Callable Bond

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A bond where the issuer has the option to redeem the bond prior to the redemption date.

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Investing Techniques for Beginners

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One of the most common questions that financial advisors get asked is whether or not now is a good time to buy stocks. The answer is yes, as long you are buying reputable companies with proven track records. No one can truly predict what will happen next on the market and it is never a good idea to try and do so. SSL recommends investing for the medium to long term in securities that display the least amount of volatility in markets. To determine the volatility of securities, analysts employ a technique called the Dollar-Cost Averaging (“DCA”).

According to Investopedia, the DCA is the buying of a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high. Investors must remember that all investments carry with it a level of risk therefore there is no technique that will guarantee that an investor won’t lose money on investments. Financial advisors favour the DCA technique of investing as it does not require a lump sum of money to begin with, but rather, encourages regular deposit of the same amount over time.

To understand this method further, we can illustrate how this technique materializes. Let us assume that Matthew decided to invest $10,000 in Apple on the first day of the month for the next three months, without the restrictions of trade fees, no minimum amount and purchasing only whole number shares. One the first month, the share price was $100, on the second, $95, and on the last month, $105. When the price increased, Matthew was able to purchase less shares with the same fixed investment amount. The opposite also held true, when the price fell, he was able to buy more shares with the same amount of money. In this example, Matthew purchased 300 shares at an average cost of $100. Given that the current price is $105, the original investment of $30,000 would now be worth $31,500.

If the investor had invested all $30,000 in one of those months instead of spreading the cost across three, the market value of the portfolio could either be higher or lower than the $31,500, subject to the month of investment. Since no-one can accurately predict the future share price of stocks, and time the market, DCA is a safer alternative strategy used by persons worldwide to hedge their risk in an attempt to lower their average price per share. This technique   eliminates the assumption that investors must have a large lump sum of money to invest and yields to more conservative, low income earners.

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Spread

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The difference in yield between different types of bonds, for example between government bonds and corporate bonds. Also referred to as yield spread.

 

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Underlying Security

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The shares, other security, or index, on which a derivative instrument is based.

 

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Tender

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Tender is a method of issuing securities whereby investors are invited to bid, subject to a minimum price. The allocation of the securities is made according to the prices bid.

 

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Return on Equity (ROE)

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Return on Equity is a method of valuation of company accounts which can determine how a company is spending its money, calculated by dividing a company’s net income by its stockholder equity.

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Chartism

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Chartism is the study of historical market data to determine trends and to try to predict future movements.

 

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Follow by Example: Learn from Experienced Investors

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There is no set method as to how one should invest. However, based on the recent decline in market prices, why not take a page out of the more experienced investors book?

What would they do in this situation?

Investors such as Ben Graham, Peter Lynch and Warren Buffett have been around for a while. They have experienced market crashes before but have also made significant wealth from investing.

The Conservative Investor

Ben Graham made his investment decisions mostly on the financial analysis of stocks. Graham focused on safe investments and was not much of a risk taker. He preferred to invest in stocks when the market price is below the company valuation to gain significantly if the market price should increase but in the case where the prices fell there would be some cushion for the stock.

The Aggressive Investor

Peter Lynch, on the other hand, is the complete opposite. His investment decisions are based on market sentiment. Additionally, he was a long-term investor and was not bothered by market corrections.

Lynch lived by several investment principles, namely:

(a)    Be aware of the stocks in your portfolio

(b)   Do not predict interest rates or the economy

(c)   Give yourself time to realise which companies are exceptional and which are not

(d)   Identify and purchase stocks where the company’s management is strong

(e)   Adapt to changes and do not make the same mistake twice

(f)    Know why you hold, sell or buy a stock

The Moderate Investor

With a net worth of US$89 billion over a career spanning over 70 years, Warren Buffett is one of the most respected and well-known investor in the US. Buffett prefers to invest in stocks with moats. Meaning the company’s ability to stay ahead of its competitors to continue making profits and increasing market shares. Buffett describes events in the market such as market correction as a positive for investors as it is a perfect opportunity to stock pick and takes advantage of low stock prices.

Which one are you?

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Market Impact

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Market impact is a measure of each trade’s average execution price versus the volume weighted average price of the stock for that trading day. It is thus a measure of how the size of the order affects the price at which it is executed.

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Flotation

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Flotation is the first issue of shares to the public in a company new to the stock market. If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

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Blue Chip

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Blue Chip is the name used to describe companies that are perceived to be high quality.

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Barbell Portfolio

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The Barbell Portfolio is a portfolio of bonds which is concentrated in short and long-dated bonds with little or no exposure to intermediate maturity bonds.

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Ticker Symbol

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The Ticker Symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both.

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Dividends

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Dividends are the part of a company’s profit after tax earnings which is distributed to the shareholders in the form of cash or shares.

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Fundamental Analysis

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Fundamental Analysis is an analysis of a company taking into account all the factors that affect its cash flow, profits, business, the industry it operates in and the economy in general.

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London Interbank Bid Rate – LIBID

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London Interbank Bid Rate – LIBID is the interest rate at which prime banks will offer to take funds on deposit from other banks in the London Interbank market.

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Over Subscription

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Over Subscription is when more applications are received than there are shares for an offer. In this event, applications are usually scaled down pro rata.

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Federal Reserve Board

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The Federal Reserve Systems’ Board of Governors that oversees Federal Reserve Banks and establishes monetary policy in the US.

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Authorised Share Capital

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Authorised Share Capital is the amount of share capital that a limited company is authorised to issue. This does not provide any indication of the worth of the company which is related to its issued capital and reserves, its Net Asset Value (NAV) and its profitability.

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Bear Market

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The Bear market is a market where prices decline against a background of widespread pessimism.

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