Ziad Melhem's Financial Advisory Blog.

Achieving Trading Perfection.

noreply@blogger.com (Ziad Melhem) — Tue, 09 Mar 2010 10:32:00 +0000

The moment you decide to trade, take an oath to do it in the best way possible, not compromising on quality. Remember, that trade selection and prior planning are the two faces of a coin. Your success is half achieved through a proper planning, than by hours of trading of anything that comes handy, which is completely incomprehensible.

Each trade has a proper style, which you must follow to reach the perfection. It involves proper management: planning, organizing, delegating, directing, and controlling.

You will not be able to plan properly, if you are not organized. Make handy your trading software, data and proper equipment. Your own well-being is also not to be done away with. It is said in trade that, there is only the winner or the loser; there is no place for the mediocre. To be the champion you need to have discipline, self-control and a willingness to train extensively. You have to give your leisure to the over charts, studying, thinking, planning and to practicing your trading and the trade selection.

This extensive study involves the study of charts. You have to record the organized and pictures data on the charts in your mind that will intrigue you to ask the questions continually as, "How does what I see in front of me relate to the supply and demand for the underlying?" or "Is what I am seeing on the chart even related to supply and demand, or is what I am seeing related to an engineered move by some insider or market mover?" As soon as you realize the fact that supply and demand do not always solely move or fail prices, it is better. Markets are maneuvered three fourth.

But the charts reflect something else than the price patterns, as the response to the world happenings, rumors, government reports and many more. The most common thing to be overlooked is the engineering from and by the insiders, the market movers and by commercials holding large inventories. You must train yourself to analyze these things from the charts. For instance, the price patterns on your charts will help you to recognize between true and false breakouts. The pioneer trader will master trading the trend and will get the best out of it. If prices are rising, the trend is up. If prices are falling, the trend is down. The tips and tricks are equally important for you to follow and it is promising to maintain and update a collection of the techniques. To be a master trader, you can not but help practicing the recognition of blockage areas, trend identification and high possibility breakouts. Though a genius never achieves perfection, yet it is always advisable to improve your performance.

Capitalize?

noreply@blogger.com (Ziad Melhem) — Sat, 27 Feb 2010 06:19:00 +0000

The term “capitalize” means registering the quantity of an entity in a balance sheet account against the income statement. Capitalizing can be different in different companies depending on their turnovers. But a big company would not do that. Moreover, in case of leased equipment, if it is a disguised purchase and not a rental agreement, then the lease should be capitalized. A process whereby anticipated future income is converted to one lump sum capital value. A Capitalization Rate is divided into the expected periodic income to derive a capital value for the expected income

There are basic differences between capitalization and depreciation.

Capitalization refers to adding the sum to the balance sheet. Suppose, a house is constructed after taking loans, then some interests of it will be added to its cost, which in total with the cost will be shown as an asset on your balance sheet.

Whereas, depreciation is the reduced amount registered on the balance sheet. It refers to the systematic allocation of the price of an asset from the balance sheet and reporting it as depreciation expense on the income statement. In short, capitalization refers to the addition and depreciation refers to the subtraction of an amount from the balance sheet.

Though not distinctly different, following types of capitalization are predominant.

• Mega cap: it includes the companies, whose market capital is over $200 billion. The most publicly traded companies like the Exxon are the leaders, which is not applicable to the majority of companies.

• Big/large cap: their market capital is between $10 billion and $200 billion. The well noted companies like the Microsoft, Wal-Mart, General Electric and IBM fall into this category. The large capital stocks are considered to be steady and safe. These stocks are also known as blue chips.

• Mid cap: the companies under this category are considered to be more unstable than the mega and large capital companies. A considerable part of this capital is characterized by the Growth Stocks. Some of the companies under this category are on the verge of becoming the industrial leaders.

• Small cap: the comparatively new and young companies having the capital between $300 million to $2 billion. They offer the possibility of greater capital increase but leaving the risk factor.

• Micro cap: The companies primarily consist of penny stocks ranging between $50 million to $300 million. They have equal upward and downward potential and thus are risk prone. You should do a lot of research before venturing into this position.

• Nano cap: capitals below $50 million are the indicator of this category. This is the riskiest of the categories and offer for very meager gain. The stocks normally trade on the pink sheets or OTCBB.

This categorization does vary with the variation in the actual market.

Real Estate in Lebanon

noreply@blogger.com (Ziad Melhem) — Mon, 24 Aug 2009 09:57:00 +0000

Beirut, the erstwhile “pearl of the orient” and the capital of Lebanon, is the 28th most expensive city in the world. Real estate in Lebanon has been the third most successful sector after banking and tourism, and has gone through significant ups and downs. Towards the end of the previous century, real estate was significantly transfusing blood in the Lebanese economy with its overall overhauling program. But, as it chiefly addressed the upper class and the gulf investors, the demand for small and middle class construction programs remained unnoticed. As a result, Beirut observed a serious inflation and a recession that had weakened the economy considerably. Liquidity vanished from the market and the home owners had to face a serious trouble to sell their apartments at a much lower price than its original.

But from a few years, the picture has started to be reverse. As against the traditional practice of family ownership of the construction industries, a recent trend of professional holding is being noticed. The country has also started to attract international investors again. Market surveys and researches are increasingly done before starting any construction, which was not a usual practice before.

Lebanon, contrary to some its neighboring countries have two additional advantages to attract foreign investments. One, its wonderful seaside position and two, its pro Christian environment are conducive for the European and American investors. Lebanese banking laws are more close to the international banking rules and regulations than those of its neighbors. Apart from the Beirut central district, the adjoining Sodeco, Hamra, Verdun and Tabaris are also enjoying the benefits of the resurrected economy. Beirut Central District and Linord are the two chief construction projects that have been decided to be deployed at the earliest.

