.

The reality of the market is that every investment portfolio ought to have some of both value and growth in it. Value is a great foundation for a diversified portfolio. But if you stick strictly to value, you’re leaving lots of growth gains on the table.

And to be fair, there is a spectrum of investing styles between these two. Few investors fall 100% into these divisions. Just as a hobbit has "some courage and some wisdom, blended in measure," so do the most successful investors create a blended portfolio that combines the best qualities of a range of stocks.

To learn more about the different approaches to investing, and find out how to create the right portfolio for you, download your FREE copy of our report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.

IPO

What is an IPO?

An IPO, or initial public offering, generates a lot of investor excitement. But these stocks could be more hype than help to most portfolios.

When a privately-owned company is listed on a stock exchange and makes shares available to the public, it’s known as an IPO. To make an “initial public offering,” a company needs to meet the requirements of and file with the Securities and Exchange Commission (SEC).

The requirements for approval are extensive, and include creating a prospectus, which describes business operations, financial status, financial statements, and potential risks to investors. The SEC also examines accounting practices to ensure compliance with federal laws.

Once the SEC approves a registration, the company can list and sell shares on an exchange, like the Nasdaq or NYSE. Each exchange, however, has additional protocols for listing. In other words, going public is a lot of work for a company.

Here’s the critical part, though. A company doesn’t go public because management wants to expand the investor base to include you and me. An IPO is usually a liquidity event that allows early investors to cash out part, or all, of their investment. Or, it’s a capital raising event that will raise money to keep the business running (not the ideal scenario for new investors) or fund growth initiatives (much more compelling, in my opinion).

What does this mean for individual investors? First of all, buying IPOs isn’t that easy. That’s because brokerage firms generally reserve most shares for large institutions and the underwriting firms’ well-heeled clientele.

You may not want to buy an IPO anyway. After the IPO (initial public offering) event, there is often a period we refer to as the post-IPO blues. This is when the excitement of the IPO roadshow and big event has passed, and a stock settles down into real life as a public company. In general, this happens at some point in the first four months of trading, and after the initial IPO surge (which usually occurs on day one). The stock then trends down, often landing well below its IPO price.

This pattern happens over and over because it takes several quarters for everyone to understand the ebbs and flows of revenue and earnings, get comfortable with the company’s business model, and cozy up to management’s communication style. There is a relationship to build between a stock and its public investors. And that takes time.

For stocks that you don't need to worry so much about, download our FREE report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks, today.

Ipos

Initial Public Offerings, or IPOs, generate a lot of excitement, but what exactly are they? And should you invest in them?

Initial Public Offerings, commonly referred to as IPOs, happen when a private company first goes public and offers shares of the company as new stock issues. Companies can raise a lot of money through these offerings, while investors can take advantage of the potentially lucrative new stocks before they skyrocket in price. 

The problem is that after the IPO event, there is often a period we refer to as the post-IPO blues. This is when the excitement of the roadshow and big event has passed, and a stock settles down into real life as a public company. In general, this happens at some point in the first four months of trading, and after the initial surge (which usually occurs on day one). The stock then trends down, often landing well below its IPO price.

This pattern happens repeatedly because it takes several quarters for everyone to understand the ebbs and flows of revenue and earnings, get comfortable with the company's business model, and cozy up to management's communication style. There is a relationship to build between a stock and its public investors. And that takes time.

For example, of the IPOs tracked by IPOScoop.com in 2019, 67 had negative returns for the year, 12 returned less than 10% to investors, and 12 had gains of more than 100%. And according to Barron's research, IPOs can underperform up to 2 ½ years after their initial pricing. 

This isn't to say you should never invest in IPOs. There have certainly been plenty of winners in the market. But investors must tread carefully when buying IPOs.  

For stocks that you don't need to worry so much about, download our FREE report, 10 Forever Stocks to Buy Now—and How to Find the Best Growth Stocks, today.

As with any stocks, the key to successfully investing in IPOs is to look for fundamentally strong companies with the ability, strategy, and good management to continue growing over the long-term.

L

Large Cap

What is a Large Cap?

You already know the names of many large cap stocks, and they are generally some of the safest stocks on the market. 

A publicly-traded company that possesses market capitalizations ranging from $10 billion to $300 billion is considered a large cap stock. Market cap, or market capitalization, measures the total value of a company’s shares. This helps give insight into the size of the company. There are also micro, small, mid, and even mega cap stocks.

To give you an idea of how much of the market these companies command, the Dow Jones Industrial Average is a combination of 30 well-known large cap stocks, such as Verizon, Nike, Coca-Cola, and so on. These are the companies that will be around years from now. Of course, these aren't the only large cap stocks, but just to give you a point of reference. 

While these stocks are generally safer, and add stability to your investment portfolio, they're hardly a monolith. You can find growth stocks and value stocks among them. Many of them pay dividends (always good), and some offer substantial capital gains. They also include diverse sectors, covering everything from health care and pharmaceuticals to construction to consumer goods to technology. 

Even with this information, it's always smart to do your research before you invest, whether it's a large cap stock, a small cap, or an ADR. It's not impossible for a multi-billion dollar company to lose significant value in the market. Of course, when one of these large cap stocks does drop in value, that could be a prime buying opportunity if the details are right.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Long-term Investors

What are Long-Term Investors?

Long-term investors are investing for the long haul, hoping to build a nest egg for retirement or save for a child’s tuition. 

The stock market can be a scary place. On any given day, a piece of unexpected bad news can push a stock into a nosedive. For short-term investors, a significant drop can be catastrophic. But for long-term investors with positions in quality companies, these drops are little more than blips. 

To use a sports analogy, if a soccer team loses a game by five points, that’s a bad loss (aka big drop in your stock price). However, if they win every other game, the overall season is a winner. Over time, that one loss doesn't seem so bad.

Sure, it can be tempting to jump from one promising stock to another every time the wind blows, but long-term investors recognize that breeze for what it is. They also recognize that more trading does not improve your returns. Holding stocks long-term does. The data and multiple studies suggest that the longer you hold your stocks, the larger the profit.

In fact, one of the most famous investors of our time, Warren Buffett, believes long-term investors have a significant advantage in the market: patience. Wait for the right time to buy, and invest only in companies that will outperform for decades. Because of market turbulence, stocks of great companies become available to trade at very cheap valuations. This doesn’t mean buy stocks and forget about them! Tracking performance is critical, and so is getting out when necessary (when your stock is overvalued or trouble is on the horizon). 

And holding stocks long-term has another benefit—dividends! Between 1930 and 2018, dividends represented nearly half of overall market returns (about 43%). But it’s only long-term investors who can truly take advantage of dividends. 

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Loss Limit

What is a Loss Limit?

You'll pick winners and losers in the stock market, but a loss limit will help prevent the losers from doing too much damage to your portfolio.

You can't avoid risk in the stock market. But you can set a loss limit to help contain that risk. A loss limit is the point at which you sell your stock if it drops in value. 

There's no question that knowing when to sell a stock is the trickiest part of investing. But selling stocks before they can do serious damage to your portfolio is a way to preserve the gains among your winning stocks.

We set a loss limit of 10% to 20%. That is, if any stock closes out a day giving us a loss of 20%, we’ll sell the next day. Note that we wait for a loss to materialize at the close of the day. Intraday volatility these days is huge, and sometimes a 20% loss during the day can shrink below that level by the close. 

There's no hard and fast rule about where you need to set these limits; it's largely dependent on the level of risk you're comfortable with. While 10% might work for us, you may be more comfortable with a 5% limit. You can even move your loss limit for specific stocks or market conditions, though we recommend a 20% loss limit as the absolute maximum.

In any case, by setting strict rules on when to sell a losing stock, you take emotion out of the equation. Even in the best of times, you want to consider how much of your hard-earned money you have at risk, and how you’ll handle your stocks should they head south. 

To learn more, download our free report, 10 Forever Stocks to Buy Now–and How to Find the Best Growth Stocks

M

Marijuana

As marijuana becomes increasingly legal in both the U.S. and Canada, it makes sense for growth-oriented investors to pay attention to marijuana stocks. The opportunities are much bigger than most investors realize!

Market Correction

A market correction can be frightening for many investors. But it can be a great buying opportunity if you’re prepared for it.

For both new and experienced investors, a market correction can be scary. It’s hard not to panic when you watch a major stock index drop 10% from a recent high. No doubt, it can be a rough experience. But if you invest in the stock market, you will eventually encounter a market correction. They happen. There’s no way around that fact. 

From July 2015 to February 2016, the S&P 500 tumbled 12.3%. The second half of 2011 was another rough patch for the market. Again, the slide began in July, and while it didn’t last as long as the 2015-16 slow-bleed, the losses were more pronounced; the S&P lost 16.5% of its value in one month! 

A similar market crash occurred in the spring of 2010. From the third week of April through the end of June, the S&P shed about 16%. Stocks didn’t really get going again until late August. There was another market correction in mid-2019. 

These corrections aren’t necessarily as bad as they seem. Usually, they are “correcting” an imbalance and putting stock prices back on their original trajectory. Value and long-term investors can generally wait a correction out; however, day traders and growth investors looking for quicker returns often panic.

