In most cases, investors buy shares expecting the share price to rise so that they can sell the shares for a profit. During a bull market, like the one we have experienced over the last decade, a lot of share prices do rise, regardless of the underlying fundamentals.

Decade-long bull markets are not the ‘norm,’ and most share prices don’t simply keep rising. As Warren Buffett says, “when the tide goes out, you discover who’s been swimming naked.” To put it another way, investors find out what they really own.

Where Does the Value of Shares Come From?

We can attribute the value of a share roughly to three factors. First, we have the legal rights that a share gives its owner. Second, we have the economic value that it represents. Finally, we have price momentum and the story that typically drives that momentum.

1. Legal Rights

A company’s shareholders have certain legal rights. These vary slightly according to the country and the type of share but typically include the following:

• The right to transfer ownership of the shares.
• The right to a pro-rated claim on the company’s assets if the company is liquidated, though bondholders and creditors are paid first.
• The right to receive a pro-rated share of dividends if they are paid.
• The right to a pro-rated vote on major company decisions
• The right to information, including financial statements, board meeting minutes, and company bylaws.
• The right to sue the company for wrongful acts.

There are, of course, certain exceptions to these rights, which depend on the type of share:

• Holders of preference shares have a claim on the company’s assets ahead of common stockholders.
• Non-voting shares are a class of common shares that do not give their holders the right to vote, though holders keep all the other rights.
• Super voting shares give their holders additional votes. These shares are sometimes issued to a company’s founders to give them control of the company when their ownership falls below 50%.

The actual value of these rights will vary according to the stability and financial condition of the company.

2. Economic Rights

The real value of a share comes from its economic value, which in turn depends on the company’s future cash flows and the value of its assets.

Sometimes shares are so out of favor that their market capitalization falls below the value of the company’s assets. If that’s the case, shareholders can theoretically vote to liquidate the company, sell the assets, and return the proceeds to shareholders.

If you buy a stock that’s trading below the net asset value per share, there are no guarantees on what upside you might realize, but the downside is theoretically limited.

More often, the economic value of a company comes from the value of expected future profits or cash flows. There are several ways to calculate the fair value of a share using expected cash flows, with the discounted cash flow (DCF) model being the most commonly used.

These calculations will only ever be as accurate as the estimates they are based on. Reliable estimates tend to be based on proven profit margins and conservative growth forecasts. Estimates are less reliable when they are simply based on a company’s potential: reality doesn’t always match up with potential.

3. Momentum and Narrative

During a bull market, the stocks that become popular amongst investors often come with a good story. When a convincing story is combined with a rising share price, a positive feedback loop develops. The price momentum is viewed as confirmation that the narrative is real, and the narrative backs up the rising price.

This is often what leads to bubbles which can occur for individual stocks, industries, and entire sectors. As stock prices rise, the narrative evolves until the expectations for companies and their valuations become detached from reality.

Bubbles almost always end with a major crash, and it isn’t unusual to see stock prices falling more than 90%. But bubbles can also last a lot longer than expected, and share prices sometimes double or triple after they enter bubble territory.

Three Types of Shares

The following three examples illustrate some of the different types of shares you may end up owning.

1. 3D Systems Corporation (NYSE: DDD)

Quite a few bubbles have burst since 2020, and the hypergrowth stocks that led the market during the first part of the pandemic have entered a serious bear market. But we don’t know how these stocks will play out over the long term.

To get a better idea of how a company and its stock can perform in the years that follow a bubble bursting, we can go back to 2014. Between 2012 and 2014, a bubble developed in the stocks of 3D printing companies. This bubble had many of the typical features, including a convincing narrative: 3D printing was about to revolutionize the world, and the growth would be astronomical.

This is the chart for 3D Systems Corp, which, along with Stratasys (SSYS), became the flagship stock for the industry.

We can see that the share price rose by 700% but then gave up all of those gains over the next two years. Since then, it’s traded between $5 and $50, with an average of around $15.

But how has the underlying business performed since 2013? In total, the company lost $6.63 per share between 2014 and the first quarter of 2022. Revenue increased from $513 million in 2013 to a peak of about $690 million in 2018, and now it’s running at around $580 million. In other words, sales growth decelerated quickly and has since declined.

Clearly, the company hasn’t delivered on investor expectations, which is reflected in the share price. This is the risk you take when you buy a stock trading on a high P/E ratio without knowing whether the growth will be sustainable. That said, it could have made a great momentum trade if you got out when the price turned.

2. International Business Machines Corporation (NYSE: IBM)

The next example is also a share that has disappointed long-term investors. IBM has been trying to reinvent itself for the last ten years and so far, hasn’t really succeeded. However, while IBM’s revenue has steadily declined, it’s still a very profitable company. That limits its risk, provided you don’t overpay.

If you bought IBM in 2013, you would have paid somewhere around $190. At the time, the company was earning about $15 a share, so it was trading at around 12 times EPS.

Since then, IBM’s annual revenues have fallen by more than 40%, but because the company has strong margins, it’s managed to push earnings to $77 a share. Furthermore, it’s paid out over $50 per share in dividends since 2013.

When you take dividends into account, the return since 2013 is around zero, and it was about -25% at the lowest point. This may be a disappointing result for an eight-year investment, but it’s much better than the 80% plus that 3D Systems has lost in value.

3. Alphabet (Nasdaq: GOOGL)

Finally, we can have a look at a share that delivered a more impressive return. At the end of 2013, Alphabet (then Google) was trading at a split-adjusted $28 (the stock was split 20 for 1 in July this year)   The company earned $0.94 a share in 2013, so you would have paid 30 times EPS. However, unlike 3D Systems, Google already had a long track record of delivering growth.

Since 2013 Alphabet has earned $21 a share, and the share price has risen 300%. Alphabet has already earned 75% of the original share price and is now earning $5 a share for shareholders.

We can summarize these three shares as follows:

1. 3D Systems Corporation was a speculative share driven by a convincing narrative and momentum. But there was no track record to back up the valuation and no margin of safety. As soon as investors realized there was no more upside, they all tried to exit, and the share price collapsed.
2. IBM was reasonably valued and had good margins. Ultimately revenue declined, and investors are still waiting for a turnaround to gain traction. The share price has been disappointing, but the lower valuation, strong cash flows, and dividends have limited the downside for investors.
3. Alphabet wasn’t cheap, but the company had a proven business model and a growing market. It managed to justify the price quite quickly and ultimately delivered amazing returns for shareholders.

Conclusion

There are many ways to make money in the stock market, but you have to know what you are actually getting yourself into when you buy a share. This article covers three of the more common types of opportunities, but of course, there are others.

Some shares, like DDD, are driven by momentum and narrative, and while large gains can be made, the price eventually retraces and seldom recovers. If you buy a stock like this, you need to be ready to exit when the price turns.

Value opportunities like IBM might not deliver the upside shareholders hope for, but the margin of safety means the downside is limited. If IBM’s turnaround had worked out, shareholders would have been rewarded. That could still happen. This means the payoff is asymmetrical, with less downside than upside potential.

Alphabet was always a promising story, but the valuation reflected that. The best companies usually trade on higher valuations. Your job as an investor is to decide whether they are really worth their cost and to take advantage of bear markets when they occur. These are also the shares that are worth holding for a long time, though not necessarily forever.

Before you buy a share, make sure you know what type of investment you are making and why you are making it. This will help you manage your expectations and plan the appropriate exit strategy.

The post What Are You Really Buying When You Buy a Share? appeared first on FinMasters.

These are some of the top options for adding backtesting to your arsenal of trading tools.

Best Backtesting Tools and Software

Some more general analytical platforms, like TD Ameritrade and NinjaTrader  include backtesting tools, but here we’ll focus on tools primarily designed for backtesting.

Some of the backtesting platforms we like include:

1. TrendSpider

TrendSpider is one of the newer technical analysis platforms and offers some innovative tools that aren’t available elsewhere. The platform has also built a loyal community of users. The platform includes powerful backtesting capabilities along with its stock scanner.

When it comes to backtesting tools, TrendSpider offers two major advantages. Firstly, most of the platform’s unique tools, including automated pattern recognition, can be incorporated into the strategies you evaluate. And secondly, creating strategies is easy and intuitive and does not require you to write code – though you can do that as well.

TrendSpider is primarily focused on price action rather than fundamental analysis (you can read more in our in-depth TrendSpider review). However, it is still very popular amongst investors who focus on momentum and growth stocks. TrendSpider’s pricing ranges from $33 to $97 a month. The backtesting feature is included in the Elite plan with a $65 monthly fee.

Visit TrendSpider

2. TradingView

TradingView is another popular technical analysis platform with a large community of traders and investors who share their ideas and strategies on the platform. The platform is cloud-based and includes all of the technical analysis features you would expect to find on a TA platform. One of the major advantages of TradingView is that most global stocks and other assets are covered.

TradingView’s backtesting is not the most advanced around, but it is easy to use. It also displays results in an easy-to-understand visual format. Creating strategies on TradingView requires coding in the native programming language, Pine Script. This may sound complicated, but it’s actually quite easy to copy and adapt strategies shared by other traders. TradingView pricing ranges from free to $59.95 a month. The backtesting tool is available on the free tier, so you can try it out for free.

You can learn more in our extensive TradingView review.

Visit TradingView

Compare our top picks head to head: TradingView vs TrendSpider

3. Trade Ideas

Trade ideas is an advanced market intelligence platform that leans heavily on artificial intelligence. The platform includes numerous AI-powered algorithms that generate trade ideas and can be incorporated into a strategy. Trade Ideas also includes social data that is built into the algorithms.

The backtesting tools module is very intuitive and does not require coding knowledge. It also provides a very informative analysis of results and suggestions for optimizing a strategy. Trade Ideas has two subscription tiers of $118/month and $228/month. The backtesting tools module is included in the more expensive tier.

Visit Trade Ideas

4. FinViz

FinViz is primarily a stock scanner to filter stocks using a combination of descriptive, technical, and fundamental criteria. In total there are 70 criteria you can use to narrow the market down to a more manageable watchlist. FinViz is also packed with other useful tools to help you keep on top of the stock market.

The FinViz backtesting tools module is fairly basic and only includes price action indicators, rather than the fundamental and descriptive filters. However, it can be a useful tool to develop trading strategies for stocks you find using the screener. FinViz offers a good balance between being straightforward to use and still being very informative and useful. The backtesting module is included in FinViz Elite which is available for $39.50/month. You can learn more in our extensive FinViz review.

Visit FinViz

5. QuantConnect

QuantConnect is one of a new breed of platforms for quantitative and algorithmic traders. It is cloud-based and open source with an emphasis on collaboration. This platform includes fundamental data as well as price and volume data. The platform can also be used to trade automatically.

Building strategies, backtesting, and trading with QuantConnect require you to write code in Python or C#. The learning curve is steep and requires commitment. However, if you want to develop and assess strategies based on both fundamental and price data, QuantConnect is the way to go. Pricing starts at $8 for individual users – however, some data feeds incur additional charges.

Visit QuantConnect

What Is Stock Backtesting?

The term “backtesting” describes any process designed to evaluate how a strategy would have performed in the past. Stock backtesting uses historical data and technology to evaluate how a strategy would have performed if you had adopted it at some previous point.

The assumption is that strategies that were effective in the past will be effective in the future and vice versa.

Pros and Cons of Backtesting

Backtesting a trading strategy can tell you a lot about how it has performed in the past and may perform in the future. While we can be fairly certain the future will be different, knowing a strategy’s strengths and weaknesses can be invaluable. If a strategy didn’t perform well in the past, it’s unlikely to perform well in the future. However, it’s worth keeping the benefits and drawbacks of backtesting in mind.

Pros of Backtesting:

• Backtesting tools show you whether a strategy was profitable in the past.
• You will know what sort of drawdowns were experienced.
• Using backtesting tools is a very efficient (time-saving) way to test a strategy with hundreds or thousands of trades.
• You may be able to see what market conditions led to underperformance, and you may be able to apply filters to avoid trading when those conditions arise.
• You can optimize parameters to improve risk-adjusted performance.
• You can remove indicators or rules that don’t add value.

Cons of Backtesting:

• In practice, real-world results are almost always worse than the results of backtests.
• There is a temptation to over-optimize a strategy so that it performs very well over a specific period of historical data. This is known as curve fitting or overfitting.
• A trading strategy will still need to be tested live to determine slippage and trading costs.
• You may become overconfident based on the results of an initial backtest. This often results in rushing to begin live trading without exhaustive testing on a stock market simulator.
• There is an inherent bias toward creating strategies using patterns that you know have worked in the past.
• In short time frames, like day trading, execution plays an enormous role in performance. Backtesting can still be a starting point for day traders, but paper trading is more important.