While the plush Dubai could not take the blow of the economic downturn, this small state has effectively passed it over. According to the General Manager of the Lebanese real estate giant Solidere, this has been possible because, the Lebanese real estate business has chiefly involved the local people in both purchase and sale. Year 2007 saw the sale of over 4.1 billion dollars of property, as the Investment Development Authority of Lebanon’s statistics suggests. And in the last year, a 40% increase was seen in the real estate price due to huge demand for buying them. Land for construction is very scarce in Lebanon and this added to the price hike. This is a striking contrast with the scenario of the region, which has faced 50% fall down in the real estate price. Lebanese real estate prices are dependent on the developers because the general financial trend is positive, being the liquidity, debt and the balance sheet all are in positive condition.

What is the Role of Banque du Liban and its Governor in the Lebanese Financial Stability?

noreply@blogger.com (Ziad Melhem) — Mon, 17 Aug 2009 12:36:00 +0000

Banque du Liban, better known as BDL, is Lebanon’s central bank and Riyad Salame is the current Governor of it. In 2005, Salame was entitled as the best central bank Governor in the Middle East by Europe’s leading business magazine ‘Euromoney’, for his appreciable performance in stabilizing the economy of Lebanon.

According to Dr. Salame, the financial model of Lebanon is so powerful that it can withstand any form of financial crisis. The following principles are the basis of this financial model-

Stability of currency: Since the past fifteen years, the currency of Lebanon (called Lebanese Pound) has been completely stable in spite of some political and social unrest.

Rapid growth of banks: The sound growth of banking sectors resulted in the extension of credit confidently.

Strict monitoring: The strict monitoring ensured the transparency in banking sector and enhanced the public trust. For this reason, the deposits in the Lebanese banks are currently worth of more than three times than the local economy.

Payment by the state: The Government paid back the debts which in turn, increased the credibility of Lebanon in the global market.

Salame said that they limited the range of credit that a bank could provide of their deposit. They fixed the limit up to 70% but international banks exceeded 100% of their deposits. Adding to that, dependence on interbank was lesser in Lebanon than in other foreign countries.

He noticed that bankruptcy could affect the global financial system negatively as it reduced the credibility of the banking sectors in global market. The price hike of oil collapsed the financial leverages. As a result, jobs and assets of countless people throughout the world were lost. He suggested a possible solution could be to extend the credit in stead of just mere speculation.

Dr. Salame stated, “There are problems in the Lebanese economy, yet its financial system has grown significantly and has been able to withstand the financial crisis.”

The problem of Lebanese economy was the rapid growth of public debt. Security was also another important factor. Having these drawbacks, Lebanon succeeded to achieve an economic growth of almost 8% in 2008 and expecting more than 4% in 2009. The prudent policies of BDL headed by Salame himself played a vital role behind it. The banks loaned up to 85% of the size of economy. The provision of huge credit helped the whole nation to weather the global economic downfall successfully. The public debt was reduced as some Lebanese institutions and CBL bought a large fraction of total debt. In this way, the country risk was reduced by 2-3%. He opined that the new Islamic banks would help to develop the economy considerably. Salame was in favor of introducing a global currency because a stable currency contributes a lot to strengthen the national economy.

The economy of Lebanon is a true example of that.

How stable is the Lebanese Financial Market?

noreply@blogger.com (Ziad Melhem) — Sun, 16 Aug 2009 17:50:00 +0000

The global recession has affected more or less the economy of all leading nations of this planet. During this global crisis, the economy of Lebanon has shown a prominent rigidity to weather it successfully. The domestic economy of Lebanon didn’t have any direct openings to the affected financial global market or products. As a result, it hasn’t undergone any considerable impact of current global crisis.

Two main challenges that Lebanon faced were- the huge amount of public debt and the large financial requirement of the contemporary Government. But the smart and prudent economical policies helped the country to overcome the external effects. These meticulous policies covered three aspects:

- A prudent policy of interest rate,
- Utilization of primary surpluses,
- Stringent supervision of Economy.

The primary surpluses considerably have been reducing the ratio of debt to GDP by approximately 20% for last three years. The Government has retained an optimized rate of interest for backing the continuation of deposit inflow, transformation of dollar into Lebanese pound (or dedollarization). The government has also emphasized on the empowerment of the country’s external position among the leading nations. A strict supervision of economy protected the domestic banks from interacting with the outer global markets, affected international banks and foreign productions.

Still there are some challenges that demand the immediate attention of Government like boosting the international reserves, proper fiscal consolidation (as it lowers the monetary stabilization cost) and powerful donor support.

The above stated policies contributed a lot to retain confidence in the economy of Lebanon even during this acute recession. The deposit inflows haven’t been affected except the initial pause. The rate of transformation from dollar to Lebanese pound has grown gradually. The banking services have passed through the global crisis with ease. The BDL (Central Bank) has succeeded to acquire international reserves without facing much difficulty. During the Lehman failure, Eurobond spreads reached a peak level but have been come down astonishingly after that.

The high rate of currency transformation has stabilized the local currency and the economic growth of Lebanon is still continuing remarkably despite the struggle of the leading nations to overcome the impact of the global recession.

When do you achieve Trading Perfection?

noreply@blogger.com (Ziad Melhem) — Wed, 10 Jun 2009 08:44:00 +0000

The moment you decide to trade, take an oath to trade in the best way possible, not compromising on quality. Remember, that trade selection and prior planning are the two faces of a coin. Your success is half achieved through a proper planning, than by hours of trading of anything that comes handy, which is completely incomprehensible. Each trade has a proper style, which you must follow to reach the perfection. It involves proper management: planning, organizing, delegating, directing, and controlling.

You will not be able to plan properly, if you are not organized. Make handy your trading software, data and proper equipment. Your own well-being is also not to be done away with. It is said in trade that, there is only the winner or the loser; there is no place for the mediocre. To be the champion you need to have discipline, self-control and a willingness to train extensively. You have to give your leisure to the over charts, studying, thinking, planning and to practicing your trading and the trade selection.

