The Basic of Commodity Derivative – Crude Palm Oil Futures (FCPO)

FCPO is a Ringgit Malaysia (MYR) denominated crude palm oil futures contract traded on Bursa Malaysia Derivatives which providing market participants with a global price benchmark for the Crude Palm Oil Market since 1980 in the Commodity Futures Exchange. It is a legal agreement to buy or sell crude palm oil at a predetermined price at a specific time in future.

FCPO were standardised for 25 metric tons for a contract with minimum price fluctuation of RM1 per metric ton. The settlement of FCPO is on physical delivery. Hence, the buyer of the futures contract is taking on the obligation to buy the agreed amount of crude palm oil when the futures contract expires.

FCPO trading market available with 2 categories of market participants, hedgers and speculators. For those oil-related businessmen such as plantation companies, refineries, exporters and millers, they trade FCPO to manage price risk. To control their product cost and profit margin, they will hedge into FCPO to against unfavourable price movement in the physical market. For traders, they act as speculators in the market and gain leverage exposure to price movements of crude palm oil and earn the spread.

There are some rules and limits in trading FCPO. The daily price limits for FCPO are controlled to trade within the 10% of price varying in the spot month (the futures contract month closest to expiration). Once the FCPO price has raised or (dropped) by its daily limit, there will be not allowed to trade at any higher (lower) price until the next trading day. When there are at least 3 non-spot month contracts are traded at within 10% limit, the Exchange will announce a 10-minute cooling off period for all contract months (excluding the spot month). During the 10 minutes, all trades are only able to take place in the 10% limit. After this cooling off period, all contract months shall specify as interrupted for 5 minutes. Then, all contract months shall not be in trading more than 15% vary from the settlement price of the preceding business day.

The contract months for FCPO are spot month and the next 11 succeeding months, and after that, other months up to 36 months ahead. So, producers can hedge the prices by up to 3 years forward and with the first year of 12 consecutive contract months. For traders, the most active trading month usually will be the 3rd month of the contract due to the contract liquidity. The final trading day for a contract will be at noon of 15th (or preceding business day if 15th is the holiday) of the delivery month. The tender period of FCPO will be from the 1st to 20th of calendar day of spot month.

The trading hours for FCPO separated into 2 sessions, which morning trading session is from 10:30 a.m. to 12:30 p.m. and afternoon trading session is from 2:30 p.m. to 6:00 p.m. As FCPO is a global trading platform, there are high volumes of trade from China’s traders in morning trading session while afternoon session is more attracted to European countries’ traders .

Bursa Malaysia Derivatives has restricted speculative position limits to prevent large price swings associated with excessive speculative trading. Hence, there are only 800 contracts allow for the spot month, 10,000 contracts for any contract month except for spot month and 30,000 contracts for all months combined.

FCPO is considered the most actively traded CPO futures contract in Malaysia and widely recognised as the Global Pricing Benchmark for Crude Palm Oil. Beside, FCPO is also the most price sensitive to the Palm Oil trading community. To increase the market liquidity and trading volume, Bursa Malaysia Derivatives had extended trading hours and the contract period of FCPO in the past February to encourage more trades and stimulate the market. Hence, traders can try to explore this market while seeking another investment tool.

Written by Evelyn Yong | 4th July 2018.

Bearish Candlestick Patterns

Bearish candlesticks are probably the most important things we have to learn in candlestick pattern analysis. Every candlestick is delivering a unique and important message to us whether there is a selling or buying point. The tug war between bulls and bears will influence and decides the market. There are many different forms, patterns and size for a bearish candlestick. Let’s us look at these few common types of bearish candlesticks.

Bearish Engulfing Candlestick

 

The bearish engulfing pattern consists of a white candle, followed by a long black candle, mark by the first candle of upward momentum being overtaken or engulfed by a larger secondary black candle.

Before the Bearish Engulfing patterns occur, there are a bull controls which creates a definite of the uptrend. They will continue to push upwards during the crucial period. The second black candlestick formed when there is early buying pressure causes the security to open above the previous close, and the seller steps in and drive the price down, and the candle closes lower than the last.

The signal conveys a very drastic change in investor sentiment which allows investors to predict that a reversal on the horizon. When the bearish engulfing pattern is present, investors who will focus on short-term gains may choose to sell the due to changes of sentiment.

Bearish Harami

 

In Japanese term, “Harami” means pregnant, which means that the second candle determines the pattern of potency. The smaller the candle may have the higher the chance of reversal to occur. Bearish Harami formed at the end of an uptrend. It starts to develop with a relatively long white candle, followed by a relatively small black candle which is engulfing by the previous candle. This formation is showing that the buying momentum is weakening.