Don’t panic. Rumors of a stock market correction might cause you to worry and sell your stocks, but that’s rarely the best thing to do.

Instead, prepare for a pullback in advance so that you’re positioned to buy low during the pullback, then reap capital gains as the market naturally recovers. Here are three tips for buying low in a stock market correction:

  1. Buy stocks with growing annual profits.
  2. Buy stocks that fell a little, while avoiding stocks that fell a lot.
  3. Buy stocks that have big dividend yields.

Although the coronavirus has come with terrible consequences, the market volatility brought on by the virus offers an opportunity to put some of these tips into action. You can explore further in our free report, What to do now? How to Invest During the Coronavirus Recovery. 

Market Corrections

What are Market Corrections?

Stock market corrections are an opportunity for investors to buy stocks while they’re on sale. But you can’t buy just any stocks.

Stock market corrections are a fact of life if you invest. And they can be pretty scary. More specifically, market corrections are when a major stock index suddenly plummets more than 10% from its most recent high.

Long-term investors, especially those with high-quality stocks in their portfolios, can usually wait out a correction. Even if you do some selling, the most important thing to remember is: Don’t Panic! It’s very possible you could miss out on major gains if you preemptively sell stocks whenever market corrections threaten.

For that matter, some very successful investors suggest that you hold your stocks during periods of market volatility so that you can reap the eventual rewards of increasing stock prices.

But let’s talk about buying during market corrections. When shareholders panic and sell, portfolio managers are forced to sell their cream-of-the-crop stocks based on the panicked behavior of uninformed investors. That’s why stock prices of good companies fall during market downturns.

That’s also why those stocks’ prices can rapidly rebound. Investment professionals know which stocks are excellent bargains after the market falls. They have their shopping lists ready, as you should! And you can look forward to buying shares of your favorite stocks after they’ve fallen. 

The caveat is that you can’t just buy any random stock and expect that stock to rise with the eventual rebound in the broader market. There’s an art to successfully buying low among stocks, and one key facet of that decision is sticking with stocks that fell, but didn’t plummet. In that light, look for stocks that fall 10%-15% during a stock market correction.

Remember, too, that if you seriously expect to own a stock for just a few days or weeks, you’re not an investor, you’re a gambler. Investors should have a several-year timeframe with no immediate need to spend their invested capital.

To learn more, download our free report, 10 Forever Stocks to Buy Now–and How to Find the Best Growth Stocks

Market Share

What is Market Share?

Market share is the proverbial pie of an industry that companies split, but there's more to it than just a simple number.

Of the many ways you can analyze the position of a given company, market share is one metric that you come across regularly. At the most basic level, this number tells you how dominant a company is within its industry.

For example, let's say there is $100 worth of couches sold in the U.S. in a quarter. Company A has sales of $30, company B is at $40, company C sells $25, and company D is just getting started and sells $5 worth of those couches. In this case, company B has the largest market share, at 40%, followed by company A at 30%, company C at 25%, and company C at 5%.

Based solely on these numbers, company B looks like the best potential investment. Here's the catch, though. This is just a snapshot. And there are plenty of other factors that play into a stock's performance. When you zoom out, you may find that company B is in decline. Perhaps their market share was 50% a year ago, which would indicate they are losing sales.

Put simply, there is no specific percentage you look for because it changes all the time. The potential market share of a company should be increasing and projected to grow within the duration of your investment. If you prefer value investing and long-term investing, you have a more extended period to wait for market share to increase. If you're a growth investor, you're not likely going to see large changes in market share over a short period.

And even with all of that, the truth is that the only reason stocks go up is that someone believes they can make money by buying them. And people’s reasons for that belief are all over the map.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Market Timing

What is Market Timing in Investing?

Market timing may not be everything, but it is a big thing for short-term investors. Here's why it's such a big deal.

For long-term investors, who have the patience to watch the market move steadily up over the years, market timing may not matter. These investors might be fine buying stocks regardless of what’s going on in the market. Pullbacks and volatility are just part of having a stake in the market.

But market timing is a vital part of shorter term investing. It can help you determine when to buy or sell stocks to maximize your profits. The old, "buy-low, sell-high" strategy.

Our studies over the years have convinced us that you can make a great deal of money from a stock in its romance phase, before most investors realize the full thrust of the company’s story. If you wait for reality and a slew of fundamental facts (like growing earnings and a knockout of all competitors) to pour in, chances are you’re too late; the stock has already factored in the great news you’re now reading.

More importantly to investors, however, is if there is any way to see a downturn coming and avoid the pain? The answer is yes, and the method for avoiding devastating declines isn’t as complicated as the media makes it out to be.

Our Cabot Trend Lines is our most reliable (and simple) market timing indicator. It averages about one signal per year, though it can be far fewer. In fact, if you had theoretically bought the Nasdaq at every buy signal during the past 18 years and went to cash during sell signals, you’d have nearly doubled the Nasdaq’s return!

So you might wonder, what do our market timing indicators portend? Well, remember, they’re trend following measures, not trend predictors (to make big money you simply have to stay on the right side of the major trends).

Our market timing indicators won’t tell you what stocks to buy. Stock selection is an entirely different set of skills. But even if you have done all the research and found what looks like a perfect stock, you need to know what the market’s doing before you hit the BUY button on your online brokerage account.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

 

 

Market Timing Indicator

What is a Market Timing Indicator?

The right market timing indicator can keep you ahead of the market curve and give you insight into when to dive in and when to hold back.

To understand what a market timing indicator is, we have to first look at market timing.

Market timing is an investing strategy based on identifying the best times to buy or sell stocks. There are many ways to use market timing, but at the most basic level, it’s the “buy low and sell high” approach. Investors use a market timing indicator, or more likely several indicators, to figure out when those buy and sell points are. 

The problem is that there are more than a few market timing systems out there. Some are okay, and most will work for at least a short time, but then not work at all. As much as that can complicate things, once you simplify and test your indicators, it’s not as complicated as it seems.

We have a few indicators that we use here at Cabot, but one very simple market timing indicator is the Cabot Trend Lines. Basically, if both the S&P 500 and the Nasdaq Composite close two straight weeks above their respective 35-week lines, it’s a buy signal; if both close two consecutive weeks below them, it’s a sell signal. Using such a long-term moving average won’t result in pinpoint signals, but that’s the point—it keeps you on the right side of the major trend.

Remember, though, this market timing indicator is a trend following measure, not a trend predictor. To make big money, you simply have to stay on the right side of the major trends. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Market Timing Indicators

What are Market Timing Indicators?

Market timing indicators help you identify the best times to buy and sell a stock, thereby maximizing your profits. 

To understand market timing indicators, it's important to understand what market timing is. The very short definition is that market timing is an investing strategy where you attempt to predict how the market will move in the coming days and buy or sell based on that. 

Even though market timing is big for short-term traders, there can be some advantages to the strategy for long-term investors, as well. Market timing indicators can give you some advanced warning of market volatility or the most important thing to investors—is there any way to see a downturn coming and to avoid the pain?

The answer is yes, and the method for avoiding devastating declines isn’t as complicated as the media makes it out to be. The biggest problem is that there are a lot of market timing indicators out there. Some of them work better than others. 

There are three market timing indicators we rely on most here at Cabot. 

The Cabot Trend Lines are our unique way of determining the long-term trend of the stock market. As long as both the S&P 500 Index and the Nasdaq Composite fluctuate above their respective trend lines, we consider the market to be bullish. If both indexes are below their trend lines, we are in a bear market.

With Cabot Tides, we use five different market indexes to help us determine the overall intermediate-term direction of the stock market.

And our Two-Second Indicator’s specialty is detecting market tops

The key here is that these indicators are trend following measures, not trend predictors. In geological terms, you can think of them as the instruments we use to predict volcanic eruptions. They measure what is happening around the volcano so you aren't caught off guard when it erupts.  

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Market Volatility

What is Market Volatility?

As long as there has been a stock market, there has been market volatility. But you might be worried about it too much. 

You don’t have to know very much about stock exchanges to understand that market volatility is part of the landscape. Some volatility, like recessions, crashes, and depressions, is so bad that they end up in the history books. However, most come and go with little fanfare outside of a few news stories here and there. 

As far as an actual definition, market volatility is the measure of how greatly stock prices vary over a period of time. And the VIX, properly known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures market expectations of near-term volatility based on option prices among S&P 500 stocks.

Like many things, however, the severity of market volatility depends partially on your perspective. You can have volatility in individual stocks or across the entire market. Time also plays a role in overall volatility. 

What’s high and what’s low depends on the period you consider. For example, the ten-year period beginning at the start of the 2008/2009 recession saw the Dow Jones Industrial Average climb about 18,000 points. After the initial rebound following the recession, the market nosed down in the last half of 2011, and again in 2015 and 2016. And 2018 brought some huge market swings, as well. 

However, even with the ups and downs, every time in the last decade that the investor fear gauge (VIX) has made a quantum leap, and stocks have plummeted for weeks and sometimes months, it took less than a year for them to fully recover.

So while you should be leery of sharp declines, you should try to avoid stressing over minor dips. Remember, volatile stocks have the potential to bring you impressive profits.