This extensive study involves the study of charts. You have to record the organized and picturised data on the charts in your mind that will intrigue you to ask the questions continually as, "How does what I see in front of me relate to the supply and demand for the underlying?" or "Is what I am seeing on the chart even related to supply and demand, or is what I am seeing related to an engineered move by some insider or market mover?" As soon as you realize the fact that supply and demand do not always solely move or fail prices, it is better. Markets are maneuvered three fourth.

But the charts reflect something else than the price patterns, as the response to the world happenings, rumours, govt reports and many more. The commonest thing to be overlooked by most is the engineering from and by the insiders, the market movers and by commercials holding large inventories. You must train yourself to analyze these things from the charts. For instance, the price patterns on your charts will help you to recognize between true and false breakouts. The pioneer trader will master trading the trend and will get the best out of it. If prices are rising, the trend is up. If prices are falling, the trend is down. The tips and tricks are equally important for you to follow and it is promising to maintain and update a collection of the techniques. To be a master trader, you can not but help practicing the recognition of blockage areas, trend identification and high possibility breakouts. Though a genius never achieves perfection, yet it is always advisable to improve your performance.

When should you stop trading on a Demo Account?

noreply@blogger.com (Ziad Melhem) — Thu, 23 Apr 2009 11:10:00 +0000

The demo account is an account which is funded virtually, but acts as a real one. All the costs and dealings are the replica of the actual business. If you want to open a demo account, you will get ready help from any Forex brokers. They would provide you with a guidance kit to create it. To proceed, you have to fill up an online form with the help of your chosen broker and after following some simple steps; your demo account would be ready. The virtual fund depending on the brokers can range from $50,000 to $100,000.

It would be helpful for you, if you retune the balance amount of the demo account according to your actual trading amount, as it is not gambling. You will also have to learn the tactics of the trading platform, which is different with different brokers. When they offer for different orders, you will have to be attuned with the facts of placing market orders accurately, setting up targets, preventing loss and other nuances. You must have the answers to the following questions: Are contingent orders available? One cancels other(OCO)? How far from market price can you place limit buy/sell order? and more. These also vary and must be well-researched before investing, as the lack of the knowledge has led to huge amount of losses.

But, don’t worry. You have the option to practice it with your demo. Before you start, get acquainted with the technical expertise that the trading software requires. You should also know whether the policy offers for system integration, automated trading, news feed and back testing capabilities. As the softwares are getting more intricate and are offering unnecessary features, you have to be clear about your real need before opting for them.

A common mistake is mostly done by the traders, that they forget about the demo after starting the real account. One more important question is, whether to keep the demo alive, and the answer is yes. You should keep it so as long as possible; whether or not you have to re-register it after every 30 days, as some of them expire after that. Don’t forget to check its health regularly by the brokers.

This is required because trading is something that mandates regular updating of the trader’s awareness. Be it a tool launched by your broker, a new approach or a new system; first give it a try in your demo. And the most interesting part of it is, it is available free of cost.

Open a Demo Account and start practicing for FREE!!

Oil? Is it a good investment?

noreply@blogger.com (Ziad Melhem) — Wed, 08 Apr 2009 17:49:00 +0000

Oil is an essential commodity that is required in various sectors and industries from consumers to factories to automobiles to airplanes. Hence, when you invest in oil, your investment should be safe. But like all investments, you need to keep two things in mind. Your investment objectives and your risk tolerance. Once you know these, you can then select accordingly. There is one thumb rule to be considered with all investments. When you want greater returns, you need to take a bigger risk.

One of the best ways to make money from the stock market is to invest in oil. Anytime is a good time to invest in oil. Even today is a good time to invest in oil. There are a couple of things you need to understand first, though. You need to understand the supply and demand of oil. You also need to understand how this supply and demand affects the price of crude oil per barrel. The key factor that you need to take into account before investing in oil involves making a decision. This decision is simple. You need to decide whether the price of oil per barrel is rising or falling.

It requires a know how of the oil production process. You also need to know the oil production statistics. So whenever the price of oil is down, it is good to invest in oil. Oil is a Great investment choice! Oil is in perpetual demand. Oil can be used for your car. But, more importantly, it is also used in plastic production. Plastics are used in almost all spheres of life. Countries like Russia and China are getting more and more industrialized. This means that the demand for oil in these countries has increased exponentially. Like in any market, your gain or loss depends on how much you are ready to invest.

The easiest and safest decision to take is to invest in the big oil companies. These companies have been around for years. Hence they have the necessary equipment and the required infrastructure to drill oil. One thing you may need to consider is the equity size, there are a large number of shareholders in such companies. Since the number of shareholders is large, you need to invest more money. The profits these companies make is substantial. But at the same time, the profit is divided among the large number of shareholders.

Gold in 2009.

noreply@blogger.com (Ziad Melhem) — Mon, 06 Apr 2009 16:37:00 +0000

Gold is one of the surest forms of investment. It is a form of investment which you can retain as tangible assets and then sell it at a later stage. The prediction is that gold will climb into 4 digits in the first quarter of the year and remain that way for the rest of the year. This holds true for the American Market. The demand for investment in Gold leapt at a blistering pace in 2008. Asia is the No. 1 market for gold. It is predicted that in 2009 also the demand for gold will remain very high.

However in the US and Europe in 2009 the gold investments will reduce. The premiums charged have increased. This holds true for gold coins as well as small bars. You would expect that gold will be a great investment in 2009. The U.S. dollar is predicted to remain under pressure. This is because the Federal Reserve will assume a more accommodative monetary policy. This is in comparison to the other key central banks. Gold still continues to be a safe asset.

Although the rate of returns that gold provides has slowed down, it has shown relatively lesser percentage decreases compared to the other assets. Where other investments have shown extreme volatility in the current financial crisis, gold remains to be a stable and safe option in 2009. Some predict that Gold is the Trade of the Year in 2009. Gold still manages to retain itself at the mean.