Bearish Tri Star Pattern

 

Bearish Tri Star pattern is a scarce reversal pattern which appears in the market that dominant in an uptrend and comprises by three Dojis candlestick. The first Doji always occurs in the uptrend which reveals that the market is indecision between buyers and sellers. The second body of Doji is higher than the previous Doji which emphasised more uncertainty, while the third Doji’s body is gap downward indicates that bears will soon to take over the control. These three Dojis strongly suggests that the trend is about to change.

Three Black Crows

 

Three Black Crows is a moderate trend of a bearish reversal pattern. It consists of three large consecutive long-bodied black candles. Each candle will be opened below the previous open and close progressively downwards than the same preceding candle. There should also be a little or no wicks formed on the candles.

Three Black Crows is an indicator that used to determine the weakness in an established uptrend and potential emergence of the downtrend. Therefore, when this happened in the uptrend, the negative market sentiment will push the price downwards, and this strong reversal will confirm that the upward price movement has ended. However, if the three candlesticks are overextended and make significant price declines, it could get into oversold territory.

Bearish Belt Hold

 

Bearish Belt Hold is a bearish reversal candlestick pattern. This candlestick pattern is straightforward to identify because it is formed by a single candlestick which is also known as Black Opening Marubozu that no upper shadow but with a small lower shadow.

This candlestick is always appearing after the stretch of the bullish candlestick. The opening price begins to decline against the overall trend of the market. It will eventually stop and close near to the low by leaving a small shadow at the bottom of the candle and formed a bearish candlestick. The longer the candle is, the more powerful and more significant it is. This candle should confirm by a bearish candlestick that developed in the next session.

 Conclusion

Reading technical chart is essential knowledge to all investors. It helps every type of investors, both of short-term or long-term to take action accordingly to their strategies. Bearish candlesticks provide useful indications for short-term investor, and it helps long-term investors to buy relevant stocks at a lower better entry.

Written by Stella Goh | 27 June 2018

Bullish Candlestick Patterns

Candlestick charts are perhaps the most popular financial chart which assists investors to predict the price movement of their securities. Swing traders have internationally used it to understand how the price of the stock has changed over a specified period. There are dozens of bullish reversal candlestick patterns and this time we will focus on few popular bullish candlestick patterns.

Bullish Abandoned Baby

Bullish Abandoned Baby is a type of candlestick which use by technical analyst to signal a reversal in the current trend. It can also be known as a rare form of morning Doji star. There are three distinct of candlesticks to make up this bullish abandoned baby. The first candle will be the red candle which located in a downtrend, followed by a Doji. There is a gap below the two adjacent candle shadows. The following candle will be a white candle which uses to indicate the strong bullish sentiment.

Bullish Engulfing Candlestick

Bullish Engulfing Candlestick chart formed when there is a large white candlestick fully cover the smaller previous black candlestick without regards to the length of the tails shadow. This type of candlestick will usually happen during a downtrend, found some support or buying volume, and then it will be made a bullish move back up by breaking the previous day’s high. It will be indicating that there is a potential reversal and it is also the signal of the beginning of a bullish trend in the security.

When there is a bullish engulfing candle form at the end of a downtrend, the reversal is much more powerful as this will represent a capitulation bottom. The lows of the candle should be the lows of the downtrend. There shall precede by a minimum of 4 consecutive lower low candles which should close near to the candle highs before the bullish engulfing candle.

Three White Soldiers

Three White Soldiers pattern consist of three consecutive large bullish candles that open within the previous candle’s real body and close that exceeds the last candle’s high. There is no gap between the candles, and do not have very long shadows open within the real body of the other candle.

When this frenzy buying continues third days, three white candles will be formed side by side with higher highs and higher lows. It signifies that the increased in the momentum in the ongoing of bullish phase.

Bullish Hammer

Hammer candlestick is just made up of only one candle and it may occur at the bottom of a downtrend. The candle looks like a hammer with an extended lower wick and short body at the top which is a sign of the sellers are driving the prices lower during the trading session and followed by strong buying pressure to end up market close higher or near to opening price.

Morning Doji Star

A Morning Doji Star is formed when the first candlestick is a long and bearish black candle, followed by a Doji that gapped below it, and then the third candle will be a white candle. If the penetration of the third candle is over 50%, it will be indicating that this pattern has much higher success rate. Morning Doji Star is a strong bullish price reversal candlestick pattern which appears at the end of a downtrend which will turn the current downtrend into the upwards direction.

Conclusion 

While fundamental analysis helps investors to select the potential stocks, the technical analysis allows investors to determine when is the best time to buy and sell. Candlesticks pattern are an excellent way to read the current market sentiment. Combination of both pieces of knowledge will significantly help investors to survive in the volatile market.

