January 28, 2004
A Return To Irrational Exuberance?
The Sarbanes-Oxley Act of July 2002 was supposed to help reign in the worst excesses of the bubble stock markets. After 18 months, it can basically be categorized as failure as investors are still throwing money around without concern, despite the new disclosures and despite a massive expansion of the government bureaucracy.
The SEC has seen its budget nearly double since 2001. The number of bureaucrats has gone up by nearly 700 in two years. All of this in an effort to enforce "full disclosure."
Problem being, despite the full disclosure, investors will still throw money at whatever penny stock they get pitched - disclosure or not.
I get these pitches almost daily. In fact, I got the same pitch, exactly the same, 6 times in one day. They all try to pump up the stock and make it sound like the greatest thing since Microsoft as an IPO. The reports, of course, don't mention any of the potential downsides. They don't mention the risks of investing in a Bulletin Board stock - in fact, they promote the OTCBB as a benefit of the stock (it is most certainly not!).
And while many people do as I do and simply delete the email as spam, there are enough people looking for the easy way out to push up the price and volume in the stock well beyond the normal range. Some people come out smelling like a rose. Most end up getting soaked when the promotional period ends and the price and volume return to normal levels.
If you're thinking about investing money, whether it be as a trading position or an investment, please take the time to research the stock. The reports coming via email are not valid research. A quick, cursory research done after receiving the email will not be sufficient either. There is no worse feeling than buying a stock only to find that when you want to sell it, there are no other buyers. And I have talked with many people who have ended up in exactly that position. I've seen people who chased every hot Bulletin Board tip, only to end with an account full of non-liquid positions.
Irrational exuberance - chasing the latest, greatest hot stock - are the greatest threat facing your retirement accounts today. More than corporate malfeasance. More than shady brokers. Your own worst investing enemy is emotion.
Take the emotion out of your investing. Before instituting a position, make a plan. How much profit do you want (reasonably!)? How much loss can you stand? What financial criteria are important to you? Then stick to your plan!
The government, no matter what the Act they pass, cannot protect you from yourself and your own irresponsible acts. Take the time to act rationally. It is the best investment strategy you can employ.
September 27, 2003
Investing Strategies - Part VIII
Bond Pricing
In my last post, I made mention of the fact that many bond investors are not aware of how the bond market prices securities. I also noted that in my original post on the bare basics of bond investing, I did not touch on it either. But since it is important to the full understanding of the article linked in the last post, let's have a go at it.
Bond prices are essentially composed of a few different components. The first is the risk free rate of return. There is also a component of interest rate risk and a component for company specific risk. In addition there may also be components of currency risk, political risk, or key persons risk. But that's not all.
There is also a question of how do you actually price a bond? To a point, it depends on what your goal in investing in that bond is. In other words, are you investing for the long term or are you simply speculating?
All these factors together make understand bond pricing and price dynamics one of the most complex areas in the market. So let's break them down one by one and see if we can't get a better understanding of how they all work and interrelate.
As I said, the first - and most important - component of bond pricing is the risk free rate of return. This number is essentially the fed funds rate, that magical number set by Greenspan and Federal Reserve. Often times, you'll hear the risk free rate described as being the return on Treasuries. Treasuries are often used as a rule of thumb proxy for comparison purposes (mainly because they are government backed), but they are not completely accurate because of interest rate risk, our second component.
Interest rate risk is how the bond market takes into account future expectations of either a rate cut or increase. It is often said in the industry that the bond market leads Greenspan, not the other way around. Treasuries are susceptible to interest rate risk just like every other bond, which is why they are not truly a risk free rate of return. Treasury risk ends (theoretically) at interest rate risk. Most bonds, including munis include a component of company risk.
Company risk is how the market accounts for risks unique to the issuer. In a way, this is a bit of a misnomer as issuers of muni bonds also have differing degrees of risk. For instance, right now it would be a greater risk to invest in a State of California muni than it would to buy one issued by, say, the State of Virginia. This is partially offset by the fact that virtually every muni is insured, but then the financial strength of the insurer comes into play in determining the company risk component. The degree of company risk will almost always be reported by either Moody's or S & P, using a variation of the AAA (or 3a), AA (or 2a) through D (which stands for in Default). AAA bonds will be priced very close to, and sometimes even at, the yield of a similar Treasury. CCC bonds will be priced to have a much higher yield, reflecting their higher company risk component.