Effective backtesting has some basic requirements:

• The strategy must be based on very specific, measurable, consistent criteria. A strategy even partly based on subjective evaluations or gut feel cannot be effectively backtested.
• The sample time period must be representative. For example, if your backtesting time sample is from 2010-2020, your test is entirely in bull market conditions. Your results will be skewed and will not predict performance in less favorable markets.

Like all trading methods, backtesting has limitations. You can use it most effectively if you are aware of those limitations.

Choosing Backtesting Tools and Software

There is a wide variety of platforms available for backtesting. These are some of the considerations to look out for when choosing a platform to evaluate your strategy:

• Market coverage. Different platforms cover different markets. Typically a platform will include one or more of the following groups of stocks: US-listed, Canada, US OTC, European, and other international.
• Time period. If you are developing long-term or timeless strategies, you should be able to test them over longer periods of time. Some platforms have data going back decades, while others only have 5 to 10 years of historical data.
• Price action data, fundamental data, or both? You may be building trading strategies based on technical analysis/price action or you may be building investment strategies based on fundamental data. You may also be using a combination of both. This is an area where trading and backtesting tools vary a lot. Some only use price and volume data, while others have a focus on filters like growth and valuation metrics. You will need to find out exactly which data the platform includes, and which of these filters can be used in a backtest.
• How sophisticated can a strategy be? Following on from the previous point, there is also a considerable difference between different platforms when it comes to building a strategy. Some stock screeners allow you to evaluate the profitability of a set of filters, while others allow for full strategy creation. Backtesting a set of filters can be informative for long-term investors but has its limitations. To evaluate a proper trading strategy, you need full control of entry and exit criteria. Each platform differs with regards to how sophisticated a strategy can be, and it really depends on how simple or complex you want the system to be.

Choosing the right platform for your needs is an important first step toward an effective backtesting experience.

How to Get the Most Out of Backtesting Tools

Backtesting should always be done on separate data samples. This is known as in-sample and out-of-sample testing. Initial tests are done on the first sample, and then the strategy is evaluated on the next sample. For results to be valid, there should be consistency between the in-sample and out-of-sample results. When results are consistent and indicate an edge, the strategy is then evaluated with paper trading and finally with live trading.

As much as possible, choose your sample periods so that both the in-sample and out-of-sample data cover a variety of market conditions. Most backtests have an element of survivorship bias built into them because delisted and suspended stocks are not included in the test data. Wherever possible you should try to include these stocks when using backtesting tools.

A good trading strategy is as much about risk management as it is about profits. It’s important to learn about the various risk management metrics. Strategies that tend to be robust and endure over time are often quite volatile. By contrast, strategies that have low volatility often break down when traded live. You should be prepared to accept some volatility if you want a strategy that continues to be profitable.

The post 5 Best Stock Backtesting Platforms of 2024 appeared first on FinMasters.

The Best Paper Trading Platforms:

1. TD Ameritrade – Best for Beginners & Intermediate Traders
2. Interactive Brokers – Best for Professionals & Retail Traders
3. NinjaTrader – Best for Analysts, Forex & Future Traders
4. Webull – Best for Simple Stock Trades & Mobile Traders

What Is Paper Trading?

Paper trading is the practice of buying and selling stocks with a simulated account. Everything works as it would with a real live brokerage account, except that you don’t actually buy the stocks. Your portfolio is simply a representation of what would have happened if you had bought the stocks.

Stock simulator software is designed to let you practice stock trading and learn by trial and error without excessive risk. You won’t benefit from your good choices, but you won’t pay a price for your bad ones either.

Paper trading has advantages and disadvantages, and it’s important to understand them before you start investing.

Best Paper Trading Platforms

As mentioned, most brokers offer demo accounts. The following are a few demo accounts we think stand out from the crowd for one reason or another.

1. TD Ameritrade

TD Ameritrade is one of the more established online brokers. The platform offers a wide range of features, tools, and instruments, and TD Ameritrade’s stock market simulator, paperMoney, is one of the most advanced available. The demo account falls within the ThinkorSwim platform suite, which includes a variety of educational resources to help you learn while you paper trade. While using the demo account, you will also have access to most of TD Ameritrade’s tools, research, and data. You can also experiment with short selling, option strategies, and other asset classes like forex and futures. 

Visit TD Ameritrade

2. Interactive Brokers

Interactive Brokers is another well-established online trading platform that is favored by professional money managers as well as retail traders, especially those interested in investing in foreign markets. The platform is more complex than most, and it will take you longer to get started. However, it also offers more tools than platforms that are built primarily for retail traders. Interactive Brokers will also give you access to more markets and instruments.

An Interactive Brokers demo account will give you access to almost all the tools you would have for a funded account. You will also have access to extensive research and educational resources.

Visit Interactive Brokers

3. NinjaTrader

NinjaTrader is a trading platform with a focus on futures, options, and forex. The platform is not a broker but provides market access via a choice of brokers, including NinjaTrader’s own brokerage service. NinjaTrader is a popular choice for futures traders and traders who focus on technical analysis rather than fundamental analysis. A NinjaTrader demo account offers simulated trades and backtesting, as well as the ability to replay historical data to paper trade on.

Visit Ninja Trader

4. Webull

Webull is a newer trading platform with a focus on simplicity and mobile trading. The platform only offers stock and options trading but charges no commission on trades. It doesn’t offer nearly as many features as the other platforms we’ve mentioned, but the learning curve isn’t nearly as steep, and you can get started very quickly. It’s also a great choice if you want to trade on a mobile device. Webull’s demo account will give you access to all the desktop and mobile app features.

Visit Webull

Choosing a Stock Simulator or Demo Account

If you are choosing a stock market simulator, there are obvious benefits to first choosing a broker you want to trade with, and then using their demo account. This will allow you to get used to the platform while paper trading. You can also use the demo account as a way to evaluate a broker, and then commit capital when you are happy with the platform. Typically you do not need a funded account before you open a demo account. There is also no reason not to try out a few different demo accounts while you are paper trading. When evaluating demo accounts, you may want to consider the following points:

• Does the demo account use real-time data or delayed data feed? To get a realistic real-world experience you should be using real-time data.
• Are realistic trading fees deducted from your P&L? Trading fees are a part of trading and should always be included when paper trading or backtesting.
• If you plan to trade with margin (leverage) you should check that you can do this with a demo account.
• When you are using a demo account, try to cross-reference the prices with a live feed and work out how realistic your execution prices are. 

Remember that the goal is to make the paper trading experience as similar as possible to the actual trading experience.

Stock Market Simulators: Demo Accounts vs. Trading Games

In this post, when we refer to stock market simulators, we are talking about demo trading accounts. Stock market games are another type of stock market simulator. These games typically involve a social element where you pick a portfolio of stocks and see how it performs against the portfolios of friends, or contestants in a competition.

These games are fun and a good introduction to the stock market. They can also be educational if you want to focus on long-term investing and stock picking. If you want to develop real trading skills, paper trading stocks is a more valuable exercise.

Paper Trading and the Psychology of Trading

Trading is not just about managing your financial capital. You also need to manage your psychological capital. Your decision-making will be affected when you make money and when you lose money. This is why fear and greed play such a big role in the market.

To be a successful trader, you need to manage your psychological capital so that you can make good trading and investment decisions regardless of what’s happening to your profit and loss. Most people can only learn to do this properly by trading with real money. This means that you shouldn’t expect paper trading success to translate to live trading success immediately.

It also means that when you start live trading, you should start out with the smallest position size possible. Some people even believe that paper trading is so different from live trading that it can have a negative effect on your education as a trader. We feel there is still a lot of value to paper trading, but it’s important to be aware of the drawbacks.

Pros and Cons of Paper Trading

Like most things related to trading, there are pros and cons to paper trading.

Awareness of the pros and cons can help you get the most out of your paper trading practice.

Paper trading provides practice in trading stocks. If you plan to invest for the long term, it won’t be very helpful unless you intend to use paper trading for an extended period. If you want to introduce a young person to the concepts of trading, setting them up with a paper trading portfolio is a great way to start!

How to Get the Most Out of Paper Trading

The key to getting the most out of trading with a stock market simulator is to take it seriously and make the experience as realistic as possible. There are several ways to do this. When you open a demo brokerage account, you will typically be given $100,000 or even $1 million in virtual currency to trade. Unless you actually plan to trade with an account of this size, try to change the account to a more realistic size. The amount you risk on each trade will then have more meaning to you.

You should also make sure your stock market simulator is including trading costs in the P&L. Always enter trades in real time at a price that you could realistically execute your order at. There is often a temptation to add trades that you missed after the fact. Missing trades is part of the deal and should be reflected in your paper trading results. Be deliberate. Follow a trading plan and keep a journal with reasons for entering and exiting trades.

One thing you can do in a paper trading account that you wouldn’t do in a live account is to experiment. You can try doing the opposite of what you think you should do or taking the opposite side of a trade. This is fine as long as it’s all part of a deliberate process of learning and experimenting. Focus on your P&L, win rate, and win/loss ratio over a series of at least 10, but preferably 50 or more trades. Try to worry less about individual trades and more about the overall returns for a series of trades.

Paper Trading vs Backtesting vs Live Trading

Paper trading and backtesting are two of the most popular ways to test out a trading strategy. Live trading, of course, is the real thing.

• Paper trading provides a real-time simulated trading experience. You’ll experience the uncertainty of trying to pick trades, but your time horizon will be limited by the time you’re willing to devote to the exercise.
• Backtesting tests the past performance of a strategy using historical data. Backtesting offers an effectively unlimited time horizon but requires a fixed set of trading parameters to be effective.
• Live trading is real trading with real money, raising a set of emotional and financial risks and challenges that no simulation can entirely match.

Paper trading and backtesting both have a place. They can help you test and assess a trading strategy and develop a feel for the trading process and for what works and what doesn’t.

Paper trading and backtesting can also be a great way to develop a feel for the stock market before you’re ready to invest, even while you are still a student.

These methods also have limitations, and it’s important to be aware of those limitations as you approach the transition to live trading. When you graduate to live trading, you’ll face an entirely new experience, a strong argument for starting your live trading experience with relatively small investments.

There’s no guarantee of success in the markets, and statistics have repeatedly verified that most frequent traders end up losing money. If you are convinced that you want to trade, though, proper use of evaluation methods like paper trading can make the odds more favorable.

The post The Best Paper Trading Platforms of 2023 appeared first on FinMasters.

There are two basic ways to practice stock trading without risking money.

• Backtesting looks at how a strategy would have performed in the past, using historical data.
• Paper trading is a form of forward testing. You trade with a mock portfolio to see how your strategy plays out in real time.

These methods have limitations, and they are no substitute for actual experience in the market. They can still be useful tools in preparing you for a dive into live trading.

Let’s take a closer look.

Some Terminology

Before we begin, we should outline a few terms related to paper trading and backtesting.

• Paper trading allows you to practice trading without risking real money. You simply log your trades in real time in a journal, spreadsheet, or stock market simulator as if they are real trades. However you choose to do it, you need to make it as realistic as possible. So, you can only use the current market price and you must account for slippage and the commission you would pay if you were trading with real money. Paper trading is sometimes known as demo trading, virtual stock trading, or simulated trading.
• Backtesting is the process of evaluating a trading strategy using historical data. Typically backtesting is done using software, but it can be done manually by logging each individual trade. Backtesting can only be used for rules-based strategies where each trade follows exactly the same set of rules for trade selection, entry, and exit. When you backtest a strategy, you will be looking at the performance over a series of at last 20 trades to see what the overall results will be.
• Live trading is real trading with real money. Obviously, live trading in the real market is the objective for any trader. But live trading with a very small amount of capital can also be part of the practice and testing process, along with paper trading and backtesting.
• Demo accounts, which are also known as stock simulators and virtual trading accounts, are trading accounts that let you trade with virtual money. Most stock brokers offer paper trading with a demo account like this. Not only does this allow you to practice trading and evaluate your strategy, but you can also get to know a trading platform before you put real capital on the line.

Let’s look at some reasons for starting with demo trades before you try live trading.

How to Use the Trading Practice Tools

Paper trading and backtesting require sophisticated tools to replicate the experience of trading with a real portfolio (paper trading) or to apply the parameters of a trading strategy to past market conditions.

Luckily we have access to tools developed specifically to make paper trading and backtesting easy.

We’ve published separate articles on the best paper trading tools and how to use them and the best backtesting tools and how to use them.