Written by Stella Goh | 20 June 2018

Warrants in Stock Market

A warrant is a security that gives holders confers the right, but not the obligation to buy or sell a specific underlying asset at an agreed price (strike price) on the expiry date. The price movement of the warrant is usually much greater than the underlying share. Hence, investors may expose themselves in higher volatility price movement due to leveraging positions in warrants.

There are 2 exercise styles for warrants, American style and European style. An American style warrant can be exercised at any time within the period before the expiration date, while European style warrant can only be exercised on the day of the expiration date. In Malaysia, we only practice the American style of warrants.

There is 2 type of warrant traded in Malaysia, which are company warrant and a structured warrant.

Company warrant

Company warrant also called as a stock warrant. It is issued by the listed company itself to raise money. It gives you the right to purchase a company’s stock at a specific price within the contract period. Once holders choose to exercise the warrants, new shares will be issued by the company for the transaction.

The validity period for company warrant can up to 10 years and determined by the issuance company. Once new shares were issued, the total company shares will increase and earning per share will be reduced. This situation makes existing stockholder owns a smaller or diluted percentage of the company. Issuing warrants can help to lower down the financing cost for the company(as raise capital through issuing instead of borrowing) as well as secure the additional capital if the stock does well.

Company warrant can be found in Bursa market with the stock code followed by –WA or WB or WC. ‘W’ stands for the representative code of company warrant while the ‘A/B/C’ is the series of the warrants issued and it can up to ‘Z’ depends on the company issuance. A company warrant price is usually lower than its mother share price and has listed the conversion ratio for exchanging into 1 share. The said of buying warrant can be volatile mostly due to the gearing ratio. When the gearing ratio is high, it will reflect higher changes on the warrant when the price of mother share is increasing or decreasing. When investors expect there is appreciation on company future value, they will purchase the company warrant which is lower cost at the same time minimises the loss if the share price drop.

Structured warrant

The structured warrant also named as an exchange-traded option or stock option and issued by financial institutions. The structured warrant settlement is in cash and does not involve any mother share. In Malaysia, there are 6 licensed issuers which are AmBank Berhad, CIMB Bank Berhad, Kenanga Investment Bank Berhad, Maybank Investment Bank Berhad, Macquarie Capital Securities (Malaysia) Sdn Bhd and RHB Investment Bank. The objective of having a structured warrant is to create the capital liquidity in the market as the price of the warrant is just a fraction of its underlying share. The issuer aims to make a profit on the risk management of the warrants sold, in doing so they also take on risk. When issuers sell warrants, they will buy shares or other derivatives to hedge their positions and attempt to capture a margin spread regardless the share price goes up or down.

Structured warrant separated into call warrant and put warrant. A call warrant gives the right but not obligation to buy the underlying asset at the fixed exercise price within the limited period of time. It will increase in value when the price of the underlying asset goes up due to the gearing ratio effect. If the settlement price of the underlying is above the strike price at expiry, the call warrant is deemed to be “in-the-money” (profit) and the holder will receive a cash payment. Otherwise, the warrant will expire worthless.

Put warrant gives the right but not obligation to sell the underlying asset at the fixed exercise price within a limited period. The value of put warrant will increase when the price of the underlying asset goes down. Put warrant price will inversely differ from the movement of the underlying asset. When the settlement price of the underlying is below the strike price at expiry, the put warrant is deemed to be “in-the-money” and the holder will receive a cash payment. Otherwise, the warrant will expire worthless too.

So the value of the structured warrant will be much valuable when in longer maturity date compare to shorter validity, which deemed to have a higher risk. Below illustrated the different company warrant and a structured warrant.

Company Warrant vs Structured Warrant

Company Warrant Structured Warrant
Issued by Company itself Financial Institution
Maturity date Up to 10years Maximum 2 years
Liquidity Low High
Stock issued Dilution, new stock Not involving underlying stock
Code -WA -PA (Put warrant)
-CA (Call warrant)
Benefits Encourage sale of shares and raise capital without incurring new debt Enabling traders to long and short the stock market or index with minimal entry cost

 

Written by Evelyn Yong | 13 June 2018.

Features of Dynamic Chart on ShareInvestor Station

Technical analysis played a significant role in investor’s life especially a big help in forecasting future price movements in the market. It is a term based on the historical price movement of an asset to predict future price movements which may help investors in making a financial decision.

Investors may use some trading tools such as identifying the trends, supporting or resistance points as well as other mathematically derived indicators to predict the future price movement of the stock. ShareInvestor Station provides with a variety of features that help in technical analysis. Let us look at this few awesome features offered in the dynamic chart of ShareInvestor Station.