If you’re curious about volatility, you might find our FREE report, Technical Analysis of Stocks, to be a robust addition to your knowledge base.

Micro Cap Stocks

Micro cap stocks are publicly traded companies with market capitalizations of less than $300 million but greater than $50 million. Like small cap stocks, micro cap stocks have the potential to net very high returns, but because of their even smaller size, micro caps carry even greater risk than small caps.

Mid Cap Stocks

Mid cap stocks are middle-sized publicly traded companies: larger than small cap stocks but smaller than large cap stocks. Mid cap stocks have a market capitalization between $2 billion and $10 billion. Mid caps aren't as risky as small cap stocks, but aren't as "safe" as large cap stocks. However, the advantage they have over many of the biggest large caps stocks is that their greatest period of growth is often ahead of them.

Mutual Funds

What are Mutual Funds? 

Mutual funds allow individual investors to invest in well-known stocks while diversifying and lowering their portfolio risk. 

Like exchange-traded funds (ETFs), mutual funds give investors access to a wide range of stocks through one single investment. When you buy into one of these funds, you get a share of a big basket of stocks. 

Many of these mutual funds are set up to follow an index, such as the S&P 500 or Nasdaq. Others may follow a particular industry, such as the financial sector

Unlike ETFs, however, mutual funds are actively managed by an investment company. Investors pay for that active management through fees. In return, they can more or less, "set it and forget it." The fund's management will work to beat the index, giving investors a gain that beats the market. 

This certainly seems like it would benefit individual investors, especially those who don’t care to take on the research and management of investments themselves. And a lot of investors like mutual funds because of the diversification they offer. There’s nothing wrong with holding these types of investments in your portfolio, but they won’t make you rich. 

In fact, most mutual funds (unless they’re in a retirement plan) will require a significant investment to start. They also come with higher fees (as compared to ETFs), have a long history of failing to beat the market consistently (despite the active management), and give you less control over your investments.

That said, one benefit of a mutual fund investment is that when any one stock tanks, your overall loss is limited thanks to the diversification. Of course, the reverse is also true.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

N

Nasdaq

What is the Nasdaq?

The Nasdaq you know and follow is much different than it was when it was first established in 1971.

Today the Nasdaq is one of the world's leading stock exchanges. It's second only to the New York Stock Exchange (NYSE). But when it was founded in 1971 by the National Association of Securities Dealers (NASD), the "National Association of Securities Dealers Automated Quotations” was just a quotation system and didn’t actually trade stocks.

The Nasdaq officially separated from the NASD and began to operate as a national securities exchange in 2006. In the early stages, it included a lot of stocks that traded as speculative over-the-counter (OTC) issues.

But as the Exchange became the first U.S. stock market to start trading online, it attracted new tech companies who saw it as a more modern, more dynamic place to list their stocks. Those companies included, Apple, Cisco, Dell, Microsoft and Oracle and a host of others.

The exchange’s heavy weighting toward tech and other “riskier” issues lets investors use it as a barometer of how much risk investors are willing to take on at any one time. The Nasdaq also offers a pre-market session from 4:00 am to 9:30 am Eastern, a normal trading session from 9:30 am to 4:00 pm, and a post-market session from 4:00 pm to 8:00 pm.

There are currently more than 3,000 equities listed on the exchange, many of them in the tech sector.

To learn more about the Nasdaq, the NYSE, and other exchanges, as well as how to get started investing in them, download our FREE report, How to Invest in Stocks and Other Investing Basics. It has all the information you need to start investing on your own today. And it costs you absolutely nothing. Download it right now and start your journey to investing success.

Net Current Asset Value

One of Benjamin Graham’s earliest analyses, created and tested 75 years ago, is the Net Current Asset Value (NCAV) approach. The objective of the NCAV formula is to find the minimum value a company would fetch if it was liquidated. The formula is:

Net Current Asset Value (NCAV) = cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities – preferred stock

The resulting value can then be divided by the number of common shares outstanding to find the NCAV per share. If the current stock price is less than the NCAV per share, the stock is a bargain. However, further analysis is necessary to determine if the company is prosperous.

Companies with earnings deficits or with erratic earnings histories are likely to become less prosperous and should be avoided. Companies in the financial sector should also be avoided, because their balance sheets are not comparable to those of other companies.

Finding profitable companies selling below their NCAV is a simple process. However, not many companies are selling below their Net Current Asset Values.

Most stocks that qualify as NCAV bargain stocks are small companies, which usually are risky investments. However, Benjamin Graham surmised that any companies selling below their NCAV values carry lower risk: “They are indubitably worth considerably more than they are selling for, and there is a reasonably good chance that this greater worth will sooner or later reflect itself in the market price. At their low price these bargain stocks actually enjoy a high degree of safety, meaning by safety a relatively small risk of principal.”

Nyse

What is the NYSE?

The New York Stock Exchange, or NYSE, is one of the largest stock exchanges in the world. Here's what you need to know about it.

By the standards of American history, 1792 was a relatively quiet year. The U.S. Postal Service and the U.S. Mint were both established, construction of the White House began, and on May 17, on Wall Street in New York City, a group of 24 stockbrokers signed the Buttonwood Agreement creating what would become the New York Stock Exchange, or NYSE. 

A lot changed in the centuries since. Today there are some 79 major stock exchanges globally, including the London Stock Exchange, the Shanghai Stock Exchange, the Tokyo Stock Exchange, and the Buenos Aires Stock Exchange. The U.S. alone has more than a dozen exchanges, with the potential for several new exchanges in the near future. 

Even considering the number of exchanges, including the popular Nasdaq, the NYSE still accounts for about 40% of the world's total market value. You'll find some of the biggest names in business there, including The Cocoa-Cola Company (KO), 3M (MMM), Goldman Sachs (GS), McDonald's (MCD), Salesforce (CRM), Visa (V), and The Walt Disney Company (DIS)

The NYSE also hosts several of the most well-known indexes. The Dow Jones Industrial Average (DJIA) is calculated using the 30 largest companies that trade on the New York Stock Exchange. The S&P 500 Index tracks the 500 largest companies in the market by capitalization, while the Wilshire 5000 Index tracks every stock on every exchange as long as it's not a Bulletin Board or a Pink Sheets stock.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

O

Options

An option is a binding, specifically worded contract that gives its owner the right to buy or sell an underlying asset at a specific price, on or before a certain date. The investor has the right—but not the obligation—to buy.

The right, but not the obligation, to take action is a key distinction. Upon the expiration date, you could always decide to take no action, at which point the option becomes worthless. If you make this decision, the option becomes worthless and you lose all of your investment, which is the money that you used to buy the option.

An option is only a contract that's tied to an underlying asset (such as, say, a stock or stock market index). Hence, it is categorized as a "derivative," because an option derives its value from something else. Derivatives have acquired a pejorative reputation of late, because incredibly complex derivatives helped fuel the financial calamities of 2008.

Options come in two flavors: calls and puts.

If you think a certain asset will increase substantially before the option expires, you'd purchase a call option, because it gives you the right to buy an underlying asset at a specific price within a specific period of time.

If you think a stock will dramatically drop in value, you'd purchase a put, which would give you the right to sell the asset at a certain price within a specific period of time. Think of a put option as a form of leveraged short selling.

Accordingly, there are four types of players in options markets: buyers of calls; sellers of calls; buyers of puts; sellers of puts. The "strike price" is the price at which an underlying asset can be purchased or sold. For calls, this is the price at which an asset must rise above; for puts, it's the price at which it must go below. These events must occur prior to the expiration date.

A "listed option" is traded on a nationwide options exchange, such as the Chicago Board Options Exchange (CBOE). These options are listed with fixed strike prices and expiration dates. The options are named based on their strike price and expiration date. For example, an ADSK January 45 Call is a call option on Autodesk stock at $45 per share that expires in January.

Call options are referred to as "in the money" if the share price is above the strike price. Put options are "in the money" when the share price is below the strike price.

P

Put And Call Options

In options trading, there are both put and call options.

A call option gives the buyer the right to buy 100 shares at a fixed price (strike price) before a specified date (expiration date). Likewise, the seller (writer) of a call option is obligated to sell the stock at the strike price if the option is exercised.

A put option gives the buyer the right to sell 100 shares at a fixed price (strike price) before a specified date (expiration date). Likewise, the seller (writer) of a put option is obligated to purchase the stock at the strike price if exercised.

R

REITs

What are REITs?

Real estate investment trusts, or REITs, are special purpose entities with a special tax status that own real estate and pass along most of the income from that real estate (rents or mortgage payments) to shareholders.

That's a mouthful! So in real life, what are REITs? A real estate investment trust can own any type of real estate, though many specialize in one kind, like apartment buildings, malls, office buildings, self-storage facilities, or hotels. Others may focus on a particular industry, like clean energy or medical facilities. In that sense, they can act very much like an ETF or Mutual Fund.

There are two types of REITs. An equity REIT owns property directly and gets most of its income from its tenants' rents. A mortgage REIT does not own property directly. Instead, it owns property mortgages and mortgage-backed securities. Its revenue comes from the interest it's paid on the mortgages.