Gold still remains the best hedge against inflation. Gold is also a very attractive investment in the current financial crises.

In the current market scenario, you should remain neutral on Gold investments. You should continue to build on it in your portfolio. This is till the time when the markets stabilize a bit. Now comes the question of investing in gold.

Other than jewelry, you can also invest in Gold ETFs (Exchange Traded Fund). The return for Gold in 2009 alone has already been 6%! Because of lower inflation and deflation, the input costs for gold have reduced. This in turn also provides operative cash flows. The share prices of gold mining companies are at twice the gold price.

What is Short Selling & How does it Work?

noreply@blogger.com (Ziad Melhem) — Sat, 04 Apr 2009 17:25:00 +0000

Short selling is also known as shorting. When the seller shares a share that he/she does not own it is known as short selling. To be more specific it is when the seller sells a share or a security that he/she does not own, but has promised to deliver it. This is in complete contrast with the process of selling long. This means exactly the opposite. This involves the purchasing of a security whose price is expected to rise. Whenever you sell a stock short, your broker is the one who lends it to you.

There are several sources that a broker can get it from. It can come from the shares the broker already owns, it can be a share from one of the other customers of the same firm, or it can also be from some other brokerage firm. Once the shares are sold, the amount is credited to your account. Once the money is credited to your account, you must buy back exactly the same number of shares. This is known as covering. These shares are then returned to your broker. If the price of the said stock drops, what you have done is bought back the same share at a lower price. Thus you end up making a net profit.

However, if the price of the share rises, then you have made a loss. This is because you sold at a higher price, hoping to cover your sale at a lower price, and that did not happen. In most cases you can keep a short held stock for as long as you want to. But in case the person who has lent the shares to you wants the shares back, then you have to sell the shares back to the lender. In such cases a brokerage firm cannot sell what it does not have. So you have few options. You need to arrange the shares from somewhere to return them to the lender. Or you need to cover. This is referred to as being called away. You don't have the stock anymore since you sold it. So, you also need to surrender to the lender any of the dividends or rights that may be related to the said shares. You also need to open a Margin account for short selling, the broker or brokerage house will insist you put a certain amount of money and only then you can trade, they will be using that as a back–up for contingencies.

Let us take an example. Company X is performing very badly. The prices are dropping. You buy shares at a price of $10. Then the share value drops to $8. Now you short sell the shares and make a net profit of $2 per share. But if the price goes up to $11, you make a loss of $1 per share.

Pigs play a huge role in today's Financial Markets!

noreply@blogger.com (Ziad Melhem) — Fri, 03 Apr 2009 16:24:00 +0000

There are different terminologies used in the stock market, and the two most common ones refer to animals. The stock market can be one of the best ways to make money if you are ready to put in the required amount of research. Conversely, it can be really bad for those people who treat trading as gambling. Everyone knows what bears are and how they behave. An investor who always expects the share price to drop is called a Bear. A Bull is a positive investor, one who always expects the price of the stock to rise. Positive investors care called bulls. Those who put in a lot of money are the Big Bulls. Negative investors are called bears, they predict a downward trend. Hence the market is called a Bull market or a Bear Market, referring to the trends.

Pigs are those investors who want to make a large amount of money in a very short duration. Pigs are people who mostly invest on hearsay. They will listen to something, some coffee table conversation, some discussion while commuting and make their investments based on those decisions. These are people who do not do the necessary research before investing, there are hundreds of thousands of such investors

Pigs play a huge role in the stock market. People who trade professionally absolutely adore the pigs. It is on the investments of the pigs that the bulls and bears make their money from the stock market.

Pigs are investors who do not think rationally before they make their investments. They think emotionally and then make their investments based on spur of the moment decisions. Greed is their overriding emotion while investing or trading. This is what happened in the last two years. This was a Pig market. People invested almost all they could get their hands on to in the stock market. Hence you could see the market reach towering heights. The people who mostly made money from the investments of the pigs were the bulls and the bears.

Hence the pigs provide the platform for the bulls and bears to invest in. This happens in every stock market around the world. Pigs are the ones who try to forecast the future. As a result they are the ones who make the maximum losses in the stock market. The pig can be considered the most important type of investor in the stock market. Just as pigs are slaughtered so that the meat can be used for human consumption, similarly even in the context of stock markets, pigs are slaughtered so the bulls and bears can make money!

Trading is not gambling. Gamblers never get Rich!

noreply@blogger.com (Ziad Melhem) — Thu, 02 Apr 2009 19:50:00 +0000

There is a lot of difference in trading and gambling. When a gambler plays, there is no logical or scientific way to predict the outcome. He plays blind luck. He may win, he may lose. Some people play for the sake of making more money, while others play for the thrill of gambling. They feel new highs and lows with the ups and downs in gambling. When you gamble, most of the stakes are against you. Anyone who has ever gambled knows that in more than most cases, even if the gambler wins, it is the casino that makes profits.

However the psychology involved in trading is entirely different. When you trade in the stock market, it is your own hard earned money that you are investing. One similarity between both of them is that you cannot predict the exact outcome in both trading and gambling. If you gamble on a game of blackjack, you may lose all your money within 5 minutes. However, this does not hold true for trading. Even after you have invested the money, if the price of the stock drops, you can still recover part of your investment.

If you are willing to be a bit more patient, you may also recover the entire amount or even make profit! Trading is a skill. You must only invest in the stock market after doing a complete market research. Any sort of ambiguity can lead to great loss. But, if you approach trading with the same approach to gambling, you are destined to head for doom. A typical gambler usually gambles based on his emotional highs and lows. If you go into trading with this approach, you will eventually lose all your money as in gambling.

Unlike gambling, trading requires a lot of market analysis. It requires in depth research. You may make a lot of money if you trade on a certain stock as a gamble or just out of pure luck. However, you will lose this Money sooner than you made it. This is because your human instinct will force you to come back to trade again (treating it as yet another gamble) Most people who have this attitude eventually wind up losing their money in stocks.

