US, which already has a trade deficit of US$57.9 billion at end 2007, announced on 13 Mar 2008 plans to lend up to US$200 billion of highly liquid US Treasuries for collaterals that include unwanted mortgage notes.

There are abundance of opportunity to make money day trading and there are 5 common markets to consider:

1. Stocks
In simple definition, stocks are a share in the ownerhsip of a company. You can buy or sell stocks on an exchange. The investing legend, Warren Buffet dominates this market but don’t let that get to you. You can still make money from stocks. If you are new to investing or day trade, you may want to consider your local stock market first. You may want to consider ETF (Exchange Traded Funds) if you are risk averse.

2 .Options
Options are a leveraged financial instrument. Its price derives from an underlying security (stocks or index for example). They give the buyer of the options contract the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. Unlike a stock, options contracts have expiry.

3. Commodities
Commodities trading involves the trade of raw materials. Such as grains, livestock, precious metals, energy, etc.

4. Futures
Futures, like options, have expiry. They are used for hedging commodity price fluctuation risks; or for taking advantage of price movements, rather than for buying or selling the actual cash commodity.
The buyer of the futures contract agrees on a fixed purchase price to buy the underlying commodity (wheat, gold or T-bills, etc.) from the seller at the expiration of the contract. This differs from options, where the buyer has the right to purchase the underlying commodity, but is not obligated to do so.

As time passes, the contract’s price changes relative to the fixed price at which the trade was initiated. This creates profits or losses for the trader.
Futures trading is one of the more complex forms of trading, but along with the increase in the skill level required, there are greater rewards (in terms of return on investment (ROI).

5. FOREX

Forex – short for foreign exchange – is trading where the commodity is currency. What makes the Forex market unique is that, unlike other financial markets, the forex market has no physical location or central exchange. Additionally, this market trades 24 hours and its daily volume exceeds $1.4 trillion, making it the largest and most liquid market in the world.

This may sound exciting to you but it’s not for the faint hearted. Forex trading can be fast and furious. If you’re just starting out, unless you have your heart set on trading the Forex, I recommend that you ensure that your trading plan can trade profitability in other non leveraged markets (e.g. stocks) before entering into this market.

Sometimes expert advise just makes your head spin, doesn’t it! How many times have you heard an expert touting the advantages of risk-reduction through diversification. Of course, the biggest proponents of diversification, and those with the ad spending budget to brainwash millions of investors, are the mutual fund or unit trust gurus–from banks to Internet fund-selling sites, all preaching the indisputable value of a widely diversified portfolio.

What is seldom heard are two divergent facts, each stabbing the fund manager in the heart:

• Fact one, while diversification does dilute the effect of one bad investment decision, it also dilutes the affect of one good investment decision–thus ensuring mediocraty, and guaranteeing underperformance after fund fees.
• Fact two, the world’s greatest investor, Warren Buffett does not diversify– in fact, he practices the exact opposite, a focused investment strategy.

Focus Investing

Hollywood has created the image of a professional money manager as running between meetings with two mobile phones in hand, frantically taking notes with one eye glued to a bank of computer screens streaming live news and prices, making instinctive key decisions every five minutes or so. Warren Buffett is far from this picture, lazily strolling out for a cherry Coke and burger between annual report studies in the lathargic small-town American city of Omaha, Nebraska. He has a computer, but spends more time playing virtual bridge than watching news and prices. He doesn’t make decisions every five minutes, but maybe once or twice a year.

Buffett-style focus investing is remarkably simple in design, and yet, like most simple ideas, it rests on a complex foundation of interlocking concepts. The world of professional money managers is locked in an epic battle between active portfolio management and passive indexing. Active managers try to use their stock-picking and asset allocation skills to beat the market index. Each day or week, fund investors dial in to see how their portfolio is doing–if the fund beat the market they will leave their money alone, but if it fell behind they may consider shifting to another hot fund or give up altogether and buy the passive lower-cost index fund (which eventually beats at least 7 of 10 active managers). Active fund managers are forced to guess stock prices in the near-term in order to win this losers game.