Like any investment, a real estate investment trust has pros and cons. As a rule, REITs pay dividends. (They're required by law to pass 90% of their taxable income through to shareholders.) Some of them even pay out monthly, and the yields can be high. They tend to be conservative investments, and you can buy and sell them much the same way as you would any other stock or ETF. They're also a great way to diversify an existing stock portfolio.

On the negative side of things, because most of the income gets distributed to shareholders, there isn't much left over for growth. So you may not see the skyrocketing numbers of, say, a hot tech stock.

It's also worth mentioning that about 70% of those distributions are taxable as ordinary income. This can be an excellent reason to own REITs in a tax-advantaged account like an IRA.

To learn more, download your FREE report, How to Invest in Stocks and Other Investing Basics, today. This report will help you take the mystery out of investing and give you the information you need to start investing independently.

Relative Performance

What is Relative Performance? 

Relative Performance (RP) measures how a stock is performing relative to a specific market or index. 

Momentum analysis of Relative Performance is one of our favorite ways to measure a stock’s health. A stock that holds its value during a declining market often soars once the market turns higher. In a strong bull market, most stocks will rise, even the stocks of weak companies! But to find the best companies with the strongest stocks, you can analyze the RP lines.

When a Relative Performance line is moving upward, the stock is outperforming the market. When it’s moving downward, the stock is underperforming the market. A flat RP line indicates the stock’s performance is equal to the market’s. 

In general, we like to see a minimum of 13 weeks of outperformance (an uptrending RP line) before we consider buying a stock. Once this condition has been met, we conclude the stock has positive momentum. If a company has a compelling fundamental story and strong positive momentum, it’s a candidate for purchase.

What constitutes strong momentum? When a stock has a powerful RP line, its corrections will be brief, lasting just a week or two. The longer the Relative Performance correction, the weaker the situation. There’s nothing more positive than an RP line that’s hitting new highs!

In general we’ll consider selling a stock if it underperforms the market for eight weeks or longer. But there are other considerations. How deep (or shallow) has the correction been? Has the stock been declining on heavy trading volume (a big negative)? Is it holding up in an area of price support? Relative Performance analysis is extremely important, but it’s not done in a vacuum. There are other considerations.

Interpreting Relative Performance lines is as much an art as it is a science. But to any serious investor, it’s worth the effort. It gives you the conviction to stay with a stock rather than selling for a quick profit. It helps you identify the strongest stocks in both weak and strong markets. And it gives you advance notice that a stock is weakening.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Rp Line

What is an RP Line?

The Relative Performance line, or RP line, of a stock measures its momentum as compared to a market index.

When we want to see, literally, how a stock is performing, we look at a graph of the RP line. An RP line is the stock’s (or ETF’s) daily closing price divided by the daily closing price of the benchmark S&P 500 Index or another major index. It shows how the stock is behaving compared to the broad market.

When an RP line is moving upward, the stock is outperforming the market. When it’s moving downward, the stock is underperforming the market. A flat line indicates the stock’s performance is equal to the market’s. 

Interpreting Relative Performance lines is as much an art as it is a science. But to any serious investor, it’s worth the effort. It gives you the conviction to stay with a stock rather than selling for a quick profit. It helps you identify the strongest growth stocks in both weak and strong markets. And it gives you advance notice that a stock is weakening.

How does it work? A stock has positive momentum if its RP line has been advancing for at least 13 weeks (the number of weeks in a quarter). The steeper the line, the more the stock has been outperforming the market. Incidentally, if the market is volatile during this time and the RP line remains strong, that indicates super-strong buying pressures.

But remember, even though Relative Performance analysis is extremely important, it’s not done in a vacuum. There are other considerations. All in all, however, you should only be buying stocks with positive momentum. The perfect RP line will have a steep slope, with corrections that are brief and shallow.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

S

Share

What is a Share?

A share: any of the equal portions into which invested capital is divided. Here's what that means to investors.

The Merriam-Webster dictionary makes the definition of a share seem pretty simple. In fact, it is. When you buy a stock, you buy a share, or a portion, of a company. So when see a stock price, that is the price of one share.

Here's what that might look like:

Company A is selling for $10 per share. If you were to put $100 into Company A's stocks, you would own 10 shares. For most companies, that would be out of millions of shares, so you're in no danger of having to sit in board meetings yet.

Shares come up in a lot of analysis of stocks, too. For example, profits are commonly discussed as earnings per share (EPS). If a company is expected to earn $1.26 in EPS, that literally means that the company will earn $1.26 profit this year for every single share of the company’s stock. In reality, the profit number could be in the hundreds of millions of dollars, or even billions of dollars. But investors go right to EPS so that the number is clear, simple and comparable to other stocks.

Of course, there's more to determining whether or not a stock is a good buy than its share price and EPS. On the whole, though, if a business is fundamentally strong (i.e. it actually makes money), has a diversified product line, and is in a solid position in its market, you are 90% of the way to finding a good investment. The remaining 10% is just a matter of looking at a few parameters – no matter what the company does – to determine if it’s the best stock for your investment dollars.

To learn more about investing, download our free report, How to Invest in Stocks and Other Investing Basics

 

 

 

Shares

What are Shares?

When you buy stocks, you are buying shares of a company. But there's more to it than meets the eye.

The Merriam-Webster Dictionary defines the noun 'share' as, "any equal portion into which property or invested capital is divided." With that definition in mind, when you buy shares of a publicly-traded company, you are buying a small portion of that business. In other words, when you invest in a stock, you own a share (or shares) of that company.

Shares can come in a range of prices, and some shares come with benefits such as dividends, which are distributions of earnings given out to reward investors. Some dividend stocks have an additional benefit that can substantially increase your results over time are dividend reinvestment plans, or DRIPs.

When you choose to reinvest your dividends, each stock’s dividend payment is used to buy new shares of that same stock, at the market rate. You then start earning dividends on those new shares, and those dividends get turned into more shares, and so on and so forth. Over time, the number of shares you own and the size of the dividend checks you receive every quarter will both gradually increase, without you doing a thing.

Of course, not all stocks offer dividends, but no matter what kind of stocks you buy, you want the price of your shares to increase. While there's never a guarantee in the stock market, there are some companies that exhibit qualities that make them desirable to investors. If you're looking to buy shares in businesses that are generally safe, and will increase in value over time, look for these five key attributes:

  1. A product or service or business model that is revolutionary
  2. A mass market
  3. A company that’s still small enough to grow rapidly
  4. A company that is not respected—perhaps not even known—by the majority
  5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality, at least on Wall Street.

One thing to watch out for, however, are dual-class shares. Dual-class (or even triple-class) structures issue shares that don’t have voting power. The idea is that investors can buy these dual-class shares, receive dividends and benefit from stock splits and other moves, but can’t vote on company decisions like appointments to the board of directors or other corporate decisions.

The usual reason for the creation of non-voting shares is that this allows company founders and leaders to maintain control of the company even if they don’t own a majority of the stock.

Stock exchanges are always eager to gain new listings and may be willing to grant permission for dual-class shares as a way to attract them. But apparently the companies that calculate major stock indexes—the FTSE Russell and S&P Dow Jones—have banned them from inclusion.

To find out more about stock investing, download your copy of our FREE report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.

Small Cap

What is a Small Cap Stock?

Despite what the moniker implies, small cap stocks are the ticket to big returns in today's stock market environment.

A small cap stock is one that has a market cap of $300 million to $2 billion. That's the total value of the company's shares. These stocks may be in biotech or cloud computing, but don't discount traditional businesses.

A lot of very successful small cap investments come from very basic business models. The corner convenience store, the healthy food manufacturer, the high-volume concrete company, the water refill service … a lot of money can be made by keeping things simple, establishing large positions in small companies with proven business models, and being patient as they grow and/or are bought out by a larger competitor who can improve its own business by a rapid-growth tuck-in acquisition.

And yes, these stocks have just as much, if not more, potential as larger businesses. In fact, the average annual return in the S&P 600 Small-Cap Index over the past 20 years is 10.5%, compared to a 7.9% annual return in the S&P 500 during that time. The numbers don’t lie: these lesser-known stocks are, historically, better performers than large-cap stocks.

Investing in a small cap stock is a good way to earn huge returns. And the smallest of these companies often have the most potential for growth. It's worth noting, however, that they also carry plenty of risk.

Anytime you buy shares of a small, little-known company, there are a bevy of unknowns. It’s impossible to take the risk completely out of small-cap stock investing. But there are ways to minimize those risks without sacrificing potential profits.

To learn more and start expanding your investing options, download our FREE report, 3 Small-Cap Stocks That Can Work Now Despite COVID-19, right now.

Small Cap Stocks

What are small cap stocks?

Small-cap stocks have a market capitalization (the total value of all outstanding shares) between $300 million and $2 billion.

Investing in small-cap stocks is an excellent way to earn huge returns. The smaller companies often have the most growth potential, but they also carry plenty of risk for investors. Anytime you buy shares of a small, little-known company, there is a bevy of unknowns. 

Some small-cap stocks are clinical-stage biotechs whose drugs have yet to be approved for commercial use. Others are chipmakers or cloud-computing companies that have been misunderstood by the market even though they have plenty of promise.