They lose money, run into debt, but come back and invest some more, in the hope that Lady Luck will shower her blessings on them this time too. Such people live on hope, rather than take a reality check.

Another rather interesting observation is that those people who fear losing money, eventually do. They lose it despite the fact that people all around them are making a lot of money. No amount of bull runs and upward trend can stop them from fouling up things for themselves. Sad, but true.

What is the American Stimulus plan?

noreply@blogger.com (Ziad Melhem) — Wed, 01 Apr 2009 12:07:00 +0000

A stimulus plan is a plan which is passed by both the house and the senate. It is a proposed plan to deal with the recession. This plan was first proposed by President Bush. Its purpose was to save the American Economy. This plan covers people at all income levels. This includes tax rebates for people who are into business. This also has tax rebate checks for Americans who earn a low to middle income. The idea or the purpose of the package is to simply put money back into the economy.

Now you think how this will impact the average American. The most immediate impactful factor of the plan is the tax rebate checks. If any businesses were to go out and purchase new equipments this year, then there would be new incentives for that business. There are advantages for home owners too. Now it is much easier for home owners to refinance their homes if they are in those states in which the housing costs are high. The funding limits on mortgages can also be increased. The only condition in this case is that they must be backed up by the government.

You would wonder what would be the best way to use it to your own advantage. The best way to use it is to invest it. You don't have to just spend it all in a hurry. You can actually use the Stimulus Plan to create more wealth for yourself and for your family. This needs to be considered over a long term, because this is what will create spending in the long term. If you purchase something new like a new Plasma TV or new furniture for your home, this is not good for the long run. The best way for you to use it is to use it for creating more income.

You can invest it. You can start a small business with it. The rebates for this plan are expected to come in the month of May. The best thing that you can do now is make use of the plan. If you don't do it at this time, you may think later that you could have used it earlier. Obama's stimulus plan allocates some specific funding. It allocates $550 billion for spending and $275 billion for tax rebates.

When is it too late to plan for retirement?

noreply@blogger.com (Ziad Melhem) — Tue, 31 Mar 2009 19:56:00 +0000

Financial Freedom is something that everyone wants. If you plan early, you can achieve financial freedom early, some people are financially free at a very early age, even in their late twenties or early thirties. Financial freedom is acquired through proper financial planning, and making certain sacrifices for some time.

People work so hard to earn money. Once the money is earned majority of the people do not invest it. It stays in the bank account or it is spent up. Then when a major need arises they don't have the funds, and that is the time they borrow, and are always overdrawn and have credit card debt piling up. Financial planning is planning finances in such a way that future needs can be met and the money is available when needed.

It is very important to save money so that you have it when it is needed. Almost all financial advisors will tell you that it is prudent to save at least 10% of what you earn. Once this money is saved, you don't have to touch it, ever. Yes, that’s right; this is your financial freedom savings that should be reinvested so that it keeps multiplying.

This money should be kept away to be used in the future. Another 10 % of your income should be saved for the rainy day spending, such as children’s higher education, weddings, vacations, and God forbid, emergency medical expenses. It is well worth the trouble to discipline yourself at an early age.

Savings ensures a debt-free life. You need to save for retirement, starting NOW! You can also teach your kids to save. The sooner you teach your child how to save, the sooner he will become financially independent. There are a few saving techniques you can use to ensure you always save money, no matter what. Most of the expenditure remains unchanged every month. So, you can make a written record of how much you spend every month. Then calculate how much you need too save.

One of the things that most people find difficult to deal with is inflation. Inflation is the rise in prices over a certain period of time. If you can consistently save, then you can also deal with inflation. One approach you can use to deal with inflation is to look for products whose prices are rising. Once this is done, you can then look to reduce the consumption of these products. There are simple things which all of us can do to save on electricity and fuel.

Taking the trouble to remain fit will save you all kinds of health problems in the future. You can look forward to spending your retirement with health as well as wealth, if you give equal importance to fitness during your life.

From an early age focus on building a passive income. Plan your investments in such a way that they give you an income all your life, be it by renting out a small property, or an income from bonds and stocks. A regular passive income means making your money work for you, instead of you working for your money. Once you monitor your financial freedom account properly and educate yourself on ignorant areas of your life such as real estate or stocks, you will find later in life that you have only to reap benefits of the seeds planted in your youth. Passive income needs to be built from an early age. This way you can be financially free all your Life. There are different sources of passive income:

Ø Property rent
Ø Royalties from books or music
Ø Pensions after retirement
Ø Returns from stocks and bonds like dividends and interests

It’s never too early to plan for your retirement so that you can look forward to doing all that you wanted to do in life after working hard, without the worry of where the money is going to come from.

What are Mutual Funds?

noreply@blogger.com (Ziad Melhem) — Fri, 27 Mar 2009 14:29:00 +0000

Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value.

Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. Mutual funds make income in two different ways. First way of income is the dividend they receive on the various securities they have. Secondly it is by redeeming the securities (shares) by various investors which will also be at a discount to the current net asset values. The profits or losses are shared by the investors in proportion to their investments. Like all investments, Mutual Funds also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking Mutual Fund investment decisions.

A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. By owning shares in a mutual fund instead of owning individual stocks or bonds, the investor's risk is spread out so that a loss in any particular investment is minimized by gains in others. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. By the laws of probability, in a good market condition, not all companies fail to give good results at one time, so they easily balance the one or two companies that are doing badly with the profits from other sectors.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. In short, Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

How can you get in on an IPO?

noreply@blogger.com (Ziad Melhem) — Wed, 25 Mar 2009 13:25:00 +0000

It is very difficult and almost impossible to get in on an IPO of a highly regarded company. In order to understand this better, it is essential to understand how the entire IPO process works.