Why Practice Trading Before You Risk Real Money

Trading is a numbers game, and there is a fine line between being profitable and unprofitable as a trader. Practicing stock trading with backtesting and paper trading helps you increase the chances of being on the right side of that line. Not all trading methods can be backtested, but if you can backtest a strategy, you will know what to expect when you go live. By backtesting your trading strategy you can:

• see how the strategy would have performed in the past,
• calculate your win rate and reward-to-risk ratio,
• find out when the strategy might fail, and,
• optimize the parameters of the system to improve performance.

By paper trading your strategy you can:

• evaluate the strategy in real time,
• Compare real-time results to backtest results,
• find out how much slippage you can expect, and,
• see if there are any other issues related to real-time execution.

In addition to testing strategies, paper trading is a useful exercise for traders of all levels:

• Beginners can use paper trade accounts to learn how emotions can affect decision-making. 
• Traders can get to know a new trading platform with a demo account before risking capital.
• You can experiment with different order types and risk management strategies.
• You can build confidence after a difficult period. Even the most experienced traders sometimes revert to trading with a stock market simulator after a string of losing trades.

These strategies allow you to make mistakes and learn from them without risking your hard-earned capital.

Paper Trading vs. Backtesting vs. Live Trading

Ideally, the process of developing a new trading strategy should include the following steps:

• Backtesting and optimization
• Paper trading
• Live trading with minimum possible capital
• Live trading with increasing amounts of capital

Each of these steps can teach you something new about the strategy and minimize the amount you put at risk before you are sure it’s profitable. The reality is that you may not be able to use each step for every approach to trading. There are also a few distinct differences between backtesting, paper trading, and live trading in respect to when and why each is useful.

When to Use Paper Trading and Backtesting

Paper Trading and backtesting can be used by anyone who trades stocks or wants to trade stocks. Even experienced traders use these methods before adopting a new strategy or changing an existing one.

There are still some situations where these methods are particularly useful.

• You want to move from investing to trading. If you’re already holding some stocks long-term and considering trading more actively backtesting and paper trading can help you prepare.
• You’re trying to decide between investing and trading. If you’re ready to dip into the stock market and aren’t sure what approach you want to take, these tools can help you evaluate your trading ideas and compare them to more conservative strategies.
• You’re saving money to invest. If you aren’t ready to invest yet but you’re working toward that goal, backtesting and paper trading are a great way to get familiar with markets and how they work.
• You’re just interested. Even if you’re still in school or beginning to build a career, you can look forward to when you’ll be able to enter the market. The more you learn the better prepared you’ll be.

Both paper trading and backtesting work best when you have a clear strategy to evaluate, but you don’t need just one. You can try out several strategies, compare, and develop as you go along.

Conclusion: Stock Market Simulators and Backtesting Tools

Both paper trading and backtesting are a crucial part of the trading process for beginners and experienced traders alike. In fact, testing your strategy and skill before going live can be the difference between taking educated risks and gambling. By using a stock market simulator and backtesting tools, you can ensure that you really have an edge before you put precious capital on the line. What are your favorite paper trading and backtesting tools?

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What Exactly Is Bitcoin and Blockchain?

Bitcoin is a good place for a primer on cryptocurrencies to start. Bitcoin was the first cryptocurrency, and most other crypto assets and blockchains are variations on the original principle. If you understand the basics of Bitcoin, you will find it easy to understand other crypto assets and networks.

Bitcoin is a decentralized cryptocurrency that exists on a decentralized ledger known as a blockchain. Every Bitcoin transaction and the number of Bitcoins held by each address is recorded on the blockchain. A Bitcoin address is like an account at a bank and tells us who owns what.

The blockchain is updated by “nodes” which are computer programs that store and process transactions. Bitcoin is decentralized, so anyone with enough computing power can download the software and run a node. Nodes that process new transactions are known as “miners”, and these nodes are rewarded with newly “mined”  Bitcoin when they add transactions to the ledger. Transactions are added to the blockchain in batches, or “blocks” of around 1,700 transactions.

Mining nodes solve cryptographic problems to “win” the right to update the next block. The transactions they add to the blockchain also need to match the transactions proposed by more than 50% of the other nodes. This ensures there is always consensus and prevents double spending and fraud. When the first block was mined, the reward was fifty Bitcoins – but this figure is halved every few years and is now down to 6.25 coins per block. Approximately 144 blocks of transactions are processed each day.

Bitcoin and the Bitcoin network were launched in early 2009 by Satoshi Nakamoto, the actual identity of whom remains a mystery. Nakamoto mined the first block on January 3rd, 2009 and created the first 50 Bitcoins. As of February 15th, 2022, the ledger is on block 723,467 and 18.9 million Bitcoins have been mined.

What Is the Value of Bitcoin?

Bitcoin does not have an intrinsic value like other assets do, as it does not generate cashflow or profits. However, supply is limited. There are only 18.9 million Bitcoins in existence so far, with just 900 new coins being added each day. The block reward will continue to halve until there are 21 million Bitcoins at which point no more Bitcoins will be created.

If supply is limited, and demand rises, the price must rise until supply and demand are in equilibrium. So, the price of Bitcoin really comes down to demand. The limited supply is one of the factors that differentiates Bitcoin from conventional currencies, also known as fiat currencies. These currencies are controlled by central banks, and the supply can be increased at any time, which causes inflation.

When Bitcoin was launched, few people knew about it and there was very little demand. This is the reason it took six months for the price to reach just 9 cents, and another four years to reach $100. However, demand grew as more people learned about Bitcoin, and the rising price supported the case for investing. Most of the demand for Bitcoin comes from traders, speculators, and investors. These sources of demand are very sensitive to sentiment.

But there is also an important use case: transferring value. Individuals, FinTech platforms and institutions can “use” Bitcoin as a method to cheaply and quickly transfer value from one entity to another. This is important as this type of demand is not influenced by sentiment.

In the past, it was retail investors that accounted for most of the demand for Bitcoin. However, this is beginning to shift to institutions and FinTech platforms. Ultimately, if demand for Bitcoin continues to rise, the price will likely rise over the long term – though there will of course be peaks and troughs along the way. 

Ethereum and Decentralized Applications

By now you should have a basic idea of what Bitcoin is. Ethereum, or Ether, was the 18^th digital coin to be launched, and it is now the second most valuable cryptocurrency, and possibly the most interesting of them all. The Ethereum network is an example of a network that added entirely new use cases to the concept behind Bitcoin and the blockchain.

Ethereum’s blockchain isn’t just a ledger for transactions involving Ether. Autonomous applications can also run on it, which makes it like a massive, decentralized supercomputer. These applications are governed by “smart contracts” that also reside on the network.

The Ethereum network creates an environment where DApps (decentralized applications) consisting of software and smart contracts can operate on the network without the control of any single entity. Examples of DApps that can run on the network include games, marketplaces, and exchanges. 

The key difference between a DApp and any other application is that the DApp is not hosted on a centralized server, and it is not controlled by any single entity. The Ethereum network effectively rents processing power to the DApp by charging transaction fees. DApps can in turn charge users for access to the application, or a transaction fee. In fact, DApps can issue their own digital coins to fuel their own platform economy.

Networks like Ethereum allow for entirely different types of applications and organizations. This means businesses, platforms and software can exist and be directed by a community of users and developers, rather than by shareholders or a traditional management structure. 

Example: Decentralized Applications (DApps)

Cryptocurrencies are traded on exchanges. These exchanges are either centralized or decentralized, with the latter being a good example of a DApp. Coinbase is an example of a centralized exchange. The platforms (there are several) are owned by a company. Like most companies, Coinbase has a management team, staff, offices, equipment and expenses to pay.

A decentralized exchange (DEX) is a DApp that exists as software and smart contracts on a blockchain like the Ethereum network. This means a DEX avoids many of the costs a centralized exchange would incur. 

A DEX, and most other DApps, will typically have its own token, which is required to access the platform, pay fees, or even to buy and sell other virtual currencies on the exchange. DApps like this are usually set up by a team of developers who are incentivized to add value to the platform, thereby increasing the value of its native token.

Types of Digital Assets

There are no “official” categories for cryptocurrencies, but we can classify them according to their primary use. In many cases, virtual currencies can have multiple use cases that give them value.

• Crypto coins – The first group of digital assets are those that primarily act as a medium of exchange (MOE) or a store of value (SOV). This group includes Bitcoin, Bitcoin Cash, and Litecoin. This category could be referred to as pure cryptocurrencies, coins, or digital currencies.
• Utility tokens – Networks like Ethereum and DApps can issue their own tokens which are required to access the service. These types of tokens are sometimes described as utility tokens as they provide their owners with utility. However, these tokens can act as an MOE or SOV too – as is the case with Ethereum. The term altcoin is used in various ways. Sometimes it may refer to any cryptocurrency that isn’t Bitcoin.
• Stable coins – There’s no denying the fact that most cryptocurrency prices are volatile. Stable coins are cryptocurrencies that are designed to have very low volatility. Most are backed by the US dollar and their prices are typically close to $1 at all times. Other stable coins use a system of collateral to reduce volatility. Stable coins offer crypto investors a place to keep their capital in the ecosystem while diversifying into less volatile assets. They also facilitate trading on decentralized exchanges which can’t accommodate trading in fiat currencies. Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) are the leading stable coins.
• Non-fungible tokens – NFTs are unique items that can be stored on a blockchain. By storing a digital asset on a blockchain, its ownership, ownership history, and authenticity can be verified. See below to learn more about NFTs.
• Asset backed tokens – Asset backed tokens are digital tokens that are backed by real world assets like real estate, commodities and stocks. This is a grey area for cryptocurrency markets as the link between a blockchain and a real asset is dependent on the legal system. There has been limited progress in this area, but it holds potential for the future. In theory, all financial market assets and real estate could eventually reside on a blockchain.

What Is DeFi?

DeFi stands for Decentralized Finance, an emerging and alternative financial system. DeFi applications aim to use blockchain technology to replace the intermediaries that traditionally act as middlemen for financial transactions. Other DeFi applications are designed to solve challenges unique to the crypto industry. Some examples of DeFi applications include:

• Decentralized exchanges
• Peer-to-peer lending
• Yield farming
• Insurance
• Synthetic assets and derivatives
• Providing liquidity
• Stable coins

DeFi applications typically operate on the Ethereum network and rely on smart contracts for governance.

Example: DeFi

BlockFi is a well-known DeFi platform that provides users with several services. Besides a wallet and trading platform, BlockFi offers users several ways to earn a yield on their crypto assets.

In addition, you can apply for a Bitcoin credit card. This allows you to spend money against your Bitcoin holdings and earn 1.5% back on each purchase. BlockFi also provides loans using crypto assets as collateral. This means you can borrow money while continuing to hold your digital currencies.

Prominent Cryptocurrencies

Bitcoin (BTC) and Ethereum (ETH) are the dominant cryptocurrencies and together account for over 60% of the total market value of all cryptocurrencies. The following is a list of other prominent and interesting cryptocurrencies. This list is by no means complete or a list of recommendations. For a complete list of crypto assets have a look at the CoinMarketCap website.

• Binance Coin (BNB) is the native token for Binance, which is a major cryptocurrency exchange. Binance Coin resides on the Binance Chain blockchain and is used to pay for various services on the platform.
• Ripple (XRP) is a payments network designed for interbank payments. XRP is the token used to transfer value between entities. XRP does not run on a blockchain but on a network of servers controlled by banks, so some believe it is not a true cryptocurrency.
• Polkadot (DOT) is a protocol designed to act as a bridge between other blockchains. Developers can also use Polkadot’s chain to create their own blockchain that inherits features from the Polkadot chain.
• Cardano (ADA) is similar to Ethereum in that it allows for DApps and smart contracts to run on the network. The Cardano network uses proof of stake (POS) rather than proof-of-work (POW) to validate transactions.
• Litecoin (LTC) was one of the earliest cryptocurrencies and was designed to improve on certain aspects of the technology behind Bitcoin. Like Bitcoin, Litecoin is primarily a store of value and medium of exchange.
• Solana (SOL) is another popular blockchain for developers to build DApps on. Solana is similar to Ethereum in many ways but boasts faster processing speeds and lower transaction fees.
• Uniswap (UNI) is a protocol that facilitates transactions between different cryptocurrency tokens. UNI is the native token used to transact on the network.
• Monero (XMR) is a cryptocurrency with a focus on privacy. Monero is one of the oldest digital coins on this list and was designed so that transactions on the network cannot be traced.
• IOTA (MIOTA) is a blockchain designed for the internet-of-things. Developers can use it to build applications that allow devices to communicate and make micropayments to one another.
• Stellar (XLM) is a decentralized network that facilitates the transfer of value between fiat and digital currencies. Lumens are the tokens used to transact on the network.