Active managers tend to hold an average of 100 stocks in their funds and generate 80% annual turnover of these holdings, while and an index fund such as the S&P 500 tracking index holds 500 stocks but with a buy-and-hold strategy. Both approaches are sold to investors as an essential way to invest in the high-risk stock markets through a cost-effective broadly diversified approach. After all, who could afford the transaction costs on a 100 to 500 stock portfolio with high annual turnover? Yes, who indeed, including fund investors?

Warren Buffett, when discussing the decision between active fund management and passive indexing, unhesitatingly picks indexing. So should investors with a low risk tolerance and no desire to spend their time learning about the economics of individual businesses but still desire to participate in common stocks. As Buffett says, By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. But he is quick to point out that there is a third alternative, a very different kind of active portfolio strategy that significantly increases the odds of beating the index. That alternative is called focus investing.

FOCUS INVESTING is a new choice. Reduced to its essence, focus investing means this: Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investents in those stocks, and have the fortitude to hold steady during any short-term market gyrations. To be cliche, put all your eggs in just a few baskets and watch those baskets very carefully.

Finding Outstanding Businesses

Warren Buffett has developed a way of choosing companies that, in his view, are worthy places to put his money for many years. His way rests on a notion of great common sense: If the company itself is doing well and is managed by smart people, eventually its inherent value will be reflected in its stock price. Buffett thus devotes most of his attention not to tracking share price but to analyzing the economics of the underlying business and assessing its management. This process involves a set of investment principles of tenets, as discussed in a previous article.

Buffett is a highly rational man. Probability theory, which comes to us from the field of mathematics, is one of the underlying concepts that make up the rationale for focus investing. The focus investor follows a methodical investment process that inevitably identifies good companies with a long history of superior performance and stable management, and this stability points toward a high probability that they will perform in the future as they have in the past. In Asia, many promising businesses are younger than in the US or European market, so a focus on intelligent capital allocation by management and the stability and predictability inherent in a particular industry are good substitutes for long track records.

Less Is More

Remember Buffett’s advice to a know-nothing investor, to stay with index funds? What is more interesting for WallStraits viewers I’m sure is what he says next: If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification (broadly based active portfolios) makes no sense for you.

What’s wrong with conventional diversification? For one thing, it greatly increases the chances that you will buy something you don’t know enough about. Know-something investors, applying the Buffett tenets, would do better to focus their attention on just a few companies: 5 to 10 (notice our WS 8 Portfolio targets this range). More important than the actual number of companies in your portfolio is understanding the principle behind it. Focus investing falls apart if it is applied to a large portfolio containing dozens of stocks.

The Focus Investor’s Golden Rules

• Concentrate your investments in outstanding companies run by strong management.
• Limit yourself to the number of companies you can truly understand. Ten is a good number; more than 20 is asking for trouble.
• Pick the very best of your good companies, and put the bulk of your investment there.
• Think long-term: 5 to 10 years minimum.

Volatility happens. Carry on.

By Curtis of WallStraits.com

Credit: Some of the material in this article was extracted from Robert Hagstrom’s The Essential Buffett.

Want to own part of a business without having to show up at its office every day? Or ever?

Stock is the vehicle of choice for those who do. Dating back to the Dutch mutual stock corporations of the 16th century, the modern stock market exists as a way for entrepreneurs to finance businesses using money collected from investors. In return for ponying up the dough to finance the company, the investor gets shares of stock-specialized financial “securities,” or financial instruments-that are “secured” by a claim on the assets and profits of a company.

Types of Stock:

Common Stock….

Common Stock is aptly named, as it is the most common form of stock an investor will encounter. It is an ideal investment vehicle for individuals because anyone can own it; there are absolutely no restrictions on who can purchase it. Young, old, savvy, reckless, genius and idiot are all invited to participate. Common stock is more than just a piece of paper (today, it’s more often electronic anyhow); it represents a proportional share of ownership in a company—a stake in a real, living, breathing business.

By owning stock—the most amazing wealth-creating vehicle ever conceived (except, maybe, for just inheriting money from a rich relative)—you are a part owner of a business. Shareholders “own” a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what drives up the value of the stock in that business.

