The first step in opening an account is choosing a broker. Brokers are typically divided into three groups: full-service brokers, discount brokers, and deep-discount brokers. What distinguishes the three groups is the level of service they provide and the resulting commissions they charge.
With a deep-discount broker, essentially the only services provided are account maintenance and order execution, that is, buying and selling. You generally deal with a deep-discount broker over the telephone or, increasingly, using a web browser.At the other extreme, a full-service broker will provide investment advice regarding the types of securities and investment strategies that might be appropriate for you to consider (or avoid). The larger brokerage firms do extensive research on individual companies and securities and maintain lists of recommended (and not recommended) securities. They maintain offices throughout the country, so, depending on where you live, you can actually stop in and speak to the person assigned to your account. A full-service broker will even manage your account for you if you wish.
Discount brokers fall somewhere between the two cases we have discussed so far, offering more investment counseling than the deep-discounters and lower commissions than the full-service brokers. Which type of broker should you choose? It depends on how much advice and service you need or want. If you are the do-it-yourself type, then you may seek out the lowest commissions. If you are not, then a full-service broker might be more suitable. Often investors will begin with a full- service broker, then, as they gain experience and confidence, move on to a discount broker.
We should note that the brokerage industry is very competitive, and differences between broker-types seems to be blurring. Full-service brokers frequently discount commissions to attract new customers (particularly those with large accounts), and you should not hesitate to ask about commission rates. Similarly, discount brokers have begun to offer securities research and extensive account management services. Basic brokerage services have become almost commodity-like, and, more and more, brokerage firms are competing by offering financial services such as retirement planning, credit cards, and check-writing privileges, to name a few.
Choosing a Broker
December 7th, 2009Slope Divergence
December 1st, 2009To change an interpretive analysis to one that can be computerized, there are two techniques, one using slopes and the other based on the analysis of peaks. A comparison between the rate at which prices and a momentum indicator are rising or falling will give enough information to automatically identify a divergence. Using a linear regression feature in either a spreadsheet (@S] ope) or a strategy testing program (@Li nea rRegSI ope), the slope of any time interval can be found for both momentum and price over the same period. Because momentum is a detrended series, the period compared should not be too long; otherwise, the slope of the trendline will be zero, a horizontal line.
Divergence can be any combination of conflicting directions between the slope of price and the slope of momentum, including prices rising faster than momentum, momentum rising faster than prices, or the opposite. However, classic analysis has focused on momentum as a leading indicator of a change in the price trend, which limits the combinations to:
1. Prices rising and momentum failing (a bearish divergence)
2. Prices falling and momentum rising (a bullish divergence)
The strength of a bearish divergence, which can be used to select which situations are best for trading, can he determined by the momentum slope provided prices are rising, or the net of the rising slope of prices and the falling slope of momentum. In the second case, the difference between the slopes must be converted to a common denominator. because the angle of price movement can cover a far wider range than the angle of momentum movement.
OSCILLATORS
November 26th, 2009Because the representation of the momentum index is that of a line fluctuating above and below a zero value, this technique has often been termed an oscillator Even though it does oscillate, the use of that word is confusing. In this presentation, the term oscillator will be restricted to a specific form of momentum, or rate-of-change indicator, which is normalized and expressed in terms of values that are limited to the ranges between +1 and -1, +1 and 0, or 100 and 0, as in percent.
To transform a standard momentum calculation into the normalized form (maximum value of +1, minimum value of -1), divide the momentum calculation by the maximum attainable value of the momentum index. A 5-day index for silver with a 20-limit move could be divided by $1.00 to find the normalized value. If silver were to move its limit up for 5 days, the oscillator would have the value of +1 rather than the momentum value of 100. If the limits were to expand, the divisor would change as well, giving the technique a means of adjusting for varying volatility Using the normalized momentum, or oscillator, the top and bottom zones become volatility-adjusted at any level.
Erratic movements in the simple momentum and oscillator make it a very difficult tool to apply without additional work. Some of these problems can be eliminated by making the buying and selling zones more extreme or by smoothing the indicator values.
The Risk/Return Tradeoff
November 23rd, 2009At one extreme, if we are unwilling to bear any risk at all, but we are willing to forego the use of our money for a while, then we can earn the risk-free rate. Because the risk-free rate represents compensation for just waiting, it is often called the time value of money.