Those are the three most common components used in determining bond prices. However, when you have a bond payable in a foreign currency (Euro denominated bonds are becoming more prevalent), you introduce the currency exchange rate risk. If a issuer is a foreign company, or the bond is secured by overseas assets, you now introduce the political risk, which is mainly concerned with nationalization or currency export restrictions. And with some, usually smaller, companies if one person is perceived as being key to the viability of the company, there may be a key person risk factor that comes into play.
So once you've determined all the various risks, do you have a useful price? Probably. The tricky part is in identifying it.
Most bonds are quoted two ways: by yield to maturity (YTM) and by the actual trading price. The YTM will be a percentage, such as 5 3/4%. The actual trading price will be quoted as say 90 3/4 (which should be read as $907.50 per $1000 par value - multiply by 100 to get the actual price). Treasuries are an exception, they're priced in 32nds, i.e. 98:15 or 98 and 15/32.
So which is the right number for you? Depends on what you're looking to achieve. If you're investing for the long term, the YTM will be the more important number for you. YTMs are relatively low right now because of the low Fed funds rate. So, as a result, people are taking more risk (investing in lower grade bonds, generally) in order to get a YTM that is acceptable. If you're looking for a short term trade, you'll be more concerned with the actual trading price of the bond as your goal will to make money on the capital gain rather than through the accumulation of interest.
So how do bond pricing and YTM work in relation to interest rates?
Let's assume that interest rates are going up. The YTM will also go up, as the risk free rate base will be rising. But since the coupon rate will not change, the only way to push up the YTM is for the price to go down.
On the other hand, if interest rates are going down, YTM will follow suit and the price will rise, as again, the coupon rate is fixed by the bond covenant.
This is where the real risk in investing in bonds right now comes in. Interest rates are virtually at zero as it is. There is really no place for them to go but up, which in turn will push down bond prices. Speculating in bonds right now may be profitable, but if you're buying for the long term you had best be planning to hold to maturity and had better be happy with the YTM as it is unlikely that you'll be selling a bond at a capital gain in the intermediate term.
But all is not lost in the bond market, if you're willing to be patient and intelligent in your investing.
If you need to put money into bonds for allocation reasons, or because you feel it is more safe than putting money in the stock market, investigate your choices. This is probably a very good time to be looking at short term bond mutual funds. Why?
As bonds get closer to maturity the risk components move towards zero and the prices become less volatile. Returns will be small, whether they be positive or negative. In a market where prices are likely to be falling, capital preservation becomes the name of the game (unless you're trying to short the market, but that's a whole 'nother story).
How can you compare different mutual funds to see which may be more appropriate for you? Look for the statistic labeled "duration." It is a measure of the average time to maturity for the fund's bond investments. The smaller the number, the closer to maturity the average bond is, the less volatile the fund will be, and the lower the potential return will be.
As always, talk things over with your broker before making any investment decisions. Everything here is for educational purposes only and is not intended to be, nor should it be construed as, a specific recommendation. All investments carry a degree of risk.
August 27, 2003
Investing Strategies - Part VII
Long Options
To understand this post you need to have a decent understanding of options, in particular the concept of the strike price. For a refresher go to my post on options or to the CBOE website and look for the education section.
Remember, options carry special risks and are not for everyone. Before trading options, talk with your broker about them and also make sure that you meet your firm's option trading requirements.
Towards the end of my brokering career, I dealt with hyper-traders. These guys were trading at least fifty times a year - most of them were in the 150-200 trades a year range (one per day, roughly) and a few were into the multithousands of trades annually. To a person, they almost all liked the idea of trading options and most could make money playing spreads or writing covered calls, but very few every made money trading long options. Most of the hardcore options traders I dealt with in fact wouldn't trade long because they thought it was impossible to make money that way. They saw it as a sucker's game.
And to a point, they're right. But there are others that make huge amounts of money playing long options. So what's the difference between the suckers and the moneymakers, if they're both playing the same game?
