Preferred stock

Preferred stock, a.k.a. preferred share, preference stock, preference share.

Definition: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

extracted from: http://www.investopedia.com/terms/p/preferredstock.asp#ixzz1X5HuqypM

In general, preferred shares are a form of corporate debt that has some qualities of common shares as well as that of bonds. The main characteristic of preferred shares are that they pay a fixed return to the holder at regular specified intervals, usually in the form of a dividend. The dividend payment typically does not fluctuate or change over time as it is determined at the time of issue, unlike common shares. However, there are rate resetting preferred shares as well (where the payment is calculated based on a predetermined formula).  The preferred share represents partial ownership in the company just like common shares do. Often, they are redeemable by the corporation after a specified date.

Here's how you read a preferred stock listed on the SGX:

eg. DBS Bk 4.7% NCPS 100

• DBS Bk - The company that offers the stock, in this case, DBS Bank.
• 4.7% - The dividend payout as a percentage of the initial offer price PER ANNUM, in this case, 4.7% of $100 = $4.7 p.a.
• NCPS - Stock type. NCPS means non-cunmulative preferred stock. If they did not declare a dividend last year, you cannot receive what they owe you last year.
• 100 - Quantity per lot (no number = default lot size of 1,000 shares), in this case, 1 lot = 100 shares.

Preferred stock is the preferred choice for growing money compared to fixed deposits as they tend to have a higher return of investment. Why?

The following are the links to the deposit rates of the various banks:

DBS - http://www.dbs.com/ratesonline/Pages/fdsgd.aspx

OCBC - http://www.ocbc.com.sg/personal-banking/tools%20and%20info/Toi_Rates_Dep_Listing.shtm

UOB - http://www.uob.com.sg/personal/deposits/fixed/singapore_fixed_deposit.html

Citibank - https://www.citibank.com.sg/gcb/static/deposit_boardrates.htm?eOfferCode=SGTDULW

Among these banks, OCBC and UOB both give the highest return of 0.7% p.a. for a deposit of >$500,000, for at least 2 years. UOB offers a promotional 0.938% p.a. for a deposit of >$40,000 for at least 3 years at time of posting. Hence the returns of fixed deposit from OCBC and UOB are 14.97% and 27.80% for 20 years respectively. Lets compare these to their respective prefered stock...

OCBC Bk 5.1%NCPS 100

Last traded price: $106.00 (5 Sep 2011)

Dividend yield: $5.1/share p.a.

Real Return: $5.1/$106 = 4.811% p.a

Minimum "deposit": $106 x 100 shares = $10,600
Total Yield in 20 Years: 4.811% x 20 = 96.22%

UOB 5.05%NCPS 100

Last traded price: $105.00 (5 Sep 2011)

Dividend yield: $5.05/share p.a.

Real Return: $5.05/$105 = 4.810% p.a

Minimum "deposit": $105 x 100 shares = $10,500

Total Yield in 20 Years: 4.810% x 20 = 96.20%

As you can see, preferred stock far outpace fixed deposit in terms of returns.
Of course the risk is that the banks may choose not to pay dividends for the year. Historically though, all 3 banks have been declaring regular payouts even during the great recession of 2008-2009.

6 keys to finding companies with economic moat

1. Solid Identity
When investing in the stock market, identify companies with a solid identity. Differentiation of the company from the rest of the players in the marketplace is one way to spot a company with a solid economic moat. When stock-picking companies, identify companies with a distinctive and outstanding look, brand name or brand symbol because these products ensure the companies’ profitability, which makes your investment profitable as well. Examples of strong global brands who were able to give a strong brand identity are Coca-cola, McDonald’s, Mercedez Benz, Apple, and Google.

2. Exclusive Rights
Investing in a company with exclusive product right is always a good idea. A patent or copyright grants a company exclusive rights to manufacture and market products, which translates to a monopoly of the market for the duration of its patent or copyright, which is a considerable amount of time. This is indicative of a considerable economic moat, which makes it a good choice for investing because it ensures a profitable investment. When stock-picking companies, bear in mind that multinational pharmaceutical companies would have products with exclusive rights.

3. Looking to the future
A company with explicit long term strategy is a company that visualizes its growth and the strategies necessary to achieve it. It also plans for unforeseen circumstances that can hamper the company’s growth. When stock picking and making decisions on investing in a company, the company’s future directions accounts for additional economic moat.

4. Deterring customer switching
With the many choices available in the market today, switching products and services has become a common practice among customers. When the cost for switching is negligible, customers are more open to vary their product consumption. This is one thing to look into when stock-picking and investing. Companies and products with a higher cost for switching will have stronger economic moat. When switching is hampered by a high cost, product loyalty is assured, and high stock performance can be expected. Mac products for one, creates this scenario. Since you have to invest on software, which is exclusive for Mac products, the urge to switch is significantly curbed.

5. Big Capital
Products needing a high capital to develop, maintain, and improve also strengthens its economic moat. Companies with a high capital requirement guarantees limited competitors. When there are limited competitors, the customers will also have limited choices from where to source their products. Example of which are cable and telecommunications companies.

6. Low capital
On the other end of the spectrum, low cost of production produces products, which can be passed on the consumers at a lower and more competitive price, opening itself up to a broader consumer population. This increases the product’s economic moat and should be considered when stock-picking. Before investing though, you also need to analyze how varied the market is. In a varied market, a lower prize can also predispose frequent switching from customers.

Leverage, the Double-Edged Sword

Most brokers provide leverage to investors and traders alike. So what is leverage?

The textbook definition of "leverage" is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest.