Because they own a part of the business, shareholders get one vote per share of stock to elect the board of directors. The board is a group of individuals who oversee major decisions made by the company. Far from being a perfunctory collection of do-nothings, the board normally wields quite a bit of power in the corporate world.

Boards decide how the money the company makes is spent. Decisions on whether a company will invest in itself, buy other companies, pay a dividend, or repurchase stock are all the purview of the board of directors. Top company management—who the board hires and fires—will give some advice, but in the end the board makes the final decision.

As with most things in life, the potential reward from owning stock in a growing business has some possible pitfalls. Shareholders also get a full share of the risk inherent in operating the business. If things go bad, their shares of stock may decrease in value—or even end up being worthless if the company goes bankrupt.

Different Classes of Stock:

Occasionally, companies find it necessary for various reasons to concentrate the voting power of a company into a specific class of stock where the majority is owned by a certain set of people. For instance, if a family business needs to raise money by selling equity, sometimes they will create a second class of stock that they control that has ten votes per share of stock and sell a class of stock that only has one vote per share to others. Does this sound like a bad deal?

Many investors believe it is and routinely avoid companies where there are multiple classes of voting stock. This kind of structure is most common in media companies and has been around only since 1987.

When there is more than one kind of stock, they are often designated as Class A or Class B shares. On the New York Stock Exchange and the American Stock Exchange this is signified by a period and then a letter following the ticker symbol, a shorthand name for the company’s shares that brokerages use to facilitate transactions.

For instance, Berkshire Hathaway Class A shares (Warren Buffett’s company) trade as BRK.A, whereas Berkshire Class B shares trade as BRK.B. On the Nasdaq stock market, the class of stock becomes a fifth letter in the ticker symbol. For example, TeleCommunications, Inc. has TCOMA, the Class A shares, and TCOMB, the Class B shares. In Singapore, you will often find a “domestic” class and a “foreigner” class of stock, whereby foreigners are limited to a certain percentage ownership in a given company.

This practice has been less prevalent in recent years, and some companies are now even beginning to merge their domestic and foreign classes into a single listing. You may also encounter different classes of shares that trade various minimum lot sizes, such as SPH (1,000 share lot minimum trades), and SPH 100 (100 share lot minimum trades). This is gaining popularity as companies look to make their stock more available to small investors.

Preferred Shares…

Preferred stock is issued by a company as a less risky investment, being closer to a bond than a stock. The preferred shares often pay a higher dividend payment than the common shares. Also, in the case of bankruptcy, company assets are liquidated to first pay bond holders, then preferred share holders, and lastly, common share holders.

The illegal buying or selling of securities on the basis of information that is generally unavailable to the public.

An example is the purchase by a director of shares of his or her firm’s stock just before the release of surprisingly good earnings information.

In-depth study of the business behind the stock price, which may include analysis of balance sheets, profit & loss, management skills, competitive market advantages, use of capital, and many financial ratios.

Fundamental analysis attempts to determine the true value of a security, and, if the market price of the stock deviates from this value, to take advantage of the difference by acquiring or selling the stock.

The investment strategy of purchasing securities and holding them for extended periods of time. Investors using the buy-and-hold strategy select companies on the basis of their long-term outlook. Such investors are not influenced by short- or intermediate-term movements in the price of a security. Such long-term investors typically focus on business fundamentals rather than market emotions.

The value of a security, justified by factors such as assets, dividends, earnings, and management quality. Intrinsic value is at the core of fundamental analysis since it is used in an attempt to calculate the value of an ongoing business, and thus its proper stock price. Intrinsic value can vary widely among different analysts. Warren Buffett uses a method that involves discounting the future cash earnings of a business to current value (discounted cash flow).

Stocks which tend to see their share prices (and profits) rise and fall in regular (although not regular enough to easily predict) patterns. The patterns of rise and fall are often tied to economic growth and contraction.

Examples include basic materials manufacturers like steel companies or aluminum companies.

So what is PE ratio?
PE equals share price / eps

Example:
XYC company
Price : 31 cents
Current Earnings = USD118,
No. of Shares = 400 millions
Earnings Per Share (eps) = 118 millions/400 millions = 5.9c

Therefore, PE = share price/eps = 31c/5.9c = 5.25