Remember, options are leverage. It is possible to make huge amounts of money on a small investment. Most option players hear stories about the guy who bought XYZ options at 3/4 and sold them a week later at 10 after an 8 point move in the stock. And this can happen. It does happen. It just almost never happens.
When an option is selling at 3/4 ($75 per contract not taking commissions into account), it tells me that either it is way out of the money (the stock is selling below the strike price) or it has a short time to expiration.
Now option prices are determined by the strike price-stock price relationship (is it in the money or out?), by the time to expiration, and by the volatility. In the XYZ example above the stock obviously became more volatile and went from out of the money to in, and there is still some time left to expiration. Hence the greater move in the option price than the stock price.
But situations are rare. More common is someone buying, say, an XYZ Jun 50 call in mid-May with the stock trading at 48.25 and paying 3/4. What almost always will happen is that on the third Friday in June the stock will close around 49.75, meaning the option expires worthless - hence the sucker's game.
A quick and dirty rule of thumb that you can use to avoid playing the sucker's game is as follows:
XYZ Calls Strike Price OI 50 .75 1000 55 .70 2500 60 .50 1250 65 .25 500 70 .10 75
If you're looking at the above listings in the WSJ, you'll notice that the open interest peaks at 55. Chances are, XYZ will be just under 55 on that third Friday in June. Usually the highest open interest will represent an expected cap. This system isn't perfect and often times you're going to find that the next couple of strike prices before the highest open interest aren't going to offer huge profit potential. Options are risky enough by themselves, the goal of this rule of thumb is to avoid playing the sucker when you don't have to.
Most of the folks I saw making money on playing the long options game wouldn't even be looking at that part of the listings. Instead they would be looking at the deep in the money, long time to expiration options. If you have faith that a company is going to make a move one way or the other, this can be an excellent way of increasing your profit from that move.
When you're buying a deep in the money option, even with LEAPS, there is usually very little time value built in to the option price. Say XYZ is trading at 50. You may be able to buy a LEAP for two years out with a strike price of 25 for around 26 or 27.50. If XYZ goes to 75 over the next two years your option would go to 50.
If you buy the stock, you make $2500 over those two years for a $5000 investment (50% in two years). If you buy the option at $27.50, you would make $2250 on a $2750 investment (an 81% profit in two years). Same move in the stock price, but the option is more profitable to buy.
One thing that is important to keep in mind is that because of the time value depreciation, the option will almost never gain dollar for dollar with the stock. But when the stock starts to go down, it almost never loses dollar for dollar, either.
Deep in the money options are one of the simplest and most effective money makers in the options market. You pay more, but you buy time and a cushion in case the stock goes down. It's kind of like buying insurance of a sort.
And therein lies the difference between the money makers and the suckers. The old adage it helps to have money to make money holds true even in the options market. Think of it as the difference between playing keno or taking 1.5:1 odds on a bet. Take consistency over percentage every time.
Options are one of the most powerful, most misused, and most misunderstand tools of the stock market. The lack of options knowledge is one of the few pockets of true market inefficiency that is still out there. Take advantage of that inefficiency to help you make money.
This posting is not intended as nor should it be construed as market advice. Consult your broker before undertaking any trading with which you are not familiar, experienced or comfortable with. The author assumes no liability for any actions you may take.
August 26, 2003
Investing Strategies - Part VI
The Long And The Short Of It
Two terms that you'll hear thrown around quite a bit when dealing with a broker or a market player are the terms long and short. Usually when they are used, the speaker assumes that the listener just automatically knows what it means.
Before I decided to go for my license, I didn't know what they meant. I had heard the terms, and I knew what short selling was, but this long concept...What was that all about? And once I became a broker I found that there are really quite a few people who don't know either.
Essentially, they are the two of the three positions that you can have in any stock. The most common position is one of no position. You don't own the stock, you don't owe the stock, and you have absolutely no financial stake in the stock. No position is a position in and of itself and is usually the one that most people forget about.
The next most common position and the one that most people are familiar with is the long position. This is where you have bought the stock and you own it in your account. Sometimes a certificate might be issued to represent your shares. But the bottom line is that you own the stock just like you do your TV, your computer, or your car.