If we are willing to bear risk, then we can expect to earn a risk premium, at least on average. Further, the more risk we are willing to bear, the greater is that risk premium. Investment advisors like to say that an investment has a “wait” component and a “worry” component. The time value of money is the compensation for waiting, and the risk premium is the compensation for worrying. There are two important caveats to this discussion. First, risky investments do not always pay
more than risk-free investments. Indeed, that’s precisely what makes them risky. In other words, there is a risk premium on average, but, over any particular time interval, there is no guarantee. Second, we’ve intentionally been a little imprecise about what we mean exactly by risk. As we will discuss in the chapters ahead, not all risks are compensated. Some risks are cheaply and easily avoidable, and there is no expected reward for bearing them. It is only those risks that cannot be easily avoided that are compensated (on average).
Online brokers
November 18th, 2009The most important recent change in the brokerage industry is the rapid growth of online brokers, also known as e-brokers or cyberbrokers. With an online broker, you place buy and sell orders over the internet using a web browser. If you are currently participating in a portfolio simulation such as Stock-Trak, then you already have a very good idea of how an online account looks and feels.
Before 1995, online accounts essentially did not exist; by 1998, millions of investors were buying and selling securities on-line. Projections suggest that by 2000, more than 10 million online accounts will be active. The industry is growing so rapidly that it is difficult to even count the number of online brokers. By late 1998, the number was approaching 100, but the final tally will surely be much larger.
Online investing has fundamentally changed the discount and deep-discount brokerage industry by slashing costs dramatically. In a typical online trade, no human intervention is needed by the broker as the entire process is handled electronically, so operating costs are held to a minimum. As costs have fallen, so have commissions. Even for relatively large trades, online brokers typically charge less than $15 per trade. For budget-minded investors and active stock traders, the attraction is clear.
Who are the online brokers? As the industry evolves, this information changes, so check our web site (www.mhhe.com/cj) for more up-to-date information. You might notice that at least some of these online brokers are actually just branches of large discount brokers. Charles Schwab, for example, is both the largest discount broker and the largest online broker.
Competition among online brokers is fierce. Some take a no-frills approach, offering only basic services and very low commission rates. Others, particularly the larger ones, charge a little more, but offer a variety of services, including research and various banking services including check writing privileges, credit cards, debit cards, and even mortgages. As technology continues to improve and investors become more comfortable using it, online brokerages will almost surely become the dominant form because of their enormous convenience and the low commission rates.
Real Estate Price Indices
November 14th, 2009In markets where the residential property market has been through a boom–bust cycle one of the most common requirements for analysts is to estimate the level of negative equity within the system.
Estimating system-level negative equity is only really possible if a representative property index exists. In many emerging markets that is rarely the case but it is usually possible to find some proxy or failing that actually goes to the land registry (if there is one) and check a select number of transaction prices on comparable properties.
The following example shows how to go about estimating the level of negative equity in a market. We will assume that all of the mortgages had an original term of 20 years and that banks lent on an 80% loan-to-price basis.
The starting point is to estimate how much prices have fallen over time. We will assume that the bubble took place in the late 1990s and that we are at the end of December 2000. The value of properties bought in 2Q96 is 50% lower now than when bought. All of the properties bought between 3Q95 and 3Q97 are worth less now than when bought.
Slope
November 8th, 2009The one-day-ahead forecast suggested in “Following the Trend,” a few paragraphs earlier. is essentially a projection of the slope of the trendline. Because of the frequent erratic price movement, also called noise, the purpose of directional analysis, whether regression or moving averages, is to uncover the true direction of prices. Therefore, the slope of the trendline, or the direction of the regression forecast, is the logical answer.
The popular alternate for triggering a new directional signal is a price penetration of an envelope or band value. Using regression analysis that band can be replaced by a confidence level. While it is true that the number of random, or false, penetrations declines as the confidence band gets farther away from the trendline, so does the total number of penetrations. At any band distance there are still a large number of erroneous signals. The slope itself should be viewed as the best approximation of direction.
Bias in Data
October 28th, 2009When sampling is used to obtain data, it is common to divide entire subsets of data into discrete parts and attempt a representative sampling of each portion- These samples are then weighted to reflect the perceived impact of each part on the whole. Such a weighting will magnify or reduce the errors in each of the discrete sections. The result of such weighting may cause an error in bias. Even large numbers within a sample cannot overcome intentional bias introduced by weighting one or more parts
Price analysis and trading techniques often introduce bias in both implicit and explicit ways. A weighted average is an overt way of adding a positive bias (positive because it is intentional). On the other hand, the use of two analytic methods acting together may unknowingly rely doubly on one statistical aspect of the data; at the same time, other data may he used only once or may be eliminated by offsetting use. The daily high and low used in one part of a program and the daily range (high to low) in another section would introduce bias.