Dynamic Technical Analysis Chart

Dynamic Chart of ShareInvestor Station provides both historical data up to 20 years and real-time intraday data which are up to 3 months. Investors can choose the duration of chart views such as years, months, days and up to second. Besides, there are also options of 5 years and 10 years length which may allow investors a quick zoom-in to their preferred chart range. The chart also will enable investors to select, zoom in, and zoom out to make them more convenient to identify the future trends of the stock. (Refer 1st & 2nd picture below)

Highly Customizable Indicators

The indicator is calculated formula derives from price, volume data, and others info.

ShareInvestor Station provides more than 100 of basic and common indicators such as Native indicators, Bands indicators, Momentum indicators, Oscillator indicators, Price Volume indicators, Trends indicators, Volatility indicators, Volume indicators, Predefined Technical Analysis indicators and financial ratio indicators.

All of these indicators came along with definition, formulas, explanations and examples. It helps investors to have a better understanding of each indicator which is customizable to some extent such as horizontal shift, line colours, and weight. Investors can create and edit their indicators via the Technical Analysis Formula Editor. All of these indicators built can be applied to the charts. (Refer picture below)

Chart Comparison

One of the most significant features of ShareInvestor Station available in the dynamic chart is Performance Comparison. This feature allows investors to compare more than 2 of any history stock price in a single chart as per the example above.

On the other hand, investors can also select the how to display the stock price by modify the colours and line weight or display it as candlestick chart, bar chart, line chart at closing price, mountain chart, Heikin-Ashi Chart and Hollow Solid Candlestick Chart. (Refer picture below)

 Drawing Tools

ShareInvestor Station consists of more than 35 drawing tools to enable investors to draw charts for analysis. There are some advanced drawing tools such as Fibonacci Retracement, Fibonacci Projection, Linear Regression, Gann Fan, Gann Grid, Andrew’s Pitchfork, Standard Deviation Channel and so on.

By using these drawing tools, investors can predict the future price movement of the stocks based on their criteria. The display of the colours, apply line width, line style or line value to their chart can be changed as well with a simple click.  Investors will able to save the studies of their chart as a template, review back the drawings and use the enhanced of drawing tools for later use. (Refer picture below)

News and Events on Chart 

Last but not least, the features of news on charts makes tracking stocks much more accessible to investors. News and events can be display on a specific date along with the trends in the chart. Therefore, investors can quickly correlate the price movement of their stock to market-moving news to make a better decision on their investment. (Refer picture below)

Conclusion

As the wise man said, useful tools are prerequisite to the success of a job. ShareInvestor Station is a great investment analysis tool to assist investor. It does not just shorten the time needed for studying the market but will also the provide the comprehensive data that not readily accessible to the retail investor.

Written by Stella Goh | 1st June 2018.

The Common Mistakes Made By Investors

When you begin investing in stock, it’s important to understand how you might lose money if you not careful enough by making some common mistake. Investors must know how to seek vital information and be sharp minded to reduce the risk of failed investment. Here are the few common mistakes that investors should watch out.

Diversification – Too Much / Too Little

As what Warren Buffet said, investors should not put all eggs in one basket; they should diversify their portfolio to spread out the investment risk. However, investors may over-diversified and under-diversified their shares portfolio. Over-diversification may result in retail investors lose tracks of their investment efficiency by diversifying into such as stock, futures, commodities, bonds and so on. As a result, any profit makes from the specific investment will be quickly written off by other non-performing investment. However, it can multiple investment portfolios can be managed together with a dedicated team of the fund manager.

On the other hand, if the investor was under-diversified, which he may only invest in one or two stock at the same time,  his portfolio will become highly sensitive to the fluctuation the stock pricing due to the short-term market uncertainties.

For another reason, if the investors concentrated only on one investment class such as bonds, he might not enjoy the opportunities arising from other asset classes such as equities when it happens.

Emotional Attachment

Commonly there are two types of emotions that influence most of the retail investors. They are none other than the sense of greed and fear. Investors may quickly catch by fear when the share prices dropped drastically in short period. They will lose their rational and make wrong judgments by disposing good investment on hand at the wrong time. These will cause them suffer a loss on the capital over an extended period.

While the market is bullish, the majority of the retail investors may turn greedy so FOMO (fear of missing out) will kick in, and they will chase to buy particular hot trending stock even though the shares are way overvalued. These will cause their capital easily locked up at peak price for an extended period.