If a company wants to go public, it must hire an investment bank. This investment bank acts as an underwriter and raises money for the company by means of debt or equity. In the case of IPO’s, underwriters are responsible for raising money by equity. There are several types of underwriting agreements between the underwriter and the company.

To put it in a more simple way, the underwriter takes full or partial responsibility for selling the securities of the company offering the IPO and thereby raising fund which may or may not be previous agreed upon. After registration with the SEC, there is a cooling off period during which the SEC investigates the material and information disclosed about the company.

During the cooling off period, the underwriter prepares an initial prospectus containing all information about the company except for the offer price and the effective date. This is known as the red herring. Using the red herring, the underwriter and the company try to hype and build interest for the IPO allocation. They go on road shows to meet institutional investors in an attempt to convince them of the promise shown by the company.

The small investors are the last ones in the chain. They usually don’t have the money and the buying power and so usually they’re not the target market of the underwriters… If the underwriters believe in the success of the IPO, they will offer shares at the IPO price to their favorite institutional clients. The only way for a normal investor to obtain such hot IPO allocations would be to have a large account with the investment bank.

Unless you have insider contact, your chances of getting an IPO allocation are slim and If you do manage to get it, its probably because no one else wants them. Of course, there are exceptions but usually, the probability of a small investor getting in on a Hot IPO allocation is very low.

Though an IPO might sound tempting, it is important not to get swept up in all the hype. An IPO is not a once in a lifetime opportunity to obtain the share of a company. The company will soon be available on the open market very soon and so care should be taken to avoid spending too much money to get it , as the share’s offer price could be overvalued.

What is an IPO?

noreply@blogger.com (Ziad Melhem) — Tue, 24 Mar 2009 09:57:00 +0000

An IPO (Initial public offering) is the first sale of stock by a company to the public.

A private company is one in which investment or ownership is limited to select individuals or organizations. A public company is one in which anyone can invest and obtain ownership by purchasing shares on a publicly traded exchange

There are several reasons why a private company chooses to become a public limited company. Some of them include raising capital, to allow the original investors in the company to realize profits on their investments, to be publicly traded etc…

Usually a company can raise money by issuing either debt or equity. If the company is offering equity to the public, for the first time ever, then it is called an IPO. Undertaking an IPO is a very important and exciting decision for a new company. If initially, the IPO is accepted well in the market, the company will have additional funds to further development and growth. It is also an opportunity for the initial investors who funded the formation of the company to realize profits for their efforts.

The term IPO was brought into public focus with the dotcom bubble of the late 1990’s. They were dozens of start up companies every week who were cashing in on their latest IPO. However, IPOs can be a risky investment. It is tough to predict what exactly will happen on the initial day of trading and in the near future since there is very little historical data that can be used to analyze the company. In most cases, purchasing IPO is all about the hype because people expect that they would be buying the first stocks of the next potential IBM or Microsoft.

IPO’s usually have a fixed time period called the ‘lock up’ period during which time the company directors, insiders and other share holders cannot sell their shares. When a company goes public, underwriters want to understand what outside investors believe is the net worth of the new stock based on information provided such as balance sheet, income statement, assets, business potential etc…If inside investors sell the stock immediately at the time of the IPO, it will obscure the price that the market decides the stock is worth by putting selling pressure on the shares on the first day of trading. This lock-in period also serves to determine if the company was setup just to cash in on the IPO money or if they intend on developing a serious business.

History of Futures Market & Trading.

noreply@blogger.com (Ziad Melhem) — Fri, 20 Mar 2009 12:17:00 +0000

In the ancient history of futures trading, the motivation was probably much the same as ours today-to make trading for goods needed, whether immediately or later on in the future, easier and more predictable. Though not as technically sophisticated as current future markets with modern clearing houses, instantaneous electronic trading etc, ancient civilizations had their own forms of commodity market trading. Records of these ancient futures commodity markets transactions survive today, including promises of the date and time of transaction deliveries. Those civilizations which were able to ensure the orderly flow of needed commodities over key trade routes became extremely powerful in the ancient history of futures trading annals. The trust that powerful and successful trading kingdoms gained, allowed them to become arbitrators.

In the mid-nineteenth century, central grain markets were established and a central marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (spot trading) or for forward delivery. The forward contracts were the forerunners to today's futures contracts. This concept saved many a farmer the loss of crops and profits and helped stabilize supply and prices in the off-season. Today's futures market is a global marketplace for not only agricultural goods, but also for currencies and financial instruments such as Treasury bonds and securities. It's a meeting place for diverse interest groups such as farmers, exporters, importers, manufacturers and speculators.

The organized way of futures trading, with well formed contracts, started in Chicago, USA in the early 1840s. The first centralized futures trading market, the Board of Trade of the City of Chicago, was established in 1948. This board has standardized the terms, delivery time and the quantity per contract of the futures. The products traded through futures markets until 1970s include agricultural commodities (wheat, rice, oats, etc), metals (silver, gold, etc) and energy products (crude oil, natural gas, etc). The Chicago Mercantile Exchange (CME), established in 1919, introduced financial futures for the first time in 1971 with the abolition of currency gold standards. Now financial futures are the most traded type of all futures and it also paved the path for other futures types like interest futures and index futures. In 1987, again CME introduced electronic trading for futures, which have revolutionized the futures trading practice with the global access.

Speculation and futures commodities markets existed long before the modern commodity market. Civilizations and traders of old were reasonably sophisticated, realizing much the same goal as today's commercial commodity producers and commercial commodity consumers in the futures commodities markets or the spot commodity market.

Fed Boosts the Market!

noreply@blogger.com (Ziad Melhem) — Thu, 19 Mar 2009 11:22:00 +0000

Associated Press - “NEW YORK - The Federal Reserve kept Wall Street’s big rally alive — and gave the Treasury market a huge boost as well. Both markets surged Wednesday after the Fed said it would pump more than $1 trillion into the economy to help revive the housing market. The plan includes buying up to $300 billion of long-term government bonds during the next six months.”