How to Invest in Cryptocurrency

Before you can invest in a cryptocurrency, you will need a wallet to store your digital assets. You will also need to choose an exchange or broker to trade with.

• Cryptocurrency wallets, public and private keys
• Crypto exchanges, brokers and apps
• Non-fungible tokens

Cryptocurrency Wallets, Public and Private Keys

Each address on a blockchain consists of a public and a private key. The public key is the address someone would use to send bitcoin or another digital asset to you. The private key is like a password that you need if you want to send your Bitcoin to another address.

A wallet is used to access your cryptocurrencies and keep them safe. You don’t actually store your digital assets in the wallet as they only really exist on their respective blockchains. Instead, the wallet is used to store your public and private keys, and to interact with the blockchain. Most people use software wallets like the Coinbase Wallet or MetaMask. You can also use hardware wallets like Ledger which are not connected to a computer and add an extra level of security.

Some wallets can be used with multiple crypto assets, while others are only compatible with a specific cryptocurrency. When you set up your wallet, make sure you follow the instructions carefully to ensure that you do not lose your private keys.

Note: If you trade on some centralized exchanges like Coinbase, you do not need to have a wallet as the exchange operates more like a stock broker. You already have a wallet included with your account on the exchange. You can however send your coins to your own wallet.

Crypto Exchanges, Brokers and Apps

You can buy and sell cryptocurrencies on various different types of platforms. These include:

• Centralized exchanges like Coinbase and Binance.
• Decentralized exchanges like IDEX and dYdX.
• Brokers, including Robinhood and eToro.
• Payment platforms like Square’s Cash App and PayPal.

If you are making your first Bitcoin transaction, the choice of platform probably won’t make a big difference. However, in time you may prefer an exchange that better suits your needs. Active traders and serious investors prefer to trade on exchanges as the fees are lower than they are for brokers and other platforms.

Decentralized exchanges are more complicated to work with, so they are probably best avoided until you are comfortable with the crypto market. Exchanges for digital assets vary widely in terms of the coins you can trade, the fiat currencies you can fund an account with, and account funding methods. 

Non-Fungible Tokens

NFTs are the latest type of crypto asset to capture the world’s attention. Assets like Bitcoin and US dollars are fungible as each unit is exactly the same as every other unit. NFTs represent assets that are not identical to any other assets, and so non-fungible.

The NFTs that gained popularity in 2021 were mostly digital artworks and copies of tweets, which exist as jpeg files. These NFTs are individual blockchain tokens that includes information like the name of the creator, the creators signature and the date the NFT was minted. The media file itself cannot exist on a blockchain, but the NFT will usually include a hyperlink to the asset itself.

These types of NFTs allow artists to monetize their artworks, and allow ownership to be authenticated. This is important for digital art (images, audio and video) that can easily be copied. But there are also lots of reasons to be somewhat skeptical about these types of NFTs. Although the individual NFTs are unique, there is no limit to the number of NFTs like this that can be produced. Many of these artworks are computer generated, and one collection can include thousands of artworks.

In addition, an NFT may give official ownership of an artwork to one person, but that doesn’t stop anyone else copying it. The earliest NFT artworks may well retain some value due to the fact that they were the first to be minted. NFT’s like the signed copy of Jack Dorsey’s first tweet should also retain value due to their rarity.

However, it’s difficult to find a reason for millions of other NFT jpegs to retain any value if they have no utility. When an NFT has utility, it becomes a different story. The real potential for NFTs becomes apparent when they give their owner utility.

Example: NFTs With Real World Utility

An example of an NFT with utility is Bored Breakfast Club. This is a collection of 5,000 NFTs that come with a free coffee subscription. NFT holders will have unique coffee blends delivered to them, wherever they are in the world, for free. 

The NFTs include a digital image of a breakfast scene made up of 200 individual traits. The artworks are inspired by the popular Bored Ape Yacht Club NFT collection. NFT ownership comes with the right to receive free, unique coffee blends roasted by Yes Plz Coffee. If an NFT is sold, the right to receive coffee transfers to the new owner. 

Initially, NFT holders will receive two bags of coffee, spread out over a two-month period. After that, shipments will be made when there are enough funds in a community fund, the Community Coffee Wallet. This community wallet is funded by royalties on NFT sales in the secondary market like OpenSea, coffee sales and merch sales.

More NFT Use Cases

The Bored Breakfast Club is a good example of the potential for NFTs. In this case, the NFT and artwork are really a ticket that provide access to a subscription service. 

There are lots of other potential use cases for NFTs, with many of them tying in with the emergence of Web3 and the Metaverse. NFTs are already starting to make an impact in digital worlds like video games. For years, objects in these virtual worlds have been traded for real money. NFTs create a mechanism to do this securely, and to transfer digital assets between digital environments.

As the Metaverse evolves, unique digital assets will become more important, ubiquitous and valuable. These could include digital real estate, avatars and access passes. NFTs are a compelling way to authenticate ownership of these assets. There are also several compelling real word use cases for NFTs. One example is event tickets which are often the subject of fraud and scams. If event tickets are issued as NFTs, they cannot be illegally sold or copied.

NFTs can also be used to protect intellectual property including images, music, videos and software. They can be used to track and pay royalties to creators. Creators can also sell their work as an NFT with additional utility. As an example, a musician could sell an album as an NFT that also gives the holder free entrance to future concerts.

Apart from these examples, NFTs can be used to track items with supply chains, to authenticate documents and credentials, and for vehicle licensing. As you can see there is a lot more to the potential for NFTs than digital art. In the future even more use cases are likely to emerge as the digital economy evolves. In fact, NFTs and asset backed tokens could become an essential link between digital and physical worlds. 

7 Ways to Make Money From Cryptocurrencies

There are lots of different ways to make money in the crypto and blockchain industry.

1. Direct Cryptocurrency Investments
2. Cryptocurrency Derivatives
3. Non-Fungible Tokens
4. Yield Farming and P2P Lending
5. Cryptocurrency Mining
6. Cryptocurrency Funds
7. Cryptocurrency Stocks

1. Direct Cryptocurrency Investments

The first and obvious option is to build a portfolio of cryptocurrencies, or to trade them actively.

2. Cryptocurrency Derivatives

You can now trade futures and options on Bitcoin and Ether on several exchanges including the world’s largest financial derivatives exchange, the Chicago Mercantile Exchange (CME). A lot of brokers now offer CFDs (contracts for difference) on a range of cryptocurrencies.

Derivatives like futures, options and CFDs, allow you to trade with leverage and to open short positions on cryptocurrencies like Bitcoin. However, with all the crypto market volatility we would advise you to be very cautious about trading with leverage.

3. Non-Fungible Tokens (NFTs)

As mentioned, the NFT market is still evolving so there should be plenty of different opportunities to invest in the future.

4. Yield Farming and P2P Lending

Some cryptocurrencies can pay you interest. Generally this involves lending your coins to a miner or validator to help them increase their stake. The validator then shares the rewards they earn for validating transactions. This process is known as yield farming. Peer-to-peer lending is another way to earn interest on your crypto assets.

5. Cryptocurrency Mining

Crypto mining is not as easy as it used to be as the costs of doing so have risen dramatically. Nevertheless it can still be profitable if you go about it the right way. The barriers to entry are lower if you invest in a cloud mining pool. However, these mining pools need to be investigated thoroughly. In general, you should develop a good understanding of the industry before diving into mining.

6. Cryptocurrency Funds

It is possible to invest in the largest cryptocurrencies using a stock trading account. There are three types of crypto funds that can be traded on the stock market.

The first of these is ETFs (exchange traded funds). It has taken a long time for crypto ETFs to receive regulatory approval – and there’s still a long way to go. At this stage, the only Bitcoin ETF in the US holds Bitcoin futures rather than Bitcoin itself. This fund is the ProShares Bitcoin Strategy ETF (NYSE: BITO).

The second type of funds are ETNs (exchange traded notes). These differ from ETFs in that the assets are not held in a trust, but on the balance sheet of the issuer. ETNs offer more flexibility than ETFs, but come with some counterparty risk. Most of the cryptocurrency ETNs are listed in Europe. Examples include the VanEck Bitcoin ETN (listed in Germany) and the 21Shares Ethereum ETP (listed in Switzerland).

The third type of funds are closed end listed investment trusts. These are similar to ETFs, but have a fixed number of shares in issue. This means that the price is dependent on supply and demand and can vary substantially from the value of the underlying assets.

The Grayscale Bitcoin Trust (US OTC: GBTC) is the best-known closed end crypto fund. This fund traded at a large premium to the NAV for years, but is now trading at a discount. Grayscale also manages various other single coin funds and two multi coin funds.

7. Cryptocurrency Stocks

There are also quite a few publicly listed companies that derive all or some of their earnings from cryptocurrencies or the blockchain industry. The companies listed below are involved directly in crypto mining, or hold substantial digital assets on the balance sheet.

• MicroStrategy Incorporated Class A (NASDAQ: MSTR)
• Riot Blockchain Inc (NASDAQ: RIOT)
• Marathon Digital Holdings, Inc. (NASDAQ: MARA)
• HIVE Blockchain Technologies Ltd (TSXV: HIVE)
• Galaxy Digital Holdings Ltd (TSX: GLXY)

There are also lots of companies, including Nvidia, CME Group, Block (Square) that offer partial exposure to the industry. You can also invest in several ETFs that invest in companies involved in blockchain technology and cryptocurrencies. Examples include:

• Amplify Transformational Data Sharing ETF (NYSE Arca: BLOK)
• First Trust Indxx Innovative Transaction & Process ETF (NASDAQ: LEGR)
• VanEck Digital Transformation ETF (NASDAQ: DAPP)

How to Evaluate a Cryptocurrency or Crypto Project

Investing in cryptocurrency should be approached with caution. While the most successful cryptocurrencies have generated massive returns for early investors, they have also exhibited extreme volatility. In addition, countless cryptocurrencies have seen their prices decline with little chance of recovery. There are now over 5,000 cryptocurrencies to trade, but there probably isn’t room for nearly that many digital currencies.

For long-term investors, sticking to the largest coins has proved to be a winning strategy. This doesn’t mean that a new or small project can’t succeed, but the chances of failure are a lot higher for small projects. Unfortunately, the crypto market has also become a platform for scams, fraud and money laundering – see below. Whether you are investing in tokens, NFTs or any other crypto asset, you should carefully evaluate each project. This will become even more important as the market matures.

First of all, it’s important to make a distinction between trading and investing. Trading is short term in nature and based entirely on supply and demand. As long as demand for an asset remains strong, a short-term trade can be profitable regardless of the long-term viability of the asset.

If you are investing, which typically means for six months or longer, you will need to look beyond current market hype. As an investor, you should be considering the value of the asset and how that may change over time. Digital assets may not have an “intrinsic value” but there are factors that affect their perceived value. The technology and use case behind a crypto project are obviously important, but you should also consider the following:

• Sustainable demand – For any asset to appreciate over time, their needs to be sustainable demand for that asset. Ideally demand should come from multiple sources – including users – and not just from speculators.
• Community – Community strength has emerged as an important indicator of the success of crypto projects. Hype doesn’t guarantee success, but a project that can’t build up a following is likely to struggle regardless of its other attributes. Community strength is especially powerful when it is “organic”, and not paid for with giveaways, paid media coverage etc. Bitcoin and Ethereum do not have marketing departments – instead they rely on a community of users and developers to spread the word.
• Competitive advantage – For any coin to succeed, there needs to be a clear competitive advantage. A lot of Bitcoin’s success can be attributed to the fact that it was the first and has always been the most valuable. For Dogecoin, the fact that Elon Musk likes it is a huge advantage. 
• Incentives – Another important aspect of a project is the way incentives are aligned between various stakeholders. During the ICO (initial coin offering) craze of 2017, project founders were often incentivized to sell out and leave the project, rather than see the plan through. If incentives are aligned, there is more chance that the community will work together.

How to Avoid Cryptocurrency Frauds

Various types of scams and frauds are becoming increasingly common in the crypto space. This is often the case with new industries that are not fully regulated and have new projects popping up every day. You can reduce the risk of becoming a victim of scams, cybercrime and fraud by following these guidelines:

• Make sure the people behind a project are real. Try to find their social media profiles and make sure there is a history and more than a few connections. A reverse image search on Google will usually tell you very quickly if someone’s identity is fake.   
• Don’t leave large amounts of digital assets in an exchange account. Use a hardware wallet for extra security if you have more than 10% of your assets in crypto.
• Be very careful with any hyperlink you receive via email, via Discord or in a chat room. Phishing scams often use websites that look very real to trick people. 
• Likewise, be careful with anything that appears to be free or too good to be true.
• In general, stick to coins, projects and exchanges that are established and well documented. The smaller or less well known a project is, the more skeptical you should be.