It’s impossible to take the risk completely out of small-cap investing. But there are ways to minimize those risks without sacrificing potential profits. For starters, set up an established set of rules ahead of time, and stick to them.

Our small-cap expert, Tyler Laundon, has a particular set of rules for identifying the right small-cap stocks. Those are:

  • Search for paradigm shifts in any field of business that requires a unique, new solution that a stand-alone company will provide. Then seek a niche supplier that will become an equal benefactor to that pioneering company.
  • Invest only when the market opportunity is enormous—and quantifiable. Only invest in small companies that serve large, burgeoning markets because you can realize tremendous growth with even small shares of the market.
  • Get into a small-cap stock before institutional investors become aware of it. Sometimes it takes a while for the big hedge funds or mutual funds to discover small yet promising companies. Once they do, it quickly drives up the price.
  • Invest in stocks that offer both growth and value. Look for relatively young companies with growing sales, yet are undervalued based on market potential versus total market capitalization. A balance sheet with little to no debt is also a big plus.
  • Invest at the right time in the product cycle. There is a direct correlation between the time of investment and the degree of risk and rate of return you can expect. The period after venture capital investors come aboard is generally the most promising.
  • Lastly, concentrate on the very best ideas. Look for industries that have hit a roadblock and need new technologies to keep growing. The small companies that provide those breakthrough technologies make for the best small-cap stocks.

These rules won’t help you pick all winners. But they should give you a leg up in selecting the right stocks.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Stock

What is a Stock?

The definition of a stock is simple enough; it's what you do with it that matters.

A stock is an equity investment that represents part ownership in a company. When you invest in a stock, you own a small portion (or shares) of that company.

Simple enough, right? You own a portion of a company, so when that company makes money, you make money. Why then, does investing seem so complicated?

In some ways, buying a stock is like playing chess. The different segments and products on the market all move in different patterns and compete or complement one another. There are mutual funds, hedge funds, ETFs, index funds, stocks, bonds, emerging markets, and on and on. It probably doesn't help that a stock is also called a security or a position. But when you get beyond the multiple names and break it down, there are some very simple elements to investing in a stock.

Any one of us can buy a share (ownership) in a publicly-traded company (as opposed to a privately-owned company). Most often, this ownership comes in the form of stocks. As long as there is someone willing to sell, you can buy a single stock or as much as you want.

The catch is that what might be a great stock for one investor might not be a good stock for you. So how do you find good stocks to invest in?

The first question to ask is, what kind of stock do you want? Obviously, you want a stock that goes up; that much is certain. But the big question is, how much risk can you tolerate?

If you’re chasing high returns and are comfortable with high risk, you can follow a momentum strategy.

Moving down the risk scale a bit, you could focus on picking good growth stocks. But in growth stocks too, risk can be substantial, and if you can’t sleep well at night because your stock holdings worry you, you’re investing at too high a risk level.

Then there are undervalued stocks. Good undervalued stocks have low risk because ideally, they are so cheap that they can’t fall any lower!

A dividend-paying stock, properly selected, has very low risk and substantial upside potential, particularly over the long term.

When investing on your own, the most common way to buy a stock is through a brokerage firm. Thanks to the internet, using a brokerage firm to invest is easier—and more affordable—than ever. There are a variety of popular online discount brokerage firms—TD Ameritrade, E*Trade, Fidelity— and none of them charge more than $10 every time you make a trade (and some of them no longer charge a dime!).

If you want to dip your toes into investing, download our FREE report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.

This free report aims to give you the confidence - and the right know-how - to dive right into the stock market. We'll show you how.

Stock Market

What is a Stock Market?

We often assume the stock market is one big financial entity. In fact, there's stock market in England, Japan, several in the U.S., and many more.

When we talk about the stock market, it's usually in generic terms. But within that, there are specific stock markets. So we might talk about the New York Stock Exchange or the Nasdaq. But beyond those big names, there are several markets within the U.S.

The Chicago Board of Options Exchange, the Boston Stock Exchange, and the Chicago Mercantile Exchange are just a few of the additional markets in the U.S. Then we can move to other countries and find the Toronto Stock Exchange in Canada, the Athens Stock Market in Greece, or Romania's Bucharest Stock Exchange.

Many of these markets even have their own ETF, which basically tracks the performance of the country’s benchmark index.

Regardless of where a stock market is located, they all function more or less the same. They provide a marketplace for public companies to sell shares, and for investors to buy and sell them. The goal of an investor is to make money: to buy a stock low, and then sell it for a price higher than they paid. With a large volume of stocks, this can add up quite quickly.

The goal of the company that has gone public, is to increase the worth of their shares, because the principals at these companies often own a lot of them, and can cash them out as needed.

Fortunately, there’s less mystery surrounding investing in stocks on your own these days. With so much information at your fingertips, it's easier to invest than ever.

To get started, download your FREE copy of How to Invest in Stocks and Other Investing Basics. This report will give you everything you need to get started with an investment portfolio - even if you've never thought about investing before.

 

Stock Market Correction

What is a Stock Market Correction?

In a stock market correction, a major stock index suddenly plummets more than 10% from its most recent high. It's not as scary as it sounds.

On any given day, both individual stocks and entire indexes, like the Nasdaq or S&P 500, move up and down. When that decline hits 10%, it's considered a correction if it's one stock, or a stock market correction in the case of an entire index. A correction may last for a day or two or several months. 

What should you do in a stock market correction? In many cases, not much. Indeed, keep a close watch on your stocks, but for long-term investors, a correction is usually little more than a bump in the road. Tighten your loss limits, and keep your stocks on a short leash in case the market starts to head south in a hurry. But don't begin preemptively selling stocks. If you do, you're likely to miss out on even more gains in the coming days, weeks … and potentially months.

In fact, a stock market correction can be a great time to "stock up" on the right stocks. For a high-quality stock, a correction is just a sale and not usually an omen of things to come. You can't just buy any stocks, though. 

There's an art to successfully buying low among stocks, and one essential facet of that decision is sticking with stocks that fell but didn't plummet. In that light, look for stocks that fall 10%-15% during corrections. Whatever you do, don't buy stocks that were already falling before the correction in the broader market arrived.

Remember, unless things get really ugly, don't start selling off your best-performing stocks. In a year, if not a month down the road, there's an excellent chance their share prices will be higher than they were—perhaps much higher.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Stock Markets

What are Stock Markets?

Yes, "stock markets" is plural. Contrary to popular parlance, there is more than one market. In fact, there are dozens. 

Even though the nightly news talks about "the" stock market, the truth is that there are dozens of stock markets around the globe. The New York Stock Exchange (NYSE) and the Nasdaq are the two most well know, but there's also the Boston Stock Exchange (BSE), the Chicago Board Options Exchange (CBOE), and others. 

These markets are essentially a shop where you can buy and sell stocks, bonds, options, ETFs, and other investments. 

Each of these markets has specific listing requirements, and some of them specialize. For example, the CBOE, as you can imagine, specializes in buying and selling options, while the Nasdaq tends to lean more toward tech companies. 

Some companies choose to list their stocks on multiple exchanges. Although for most individual investors, it doesn't change very much about how you buy stocks. You won't find a better price on one exchange vs. another. 

There are stock exchanges far beyond the borders of the U.S., as well. Our upstairs neighbors in Canada have the Toronto Stock Exchange, and you'll find major stock markets in Tokyo, London, Bucharest, Johannesburg, Shanghai, Buenos Aires, and so many more. 

So what can different stock markets around the world offer that domestic markets can't? In a world where faster growth is happening in many places outside U.S. borders, it's never been more important to have a global portfolio.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Stocks

What are Stocks?

Stocks as we know them today conjure images of fast and furious trading, computer programs, and a hectic stock exchange floor. But stocks weren't always traded that way.

When we think of stocks today, what comes to mind for many people is Wall Street and the New York Stock Exchange. But stocks, in one form or another, have been around for centuries. In the 1300s, Venetian merchants traded debts. In the 1600s, England's East India companies issued stocks, even though many of these businesses had no actual business (lookin' at you, dot.com bust).

The modern U.S. stock exchange developed in the late 1700s, eventually turning into the New York Stock Exchange, where some of the biggest companies in the world are currently traded. But what are stocks?

According to Merriam-Webster, stocks are, "the proprietorship element in a corporation usually divided into shares and represented by transferable certificates." Or in English, when you own stocks, you own a portion of a company.

Although there are plenty of reasons for investing in stocks, for most of us, they are part of a retirement plan, whether that's through an employer-issued 401k, an IRA, or investing on our own. However, as evidenced by recessions, depressions, and crashes, investing in stocks can be risky business.

Fortunately, there are plenty of ways to lower your risk and increase your chances of making money in the stock market. One way is to add "forever stocks" to your portfolio. What are stocks you can hold forever?

Forever stocks are fairly evergreen. Typically they are industry leaders that have been growing for a while and should continue to grow for decades to come. They’re stocks you can count on to be viable not only today, but 20 or 30 years from now.

That's not as easy as it sounds. The toughest thing in stock investing is to do nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action.