Up until now the Federal Reserve has been seen behind, they act after the problem. Yesterday’s aggressive action by the FED sure brought the ball back to their field and the game back to their hands. It is a nuclear decision. The question is now when will it be executed? Will it be done today or in the coming 3 to 4 month? Now if they decided to execute later the impact of this decision will turn out to be negative since the FED again will be acting after the problem takes place. The reward will be huge if executed immediately since the FED will be telling us “hey everyone, we’ve decided to take control of problem, and put an end to it.”

With One Word, Fed Chairman declares Who Actually leads the US!

noreply@blogger.com (Ziad Melhem) — Wed, 18 Mar 2009 16:34:00 +0000

Watching TV recently, in an appearance before Congress, Fed Chairman Dr. Ben Bernanke declared with one single word who really runs the United States nowadays:

Senator Sanders: "Will you tell the American people to whom you lent $2.2 trillion of their dollars?"Bernanke: "No".
He said “NO”.

For sure Dr. Bernanke and his board refuse to give out this important information even if confidentially and not in public to the Congress.

With his word "no", Bernanke showed us that Congress in the US is kind of disabled. In other words, the Congress in the US doesn't really run the country when it comes to the area of business, finance and the economy. The financial giant of the country is the Fed.

History of Economics.

noreply@blogger.com (Ziad Melhem) — Tue, 17 Mar 2009 12:49:00 +0000

Lionel Robbins in a 1932 essay defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." Economics aims to explain how economies work and how economic agents interact.

In the words of Alfred Marshall, the great nineteenth century economist, "Economics is the study of mankind in the ordinary business of life". The word economy comes from the Greek oiko for "house" and nomos for "laws". The term economics was coined around 1870 and was popularized by Alfred Marshall. Greek philosophers like Plato and Aristotle were among the first ones to write on the subject of economics.

Modern economics began in 1776, with the publication of Adam Smith's Wealth of Nations- the first comprehensive defense of the free market. The "invisible hand" theory says that the market is actually guided to produce the right amount and variety of goods and services. During the Industrial Revolution (a period in the late eighteenth and early nineteenth centuries) the idea of "laissez faire" which advocated minimum or no government intervention in various aspects of the society became popular. This philosophy of economics gave rise to the economic system of capitalism which favors private ownership.

In the nineteenth century, Karl Marx attacked the capitalistic, "laissez-faire" theories of competition and instead favored socialism which advocated more government control and state ownership of property. His work was the most widely adhered-to critique of market economics during much of the 20th century. While formerly an item's value stayed the same depending on what the item was, during this time the worth of an item came to be determined by how many people wanted the item and how great the supply of the item was. This marked the beginning of the laws of supply and demand. In the early 20th century, economics became increasingly statistical, and the study of econometrics became increasingly important.

Statistical treatment of price, unemployment, money supply and other variables, as well as the compiling of these statistics became more and more central to economic writing and disputes within the field of economics. In the first half of the twentieth century, John Maynard Keynes wrote about business cycles - the fluctuation of economic activity around a long term growth trend. His theories led to better government controls so as to prevent the wide swings. It grew in popularity as a reaction to the Great Depression. After World War II, emphasis was placed on the analysis of economic growth and development using more sophisticated technological tools. In recent years, economic theory has been broadly separated into two major fields: macroeconomics, which studies aggregates of the economy; and microeconomics which studies the economic behavior of small economic groups like firms and households.

The latter part of the twentieth century saw the emergence of supply side economics according to which a healthy economy is very necessary for the health of the nation and monetarist Milton Friedman's ideas that money supply has the most important influence on the economy. In recent times, three of the important areas of economic thinking are: risk based rather than price based models, imperfect economic actors and treating economics as a biological science based on evolutionary norms rather than abstract exchange. The study of information and decision hasbecome central to attempts to unify microeconomic with macroeconomic theory examples of which include the work of Joseph Stiglitz.

What is Short Selling & how does it work?

noreply@blogger.com (Ziad Melhem) — Tue, 17 Mar 2009 01:26:00 +0000

Short selling involves the sale of a security that the seller doesn't own at the time of trading but that he or she has promised to deliver. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. Most of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants the stock you borrowed back. Brokerages can't sell what they don't have, and so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as being called away. It doesn't happen often, but is possible if many investors are selling a particular security short. Since you don't own the stock, you must pay the lender of the stock any dividends or rights declared during the course of the loan. Because you are being loaned the stock, you are buying on margin.

The two main motivations to short a stock are to speculate and to hedge. The most obvious reason to short is to profit from an overpriced stock or market. The majority of investors use shorts to hedge i.e. they use short sales to protect other long positions. When an investor goes long on an investment, it means he or she has bought a stock believing that its price will rise in the future. Conversely, when an investor goes short, he or she is anticipating a decrease in share price.There are many restrictions on the size, price and types of stocks you're allowed to short sell. Short sellers are typically sophisticated, wealthy individual investors, hedge funds, large institutions and day traders.

Despite being a long-standing market practice worldwide, short sales have been the subject of considerable debate and divergent views in most securities markets. The votaries of short-selling view the practice as a desirable and essential feature of a securities market. They argue that in a weak market, short-covering of positions taken at the beginning of a downturn, would arrest the declining trend. Critics of short-selling, on the other hand, are convinced that short-selling poses potential risks and can easily destabilize the market directly or indirectly.

What are Options used for?

noreply@blogger.com (Ziad Melhem) — Sun, 15 Mar 2009 09:26:00 +0000

The primary reasons why investors use options are to speculate and to hedge their risk.

The speculating aspect involves the direction in which you feel the price will move. Suppose you buy a stock at 10$, you expect it to go higher and if the market moves along your bias, your upside potential is unlimited. However, if your initial bias proves wrong, you can stand to lose, sometimes even your entire capital invested on the stock. Using options is a method of limiting this risk of loss. When you purchase an option, you pay a premium which is considerably much lesser than the value of the stock. If your bias is proved wrong, you would have limited your downside risk to the amount spent as premium whereas the upside potential would be unlimited.