Short is the opposite (strangely enough!) of long. Shorting is where you borrow the stock and sell it, with the hope of being able to buy it back at some point in the future for less money than you sold it for. When you short a stock, you literally end up short in your account; you owe it instead of owning it.
The easiest way that we used to teach the concept of long and short was to have people think of it in terms of timeframe. When you own a stock - you're long - chances are that you'll want to hold the stock for a long time. When you've borrowed a stock - you're short - chances are you'll want to get out of that position in short order.
It's really a pretty simple concept, but one that is almost never explained.
August 24, 2003
Investing Strategy - Part V
Excess SIPC
I haven't done a post on investing lately; so let's try to rectify that situation.
A few days ago, I noted an article that talked about three brokerage firms losing their excess SIPC insurance coverage. It was in a Quick Links post and I mentioned that it was very significant. I'm sure that some people were wondering what I was talking about and why it was so significant.
To understand why the loss of excess SIPC is so important, we first need to understand what SIPC is. SIPC is the brokerage equivalent of FDIC. But it doesn't work quite the same way.
FDIC ensures that your money in the bank will always be worth what it is. In other words, if the bank has your money invested in Treasuries that suddenly dive in value (without your knowledge, of course. If you tell them to put it in a money market account, you lose the FDIC protection), FDIC will ensure that your, say $5000, is still worth $5000. With FDIC, you cannot lose value.
Most people really think of FDIC as protection against the bank failing, and that is part of what it does. SIPC is insurance only against the failure of the brokerage firm. Let's assume you have an account at Joe's Discount Brokerage in which you have $50,000 in cash and $250,000 market value in various securities.
SIPC protects you in the event that Joe's goes bankrupt. Should that happen, SIPC will make sure that you receive back your $50,000 and the securities in the account - even if the assets of the firm are insufficient to return them to you. SIPC does not insure you against your investment in XYZ going down in value. In the above example, if the $250,000 is invested entirely in Joe's stock (say you owned 2500 shares @ $100.00 per share at one point) and Joe's goes bankrupt, SIPC will cover the $50,000 in cash and will return your 2500 shares of the now worthless Joe's stock. In other words, they do not protect against market movement.
But SIPC only covers up to $100,000 in cash and $500,000 in securities (and for SIPC purposes, money market funds are securities. Keep this in mind, as it is a very important distinction). Let's say that you've got $8 million dollars to invest. SIPC doesn't really mean much in the way of protection for you.
Many wealthy investors who run into this situation will open $500,000 accounts at multiple brokerage firms. They'll do it partially to protect their money with SIPC and then they'll also claim that it is to "acquire a broader range of research and opinion." It's an effective approach, but it creates investing inefficiencies and paperwork nightmares.
A few big firms figured this out and went and negotiated insurance coverage to cover the value of the securities in their accounts that were over the $500,000 SIPC limit. This was called "excess SIPC insurance." At some firms, it imposed a new limit at $100 million per person; the firm I was at - there was no limit, in theory they would have insured accounts over $1 billion in value.
Excess SIPC was a big selling point. I used to talk to folks with multi-millions in the market all the time and one of the easiest ways to close a sale was to ask them about the excess SIPC insurance they had at Joe's Corner Brokerage where their buddy was their broker. It was easy: point out the value of excess SIPC and then watch the money transfer over.
Now why would people feel so secure knowing that they had excess SIPC insurance on their accounts? Brokerage firm failures are relatively rare, after all. Part of the reason was the feeling of safety that the insurance provided. But it was the second factor that always seemed to play a bigger part.
Everyone knows that the insurance companies have become so risk averse lately that if they even think that you might make a claim, or even place a phone call to them, then they'll drop you like a hot potato. With the big brokerage firms, people believe that the potential excess SIPC liability is huge, so if the insurance companies are willing to cover a brokerage house, then it must be safe (we never said this, but the implication was always there).
But the insurance companies also know that they've been raking in huge premiums without any claim action on these excess SIPC policies so, barring a significant change in the risk, they aren't going to want to cancel the gravy train.
But they did. They cancelled several of the policies. Which tells me that the insurance companies have detected an increase in the degree of risk associated with writing these policies.