Why is that so bad?

Your very best ally in the investing business is time. Holding forever is the best way to put that ally on your side, permanently. But you’ve got to buy the right stocks.

And what are they?

  1. They’re the stocks of companies with revolutionary goods and services that are likely to be in big demand by growing numbers of customers.
  2. They’re the stocks of companies that are still relatively small, and thus have room to grow.
  3. They’re the stocks that are not currently loved by investors and thus have the potential to benefit from improved perception as the years go by.
  4. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality, at least on Wall Street.

To learn more about finding stocks you can hold for the long term, download your FREE copy of our report, 10 Forever Stocks to Buy Now-and How to Find the Best Growth Stocks.

These stocks might just make you rich.

T

Tariffs

What are Tariffs?

Tariffs pop up every so often in economic news stories, but what exactly are they, and how do they impact your investments? Let’s find out. 

By definition, tariffs are taxes imposed at the border on international goods. In theory, these taxes make imported goods more expensive, making domestic manufacturers more attractive to consumers. Any country can impose tariffs on another country, and they can be for selected goods or broad swaths of products. As you know, though, theory and reality are often two very different things. 

For example, in 2018, the U.S. put out a list of 1,300 Chinese exports that were subject to 25% tariffs, most notably, steel and aluminum. In response, China imposed tariffs on $50 billion worth of U.S. imports, ranging from soybeans to various chemicals. As a result, businesses using imported steel, such as technology, air conditioner makers, tool manufacturers, and automobile producers felt the pressure from rising costs. But the American steel industry, which is historically a very cyclical segment of the market that has seen many highs and lows—stood to benefit from the trade war

For stock prices, the results of tariffs may be similarly mixed. Investors don’t like what imposing additional taxes on foreign goods could do to trade. Some feel it could stunt America’s economic growth over the long haul. And despite the idea that tariffs should help domestic businesses, our global economy rarely makes it quite that clear cut. 

Even with the uncertainty that tariffs can bring to the stock market, some stocks, like utilities, can be fantastic investments. They typically pay high dividends, which account for a high percentage of market returns in flat markets. And their businesses are virtually immune to the business cycle, as customers use electricity and heat and air conditioning regardless of the economy. Most also operate only in the U.S.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

Technical Analysis

What is technical analysis?

The technical analysis of a stock can be a powerful tool to help investors identify trend reversals and entry and exit points.

As you read Cabot newsletters and listen to investing news, you will probably hear technical analysis terms like ‘head-and-shoulders pattern,’ ‘trendline,’ ‘support and resistance,’ ‘double top’ or ‘double bottom,’ “triangle,’ and ‘gap.’ These are all different trading and movement patterns, and understanding them can be the difference between a successful and a failed investment.

Learning about these basic formations and how to read stock charts will make you a better, more profitable investor. Even a basic understanding of these charts can significantly improve your investing results. How does it work?

Technical analysis focuses on the price and volume activity of a stock. In its purest form, technical analysis assumes that all the fundamental factors of a company are reflected in the price of its stock. Technical analysis studies the market supply and demand in an attempt to identify where a stock’s price will go in the future.

By contrast, fundamental analysis involves analyzing the characteristics of a company to estimate its value. This includes examining a company’s financial statements and financial health, its management and competitive advantages, and its competitors and markets.

The key is to use technical and fundamental analysis together. A great chart is nice to look at, but the company may not be worth investing in unless it also has a terrific long-term growth story. Likewise, a company may have a terrific fundamental story, but its chart (which is really what you’re buying) may not look so good.

Only if both the technical and fundamental analysis looks outstanding should you consider a stock for purchase. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Technology Stocks

What are Technology Stocks?

Technology stocks can be very exciting investments, and the world of tech is vast. These stocks can also be very volatile. 

It can be challenging to hone in on what, exactly, technology stocks are. In part, that's because there isn’t one type of tech company. So “tech stocks” could be biotech, financial tech, educational technology, engineering software, and so on. The common thread is that they are technology companies first, and then they specialize from there. 

As a whole, technology stocks have been moving up faster than the general market. The Information Technology sector of the S&P 500 has been the index’s top-performing sector for the past 10-year, 5-year, 3-year, 1-year, and year-to-date periods, outperforming the Nasdaq by well over triple-digit percentages in some cases.

But as you know, big rewards come with big risks. For example, 2000 was the year the dot-com bubble, which had driven internet stocks to unsustainable valuations and share prices, finally burst. The indexes fell apart, but none more so than the tech-heavy Nasdaq, where many of those overinflated internet stocks resided.

At the same time, technology is thrusting the world into a whole new era. Going forward, there is a good chance tech sector performance will be even more dominant than it has been in the past. As the meanders along during this economic mess, there are great opportunities to buy good stocks cheap. The very best technology stocks should be first on your list.

With so many players, it’s impossible to predict which stocks will make the technological breakthrough that turns them into the next goldmine, but one thing is for certain: there’s growth ahead.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You'll learn about the four types of stocks, what it takes to be a successful investor, and you'll discover five reasons you should skip the broker and invest on your own. 

The Stock Market

What is the Stock Market?

With all the talk of the stock market as a singular entity, it's easy to forget what actually makes up the stock market and how it works.

Even though many of us talk about "the stock market" in a way that makes it sound like one giant financial monolith, the actual market is a little more nuanced. The overall market includes multiple exchanges, such as the Nasdaq or New York Stock Exchange (NYSE). If you want to buy stocks of Apple (AAPL), you would get that on the NASDAQ. Honeywell International, Inc. (HON) is on the NYSE.

An easy, and admittedly simplistic, way to think of it is like a service center on the interstate. You might pull into Service Center #9 (the stock market), where you can gas up your car at Shell, and get lunch at Subway (the indexes). Before you leave, you'll grab some coffee and snacks (stocks) for the road. This market, though made up of several separate businesses, is all one, centralized spot for you to get what you need.

Of course, that doesn't take into account the fact that you can also sell stocks you already own, or that prices can fluctuate based on how popular a given item is, but you get the idea.

The stock market, as a whole, provides a destination for publicly owned companies to sell shares, and for investors to buy and sell them. The goal of an investor using the stock market is to make money: to buy a stock low, and then sell it for a price higher than they paid. The goal of the company that has gone public is to increase the worth of their shares.

How does it all work? Market prices are determined by the actions of millions of investors every day, including thousands of well-trained security analysts, technical analysts, insiders, and friends of insiders.

To learn more, download our FREE report, How to Invest in Stocks and Other Investing Basics. You'll learn everything you need to get started investing on your own.

Trading

What is Trading?

Trading is one of those tricky investing terms that can mean different things depending on the context

At the most basic level, trading stocks simply means the buying and selling of stocks. If you've ever bought or sold a stock, then you've been involved in trading. But like many things in the investment world, context is important, and there is a big difference between trading stocks and investing in stocks.

When you invest in a stock, you're committing to the long haul, at least within reason. That could be six months or five years or forever, but the intention is to put money into your chosen stocks and give that money time to grow and work for you.

Trading, on the other hand, is noted for extremely quick holdings, to exploit short-term market inefficiencies. These short-term positions can be in a wide range of investment categories: stocks, options, futures, currencies, exchange traded funds (ETFs), and virtually any other investment that can be traded electronically.

You're probably most familiar with the concept in terms of day trading. From an investing standpoint, however, day trading is like gambling. We know that the stock market goes up over time. Day to day, you have no idea which direction the market is headed, and individual stocks can be even more difficult to pinpoint. Sure, people can succeed in doing it, but it takes considerable practice. You can’t just dive into day trading and expect to make money with any consistency.

We’re not completely averse to short-term trading. After all, we have an advisory called Cabot Top Ten Trader, which every week recommends the 10 hottest stocks on the market, complete with buy ranges and loss limits. But the timeline for owning the stocks Top Ten Trader recommends is weeks or months—not days, and certainly not one day.

There’s nothing wrong with trying to make a quick profit. In fact, the quicker you profit from your investments the better. But to make money in investing, the longer your timeline, the more the odds are in your favor. With day trading, your odds are a flip of the coin—at best.

To keep you on your toes, though, there's also trading volume. Trading volume reflects the overall activity of the market, indicating the sheer amount of buying and selling of securities. Next to price, it is one of the most closely watched indicators.

Specifically, trading volume represents the total number of stock shares, bonds or commodities futures contracts traded during a certain period of time.

The major exchanges report trading volume figures on a daily basis, both for individual issues trading and for the total amount of trading executed on the exchange. Trading volume indicates market liquidity and the supply and demand for securities.

To get a more in-depth look at investing, trading, and all the important stock market information, download our FREE report, How to Invest in Stocks and Other Investing Basics, right now. This report gives you the information you need to start investing on your own.

 

 

 

Trading Volume

What is Trading Volume?

Trading volume reflects the market's overall activity, indicating the sheer amount of buying and selling of securities. 

Next to price, trading volume is one of the most closely watched indicators. Specifically, it represents the total number of stock shares, bonds, or commodities futures contracts traded during a specific period.