Just as what Warren Buffet said, “When Investors sell on fear; it will drive a stock price down. Likewise, when they buy on greed, it will drive the stock price up in short-term.” Investors should invest based on the reliable information tools, instead driven by emotion.

Lack of Knowledge

Another common mistake made by retail investors is lack of investment knowledge. These group of people wish to earn quick profit from investment but lazy to learn a new skill. They do not know where to set the cut-loss point and also target profit. They more willing follow blindly what the analysts and experts said without doing own analysis. Most of the analyst report was for long-term investment period so it will be irrelevant for retail investors to look at it and try to make a quick bet based on the analysis report.

Therefore, investors should know how to establish an entry and exit strategy which can help them to make better and quicker decision.

Not Doing Research

Analysis research on the stocks is essential as it tells the better story inside the company. As what Warren Buffet said, “Risk comes from not knowing what you are doing”. Investors should study how well the company is operating, where the fund of the company investing and the company’s objective which will give us the insights of the company future and gauge the risk. Investors should always look at the business potential and prospect of the company to make their own investment decision.

Conclusion

In conclusion, investors should always keep all these factors in mind as a lesson so you can make a right investment decision in future. Discipline is the key to success, be patient and look at the long-term gains instead of short-term profit. As what Warren Buffet said, “The stock market is a device for transferring money from the impatient to the patient.” Therefore, investors must invest smarter with patience to grow their money.

Written by Stella Goh | 7 May 2018.

中美贸易战之中国手上没王牌?

无可避免?

在特朗普对1300个,涉及高达600亿美元的进口商品后,不甘失落的中国也立即向美国进口商品征税的清单,涉及128个税项产品,根据不同类别商品实行额外征收15%到25%不等的关税,涉及金额高达30亿美元。

中美贸易战和保护主义拉开序幕,并且这紧绷的氛围持续僵持了一个月左右。这诡异的气氛也为全球股市都带来不确定因素,其中富时大马综合指数更是连续滑落两个星期。股友们因为世界最大的两个经济体之间的贸易战而不停的抛售手上的股票。

直到中国国家主席习近平近日在博鳌论坛提出开放市场、降低外国汽车进口关税等措施后,中美贸易战紧张的趋势才有看到缓和的迹象。

国际货币基金组织(IMF)总裁克里斯蒂娜•拉加德周三在香港大学(University of Hong Kong)发表演讲时警告, 针锋相对的关税措施只会衍生全球的保护主义意识和破坏全球贸易的规则。

克里斯蒂娜•拉加德也强调, “多边贸易体系在过去的一代人时间里改变改变了我们的世界。但是,现在这套基于规则和共担责任的体系有被撕裂的危险。这将是不可原谅的集体政策失败。”

众所周知提高进口关税只会提高通货膨胀,只会提高通货膨胀。随着物价逐渐昂贵,人民的消费能力更加有限,影响贸易在提高生产率和推广新技术方面发挥关键作用以及全球复杂的供应链 。比例,亚洲的贸易供给已经形成产业链,中美贸易摩擦存在很多不确定性,可能会引起亚洲经济波动。因此没有人会从贸易战收益。这也就是拉加德呼吁各国“避免一切形式的贸易保护主义”的原因 。

把焦点看回我们马来西亚人的国土,所谓城门失火,殃及池鱼。马来西亚贸易总额比国内生产总值多五倍,也是净出口国。这意味着我国经济高度依赖贸易,因此容易受到全球贸易往来变化的影响,尤其是当牵涉到两大经济体,也就是美国和中国的时候,我国遭受波及更是在所难免。任何给中国带来负面影响的贸易行动都往往会衍生负面的后果。亚细安十个成员国与中国在区域内不只贸易往来频繁,投资流量也不少。这也势必会引发其他美国盟友的贸易报复。

中国手上没王牌?

中国国家主席习近平最近出席博鳌论坛表明,中国将扩大对外开放。除了创造更有吸引力的投资环境,中国也将完善保护知识产权制度。此外中国也承诺降低汽车和其他产品进口关税,主动扩大进口市场。中国重申将致力于推动经济全球化朝更开放和包容的方向发展,以及放宽外资进入中国金融市场的限制,为贸易和投资自由化, 便利化,维护多边贸易体制做出贡献。外界指中国国家主席习近平在博鳌亚洲论坛上,宣布的一系列市场开放措施是为了缓解两国近期的贸易摩擦以及受到美国贸易制裁的施压而释放的善意。

在笔者看来,习近平并非害怕美国,而是为了实现中共19大对外开放政策的承诺:坚持对外开放的基本国策,打开国门搞建设,推动形成全面开放新格局。中国开放的大门不会关闭,只会越开越大。秉持着共赢,共存的理念,来体现未来经济强国的风范,以及拒绝任何单边贸易的来往。