Chances are that no major brokerage firm is going to be going out of business any time soon. But still, this should be a major warning to investors to learn about your firm and take steps to protect yourself, if necessary. And don't forget about your 401k. Don't be afraid to stir things up with your benefits department if you've got a serious chunk of change sitting in your account. It's your money and no one else is going to watch out for it for you.
July 03, 2003
Investing Strategy - Part IV
Covered Calls and Protective Puts
Continuing the series on Investing Strategies, today I want to take a look at the covered call and the protective put. In my earlier Investing post on options I discussed the concept of the collar. The covered call and protective put are the two components that make up the collar. So what are they, how do they work, and why are they beneficial?
The covered call is the probably the most common type of option position taken in the market. To enter a covered call position, you must buy or own 100 shares of a stock and then you sell a call option - you give someone else the right, but not the obligation to buy your stock. If the call gets exercised you get to sell your stock for the strike price you accepted when you sold the option. If the call is not exercised, you get to keep the premium the call buyer paid and you keep the stock. That's why we sometimes described it as collecting rent on the stock. Covered calls work best in generally flat markets, as you can repeatedly "collect the rent" without ever having to sell the stock.
The protective put is a way of buying term investment insurance. Again you have to own a minimum of 100 shares of the stock. For as long as you own the put, you have insurance that in the event the stock price declines significantly, you can exercise your right (but not obligation) to sell the stock at the agreed upon strike price. It essentially sets a floor on how low the stock can go for you for a set period of time. And buying a protective put is very much like buying insurance - you pay the premium for the peace of mind that having a stock price floor brings.
Put together a covered call and a protective put and you have a collar, which essentially dictates what kind of value range your position will stay in. The call prevents it from going too high; the put protects it from going too low. Usually when entering into a collar, the proceeds from the sale of the call are used to finance the purchase of the puts, which means little to no money out of pocket for the trader.
Both of the strategies are about as safe as you can get while dabbling in the options market. As such they are the only options positions that the IRS has approved for use in IRA accounts.
Hedging a position against a sideways or down market is usually one the primary goals of every long-term investor. The covered call and protective put can both be excellent tools for furthering that goal.
June 30, 2003
Investing Strategy - Part III
Short Selling
Short selling is an interesting strategy to use. Essentially, it takes the idea of buy low-sell high and turns it on its head - sell high-buy low (in that order). It is certainly one of the most risky strategies that you can undertake in the market, as your upside is absolutely limited (the stock can only go to zero), while your risk is absolutely unlimited (just like the stock price itself). So how do you go about short selling and why would you want to do it in the first place?
Most investors are in the market to make money. Period. They don't really care all too much where it comes from so long as it goes into their account. As a consequence, they're constantly on the lookout for something that will allow them to make money in a down market, as well as an up market. Enter short selling.
With short selling, you are actually borrowing the stock from someone else and selling it, with the intention of buying it back at some point for less money than you sold it for. Pretty simple, huh? So why is it so risky?
First of all, you have to be able to borrow the stock, which is not always easy to do. On volatile stocks it is not uncommon for your broker to tell you that the stock isn't available. But that's not so bad. At least at that point you're not into a trade yet.
When you have found stock to borrow, if the original owner decides to sell the stock, your broker will have to work on finding some more shares to cover your position. If the broker cannot find more shares for you, you can get caught in what's known as a short squeeze. If that happens, you end up buying the stock back at the current market price whether the resulting trade is profitable for you or not.
Now even if you find the stock, and you don't get squeezed, you're still not out of the woods yet. In order for this strategy to be successful, the stock must go down in price. If it does not go down, you lose money, and it can go very, very quickly. The worst I ever saw was a fellow who managed to blow his entire account, plus another $250,000 beyond shorting Yahoo! on the way up. It was the only time in my brokerage career that I actually saw a firm take a client to arbitration to try to recover money for losses.
Think about that for a minute. He played the game and lost. He lost everything he had plus a quarter million. Buy a stock; you can never lose more than your original investment. Short a stock; you can lose everything and then some.
And that's not all. Remember, you borrowed the stock. The original owner is expecting to receive all the benefits of ownership. But you sold their stock. How do they continue to get things like dividends or stock splits?