Hedging is nothing but an insurance policy for your investment. Most investors are bullish, meaning that they expect the price of the stock they hold to go up. However, they are constantly threatened by unexpected events that could cause their stock price to plummet downhill. So, they decide to take an insurance policy. In this case, it is the put option. When you buy put options, their value will increase as the value of your stock decreases. So you’re able to maintain a sort of equilibrium in your portfolio. However, like insurance requires us to pay monthly/semi annual/annual premiums, we have to periodically buy put options.

The following is an example of how a stock option works:
Let’s assume that the value of the stock of a company is currently at 10$. A trader who feels that the value of the stock is about to increase decides to buy, lets say 1 call option contract at 50 cents for a strike price of 11$. (Call option gives the owner the right, not an obligation, to purchase 100 shares of the underlying stock at a specific price per share (strike price) on or before the date of expiration.) Therefore he now controls 100 shares with a capital of 0.50 x 100 = 50$.

Also, let’s assume that the value of the stock has risen to 12$ before the expiration date on the call contract. The trader can use his call options and buy 100 shares of the underlying stock at 11$ and immediately sell them at 12$. Because of this, the option will sell at 1$ on the expiration date. Since the investor purchased the option at 50$, the profit made on this trade would be 50$, which is 100%.

How does the Futures Market work?

noreply@blogger.com (Ziad Melhem) — Sun, 08 Mar 2009 23:35:00 +0000

In futures trading, there is usually a contract, which is essentially an agreement between two parties to buy or sell an underlying asset such as a physical commodity or a financial instrument at a certain time in the future at a certain price. A futures contract usually has a standardized date and month of delivery, quantity and price.Futures trading is usually carried out on a futures exchange. In order to facilitate liquidity in futures trading, the futures exchange specifies certain standard features of the contract. In futures trading, a futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of transactions in the futures trading are usually offset in this manner. The date specified in the options/futures contract is known as the expiration date. Day traders trade futures contracts to make a profit on the difference between the buying price and the selling price, rather than to actually own the underlying commodity.

Even so, day traders need to know when the current futures contract will expire, so that they can make sure that they do not have any open positions at that time. Futures contracts are traded not only by day traders and longer term traders, but also by non traders with an interest in the underlying commodity. The Futures price is the price at which the futures contract trades in the futures market. The most important role that futures trading performs is in aiding the process of proper price discovery. Futures contracts also aid in the hedging of price risk in a commodity. Futures contracts help the producer to obtain an idea of the price likely to prevail and thereby help him quote a realistic price and hedge risk.

The Futures Market is an auction market in which participants buy and sell commodity/ future contracts for delivery on a specified future date. Volume in the futures market usually increases when the stock market outlook is uncertain. Futures markets can be traded in both directions- up and down. If a trader expects the market to move upwards, they will make a long trade, which means that they will enter their trade by buying a contract, and exit their trade by selling a contract. Conversely, if a trader expects the market to move downwards, they will make a short trade, which means they will enter their trade by selling a contract, and exit their trade by buying a contract. Being able to trade in both directions allows traders to make a profit regardless of which direction the market is moving.

Futures markets have several advantages over other markets. Futures markets are available with a wide variety of underlying instruments, they have good range of price movement and liquidity, and some futures markets are available for day trading 24 hours per day. Futures markets are offered with three main underlying instruments, including currencies such as the Euro to US Dollar exchange rate, stock indexes such as the Dow Jones and commodities such as Gold, Silver, and Oil.

After what we saw last week, is the US dollar still 'the' currency?

noreply@blogger.com (Ziad Melhem) — Sat, 07 Mar 2009 16:11:00 +0000

We all saw last week what happened in the US Market. While we were all watching the sharp fall of the Markets it brought to us the bad memories of 1996 — with the Dow Jones industrial average and the S&P 500 hitting lows last seen in 1996.

We also saw the US dollar heading in opposite direction were it was rising steadily against Euro, GBP, & Yen. Last August my $100 in London used to buy me £50, today my same $100 buys me around £72. As a tourist in London nowadays my money goes much further than it used to in the past 5 years.

The ironic thing is that when the dollar rises we used to think that Washington is doing an excellent job in handling the economy. It would be real nice to think the rising dollar is a healthy sign. Maybe it is. But as an economist I have to look at the real reason behind the strengthening US dollar. Well the fact is during uncertainty people run for the dollar, as they say cash is king. For years now the US dollar has been a safe currency for people. Investors used to have their assets in US dollar for them not to worry about a sharp decline in value. I don’t think the US dollar will remain one of the ‘safest’, like gold. I mean if you watch CNBC for 30 minutes, you will start having your own worries about the huge size of the US debt and whether the dollar will remain to be the safe haven for investors. Another question you need to ask yourself “if the US dollar became a ‘no’ safe currency do we have an alternative?” I think there is no practical alternative to the US dollar in this situation. I mean do we have another country that really have enough money supply to accommodate the world wide demand? The answer is no. Not even all the gold of the world can takes the dollar’s place. So in summary, if the Markets go down, don’t be surprised to see the dollar going up.

If we look at unemployment, yesterday the Non-farm payrolls dropped by -651,000.

(courtesy of EMPfx.com Economic Calendar)

Analysts were expecting the number to be 650,000 lost jobs in February. It came out 651,000 which is 1,000 more than the forecast, 598,000 compared to January. More than 4.2 million US citizen lost their jobs since January 2008. Unemployment rate @ 25 years high (8.1%). There is no question that the labor market is weak. Clearly the direct effect of such numbers will be less consumer spending (less jobs, less income, then saving your cash is king). Thus further contraction in the US economy, means more heat for Obama. Are we going to see a 1 Million or 2 Million jobs lost in March or April? Is it a scary number? Well we’ve seen that before in the 40s.