For example, you deposit $10,000 in your trading account. You buy 2 standard 100K lots of EUR/USD at a rate of $1.0000. The full value of your position is $200,000 and your account balance is $10,000. Your true leverage is 20:1 ($200,000 / $10,000)

Let's say you buy another 2 standard lots of EUR/USD at the same price. The full amount of your position is now $400,000, but your account balance is still $10,000. Your true leverage is now 40:1 ($400,000 / $10,000)

Let’s say the price of EUR/USD increased by 2% to $1.0200. Your 4 standard lots of EUR/USD will now be worth $408,000. If you closed the position, you would have made $8,000 in profits which equates to a 80% profit.

However, suppose the price of EUR/USD fell by 2% to $0.9800. Your 4 standard lots of EUR/USD will now be worth $392,000. If you closed the position, you would have made a loss of $8,000, depleting your account by a whopping 80%!

Your profit/losses are calculated using the following:

(true leverage used)  x (% change in market price)

A Consistent Approach Yields Consistent Results

We shouldn’t expect to win every trade.  Some of the best traders in the world win on less than half of their trades.  But they also know that after a series of trades, because of sound money management, they can expect to be profitable. This is because they are consistent in their approach, so they expect some consistency in their results. 

When developing a new strategy, you have to judge it’s effectiveness through different market conditions. This means that you have to see how it works when the market is trending up, trending down, in a range bound situation and also when the market seems confused and directionless. This may mean running through 100 practice trades to get a good feel for the strengths and weaknesses of the approach. Just because that approach loses three trades in a row does not mean it doesn’t work.  If you and I were flipping a coin where I won on heads and you won on tails, we know that we would each win on about half of the flips. But if tails came up three times in a row, that does not mean that there is something wrong with the coin, it is just chance. We would still know that after a series of 100 flips, we would each still have won and lost about half of the flips. Think of this as you are working on ways to trade the market. Don’t be too quick to judge that approach on a small number of trades. Think long-term when judging and then if the results are acceptable, be consistent in taking the trades and your trading results will also start to show some consistency. 

Taken from:

http://www.dailyfx.com/how_to_trade_forex/course_trading_tips/

Learn to Crawl, Then to Walk, Before Running to Wealth

In order to be a professional, one must go through vigorous training and learning. It is difficult to become a consistently profitable trader and most new traders will quit before attaining that status. Becoming profitable is achievable, but it takes time and practice.

Get a feel for trading by first practicing in a demo account or do paper trading. Start out small, trading one trade at a time. After months of trading and creating a plan to take on the market profitably, do live trading.

Start out small with your live account. The difference between trading with and without real money is like a wide chasm separating the two. People often think it’s the same and start squirming after the market goes against them. A 20 pip move against you and fear starts to overwhelm you in live trading. With time, you will find that trading with real money becomes easier, but you should learn to walk before you start trying to run with the professionals.

Look at the Big Picture, then Take Out the Microscope

I recommend identifying the weekly or daily trend, before zooming in on the 4-hourly or hourly chart to look for your entry and exit. Only enter in the direction of the daily trend. Too often though, new traders lose their way and start with the short-term charts to find a trade and then move up to the daily chart to justify their choice. 

Know Your Exit

Many traders exit a trade without a strategy in place. More often than not, the decision to exit is determined by emotions of the trader. Emotions of fear and greed. Decisions made by fear and greed are not only inconsistent, but many times seem to lead to an exit at the worst possible moment. The best way to keep our emotions out is to have a sound strategy.

Many experienced traders follow a simple risk-to-reward ratio as an exit strategy. A risk-to-reward ratio of 1:2 allows the trader to place a target that is twice the risk. For example, Trader A place a EUR/USD long @1.4500 with a S/L @1.4400 or 100 pips, He would place his T/P @1.4700 or 200 pips.

Trading Rules!

1. Never risk more than 5% of your investment capital. If you have $10,000 in your account, you can risk up to $500.

2. Always use stop orders. Forex markets can move quickly, so a stop order can save you from potential losses as well as profit protection. Identifying your risk is the key to successful trading.

3. Never trade against the daily trend. Never buy or sell if you are not sure of the trend.

4. Never enter a trade without a good reason. A consistent approach increases your chance of success.

5. Trade only in active currency pairs. Keep out of slow, inactive ones.

6. Avoid co-related risk. Avoid tying up all your capital in any one currency.

7. Don’t close your trades without a reason.

8. Never average a loss

9. Never get out of the market just because you have lost patience or get into the market just because you are anxious from waiting.

10. Never cancel/move a stop loss order to allow for more losses, hoping that the market will reverse.

11. Be just as willing to short as you are to long. Your objective is to keep with the trend and make money.

12. Never buy just because the price of a currency pair is low or sell just because the price is high.

3 Choices to Investing

When it comes to money and investing, people have three fundamental reasons or choices for investing. They are:

1. To be secure,
2. To be comfortable, or
3. To be rich.

All 3 choices are important. The difference in one's life occurs when the choices are prioritized.

Most people place the choices in the following order:

1. To be secure
2. To be comfortable
3. To be rich

For most people, if becoming rich disturbs their comfort or makes them feel insecure, they will forsake becoming rich. That is why so many people want that one hot investment tip. People who make security and comfort their first and second choices look for ways to get rich quick that are easy, risk free, and comfortable. A few people do get rich on one lucky investment, but all too often they lose it all again.

I put my priorities in this order:

1. To be rich

2. To be comfortable

3. To be secure

As stated earlier, when it comes to money and investing, all three priorities are important. Which order you put them in is a very personal decision that should be made before beginning to invest. To be rich, comfortable, and secure are really personal core values. One is not better than the other. I do know, however, that making the choice of which core values are most important to you often has a significant long-term impact upon the kind of life you choose. That is why it is important to know which core values are most important to you, especially when it comes to the subject of money and financial planning.