Easy, you pay them. You short the stock, you pay the dividend. If it splits two for one, you get to buy back twice as many shares.
When the risks are acknowledged and understood and proper research has been done, shorting a stock can be a great tool for enhancing your returns in a down market.
The important thing to remember is to beware. Generally the risk is outsized in relation to the potential return. Make absolutely sure that you're comfortable with a short before you enter into it. And if the trade goes bad anyways, don't be afraid to cut your losses.
June 21, 2003
Investing Strategies - Part II
Order Types
It just occurred to me that before I get too deep into a discussion of trading strategies, we probably ought to review the basic types of orders and what they do.
There are really four types of orders that are used: market, limit, stop, and stop-limit.
Market Orders - This is the most basic type of order that there is in the stock market. With a market order, you're basically telling the broker to buy or sell at whatever the current price is. During regular market hours, when everything is functioning normally, these orders usually execute in less than a minute and are fairly safe to use. However, there can be downfalls. If they are placed outside of normal market hours, or during a trading halt, there is a possibility - especially strong in the case of a halt - that the stock will gap, or make a major move one way or the other, when it opens. This gap may be beneficial to you, it may hurt you.
Assuming the market is open, a market order guarantees an execution, but not a price.
Limit Orders - This is probably the most common type of order that I handled as a broker. Essentially, with a limit order, you're telling the market what price you're willing to trade at. If you're buying, your limit order specifies the maximum price you're willing to pay. If you're selling, your order specifies the least you're willing to accept. In either case, your order should be considered "or better" meaning you can pay less to buy or can sell for more (ask your broker if your limit is "or better." If they say no, find another broker.) Limit orders can be both beneficial and problematic. The can benefit you by helping to impose a degree of discipline not available with market orders, but I've also watched people change limit orders - trying to be greedy - and they've "chased" themselves right out of a profitable trade. Once a limit order has been placed, it needs to be changed only after some serious deliberation.
Assuming the market is open, a limit order will guarantee a certain price (or better), but not an execution of the trade.
Stop Orders - This and the stop limit are generally misunderstood by most investors. If you place a stop order, you are specifying a trigger price for a market order. It is most commonly used to provide some protection on the downside. For instance, many traders will place a stop order 10% lower than their purchase price so that if the stock drops by 10% they automatically have the position sold so that they protect as much principal as possible. The key is to remember that a stop order triggers a market order once the stock trades at or through the stop, or trigger, price.
During regular market conditions this may not be a big issue. A sell stop order at $50 may produce a trade at say $49.50, during normal trading. Stop orders overnight can be a big, big risk. On a stock that closes at $55 a stop at $50 may produce a trade at $25 or $10 if the stock gaps down overnight. Remember, a stop triggers a market order once the stock trades at or through the stop price. A gap down from $55 the night before to $10 at the open is trading through and will trigger the market order to sell at the first available price. This usually leads to a very unpleasant conversation with your broker (believe me, I've been on the other end of more than a few).
A stop order will guarantee an execution under certain conditions, but the price is almost certainly going to be different than expected.
Stop Limit Orders - Some brokers will try to convince you that the way to protect yourself from the downside potential of the stop order is to use a stop loss. It is your responsibility to know that there is no such order as a "stop loss." What the broker is usually proposing is a stop limit order. The difference between the stop and the stop limit orders is that the stop limit, instead of triggering a market order, will trigger a limit order to be placed once the stop price is passed. It requires that you establish two prices: the stop or trigger price and a trailing limit. The stop price is the one that you would like to sell at, the limit is the minimum that you're willing to accept.
Let's look at our previous example of the stock closing at $55 and gapping down to $10 overnight. We demonstrated that a stop order at $50 would cause you to sell somewhere around $10. If we have a stop limit with a stop at $50 and a limit at $40, then we would not sell at $10, but we would have a limit order on the books to sell at $40. The upside is that the stop limit has given you more time to evaluate the new situation, but the downside is that the stock may be heading even lower as you reconsider - and you still own it.