Conclusion

This guide to cryptocurrency investing is just a starting point, but hopefully it has given you a good foundation for further research. We should probably still regard cryptocurrencies as speculative investments. However, the physical and digital economies are beginning to converge.

Cryptocurrencies and blockchain technology are an essential building block for the economy of the future – which means they shouldn’t be ignored either. What are your thoughts on investing in cryptocurrency? Do you think that at some point all assets will be tokenized? What is your favorite cryptocurrency or NFT any why? Let us know in the comments below.

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This post will give you an overview of market sentiment, CNN’s Fear and Greed Index, and how you can use market sentiment to improve your returns.

How Fear and Greed Drive Asset Prices

One of the great paradoxes of the financial markets is the fact that investors are at their most optimistic at market tops and most pessimistic at market bottoms. Emotional decision making creates this paradox. In particular, it is fear and greed that often causes the decision making that leads to major market highs and lows. Emotions play a key role in the way humans make decisions.

You only need to visit a casino, to see people putting money into slot machines when they probably know the odds are stacked against them. When you invest in stocks, or other financial assets, the odds are not necessarily stacked against you like they are in a casino. But, when you let emotions cloud your decision making, you can stack the odds against you.

On the other hand, if you understand a bit about market sentiment and behavioral finance, you can use these insights as a market timing tool. Rather than letting emotions cloud your decisions, you can wait for extreme fear or extreme greed to enter and exit positions at favorable prices.

Emotional Decision Making

People buy and sell stocks for lots of different reasons. Sometimes the decision to buy or sell an asset is the result of a rational decision-making process. In other cases, emotions like fear and greed compel people to trade. Fear and greed are the emotions that tend to dominate at market highs and lows.

Several other emotions can and do affect decision making at other times. These can include boredom and frustration, euphoria, excitement and hope. These emotions tend to affect different people at different times. They are also more common to certain investment strategies. Fear and greed are different because they can affect large numbers of investors at the same time. 

When emotions drive decisions, investors often become less sensitive to the price they trade at. Large price moves occur when investors are more concerned with executing a trade, than the price they trade at. Price extremes usually occur when large numbers of investors become insensitive to the price they trade at.

Greed is associated with market bubbles and periods of irrational optimism. Rising prices are taken as proof that prices can continue to rise regardless of valuations or fundamentals. In many cases, new narratives will evolve to justify inflated prices regardless of whether they are realistic or not. The result is that asset prices can become divorced from reality. Often, prices will rise until there is just no more buying power.

Fear is associated with corrections, bear markets and market bottoms. Fear begins to affect investors when they see the value of their portfolios fall. This is when people begin to expect the worst and they are often motivated to sell securities to prevent further losses – even when they know prices are too low. Very often the bottom occurs when investors capitulate and sell their stocks for whatever price they can get.

Market Sentiment and Investing

Market sentiment is mostly used as a contra-indicator. Betting against the dominant emotion in the market is a fairly reliable way to sell stocks when sentiment is too bullish, and buy stocks when investors are too bearish. Like many investing tools, sentiment works a lot of the time, but not every time. Combining sentiment with other tools can produce more consistent results.

Contrarian investors typically look to sentiment as an investment tool when it is at extremes – either extreme greed and bullishness, or extreme fear and bearishness. However, market sentiment can also be used to confirm a change in the market’s bias when it shifts from bullish to bearish or vice versa. 

Sentiment Indicators

We can’t really measure market sentiment itself. But we can estimate it with several indicators. These indicators come in many forms and reflect sentiment in different ways. Most of these indicators fall into the following categories.

• Investor sentiment and business surveys.
• Demand for risk-on assets like junk bonds.
• Demand for risk-off assets like gold and bonds.
• Demand for portfolio hedging products like futures and options.
• Market internals which evaluate the performance of stocks within an index.

Each market sentiment indicator has its pros and cons, so it’s advisable to consider several when conducting sentiment analysis.

CNN’s Fear and Greed Index

CNNMoney publishes its own Fear and Greed Index, which combines seven commonly used sentiment indicators. Each indicator is assigned a rating between extreme fear and extreme greed, with the overall indicator reflecting the average of these indicators. The index ranges between 0 (extreme fear) and 100 (extreme greed), with 50 indicating neutral investor sentiment.

The 7 Components of the Fear and Greed Index

The CNN Fear and Greed Index is made up of the following seven indicators:

1. Stock Price Breadth
2. Stock Price Strength
3. Market Momentum
4. Junk Bond Demand
5. Safe Haven Demand
6. Market Volatility
7. Put and Call Options

1. Stock Price Breadth

Market breadth compares the number of stocks with rising prices against the number of stocks with falling prices. The CNNMoney Fear and Greed indicator uses the McClellan Volume Summation Index for the NYSE. This indicator keeps a running total of the McClellan Volume Oscillator, calculated by subtracting declining stocks from advancing stocks. This indicator is compared to its range over the previous 2 years to arrive at a rating between extreme fear and extreme greed.

2. Stock Price Strength

Stock market sentiment can also be measured by comparing the number of net new 52-week highs and lows in a given market. CNN calculates this indicator for stocks trading on the NYSE.

3. Market Momentum

The market’s momentum is gauged by comparing the index level for the S&P 500 index with its 125-day moving average. The indicator is expressed as a positive or negative percentage relative to the moving average. 

4. Junk Bond Demand

Junk bonds are bonds with high yields that also have a relatively high-risk rating. When market sentiment is dominated by greed, investors seek out the higher yields that junk bonds offer. Demand for junk bonds is gauged by considering the spread between the yield on high yield bonds and investment grade corporate bonds. This spread narrows when junk bond demand is high and widens when greed subsides.

5. Safe Haven Demand

When market sentiment is dominated by fear, investors move capital from risk assets to safe haven assets like bonds. The CNN Fear and Greed Index measures safe haven demand by comparing the returns for bonds and stocks over a 20-day period. The difference in returns is compared to the historical range to determine a sentiment score.

6. Market Volatility

A popular sentiment indicator is the CBOE volatility index, or VIX. Implied volatility is a key component of the value of an option, and reflects the amount of uncertainty in the market. Typically implied volatility also rises when demand for put options rises.

The VIX is an index of the implied volatilities for a range of S&P 500 index options. The index is usually between 15 and 20%, but has reached over 90%, and fallen to below 10% in the past. For the Fear and Greed Index, CNNMoney compares the index to its range over the previous two years.

7. Put and Call Options

Investors buy and sell options for several reasons. However, when investors are bullish, volumes for put options lag call options. Conversely, when investors are bearish, volume for call options lags put options. The put/call ratio simply divides put option volume by call option volume over a rolling 5-day period. The most commonly cited put/call ratio uses data for CBOE equity options. 

Pros and Cons of the CNN Fear and Greed Index

CNN’s Fear and Greed Index is a useful tool, but like any investment tool it has strengths and drawbacks. It’s especially important to take note of its limitations before using it to make decisions.

Pros of the Fear and Greed Index

• The index can help you identify favorable periods to buy and sell stocks by betting against the crowd.
• You can use the index to quickly understand market sentiment and how the underlying indicators contribute to the overall score.
• Technical issues unique to a specific market often affect individual sentiment indicators. By combining several indicators, the CNN index reduces the impact of these factors on the overall reading.

Cons of the Fear and Greed Index

• The index is not always consistent over time. An underlying reading that signals extreme fear today, may have given a neutral signal in the past. This prevents proper backtesting of the index.
• Stock prices can continue to fall after the index reaches extreme fear and continue to rise after the index reaches an extreme greed level.
• The index is not a silver bullet, and is best used alongside other investment tools and stock valuation metrics.

Other Market Sentiment Indicators

CNNMoney’s Fear and Greed Index combines seven widely followed indicators. These are a few other sentiment indicators worth knowing about:

• The AAII Sentiment Survey reflects US individual investor sentiment in the US. Respondents are asked whether they are bullish, bearish or neutral on the market outlook for the next six months.
• The CFTC publishes a Commitment of Traders report. This report reflects the open futures positions held by various types of market participants. It covers stock index futures as well as other futures markets.
• TradingView also has a sentiment indicator based on several technical analysis tools. The indicator is available for most major indexes.
• The Dollar Index (DXY) also reflects safe haven demand as investors prefer to hold dollars during periods of uncertainty. The index tracks the performance of the USD against a basket of currencies.
• Due to the popularity and success of the CNN Fear and Greed Index, there are now also comparable indicators for cryptocurrencies available on various websites.

How to Use Market Sentiment

The CNN Fear and Greed Index is quite accurate when it comes to gauging market sentiment. But it is not always accurate when it comes to timing. The fact that there is extreme fear or greed in the market does not mean that stock prices will reverse. 

Whether index prices reverse or not will often depend on the issues contributing to sentiment and the underlying trend. For this reason, market sentiment indicators should always be used in conjunction with technical, fundamental, or quantitative analysis. There are also a few differences between market tops and bottoms to consider.

Market Tops and Greed

Bull markets often continue for a lot longer than investors think possible. Market tops can also occur a long time after valuations become excessive. Sentiment indicators like the fear and greed index can also reach an extreme greed level some time before the top.

Typically, a market top only forms when the market runs out of buyers (i.e. everyone is already fully invested), or when a catalyst occurs. Catalysts can come in the form of a black swan event, a geopolitical event or unexpectedly bad corporate or economic news.

An extreme greed reading isn’t necessarily a sign to sell all your stocks. But it can be taken as a signal to take some profits, manage risk carefully or avoid very speculative stocks. It’s also a good time to start looking for a catalyst that may lead to a sell-off.

Market Bottoms and Fear

When it comes to looking for market bottoms, there are more factors to consider. A stock market crash or correction may be caused by geo-political events, a financial crisis, disappointing corporate earnings, or an economic shock. Very often, the fear is motivated by speculation about what might happen, rather than what is actually happening.

This is the type of situation that often sets up a great buying opportunity. There are some occasions when stock prices can continue to fall. This is likely to happen when more than one of the following conditions are present:

• News flow: If news and events continue to deteriorate or are worse than expected, there’s a reason for further downside. We are talking here about actual news and events – not the forecasts made by market pundits. When pundits warn of further downside, it’s often a bullish sign.
• Valuations: If stock valuations are still at historically high levels after a correction, there may be more downside ahead.
• Technical support: If analysis confirms a downtrend, or the index is trading below a key support level, it’s more likely there will be more downside. An index is generally considered to be in a downtrend if it is trading below its 200-day moving average.

These conditions point to the potential for further downside. That doesn’t mean you shouldn’t do any buying as prices often don’t fall much further. You can begin to scale into high-quality stocks that you would like to own for the long-term, and then add to those positions if prices do fall further.  

Market Behavior of Stocks vs. Indices

Market sentiment indicators like the fear and greed index reflect overall sentiment for the market. This generally aligns with the broad market indexes. Most stocks will follow a similar pattern to the indexes, with a few exceptions.

Speculative stocks (and other riskier assets) are worth paying extra attention to. After a shallow correction, these stocks will usually recover very quickly. However, when there is a prolonged downtrend, speculative stocks may take some time to recover – and some may never regain their previous highs.

It’s usually a good idea to focus on high-quality, profitable stocks when the market is making a potential low. These are the stocks large institutions are most likely to buy on weakness which will provide support. While valuation is also important, you should try to avoid value traps. These are stocks that at first glance appear cheap, but may have poor business prospects going forward.  

CNN Fear and Greed Index Example: March 2020

The beginning of the COVID-19 pandemic was a great example of the fear and greed index doing a decent job of indicating both a market top and bottom. The index reached its highest greed rating in years just a few weeks before the market top. And then the index fell into extreme fear territory just as the market bottomed. 

This was an example of extreme fear indicating that the market was overreacting to actual events. Travel restrictions and social distancing policies absolutely decimated the travel and hospitality industries, but these industries are just a fraction of the world economy. The S&P 500 fell over 30% because people expected the worst – not because of what was actually happening. 

The fear and greed index actually carried on falling for a few weeks after the market bottomed. This illustrates the value of scaling into new positions as soon as the index reaches an extreme fear level.  

Conclusion: CNN Fear and Greed Index

Warren Buffett said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. Contrarian investing using market sentiment is one of the best ways for investors to lock in great prices. The CNN Fear and Greed Index is a useful tool to gauge sentiment. However, just like other tools and indicators, it should be used alongside other methods of market analysis.

The post Fear and Greed Index Explained: How to Use It appeared first on FinMasters.

In this post, we look at the reasons for a gold investment, how to invest in gold and the pros and cons of doing so. Investing in gold can be a controversial topic, so we have tried our best to keep things balanced, and include both the opportunities and the risks of gold investments.