The major exchanges report trading volume figures daily, both for individual issues trading and for the total amount of trading executed on the exchange. This metric indicates both market liquidity and the supply and demand for securities. It also reflects pricing momentum. When stock market activity—i.e., volume—is low, investors anticipate slower moving (or declining) prices. When market activity goes up, pricing typically moves in the same direction.

Low volume of a security, even if it's rising in price, can indicate a lack of conviction among investors. Conversely, high volume of a particular security can indicate that traders are placing their long-term confidence in the investment. Certain types of investors who subscribe to the "technical analysis" school of thought place enormous importance on the amount of volume that occurs in the trading of a security or commodity futures contract.

Lastly, trading volume also serves as a warning as to whether a stock is on the verge of breaking into upside territory (high volume) or into a downside trend (low volume). High volume gives investors more time to determine when it's the right time to sell for a profit. For example, a dramatic rise in volume is interpreted to signify future sharp rises or drops in price, because it reflects increased investor interest and sustained momentum. Low volume, on the other hand, can generate price volatility and mirror factors that are ephemeral and untrustworthy from an investment standpoint.

Take note: Extremely low volume sometimes attracts scam artists who are determined to manipulate the stock price because their trading will exert an outsized influence.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

U

Undervalued

What is an Undervalued Stock?

An undervalued stock is the key to the age-old wisdom of “buy low, sell high,” but most most investors know what that really means.

The definition of an undervalued stock may seem obvious — it's a stock that is undervalued. This doesn’t necessarily mean these stocks are inexpensive though. As an example, you could buy a brand new Ferrari Roma for $150,000; that would be undervalued, but certainly not inexpensive!

There's a lot to finding these stocks, though. Value investing, perhaps more than any other type of investing, is more concerned with the fundamentals of a company’s business than its stock price or market factors affecting its price.

Don't, however, disregard the importance of finding out why a stock is selling at a bargain price. Is the company competing in an industry that is dying? Is the company suffering from a setback caused by an unforeseen problem? The most important question, though, is whether the company’s problem is short-term or long-term and whether management is aware of the problem and taking action to correct it.

Assuming that all checks out, then look at the numbers more closely. Often, an undervalued stock will have strong sales and/or earnings growth, and the market either doesn’t fully understand or appreciate the product yet or has punished the stock for an embarrassing headline that doesn’t truly affect the company’s long-term growth trajectory.

It’s also worth looking at the strategy developed by Benjamin Graham. We used one of Benjamin Graham’s value investing methods for years, with great success.

Mr. Graham suggested that value investors should buy stocks that fit all of the following criteria:

  1. The current price-to-earnings (P/E) ratio is 9.0 or less.
  2. The price-to-book value (P/BV) ratio is 1.20 or less.
  3. The long-term debt-to-current assets ratio is 1.10 or less.
  4. The current assets-to-current liabilities ratio is 1.50 or more.
  5. Earnings per share growth during the past five years is 1% or more.
  6. The company currently pays a dividend.
  7. The Standard & Poor’s Quality Rank is B+ or better.

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Undervalued Stock

What is an Undervalued Stock?

There are plenty of cheap stocks out there. And you can find an undervalued stock or two, as well. But rarely are they the same thing. 

An undervalued stock is one with a strong balance sheet, good earnings growth, and a low price-to-earnings ratio (P/E). You can often find these stocks by looking for those that are beaten down by the market due to bad news or negative rumors. Benjamin Graham, the father of value investing, constantly searched for companies that once fetched sky-high valuations but that crashed when the companies were unable to deliver on investors’ expectations.

Be aware, however, that undervalued and cheap are two very different things. A cheap stock can very easily get cheaper, meaning you’re losing money. An undervalued stock, on the other hand, will likely increase in price over time. 

To profit with these stocks, look for companies that are currently paying dividends. Investing in undervalued companies requires waiting for other investors to discover the bargains you have already found. Sometimes your wait period will be long and tedious, but if the company pays a decent dividend, you can sit back and collect dividends while you wait patiently for your stock to go from undervalued to overvalued.

It's also important to look closely to determine why an undervalued stock is priced the way it is. Is the company dealing with a short-term or long-term problem and is management aware of it and taking action to correct it? 

Study the sales, too. If a company’s sales are increasing every year, even when the economy is weak, we’re interested in the potential of its stock. Don’t mistake profits for increasing sales, though. Many companies are cutting costs, and that is one way to increase profits, but if their sales aren’t growing, their future growth is jeopardized. What the companies are doing is downsizing the company, which will lead to stock price erosion sooner rather than later.

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Undervalued Stocks

What are Undervalued Stocks?

There's a big difference between undervalued stocks and cheap stocks. Here's how you can tell the difference.

If there's one thing every investor has in common, it's that we'd all like to find those perfectly undervalued stocks at rock-bottom prices and scoop them up. We'd love to hold them as they increase astronomically in value, securing our retirement in the process. 

The truth is that there are plenty of cheap stocks out there. And there are undervalued stocks, as well. But rarely are they the same thing. 

Value stocks are most often quality companies where capable management is working hard to build value. Sometimes there are issues that cloud the near-term story but will likely be remedied. In others, the companies are hidden among less interesting industry peers. Occasionally, the market is waiting for several quarters to pass following a transition (new CEO or spin-off, for example). In other words, you need patience to make a profit with these stocks. 

Four components will help you identify value stocks:

  1. Earnings per share (EPS) growth: Over the medium and long term, earnings growth drives share price growth. The stock that's most likely to rise is the stock with growing earnings. 
  2. Price/earnings ratio (P/E): The stock's current P/E should be lower than the EPS growth rate.
  3. Dividend yield: A long-term dividend payout is almost always a good sign. 
  4. Long-term debt-to-capitalization ratio: Simply put, high debt levels can strangle a company's ability to invest, innovate, and compete.

One last word of advice: Always find out why a stock is selling at a bargain price before investing. Is the company competing in an industry that is dying? Is the company suffering from a setback caused by an unforeseen problem? The most important question is whether the company's situation is short-term or long-term and whether management is aware of the problem and taking action to correct it. 

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

V

Valuation

What is Valuation?

The simple answer is that the valuation of a company or stock, is how much a company is thought to be worth, based on a variety of factors.

As a definition, this simple answer is fine. But when it comes to determining the actual value of a stock, not all valuation methodologies are created equal.

No single method applies to all companies or succeeds in all market conditions. The price of a security is based on several tangible and intangible factors: the current status of the company, the prospects for the company, market sentiment, economic or political environment, and many other factors.

Again, value refers to potential capital gain opportunities in the stock market. More obvious factors include strong balance sheets, good earnings growth, and low price-to-earnings ratios (P/Es). Other hidden values that go into a valuation could be real estate owned by the company, patents on intellectual property, or secondary revenue streams that could become more prominent sectors of business in the future.

But even within the investing industry, there is no hard and fast rule about the importance of valuation. Some professionals believe it’s essential to consider valuation and room for growth, then buying when valuation as compared to peers is reasonable.

For others, valuation is just one of many data points to look at. In fact, many of history’s biggest winners got going with huge valuations. The bottom line is that, if the growth is exciting enough (and the market is bullish), valuation doesn’t stand in the way of institutions piling in as the story unfolds.

As you can see, valuations are based on several influences, but it’s still up to the individual investor to decide if they believe the hype, or to the contrary, if they see an underdog who is going to spike. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

Value Investing

Finding value is all about buying something at a discount to what it’s actually worth. The same is true of value investing.

Sometimes factors can cause a stock to get beaten down to the point of being undervalued. Value investing is about finding stocks that are worth more than their current share price.

Investment legends like Sir John Templeton, Benjamin Graham and Warren Buffett realized decades before behavioral finance became a respected academic discipline that systematic psychological errors tend to create market inefficiencies. Templeton, Graham and Buffett reasoned that herding behavior (including momentum traders and short-term speculators that chase price trends) and overreaction bias (the tendency of people to overreact to bad news) are strong forces in the market that can push stocks far below their fair value.

Based on these observations, many of the world’s greatest investors look for stocks that are beaten down by the market due to bad news or negative rumors. Benjamin Graham, the father of value investing, constantly searched for companies that once fetched sky-high valuations but that crashed when the companies were unable to deliver on investors’ expectations.

Warren Buffett famously said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Value investing is about recognizing opportunities and spotting deep discounts. One way some investors measure a company’s value is its price-to-earnings ratio, or P/E. But P/E is a very simplistic measure of a stock’s value. Experts dig deeper, examining a company’s sales, cash flow, dividend, book value, debt levels, historical valuation patterns and more to determine if a stock is undervalued.

Value Investor

What is a Value Investor?

A value investor looks for stocks that are worth more than what is reflected in the current price. Value investing has been proven to work well over time if you buy carefully and hold for the long term.

In some ways, a value investor is a researcher, or perhaps, a detective. These investors are more concerned with the business and its fundamentals, such as earnings growth, dividends, cash flow, and book value, than market factors or a stock’s price.

There are a few basic tenets that a value investor may follow in choosing stocks:

  • Buy stocks with sustainable, predictable business models.
  • Look for operational excellence, including good management and strong financials
  • Look for companies with price to book value (P/BV) ratios less than 1.20. 
  • Invest in companies that are currently paying dividends. Investing in undervalued companies requires waiting for other investors to discover the bargains you have already found. Sometimes your wait period will be long and tedious, but if the company pays a decent dividend, you can sit back and collect dividends while you wait patiently for your stock to go from undervalued to overvalued.

