Even more on EMT, and how it applies to different strategies

Hello,

I've getting a handle on how EMT effects investing strategies now. At first I thought of it as a largely irrelevant model that really didn't make any difference to anything at all.

I noticed over time, and talking to people that they corrected me when I said something along the lines of "Investor emotions undervaluing stock prices", and said that really it's that the market has already factored in the issue or event that has taken place. I thought that that was only a bit like the cup is half full, or the cup is half empty. An identical viewpoint with a different explanation. So why would you care, if the intent is the same? It seems that you should, depending upon how you invest.

So, let me try to explain. Let's imagine that you're going to sell or buy options, all shorter term fluctuations in price cannot be gleaned from a company's financial records. Yes, some of the information will be in there, it's a good company with a great future, but there simply is not enough information to be sure where the market would be when the option expires, for example. So here we have an investment strategy that relies more on investor emotion, or EMT to try to predict where a stock will be. It's good to know the fundamentals of the company, because you may see that it's a really bad company to invest in traditional stocks with, for example. However, even that doesn't mean that you won't make money from it, it just means that you might be able to predict the direction in which the price will trend.

So, in that case, what's the alternative? Instead, it's probably better to work thinking in terms on EMT, and looking for price patterns and trends in the prices. Given the cyclic nature of stocks, it seems that you're statistically more likely to pick the correct price than looking at the fundamentals, and hoping.

Then, on the other side of the fence, there's a value investor, someone who looks for undervalued stock. That statement by itself indicates that this breed of investor is at odds with the whole EMT idea. You can't have an undervalued stock, since the price reflects the true value of the stock. Yes, I could rephrase the first statement to make it compatible with EMT, but it indicates where the investor is coming from. He's probably going to be aware of the current stock price, to see if it represents good, value, but probably isn't really interested in recent patterns and trends, since that concept is at odds with his approach.

This information may well be obvious to some readers, but I thought that I'd point it out, since the penny finally dropped, and I can now see how the land lies. I hope this helps readers understand a little more as I now feel that I do.

Foreign Exchange, Forex, FX - Good or not?

Hi,

I have read a lot of people talking about Forex, so I thought that I'd try to figure out what the deal was. Is it like the lottery, or does it offer some promise to make money? Is it risky? Does it cost a lot?

First things first, Forex trading allow you into a leveraged position. This isn't the same sort of leveraged position as you would get with ordinary shares - margin lending. With Forex, your position is closed out by the amount of money you put in being wiped out. In other words, you can only loose what you put in, that seems to be the case anyway. The upside to that is that you can leverage the market something like 100:1, in other words if you put in $1000, you have access to $100,000. This means that the money you put in is amplified in effect, to give you a greater effect, but this works in both the positive and negative direction.

Forex works through pips, for example, if a currency is trading for 3.1456 and goes up to 3.6556, then it has gone up 200 pips. The other thing that happens is that you but one currency by selling another, and making money from then selling that.

Is Forex like the lottery? Well, in the same way that it would be if you participated in shares without using Fundamental or Technical analysis. If instead you use patterns, trends and so on to make your calls for Forex, you can potentially make a lot of money. So here is another avenue of making money that relies largely upon technical analysis, so on that basis, I will have to learn how that all works, and report back to you all.

Is Forex risky? Well, it can be. If you try to make millions, and are not sensible with protecting your principle, then you can get into risky situations, however if you correctly analyse, and are sensible with trades, it seems plausible that a Forex trader could make some good money.

Finally, does it cost a lot? As previously mentioned, you get a leveraged position, so you don't have to put up a lot of money to make a lot of money, it seems.

Having only just started to read about this area, I would love to hear some feedback from the traders out there who have real experience with how the Forex market works, so that I can talk to you, and you can perhaps write a post of two to help our readers?

Fundamentals Analysis - PEG Ratio - Price Per Earnings Per Growth

Hi,

This is the second in a series of fundamentals analysis ratios.  This post is about the PEG ratio, which is gives us an insight into how expensive a share in a company is, given their expected growth.  

This ratio is useful because it takes into account an extra piece of information, growth, or future potential to give us an indicator of value.  One thing that we may do with the information is also perform analysis on the company to find out if their projected growth is realistic.  If it seems to be, then this could well be a good company.

The PEG ratio = (Share Price / Earnings Per Share) / Annual Earnings Per Share Growth.

See also PE Ratio

Due to the fact that the growth part of the ratio is projected, this is a speculative value, and therefore can be less accurate.  If you use this ratio in conjuction with other ratios and they all tell the same story, this should give you a good idea as to where the company is heading.

The value of the PEG ratio, if a lower number is obtained, the stock could be seen as cheaper.  The higher the ratio, the more expensive the stock is.

A value of 1 is generally accepted as a reasonable trade-off between stock cost and the expected growth of the company.  A value of 2 or higher would generally be seen as expensive, relative to the amount of growth that is expected for the company.

This ratio is less appropriate for valuing the price of a share for a company that does not expect future growth, and instead expects dividend income.  The use of the ratio in this case is down to what you are looking for in a stock purchase.

Fundamentals Analysis : PE Ratio, Price Per Earnings

Hi,

This first in a series of descriptions of fundamental analysis will look at the PE ratio.  The PE ratio, or Price Per Earnings Ratio, is a measure of how expensive a particular stock is.  It is a value ratio.

The PE ratio = Stock Price / Earnings Per Share

To get an idea of how good the PE ratio is, you would have to compare it to other similar companies to see if it is good or bad.

The value of PE is the amount the investor is willing to pay for $1 of earnings.  If the value of the PE ratio is high, it may be that the stock is overpriced, or it may be that the company has a high expected future growth, and investors are getting in early.  By itself and in isolation, the ratio has little meaning, but put in context it can be very powerful is deciding how profitable an investment might be.