但却有中共媒体以及一些学者认为在中美贸易战中,中共只能打美债、石油人民币、黄金储备的牌。前美国大唐集团中国区首席经济学家谢作诗表示,其实中共手上没有什么”王牌”好跟美国较量所以才乖乖就范。

然而实际上, 中美贸易战中, “大豆”是中国最具杀伤力武器之一。因为中国是美国大豆的最大买家,一旦中国提高大豆关税,这将会减少美国大豆对外出口,也将会打击美国多州的农户。值得一提美国中期选举的将在今年11月举行,而他们(农户)都是美国总统特朗普的支持者。

美中贸易全国委员会副会长彭捷宁 说,“他们认识到,美国的大豆种植者多在特朗普总统部分核心政治选区,这不仅会影响中国从美国进口的最大进口品的整体贸易逆差,也可能对未来政府产生政治影响。” 如果中国真的以大豆来施行反制措施, 不止会影响特朗普选民的支持率,影响政权,甚至无法连任下届总统。特朗普是个成功的生意人,一般相信特朗普不会跟中国打这一牌,因为政治的现实会让他意识到最大的输家会是他本人。

在笔者看来, 美国并非想打贸易战,无非想避免对巨额的贸易逆差和侵犯知识产权的问题恶化下去。特朗普此举是为了确保自己有筹码好让中国能回到谈判桌, 终止几十年来一直采取不公平、非法的贸易手段,多次违反世界贸易组织的规定。

特朗普将是这数十年以来,第一位美国总统在这每个国际社会都知道的问题上都能勇敢地和骨气地表态。 有趣的是中美贸易之间的摩擦,不会让他们变成敌人,互相指责彼此的他们始终都会依旧保持友好,因为经济要成长,两个世界最大的经济体系必然会合作,这就是政治。

Written by Benjamin Lai | 17 April 2018

Why Investing in Stock Market is NOT considered Gambling?

Bull-and-Bear-GamblingInvesting in stock market is just like gambling.

Some people fear of investing by thinking that way. It will depend on the perception of how we feel about it. The problem arose when most of the people treated investing in the stock market like a casino, wish to win big, especially the novice investors should not assume this way.
So, what do you think about it? It was a myth that stock market equates to gambling which spread on the internet a few years ago. There are some similarities between investing and gambling which may confuse us.

Risk

Both investing and gambling involve risk. You need to put your capitals at risk to get returns from your investment or gambling. Both of the investors or gamblers should have their risk tolerance before they start to invest or gambling. They must know how much they are willing to lose. However, the risks that took by stock investors are much more on fundamental-based and calculated. The risk is manageable by using strategies of diversification across various types of assets. Just like what Warren Buffet said, “Do Not Put All Eggs in One Basket.” At the same time, gambling is as easy as flipping a coin. The players will either win or lose, with nothing in between.

Ownership And Information

Investors who purchase a share from common stock mean that they are acquiring the part ownership. More importantly, investors still can get a small fraction of profits that they have invested when the company is giving out dividend back to the investor. To get benefits from investment, investors must gauge the company and its profitability. The earnings from the business are ever changing; investors must analyse the company by using charts, fundamental analysis, news and some company’s metrics to estimate the future earnings of a company.
However in gambling, you do not have any ownership, and nothing useful information can be obtained that give you an edge on the gambling table.

Zero Sum Game

In investing, It was entirely different from gambling due to it can help the companies to generate more profits by increasing productivity and develop new products which may change people’s lives.
On the other side, gambling is a zero-sum game. There will be no values created because the money is transferred from a loser to the winner all the time. Therefore, investing helps to generate wealth for long-term for investors.

Time Horizons For Trading and Gambling

There was a significant difference exist between trading and gambling. Gambling is a probability event that you are either a loser or winner and there is no middle ground in between.
However, for investing, investors may receive dividends from the company when they have purchased shares from them. In the stock market, the price of your stock fluctuates from time to time so you may experience paper gain or loss. However, you may be still able to get dividends for each quarter as long as you hold the stocks. Investing on the valued stock will have a higher chance of rebound back or even going higher than initial buying price.

Valuation

In gambling, the value of the money does not grow even the bet size or pool of money increase; it stays the same.
On the other hand, the value of the stock will grow because the value of the company will increase whenever there is innovation created or new asset bought.

Social Acceptance

The differences between investing and gambling are how society will perceive them. Investing played a significant role in today’s economy; due to people invest in improving their life in future. Investors nowadays favour companies that will enhance people’s experience and contribute to social life security.
On the other hand, gambling brings negative connotations. Gaming business may help to stimulate the economy. However, it had adverse side effects like attracting illegal triad activity.