A Brief History of Gold

Both gold and silver have been used as currencies and financial instruments for at least two thousand years. It is believed that gold was used for decorative purposes over 40,000 years ago, and that gold was the first metal that was used by man. Precious metals were already widely known, used, and valued when the first coins came into being.

Prior to using gold as a form of money, crops and livestock were used as a store of value and a medium of exchange. However, using these commodities as a currency presents all sort of logistical problems. Objects like sea shells and feathers were also considered, but lacked the durability something of value requires.

Gold was an obvious choice to replace these primitive currencies. Its scarcity meant a small quantity carried significant value. It was durable, it could easily be divided into small quantities, and it could be minted into individual “units”. 

The earliest known coins, which were made of a mixture of gold and silver, were used in what is modern day Turkey approximately 2,600 years ago. Until not long ago, gold and silver have continuously been used as currencies ever since.

Gold, silver, and various forms of gold-backed paper money remained the primary monetary system until the second world war. In the period since then, the global monetary system has moved away from precious metals, although most central banks still hold some gold reserves.

By decoupling currencies from gold, governments have been able to more effectively use monetary and fiscal tools to manage their economies. However, money that is not backed by gold is also more prone to inflation. The increase in the global money supply has led to concerns of instability and hyperinflation in the future.

What Is Gold Worth? Supply, Demand and the Price of Gold

Gold does not generate cash flows in the way that real estate or a company does. This means it cannot be valued, and the price is purely a function of supply and demand. The major swings in the gold price are often the result of speculative demand, which in turn depends on sentiment and inflation expectations. However, beyond this demand there is also an underlying relationship between supply and demand.

As more gold is extracted from the earth, the cost of extraction rises. This is simply because the remaining gold is harder to reach. Each gold mine has a cost of production (COP), so when the gold price falls below that COP, the mine is no longer profitable. If this happens the mine may suspend production or halt new investments. The net effect is that as the gold price falls, the supply of new gold coming into the market slows.

On average, about 50% of the gold produced each year goes to the jewelry industry. In addition, 5 to 10% of production is used by technology industries. The remainder of the demand comes from sources that could be considered speculative: central banks, investors, and speculators.

The point here is that there is still residual demand beyond the more speculative demand. And, as the price falls this residual demand increases. So, while we can’t “value” gold, we know that there is a stabilizing relationship between supply and demand. 

Gold Investment as an Inflation Hedge

One of the key arguments for a gold investment is as a hedge against inflation. Central banks can effectively print as much paper money as they want, and rising money supply can lead to inflation. On the other hand, we know that the relationship between gold’s supply and demand is relatively stable, which means its “value” can’t be debased. 

History has shown that over long periods of time gold has maintained its purchasing power. Over short periods of time, its purchasing power has fluctuated about as much as its price.

When we talk about inflation, we are talking about the purchasing power of currencies. It’s important to point out that while gold has maintained its purchasing power far better than currencies, over the last 150 years, stocks have done an even better job. If your only goal is to beat inflation, stocks have proven to be a better hedge. However, as we will see, there are other compelling reasons to invest in gold.

Gold Investment as Portfolio Hedge

A gold investment has a very solid track record as a portfolio hedge. If you are investing in stocks, you can reduce portfolio risk by adding safe haven assets to your portfolio. Safe haven assets, which include precious metals, bonds and cash, are assets with stable values.

The prices of risk assets, like equities, are closely tied to global growth and economic stability. The price of these types of assets usually falls when a recession is expected or when market volatility increases. When this happens, capital usually flows to safe haven assets. T

This is known as flight to safety. This negative correlation between risk assets and safe haven assets can be used to reduce the volatility of an investment portfolio. 

The charts below show the effect of allocating between 0% and 50% of a portfolio to gold, with the rest allocated to stocks. For gold we are using the GLD ETF and for stocks we are using the SPDR S&P 500 ETF (SPY). The first chart illustrates the extent to which investing in gold would have reduced the downside risk of an equity portfolio during the global financial crisis in 2008.

The second chart illustrates the extent to which a gold investment reduced volatility during the COVID-19 correction in 2020.

The two charts above show how investing in gold reduces portfolio volatility during equity market corrections. However, it’s important to note that over long periods of time, including gold in a portfolio has resulted in lower overall returns. The following chart, which includes both corrections, illustrates the performance of the four portfolios from 2008 to 2021.

Gold Investment as Hedge Against a Global Financial Collapse

The world has never really experienced a complete collapse of the financial system. We are talking here about a catastrophe that results in banks and institutions not being able to operate. This would obviously have catastrophic consequences for the economy and financial assets could lose most of their value.

It’s impossible to assign a probability to this scenario. It’s probably not zero, but it’s probably quite low. During the last few market crashes, central banks have shown a willingness to do whatever it takes to make sure there is liquidity in the system. They have also shown they are prepared to bail out banks and institutions if necessary.

Perhaps the bigger risk is the fact that so much of the financial system is now electronic, and the fact that cybercrime continues to rise. If there is a complete financial meltdown, cyberterrorism might be a more likely cause. But again, the probability is probably quite low.

So, is gold a good investment as a hedge against a scenario like this? Prophets of doom have been warning about the imminent collapse of civilization for decades – and gold is often touted as the only solution. If there is a financial meltdown, gold would almost certainly retain its value better than other assets. But there are also practical issues to consider – like buying everyday goods when all you have is a one-ounce gold coin. The good news is that investing in gold as a portfolio hedge should give you some protection against this “end of the world” type scenario. 

One thing to consider is that unless you hold physical gold that is actually in your possession, it may be difficult or impossible to actually claim your gold holding in the event of systemic collapse. Holding gold in your possession exposes you to possible theft or loss, which is probably more likely than a global economic collapse!

6 Ways of Investing in Gold

There are now several ways to invest in gold. These range from owning physical gold to “paper gold” and gold stocks. Each type of gold investment comes with its own advantages and disadvantages.

1. Gold bullion
2. Gold coins
3. Gold jewelry
4. Gold ETFs
5. Gold derivatives
6. Gold mining stocks

1. Gold Bullion

Gold bullion is the traditional way to own relatively large quantities of gold. The word bullion actually refers to bars, ingots and coins. For gold bars to qualify as bullion they must have a known purity (usually above 90%) and must be produced by accredited refiners.

Gold bars range in size from 1 gram to 400 ounces, so a gold bar can be worth anywhere from $60 to $735,000. Larger bars usually need to remain stored in approved vaults to retain their provenance. Smaller bars can be stored in a vault or wherever the owner chooses.

2. Gold Coins

Buying gold coins has been the traditional way for most investors to invest in gold. Gold coins of various types have been around as long as gold has been used as a currency. They allow investors to accumulate small quantities of gold over time.

It’s important to know that there are two very different categories of gold coins. The first category is gold bullion coins like American Gold Eagles and Krugerrands. These coins are made of pure gold or 92% gold alloy and generally contain one ounce of gold. They are minted by government mints. These types of gold coins often trade at a small premium to the gold price, but their prices track the gold price closely. Owning these coins is the same as owning gold bars and a direct investment in the price of gold. 

The second category consists of numismatic, rare, and limited-edition coins. The price of these coins reflects the gold they contain as well as a premium that reflects their age and rarity. Investing in these types of coins is more like investing in antiques. Investing in these coins requires specialized knowledge and caution is advised.

3. Gold Jewelry

Buying gold jewelry can also be considered a form of gold investment. But, just like rare and numismatic coins, there is more to the value of jewelry than the gold it contains. In the case of jewelry it’s usually the aesthetic qualities that contribute to the value. Investing in gold jewelry gives you added utility, which is probably worth something. You just need to remember that the premium you pay will always be subjective, both when you buy it and when you sell it. 

4. Gold ETFs

Exchange traded funds (ETFs) have emerged as a very convenient way of investing in gold. ETFs are vehicles that trade on the stock market, just like any other share. Gold ETFs are trusts that own physical gold stored in a vault. They allow you to hold your gold investment alongside your stock portfolio in a trading account.

Gold ETFs are cheap to trade and own, and eliminate the need to worry about storage, insurance or transport. The SPDR Gold Shares ETF (GLD) is the largest ETF that tracks the gold price, and was briefly the largest ETF in the world. There are similar ETFs listed on most major exchanges.

5. Gold Derivatives

Futures, options and CFDs (contracts for difference) based on the price of gold are another way to trade gold. These instruments are all derivatives that can be traded on margin, which allow for leverage. Derivatives are probably the best instrument for active traders, but not necessarily for investors.

6. Gold Mining Stocks

Investing in the shares of companies that mine gold is an indirect way of investing in gold. Gold mines have relatively stable costs, while their revenue fluctuates according to the gold price. In most cases, gold stocks offer leveraged exposure to the gold price – their profits rise faster than the gold price when it rises, but fall faster than the gold price when it falls. Some gold miners have fairly predictable cash flows, while others are very speculative. The more stable companies have low production costs, which means that they remain profitable even when the gold price falls. 

More speculative mines, known as marginal miners, have higher production costs and are at risk of losing money if the gold price declines. Junior miners are companies involved in exploration and development of mining operations, and are even more speculative. The following are prominent examples of gold mining companies in various categories along with their US stock tickers. Be aware that some of these companies may have exposure to other precious metals too.

• Largest gold producers
• Lowest cost gold producers
• Junior and marginal gold producers
• Gold royalty and streaming companies

Largest Gold Producers

• Newmont Corporation (NYSE: NEM)
• Barrick Gold (NYSE: GOLD)
• AngloGold Ashanti Limited (NYSE: AU)

Lowest Cost Gold Producers

• Kirkland Lake Gold (NYSE: KL)               
• B2Gold (NYSE Arca: BTG)              
• Centerra Gold (NYSE: CGAU)                 

Junior and Marginal Gold Producers

• Yamana Gold (NYSE: AUY)
• DRDGOLD (NYSE: DRD)
• Seabridge Gold (NYSE: SA)

Gold Royalty and Streaming Companies

Another category of gold stocks are royalty and streaming companies. These are companies that provide capital to gold producers in return for royalties or a percentage of the gold produced. These companies have less exposure to the risks and costs associated with gold mining. Some examples of royalty and streaming companies include:

• Franco-Nevada (NYSE: FNV)
• Wheaton Precious Metals (NYSE: WPM)
• Sandstorm Gold (NYSE: SAND)

There are also a few gold miner ETFs to consider:

• VanEck Gold Miners ETF (NYSE Arca: GDX)
• VanEck Junior Gold Miners ETF (NYSE Arca: GDXJ)

Investing in Gold Stocks vs. Investing in Gold Itself

Gold stocks can generate higher returns than gold itself, but gold stocks are also a lot more complicated than simply investing in gold. There’s a lot more to a gold miner’s profits than the gold price. You must also consider a producer’s cost of production, gold reserves (the amount of underground gold a mine has access to), labor costs and the balance sheet. In addition some gold mines are in countries with significant political and legislative risk. Some mines hedge their exposure to the gold price, and this also needs to be considered.

Investing in the largest gold producers will have slightly more risk than gold itself, along with more upside potential. These companies are well diversified with mines around the world, and have relatively low production costs. Investing in the junior and marginal gold stocks requires a lot more knowledge, research and time – and carries a lot more risk. Junior gold miners are definitely not suitable for buy and hold investing.

This chart illustrates the relative performance of the gold price represented by the GLD ETF and the GDX ETF since 2006 when it was launched. As you can see, gold stocks underperformed the gold price by a significant margin. However, it is worth noting that this has been an historically difficult period for gold miners and gold mining shares.

The Physical Gold vs. Paper Gold Tradeoff

ETFs like the SPDR Gold Shares fund are probably the most convenient and cheapest way to trade and own gold. Gold ETFs, futures and other instruments based on the gold price are sometimes referred to as paper gold. Some investors who invest in gold as a hedge against the stability of the financial system believe paper gold is almost as risky as other financial assets. There is some truth to this as you cannot trade ETFs and futures if exchanges don’t open for business. More skeptical investors even question the existence of the gold held by ETFs.

On the other hand, investing in gold bullion or coins requires storage, security and insurance. There are also logistical issues to consider when you buy or sell physical gold. And there’s an argument to be made that if you own physical gold that is stored at a financial institution, all you really have is the receipt which is once again like paper gold. The alternative is to store the gold yourself in a safe or hidden somewhere. Ultimately, there is no single best way to invest in gold. It really comes down to your reasons for a gold investment and your preference for convenience.

Is Gold a Good Investment Compared to Silver?