Another key thing to remember with stop limit orders is that the bigger the spread between the stop and the limit, the more likely the order is to execute. You should almost never set both prices the same - it makes an execution very unlikely. A stop limit order will guarantee a minimum price, given the proper conditions, but it does not guarantee an execution. And it will not stop a loss. Never let a broker convince you that this order is the perfect form of downside protection. It too has its drawbacks.
Also understand that market and limit orders are available on all stocks, but that stops and stop limits may not be available, may be suspended without notice, and that they are executed on as possible. In extremely volatile market conditions, a stop or stop limit may not execute right away if the broker or floor trader is working on filling market and limit orders.
Order Qualifiers
With most all of these orders there are usually also some order qualifiers that can change the behavior of you order and how it is treated. The full list of qualifiers is fairly lengthy, but we'll just touch on a few of the biggies here.
Day Order - essentially this means that your order is good for the day only. AT 4:00 pm, when the market closes, all day orders are cancelled, or outed, and must be replaced the following day. Every type of order can be a day order.
Good 'Til Cancelled - This order can vary from firm to firm. Some firms will treat a GTC order as a sixty-day order. Others will treat as a thirty-day or maybe a one hundred eighty day order. A few firms make it truly good until cancelled with the order never expiring (every once in a while, I'd talk to someone who had had an order from three to five years earlier execute at another firm. It almost always created massive problems for the client). Ask your firm how long their GTC orders are good for - it's important knowledge to have. GTC orders are available on all types of orders, although they will usually only be accepted on market orders in very unusual circumstances - I personally only ever saw one GTC market order and we did it only because there was virtually no market for the stock.
All or None - This qualifier can be used on larger trades to ensure that the entire block of stocks trades at once. This is usually used on very large quantities of a heavily traded stock to ensure that the trader doesn't end up with ten or fifteen different execution prices. The downfall of the AON restriction is that it takes your order off the order book and it is left to the floor trader to trade it on an as possible basis (which means that it may not happen at all). AON also has a cousin known as Minimum Quantities in which you allow the block to be broken up, but only so far. Same downsides.
Immediate or Cancel and Fill or Kill - These two are very similar to each other. The IOC order basically tells the market to fill what the can immediately or cancel the order. FOK tells the market to fill the entire order or none of it, but do it right now. IOC allows for a partial fill, FOK does not. But on both orders you will know within minutes the outcome of the trade. These are usually only used on large trades when someone is trying to get just a tick or two more than the market is allowing at the time.
There are other qualifiers, but they get used so infrequently as to never been seen. Most people never use an order qualifier beyond a Day Order or GTC because the rest of the qualifiers are targeted at large block traders and usually have restrictions or drawbacks that are very detrimental to the smaller, individual trader.
Investing Strategies
This post is going to be permalinked over in the sidebar. Since I expect this series to run longer and to be updated whenever I feel like it, I figured that one central post with links to all the others might not be a bad idea (especially since the suggestion was made several times with the last series!)
June 14, 2003
Investing Strategy - Part I
Buy and Hold
The most basic strategy for novice investors (and serious ones also) is a strategy of buy and hold. Essentially this means that you're going to find a good stock (usually through a thorough fundamental analysis) and then you buy it to hold for the long term (defined here as 5 years or more).
Buy and hold is only effective when the stocks are well researched and then are monitored on a regular basis. This is not buy and forget. Every position in your portfolio should be re-examined at least every six months. This doesn't need to be the same as the initial investigation, you should just simply be looking to make sure that nothing has really changed since you bought the stock in the first place. The changes in both Enron and Lucent, among the multitude of poor performers from the last few years, were telegraphed more then a year before the collapse. A regular re-examination of the fundamentals (and the news) would have kept you out of those stocks during their final respective collapse.
Why would someone want to use a buy and hold strategy? After all, it means that there are going to be times when you're holding the stock as it's declining in price.
The idea of the buy and hold is that quality companies will always perform well over the long term. A 20% one year decline isn't really all too important if over the course of five years your average annualized return has been running around 15%. Over the long term, you should really be concerned with your overall return, not a one-year return that may not be representative of the quality of the company.
Buy and hold is one of the best strategies to use for the core portion of your portfolio. Just remember, it is buy and hold, not buy and forget. Keep vigilant with your stocks.
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