Conclusion

By the way, there are still a lot of people thinking to get rich quick in the stock market and confuse trading with gambling. Please remind that investing and gambling have some similarities, but they had few significant differences between each other. Gambling can be considered as a short-lived entertainment for fun while investing in stock is to improve future lives.

Written by Stella Goh | 23 March 2018.

5 Fundamental Ratios that widely used to check Company Financials Health

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Fundamental analysis is a method to analyse a business by getting more understanding of a company background business and their future direction. It will be including examining the annual reports and financial statements, using some of the simplified calculation to gauge the effectiveness of the company.

Let’s look at the five fundamentals ways below:

1. Current Ratio
The current ratio (also known as liquidity ratio) is a ratio which used to measure the ability of a company to pay off their debts and obligations (debts and account payables) by using its assets (cash, marketable securities, inventory, and account receivables). The current ratio divides current assets by its current liabilities to come up with a value which indicates the company’s ability to cover its debts and obligations.

For examples, a current ratio of 4 means the company has four times more current assets than current liabilities. Therefore, it indicates that the companies have more to than enough asset to pay off their debts without needing to sell off their long-term asset.

Which mean a company that has a current ratio of 1 or more should not face any liquidity problem. The higher it is, the better the company liquidity. However, the high current ratio may also suggest that the company is not using the current assets efficiently since extra cash can be used to reduce debts interests or reinvest in the business.

You may make a comparison of the current ratio with the companies in similar industries but not with different sector due to a different operating method in various business.

2. Price-to-Earnings Ratio

The price to earnings ratio is one of the most widely used. Also known as market prospect ratio which calculated as the market price of a stock’s share divided by earnings per share to find out the value of investors is willing to shell out for each dollar of a company’s earning. In other words, PE ratio helps investors to analyse how much the stocks worth based on current earnings.

This ratio is beneficial to evaluate what is the stock’s fair market value should be by predicting the future earnings per shares. High PE ratio indicates that the market participants are bullish on the stock and they have an expectation on the company to post their higher earnings growth going forward. However, high PE ratio may also a signal that the overvalued stock and a lower PE ratio suggests the vice versa. Besides, when a company does not have any earnings or is posting losses, the PE can be expressed as N/A, so it is possible to get a negative PE ratio.

The PE ratio may compare with its peers having parallel and must always relative to the company’s position in the life cycle and relative to its peers in the same industry and the market as a whole. For examples, new companies may have higher PE ratio if they have high growth of prospect since their current earnings are minimal but they spend more money to grow.

3. Price-to-Book Ratio

Price-to-Book Ratio (also known as a market-to-book ratio) is a ratio which used to compare the stock’s market price value to its book value. This ratio calculated by dividing the company’s current share price by its book value of equity. This ratio also gives some idea of whether you’re paying too much for what would be left if the company went bankrupt immediately.

Price-to-book ratio helps investors for reality check who are seeking for growth at reasonable price. A high PB ratio indicates that there will be a robust future expectation of earnings due to the perceived growth opportunities and some competitive advantages. It was due to the company has been earning a very high return on its assets. However, the high the PB ratio also indicates that the share price overvalued.

The intangible assets in Price-to-book ratio shall be excluded to avoid the calculation the price-to-book ratio to be misleading. Low PB ratio could mean that the stock is undervalued. However, under certain circumstances of financial distress, bankruptcy or expected plunges in earnings power, a company’s P/B ratio can be dive below one due to the accounting principles do not recognise the brand value and other tangible assets.

4. Total Debt to Equity Ratio

The standard overall debt-to-equity ratio can be a more reliable indicator of the financial viability of a business since it includes all the short-term debts. This ratio can help a firm to plan for asset financing and to the extent whether shareholder’s equity able fulfil the obligations to the creditors in the event of loss from the business.

A financial healthy company’s leverage shall be higher when total debt to equity ratio is high due to the company must meet their principal and interest on its obligations. Therefore, the companies with high debt to equity ratios might look riskier due to their liabilities more than equity.

Some of the potential creditors may be reluctant to give financing to a company with high debts position. However, the magnitude of the debts should depend on the type of business. For examples, based on ordinary circumstances most of the bank’s debt to equity ratio will be considered risky, but due to their assets generated are very liquid, their ability to pay the debt will much better than the rest. For the second example, a utility sector company can afford a higher ratio than a manufacturer company due to utility company had more stable and consistent earnings.

5. Time Interest Earned Ratio

Time interest earned ratio (also known as interest coverage ratio), is a ratio which used to measure how much of the proportionate income can be used to cover the interest expenses in the future.