Some precious metals investors prefer silver to gold. There are pros and cons to both, which can be summarized by the following points:

• Investing in gold has delivered higher returns over the long term.
• Silver has more industrial uses, and is used by the growing solar energy industry. This means demand may rise as economies grow, but also means recessions could dampen demand.
• For several reasons, the silver price is more volatile, and is likely to remain so.
• Gold is preferred by central banks.

So, is gold a good investment compared to silver? With lower volatility and higher long-term returns, gold is probably a better asset to own over the long term. However, if you track the precious metal market closely, you may identify periods when silver makes more sense.

Is Gold a Good Investment Compared to Bitcoin?

The emergence of cryptocurrencies, and notably Bitcoin, have given investors a new asset class to consider. Bitcoin is often referred to as digital gold – but is it really? The correlation between Bitcoin and speculative assets remains very high. This suggests that Bitcoin is really a speculative risk asset, while gold is the opposite. Bitcoin returns increase when risk appetite rises, while gold returns increase when risk appetite falls.

Investing in Bitcoin is really an investment in an emerging technology and monetary system, and a speculative one too. It could also be considered a hedge against a total collapse of the financial system. But it hasn’t proved to be a very good hedge against portfolio volatility, and the high volatility also outweighs its ability to hedge inflation.

In the last decade, the returns from Bitcoin have eclipsed the returns from gold. Whether this continues in the future remains to be seen. When comparing the two, you really need to consider your goals and see the two as very different assets.

Pros and Cons of Investing in Gold

There are pros and cons to investing in any asset, and gold is no exception. We can summarize the case for investing in gold by listing these pros and cons.

Pros of Gold Investments:

• Gold has a long history as a tradeable asset, and has a proven track record as a store of value. As a real asset, the value of gold is not linked to the financial system. 
• Gold has also proven to be an effective safe haven and portfolio hedge during periods of market instability.
• The increase in the global money supply is leading to growing concern about inflation and the stability of the monetary system.
• Cybercrime continues to increase, and the global economy is becoming more digital and connected. This means there is more at stake from a major cyberterrorism incident.
• If you hold gold as a permanent hedge in your portfolio, you do not have to rely on market timing to avoid volatility.

Cons of Gold Investments:

• Gold doesn’t generate profits, dividends or rent.
• Because gold doesn’t generate yield, it can’t really be valued. The price of gold fluctuates with supply and demand, and is prone to speculative bubbles. 
• If Bitcoin or another cryptocurrency becomes an integral part of the financial system, it may live up to its promise as a form of digital gold. This could make gold a less compelling investment.

Is Gold a Good Investment in 2022?

To get an idea of how the gold price may perform in 2022, we need to go back to the first half of 2020. During the first few months of the COVID-19 pandemic, the gold price rallied as much as 30%. This move was largely driven by speculation and the fact that central banks were “printing” money at unprecedented rates. This created a situation where most of the potential buyers were already long, and there were few buyers left to take the price higher. Some of the buying was done with leverage, which meant there were forced sellers when the momentum ran out.

The result has been that the gold price has underperformed other asset classes for most of the last 18 months. The strong performance of cryptocurrencies and growth stocks also resulted in little interest being shown in gold. Global inflation is now the highest it has been in decades. Whether it remains high, or declines remains to be seen.

As various forms of quantitative easing come to an end, there is some risk that gold becomes less attractive. However, this is probably offset by the fact that ending quantitative easing is likely to lead to more stock market volatility. Predicting a massive rally in the price of gold would be pure speculation. However, as of early 2022, there are a few compelling factors in gold’s favor:

• Gold probably carries a lot less risk now than it did during the speculative rally in 2020. 
• At the same time, equity market volatility has increased and there are fears of further downside. 
• Recent volatility in the cryptocurrency market make gold a more compelling hedge against inflation or a financial crisis.
• With rates rising, bonds are also becoming less attractive safe haven assets.

All of this suggests gold is very well positioned as a hedge against other asset classes in 2022. The possibility of further inflationary pressure would add to the case for gold.

Conclusion: Is Gold a Good Investment?

At any given time there will be market pundits predicting gold’s imminent raise to $5,000 and higher. This is pure speculation, but there are other good reasons for gold investments. The most compelling reason to invest in gold is as a hedge against portfolio volatility and potential inflation. What are your views on gold as an investment? Please let us know in the comments below.

The post Is Gold a Good Investment? appeared first on FinMasters.

Important note: This article provides an introduction to various hedging strategies, hedging instruments and how they can be implemented. However, this is a complex topic, and this article should not be regarded as investment advice. Before implementing any of these strategies and particularly short selling or option strategies, you should seek professional advice or research the topic thoroughly.

What Are You Actually Hedging?

The objective of hedging stocks, or other investments, is to manage risk. But exactly what risk is being managed? In a portfolio of stocks, each stock carries unique risks associated with the company and the market it operates in. There are various ways to hedge the risk of an individual equity position. However, we generally accept these risks and rely on diversification to reduce the impact they pose to a portfolio.

Market risk is more of a problem because it can affect an entire portfolio. This is the risk that a large correction or bear market can pose to almost every stock in the market. If you want to reduce a portfolio’s exposure to market risk, you will need to look beyond diversification.

Portfolio hedging strategies are implemented to reduce a stock portfolio’s exposure to market risk – in the form of volatility or risk of loss of capital. The strategies described here concern this type of risk. Investors also face inflation risk. This can be hedged, though a typical stock portfolio aims to generate returns that beat inflation – so in a sense a stock portfolio is a hedge against inflation.

Different Approaches to Portfolio Hedging

Broadly speaking, there are two approaches to hedging stocks. The first is to implement a hedge consisting of options or short positions to reduce downside risk. This type of hedge can be added or removed according to market conditions. The second approach is to include assets that tend to perform well during bear markets and corrections to a portfolio of stocks. This approach is a little less effective but can be combined with a long-term investing strategy. This means you will not have to try to “time the market”.

• Short Selling
• Inverse ETFs
• Portfolio Hedging With Options

Short Selling

Short selling is a very direct method of hedging stocks which can be useful in certain situations. If you anticipate general market weakness, you can short sell stocks, ETFs (exchange traded funds), futures or CFDs (contracts for difference) to temporarily reduce exposure to the stock market.

There wouldn’t be much point in having a permanent hedge consisting of a short position like this – so it’s an active approach to portfolio hedging. In most cases, you would short sell an instrument that represents a market index, like an index future or an ETF.

Hedging stocks in this way has two distinct advantages. Firstly, a hedge like this can be implemented quickly and relatively cheaply. And, secondly, you can avoid the taxes that may have been incurred by selling stocks in your portfolio and realizing a capital gain. The disadvantage to this approach is that you are limiting gains as well as losses. Your timing will also have a significant impact on how well the hedge performs.

Market timing is not easy, and you will need to decide when to open and close the hedge – so that are two decisions you will need to get right. Nevertheless, there are times when you may want to reduce exposure, and this is a very simple way to do so. Remember, you do not have to hedge the entire portfolio. You can also add to the short position as volatility increases, and remove the hedge when volatility falls.

Inverse ETFs

An alternative to short selling index ETFs or futures is to buy inverse ETFs and leveraged, inverse ETFs. These funds are designed to rise when the underlying index falls and vice versa. It’s important to note that because of the way these products are structured, their performance can diverge from the performance of a direct short position.

They can still be effective over short periods of time but may not perform as expected over longer periods. The other notable difference between inverse ETFs and direct short positions is that they require capital to purchase, whereas short positions result in a credit in your trading account.

Portfolio Hedging With Options

Options offer a more sophisticated alternative for portfolio hedging. A call option is a contract that gives you the right to buy an asset at a specific price (the strike price) in the future before or on a specific future date. A put option gives you the right to sell the asset at the strike price. The price you pay for an option is the premium. In the context of hedging stocks, the premium can be thought of as insurance against loss.

The simplest way to use options to hedge a portfolio is to buy a put option. However, investors often use a combination of long and short option positions to reduce the total cost. We will first describe a simple example using a put option, and then look at some more complex option structures.

From this example we can make a few observations:

• There will be a cost for a hedge like this regardless of whether the expected correction occurs or not. Using options is a trade off between the cost and the potential loss.
• There may be a mismatch between the performance of the index and the performance of your portfolio. This will depend on the index you choose, and the type of stocks you hold in your portfolio.
• An option has an expiry date – the further out the expiry date the more expensive the options will be.
• Apart from the premium you paid, there is no opportunity cost, and your upside is not limited as it was with the short sale.

Alternative Option Structures

An at-the-money put option, where the strike price is equal to the current price is the simplest way to hedge with options – but it’s also the most expensive alternative. The following are a few cheaper alternatives:

• Out-of-the-money put option – Instead of buying an at-the-money put option, you can buy a put with a lower strike price. This means your portfolio will only be protected after the index falls a certain amount, but the premium will be lower. So, you will be partially protected from a large correction, but will still be affected by a small decline.
• Put spread – You can also buy one put option and sell another with a lower strike price. The premium you earn by selling the second put option will offset part of the premium you pay for the first. A put spread means your downside protection is limited to the difference between the two strike prices. If the index falls below the second-strike price, gains on the first option will cancel out losses on the second option.
• Collar – A collar consists of a long put and a short call option. You would buy a put option with a strike price at or just below the current market price and sell a call option with a strike price above the current market price. By selling a call option you earn a premium to offset the premium you pay for the put option. The disadvantage of a collar is that the short call position will cap your portfolio gains if the market rises. This structure does make sense if you are convinced the market won’t rise.
• Short fence – A short fence combines a put spread and a collar so that you buy one put option and sell a put and a call option. We can illustrate the logic behind this structure by building on the previous example.

Option strategies like a short fence provide partial protection but will not protect a portfolio from a catastrophic market crash. These structures are favoured by portfolio managers who aim for relative outperformance.

Options on ETFs vs. Options on Futures

In the examples on short selling and portfolio hedging with options we have used the SPY ETF and options on it. You can also use futures contracts and options on these futures contracts. There are pros and cons to using both. ETFs and options on ETFs can easily be traded using a normal stock trading account.

There are also more ETFs than futures contracts, though some are more liquid than others. Futures and options on futures require a separate futures trading account. However, they can be traded with margin, which means you do not have to fund the full value of a long option position. Futures also have lower trading costs and tighter spreads.

Portfolio Hedging With Asset Allocation and Diversification

Hedging stocks with options and futures can be very effective, but it also can be expensive – both in terms of option premiums and opportunity cost. Alternatively, there are several ways to hedge a portfolio through diversification and asset allocation. Assets that are viewed as safe havens can retain value during periods of market volatility. Therefore, hedging stocks with safe haven assets is a common strategy to protect portfolios against drawdowns.

This often results in capital flowing into these safe haven assets as volatility increases, which means their prices rise as equity prices fall. The prices of these “risk-off” assets may appreciate over time, though they tend to underperform the equity market. Including them in a portfolio results in slightly lower returns, but at the same time reduces portfolio volatility significantly. The following assets can be used as hedging instruments:

• Bonds
• Gold
• Defensive stocks
• Cash
• Volatility ETFs

Bonds

Bonds, and AAA-rated government bonds, in particular, are regarded as being risk free. Bonds have proven to be a reliable way of hedging stocks during almost every period of stock market volatility over the last few decades. US treasuries have also appreciated over most periods for the last four decades.

You can hold bonds in your stock account via an ETF like the iShares 20+ Year Treasury Bond ETF (TLT).

Gold

Gold is probably the oldest safe haven around and has been used as a store of value and a medium of exchange for centuries. The price of gold has also shown itself to be negatively correlated with stock prices during market corrections. Whether or not gold makes a good standalone investment is the subject of a separate discussion – but it has proven to be a very effective hedge over the years. Gold has the added benefit of being an inflation hedge.

There are lots of different ways to invest in gold, and we will cover them in a different post. However, for stock investors, the SPDR Gold Shares ETF (GLD) is an efficient and cost-effective vehicle.

Defensive Stocks

Stocks in certain sectors and industries are regarded as being defensive if their fundamentals are not closely tied to the health of the general economy. Defensive sectors and industries include consumer staples (like household products), healthcare, utilities and defence. While defensive sectors theoretically outperform during bear markets, in practice this isn’t always the case. Certain sectors have outperformed during each correction, but on the whole, defensive sectors haven’t always been a reliable means of hedging stocks.

If you do want to invest in defensive stocks you can consider ETFs that hold stocks in relevant sectors and industries, or consider a specialist fund like the Invesco Defensive Equity ETF (DEF).

Cash

Holding cash is another method of hedging stocks. In today’s low interest environment, the return you earn from cash will be close to zero. However, hedging stocks with cash is very flexible and cash can be rotated into stocks at lower prices as a correction unfolds.