Be aware that undervalued and cheap are two very different things. Cheap stocks can very easily get cheaper, meaning you're losing money. Undervalued stocks, on the other hand, will likely increase in price over time. 

Many people have made fortunes using a value-based approach to investing, but a value investor must have patience. Patient investors are the best prepared when opportunities emerge. Because of market turbulence, stocks of great companies become available to trade at very cheap valuations. 

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

Value Stocks

What are Value Stocks?

Notice any stocks that are getting pummeled as a result of embarrassing headlines or negative rumors? They might be the next great value stocks.

Investing in value stocks isn’t quite as simple as that. But that’s sort of the mentality. “Be greedy when others are fearful,” legendary value investor Warren Buffett once said. His advice still rings true.

Sometimes good companies get wrongly punished by the stock market, often to the point where they become undervalued. But not just any company receiving a bit of bad news qualifies as a good value play. Instead, value stocks typically share a couple of key characteristics.

Those are:

  • Strong growth prospects. Every stock takes it on the chin at one point or another. The companies whose sales and earnings grow through it are the ones that consistently bounce back. It doesn’t take much for a stock to get knocked down—a disappointing new product, a scandal involving one of its executives, a bad Super Bowl ad. Those are temporary problems. For savvy value investors, they’re also prime buying opportunities.
  • Cheap multiples. There are ways to actually measure value stocks. And it’s not as simple as looking at the price to earnings (P/E) ratio, as some analysts might have you believe. Price to earnings is just one of six valuation benchmarks we use. The others are price to book value, price to cash flow, price to dividends, price to sales, and the PEG ratio, which is calculated by dividing the current stock price by the last four quarters of earnings per share growth. For a company to be considered a strong value stock candidate, at least one of those ratios needs to be low. If several of those valuation multiples are low, and earnings are projected to grow, then you may have found a stock that is trading well below its intrinsic value.

Even with those characteristics in place, successful value investing still depends a lot on timing. You don’t want to invest in a strong value candidate while it’s still in free fall. You want to buy value stocks right around the time they’ve hit rock bottom—or at least close to it.

To learn more and discover how you can find the right stocks for your portfolio, download our free report, How to Find Undervalued Stocks - Plus the Benjamin Graham Approach to Value Stocks, right now.

 

 

 

Volatility

What is Volatility?

There's an invisible force that moves your stock up or down on a daily basis, ignoring the underlying fundamentals of the company. That force is called volatility.

Volatility is the same mathematical concept as the one that says today’s temperature might vary a few degrees one way or the other from yesterday’s or that today it might take you a few minutes more or less than yesterday to get to work. It is essentially random movement governed by the mathematical laws of chance.

That may not be comforting, but it is an everyday reality in investing just as it is pretty much everywhere else. Volatility is very complex to predict, but it is a relatively simple concept mathematically, and it's measurable.

In stock market terms, volatility is the measure of how greatly stock prices vary over a period of time. And the VIX, properly known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures market expectations of near-term volatility based on option prices among S&P 500 stocks.

The VIX is commonly known as the investor “fear gauge." High VIX reflects high uncertainty. And because markets are usually more volatile when prices are falling, a high VIX can also suggest high expectations for falling prices.

A low VIX means low expected volatility, which is more associated with expectations of rising prices. Here's one example of high volatility and falling stock prices: In August 2015, the VIX gapped from 12 to 28 in just a couple trading days. Stocks tumbled 8% in the ensuing six weeks, and after a quick recovery, fell to new lows in early February.

Here's the good news about volatility: every time in the last decade that the investor fear gauge has made a quantum leap, and stocks have plummeted for weeks and sometimes months, it look less than a year for them to fully recover.

If you're curious about volatility, you might find our FREE report, Technical Analysis of Stocks, to be a robust addition to your knowledge base.

Volume

What is Volume in Stocks?

Volume reflects the overall activity of a stock, indicating the sheer amount of buying and selling. Next to price, it is one of the most closely watched indicators.

While many investors these days are familiar with charts in a general sense, too few pay attention to one key aspect of stock charts—volume. Trading volume represents the total number of stock shares, bonds, or commodities futures contracts traded during a certain period of time.

The simplest use of volume is just to confirm advances and declines. When a stock is making good progress in price terms, it’s good to see that volume is also up. It confirms that lots of buyers want in. Similarly, when a stock is declining, a parallel increase in selling volume lets you know that sellers are in control. Just using these two inputs, you should be able to identify good buy and sell points.

When you see a stock stage either (a) a huge gap up on big volume on meaningful news (often earnings), or (b) many days in a row of heavy buying that takes the stock to new highs, that “volume area” will often provide support during the next few weeks. And that means dips into that area represent low-risk buy points.

Big volume clues that coincide with meaningful moves in a liquid stock are invaluable—they often point to a new uptrend getting underway, or the end of a prior move. These huge moves are caused by institutional investors … and once institutions start buying or selling, they rarely stop in just a couple of weeks.

One word of advice: Stocks with low trading volume (and low prices, as well) can be very volatile, often enticing you with rip-roaring advances that make your mouth water. But beware! If a stock is trading fewer than 300,000 shares a day, you may have difficulty executing a trade in a timely manner, which could mean buying higher (or selling lower) than you meant to.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons

W

Wall Street

What is Wall Street?

What is Wall Street? That's a good question, and it could have several answers, from an actual street to an investing concept.

Yes, Wall Street is an actual street in the financial district of New York City. Wall Street is home to the New York Stock Exchange, the Federal Reserve Bank of New York, as well as several other major financial institutions.

Because it is a literal hub of economic activity, Wall Street is also a concept. You can see this reflected in popular culture in the form of films, such as The Wolf of Wall Street, and in social movements, such as Occupy Wall Street.

Wall Street is also a general term for economic institutions, such as big banks, as well as the stock market as a whole. Pundits take about the activity on Wall Street or the Wall Street bubble. You might hear radio hosts say that Wall Street reacted to certain good or bad news or that it made big moves.

More important for investors, though, is how they approach Wall Street and investing in general. Fortunately, it's a lot easier today than it was in previous years.

Today, online investment advisories provide expert opinions on what stocks to buy and where the market is headed. And online brokerage sites like TD Ameritrade or E*Trade Financial allow you to create and manage your own investment accounts without having to hire a personal broker.

Put simply, the Internet has given self-directed investors more tools to do it themselves than ever before. Investing in stocks isn’t as scary as you think. Investing on your own is empowering and educational, and profitable.

To learn more, and get an introduction to investing, download and read your FREE copy of our report, How to Invest in Stocks, and Other Investing Basics today.

 

 

 

Y

Yield

What is Yield?

Yield? Return? What does it all mean? And do investors really need to worry about it?

One of the most challenging things for new (and even experienced) investors is trying to make sense out of all the terms. It can feel almost like trying to learn a new language. But like a new language, you don't have to learn everything at once, and some basic phrases will give you what you need to get by until you learn more.

For instance, you need to know what stocks are if you are going to invest. That would be the language equivalent of asking someone in Paris if they speak English (Parlez-vous anglais?). The next step would be terms like return and yield. In our language example, that might be similar to asking for a coffee (Bonjour. Un café, s’il vous plaît). But what is yield? And how is it different than return?

Yield is calculated on a monthly, quarterly, or annual basis and is the return of an investment divided by the initial purchase price. Return, on the other hand, is the monetary gain you make on an investment. So if you buy a stock for $20 and sell it for $25, your return is $5.

That's the basic definition, and naturally, there's a lot more to it if you want to go in depth. For example, we write a lot about dividend yield. Plainly speaking, dividend yield is how much a company pays its shareholders over the course of a year of ownership, divided by its current stock price.

A dividend is a sum of money a company pays to its shareholders, typically on a quarterly basis. The higher the dividend payment, the higher the yield, which is calculated by the total annual dividend payout per share by the current stock price. So, if a company pays $2.00 per share per year, and has a stock price of $60.00, it has a yield of 3.3%. And any yield above 3% is considered good.

When you buy a dividend stock, you’ll receive a steady stream of income—generally on a quarterly basis. If the market crashes and the share price begins to fall, the nice 3% or 4% yield (or higher) will soften the blow.

U.S. Treasury bonds also offer a yield which is tied to the interest rate. Bonds are low-risk, as far as investments go, but there's a caveat: when interest rates are rising, bond prices fall. Treasury bonds have two moving parts: the price and the yield. Presumably, an investor can buy a $10,000 U.S. Treasury bond and lock in an interest rate (which has been under 2% for most of the last 10 years). Once you buy that $10,000 bond, the price changes a little bit every day, but it’s guaranteed to be worth $10,000 upon maturity.

To really learn the basics of investing, and find out more about return, yield, and how to make smart investing decisions, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics, today.

 

 

 

 

Higher yields come with higher risks though. Many of these stocks’ yields are so high because they’re struggling, and they may even have to slash their dividends soon.