This ratio also can be considered as solvency ratio because it used to measure a firm’s ability to make for interest and debt payments. These payments are treated as fixed expenses because the interest payments set on a long-term basis. Therefore, if the company could not make payments, the company may go into bankruptcy or to ceased to operate.

The time interest ratio stated in numbers as opposed to a percentage. A ratio of 4 times indicates that the company has made enough income to pay for its total interest expenses over four times. Most of the creditors favour this type of company because of their ability to pay interest when it’s due.

Conclusion

To be advised that ratios measuring may indicate the effectiveness of the company management to deal with day to day operation but does not indicate the future stock price movement. You may be advised to use other information or strategies such as technical analysis or some qualitative metrics such as management quality.

Written by Stella Goh | 14 March 2018.

Kitchen versus Trading Philosophy

This few weeks I obsessed watching old TV show Kitchen Nightmares, where famous Chef Gordon Ramsay hits the road to help struggling restaurants all over the United States turn their luck around. Ramsay examines the problems each establishment faces, from unsanitary refrigerators to lazy or inexperienced staff, and searches for resolutions. With help from his team, Ramsay redecorates each eatery to give it a fresh new look and updates the menu as needed. Ramsay’s ultimate goal is to make the restaurants he visits popular and profitable, but it’s up to the restaurateurs to take his advice and turn their business nightmare into the American dream.

I observed in each episode; each restaurant had a different type of problems but all down to 3 similarity which is:

  1. The owner/s is in denial
  2. Losing support
  3. Lack of Principle/had swayed from the original principal

Why and how all this related to investment/trading?

  1. The owner is in denial

In the TV show from the start of each episode, the owner will keep saying to the Chef Gordon,”The food is perfect, I don’t agree with you that the food is terrible. The kitchen is clean and the food is not frozen and fresh waiting to serve. I had dedicated the job to him/her, so it is not my responsibility”. And the owner will get angry whenever his customers or staff is complaining and telling him the truth.

When Chef Gordon show the owner all the frozen package, the expired food, the cooked food had been put together with the raw food (which is a big no in kitchen rules; the cooked food will get contaminated easily) all inside the freezer which is most of the time not work correctly. The owner will either cry and blame the others or realise it is his responsibility because he owned the business.

When a trader is in denial, It means that he keeps denying by telling everyone including himself that he saw nothing is wrong, did nothing wrong and assumed that he had done everything correctly. So how he knows he is wrong? Just look at the trading account statement, and it never lies! If you keep losing money in the long run just like a restaurant business owner, you should start finding out what is the problem and fix it. If you still in denial, you will never be able to see the problem clearly, therefore finding the solution will be a mounting task to do.

  1. Losing Support

In the interview before Chef Gordon comes to help them, all the owners had the same/similar speech which is ”I don’t know why I lose in this business and I don’t know what to do next”. By the time Chef Gordon pointed out their mistakes, the owner realises all the error were apparent that they already should know it long before from the customers and people around him. The problem is the owner stop listening.

When you stop to listen, you stop getting valuable feedback from your staff, from your client and even from your own family. When you are in ignorance, people around you will stop communicating with you and the worst thing will follow is they stop supporting you.

As a trader, you may think why I need others people support? Whether you are fund manager or just a garbage collector; you will still need human support because we are only human. A trader at some point will need either emotionally or financially support from family, friends and even traders community itself. You need a mentor like Chef Gordon to guide you if you are a restaurant owner, same as you will need successful traders or fund managers to guide you along the way in your trading journey as well. You also will need support from investors when you become a successful fund manager. You can’t trade like George Soros if you don’t have investors to back you up. Please bear in mind that even George Soros makes his fortune by managing investors money first.

  1. Lack of Principle/had swayed from the original principal

In some episode, the owner had a good business before it goes downhill. It happens when the owner changes their business model like serving more type of foods, reduce costs by cutting headcount and cook using frozen food which needs lesser people to handle. All this practice is to improve profitability for the business but also jeopardise the quality of the service and the food. Eventually, the customer stops patronising the restaurant and business start to lose money. The owner had no longer follow their principle which providing good food and excellent service to customers which had become their pride when business is thriving. In the end, they lose their business and worst, their principal and pride.

A lot of traders will try to increase their profit by double the lot size every time they make some money without a proper plan, so they can quickly double the gains. They will also try to find brokers that offer cheap brokerage without checking their credibility. Instead of focusing on how to improve their trading skills and knowledge, they try to take a shortcut by concentrating on short-term gain. When you lose a principal, you will start to lose focus. Eventually, you begin to lose money.

Written by Jeff Kum | 27 February 2018.

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