Holding cash directly provides peace of mind and means you won’t have liquidity issues if trading on exchanges is restricted. Alternatively, you can invest in an ETF that holds bonds with maturities shorter than 3 months. A popular choice is the State Street 1-3 Month T-Bill ETF (BIL).

Volatility ETFs

A newer hedging instrument that has emerged in the last decade is the volatility futures contract and ETFs that hold these contracts. These are not safe haven funds but they do perform well in “risk off” environments. Implied volatility is the variable component of an option’s price and increases when demand for options rises. This typically occurs as market volatility increases. The VIX index tracks an index of the implied volatility of various S&P 500 option contracts. This index is tradable via futures contracts with weekly expiry dates.

Several ETFs that hold volatility futures are available to investors. These funds will give your portfolio positive exposure to implied volatility, so they offer another alternative for hedging stocks. However, it’s important to note that over time these ETFs lose value. This occurs because each futures contract is rolled into a more expensive contract as expiry approaches.

The ProShares VIX Mid-Term Futures ETF (VIXM) is one volatility fund to consider.   

Portfolio Hedging Examples With Safe Haven Assets

We have mentioned several ETFs that can be used to reduce downside risk in an equity portfolio. In the following examples, we will combine these ETFs with the S&P500 SPY ETF to see how they performed during the corrections in 2008 and 2020. In each case, we are tracking the performance of a portfolio with 70% invested in the SPY ETF and 30% in the other ETF.

• SPY: S&P500 only
• SPY + TLT: 70% S&P500 and 30% bonds
• SPY + BIL: 70% S&P500 and 30% cash
• SPY + GLD: 70% S&P500 and 30% gold
• SPY + DEF: 70% S&P500 and 30% defensive stocks
• SPY + VIXM: 70% S&P500 and 30% volatility ETFs

First, the major bear market of 2008 and 2009:

And secondly, the sudden correction that occurred in March 2020:

Using these examples we can make a few observations:

• Firstly, apart from the volatility ETF, allocating 30% of a portfolio to a safe haven asset reduced downside risk by up to 50%.
• The volatility ETF didn’t exist in 2008, but was very effective in 2020.
• Gold was a very good hedge in 2008 and performed slightly worse than bonds in 2020.
• On balance, gold and bonds are both effective hedging instruments.
• Cash is inferior to bonds as a hedge – though it does provide liquidity.
• The defensive ETF we included here provided very little protection during both corrections.

For a more complete picture of the effectiveness of these assets for portfolio hedging, we need to consider the opportunity cost. We can do this by repeating the exercise over a five year period. You will notice that the portfolio with VIX ETFs underperforms by a very wide margin. The portfolios with gold and bonds provide adequate long term performance.

Portfolio Hedging With Alternative Assets

Alternative asset classes can also be used for hedging stocks. Alternative assets that can be used for hedging include hedge funds, commodities, real estate, private equity funds, venture capital and even art. These assets can all generate positive returns over time – but returns will depend on the choice of asset or fund, and the timing of the investment.

When it comes to hedging stocks, the biggest advantage of the alternative assets mentioned above is probably the fact that they are illiquid. If an asset is illiquid, it can’t be traded and priced each day. The risk of loss still exists, but you don’t have the volatility of liquid instruments that are valued using mark to market pricing.

Cryptocurrencies and commodities can also provide some diversification, and commodities, in particular, can be effective inflation hedges. However, both commodities and cryptocurrencies can become volatile during equity market corrections.

When to Hedge a Portfolio

If you are hedging stocks using short selling or options, you will need to decide when to implement a hedge. There is often a temptation to implement a hedge when you believe a market crash is coming. Before you do this, you should consider how likely you are to be correct. Plenty of crashes are predicted that never actually occur. If you hedge your portfolio every time a crash is predicted, you might lose a lot of potential upside or spend a fortune on option premium. Nevertheless, there may be certain periods when you would like to reduce exposure.

In general, it’s worth adopting a more systematic approach. A contrarian tactic is to buy options when the market goes through a euphoric period and momentum hits historically high levels. This may not seem like the time to buy options, but there are two advantages. Firstly, you get to lock in gains by setting your strike at a higher-than-normal level. And secondly, this is when demand is low and implied volatility is at its lowest – so options are at their cheapest.

With short selling, you can take the opposite approach, and build up a short position as the index falls through key moving averages – the 50-day, 100-day and 200-day for example. This will give you more protection as the index falls, and you won’t have to make predictions. You would then buy back the short positions as the index rises again. Ultimately there will be a cost to this strategy, but the cost will increase as the severity of the correction increases. You won’t be over-hedged if the correction is shallow, and you won’t be underhedged if it turns into a full-blown crash.

The alternative approach – including safe haven assets and alternative investments in your portfolio – means you don’t have to try to time the market. It also means you will have some protection if a black swan event comes along.

Hedging Costs

Hedging stocks is all about weighing up various risks and costs. Besides the obvious risk of loss, you will need to consider the potential psychological cost of a loss, and how that may affect your decision making. Investors often make their worst decisions when their portfolio takes a big knock. This is when the full value of hedging can become apparent. When it comes to costs, you will need to consider the actual hedging cost (option premiums and trading costs) as well as the opportunity cost of limiting upside, and slippage (which increases during periods of volatility).

Conclusion on Portfolio Hedging

You can’t eliminate portfolio risk entirely, and you should probably avoid the temptation of trying too. If you take away all the risk, you’ll probably limit your returns severely. At the same time, it’s important to reduce unnecessary risk – and portfolio hedging is one way to do this.

Ultimately, there is no such thing as a perfect hedge, perfectly executed. To avoid placing too much importance on any one decision, it’s often worth combing several different approaches to hedging. What is your view on hedging a portfolio and what are your favorite hedging strategies? Share your thoughts in the comments below.

The post 11 Most Effective Portfolio Hedging Strategies appeared first on FinMasters.

Let’s look at some of the best stock screeners, their features and pricing plans, and the various metrics and criteria they offer for refining stock searches.

The 15 Best Stock Screeners

In reviewing the stock screeners, we focused on the features they do and don’t include and the type of investors each one is best suited to. The user experience is more of a personal choice, and you really need to have a look at the way each one is set out to find a screener that works for you.

We have grouped these screeners according to their primary tools and the types of investors they are most suited to.

1. FINVIZ

FINVIZ is one of the most popular stock screeners around. While FINVIZ is primarily known for its stock screener, the website includes a lot of other useful features. Amongst these are financial visualizations that you can use to quickly get an overview of what’s happening in the market.

The stock scanner itself will help you narrow a list of about 8,000 US-listed stocks down to the best stocks to buy or sell. You can filter stocks using 70 different criteria, which are divided into three categories: descriptive, fundamental, and technical. First time users sometimes find the interface quite busy, but you can quickly get used to the layout. Other features include heat maps, economic calendars, insider trading, news, and detailed data on individual stocks.

FINVIZ is one of the best sites around if you want to quickly get an idea of what a company is all about. While there isn’t a FINVIZ app for mobile devices, the website can be accessed from any device. If there is a drawback to Finviz, it is the fact that the screener only includes US-listed stocks, so there are no OTC stocks or shares listed on foreign exchanges. There is also limited data on ETFs, futures, forex, and cryptocurrencies.

Pricing

• Unregistered (Free): Access to most tools, but nothing can be saved, and quotes are delayed.
• Registered (Free): Allows you to save Finviz screener settings and portfolios.
• Finviz Elite ($39.50/month, or $299.50/year): Includes real-time prices, pre-market and aftermarket quotes, customizable screener settings, and backtesting.

An Excellent Choice For

• Traders or investors who like to combine technical and fundamental analysis.
• Anyone wanting a good single-page overview of each and every US-listed stock.

Visit Finviz

Read our full review of Finviz

2. ChartMill

ChartMill is a standalone stock scanner with a simple and intuitive user interface. It offers a good balance between providing all the information you need and avoiding information overload. The website covers North American and European equities, which is unique.

The scanner itself gives you around 120 descriptive, fundamental and technical analysis filters to help you to find the best stocks to buy. You can also create and save custom expressions to help you find exactly the right stocks. Besides using raw data to scan, you can include ChartMill’s own ratings when screening.

In addition to running your own scans, you can refer to an extensive list of “Trade Ideas.” These are pre-configured scans designed to identify potential opportunities. The ChartMill Analyzer is another tool that provides a detailed overview of each stock. This stock evaluator includes technical and fundamental analysis, a chart, analysts’ ratings, and forecasts. All data is delayed by 15 minutes which may be an issue for some day traders.

Pricing

ChartMill has a unique system of credits that lets you pay for what you use. You start the month with 6,000 free credits, and every time you use a tool, credits are deducted. You can then buy 10,000 additional credits for $10. This is a viable option if you only run a few scans a week and know exactly what you are looking for. If you want to use the scanner more often, it is advisable to buy a monthly subscription.

• Unregistered (Free, ad-supported): Screener with 3 results per scan, no watchlists, charts or reports. 
• Unlimited ($29.97/month or $259.97/year): More saved filters and watchlists and advanced filter support.

An Excellent Choice For

• Traders or investors who want to get up and running quickly.
• Anyone looking for a straightforward scanner with fundamental and technical filters.
• Investors interested in North American and European equities.

Visit ChartMill

3. Trade Ideas

Trade Ideas, one of the most powerful stock screeners around, bills itself as a market intelligence platform. The platform includes a range of features to assist traders in generating ideas. These include a powerful stock scanner, preconfigured idea screens, and AI (artificial intelligence) powered suggestions and recommendations. Besides technical and fundamental data, the screener includes data from social media platforms. With this screener, you can be extremely specific about the stocks you are looking for and then save your screener settings.

In addition to the stock scanner, the platform includes a live trading room, simulated and automated trading, and backtesting of trade ideas. Trade Ideas can be accessed via a web portal or a desktop application. There are two subscription plans, but no free version. The biggest disadvantage to Trade Ideas is the hefty price tag. It is also worth noting that the platform only covers US and Canadian-listed stocks.

Pricing

• Standard ($118/month): Includes stock scanner, trade ideas, simulated trading, price alerts and live trading room.
• Premium ($228/month): Additional features include AI-powered recommendations, backtesting, and automated trading.

An Excellent Choice For

• Professional and active traders wanting an extra edge.
• Traders who devote a fair amount of time to their trading – you will need to spend some time using the platform to get your money’s worth out of it.

Visit Trade Ideas

4. StockFetcher

StockFetcher is a dedicated stock scanner tool with a focus on technical indicators and price action. The website also includes basic charts and watchlists. The scanner is unique in that filters are created using a custom coding language. This may sound complicated, but the language is simple and based on natural language. An example of a filter is as follows:

show stocks where MACD Fast Line (12,26,9) crossed bearish MACD Slow Line(12,26,9) and MACD Fast Line (12,26,9) is below 0

The code-based filters allow you to set up very complex scans, which you can then save. You can also set all your scans to run every evening and have the results emailed to you. There are plenty of prebuilt scans to use if you don’t want to create your own. Results can be displayed as charts, so you can go through all the results quickly to find those worth investigating further. Watchlists can also be displayed in the form of charts.

StockFetcher is geared toward technical analysis, so there are just a few fundamental and descriptive filters. Also, it’s worth noting that data is delayed by 15 to 20 minutes which may not suit everyday traders.

Pricing

• Free: You can run scans on the previous day’s data and see the first five results.
• Standard ($8.95/month or $24.95/quarter): 100 saved filters and watchlists, daily email alerts.
• Advanced ($16.95/month or $44.95/quarter): More saved filters and watchlists and advanced filter support.

An Excellent Choice For

• Anyone looking for a price action scanner at a great price.
• The complex scans with daily results emails are perfect for swing traders and trend followers.

Visit Stock Fetcher

5. Stock Rover

Stock Rover is a popular stock scanner and research platform for long-term investors. The platform covers North American listed stocks, ETFs, and mutual funds. A lot of thought has gone into keeping the layout straightforward and easy to navigate. However, there is a lot of information available, including 10 years of historical data and 8-page research reports on each stock. A useful feature is the ability to chart fundamental data.

The screener includes 140 pre-configured scans, but you can also set up and save your own scan with over 500 different metrics. The screener is quite unique in that you can set up complex scans using equations and if/then logic. Besides the screener and extensive analysis resources, there are also tools for portfolio management and analysis. You can link these tools to your brokerage account to analyze and rebalance your portfolio.

Pricing

• Free: Portfolio management tools and some data, but no scanner.
• Essentials ($79.99/year or $7.99/month): Scan using 260 metrics and use other basic tools.
• Premium ($179.99/year or $17.99/month): Scan using 350+ metrics, export data, chart with multiple metrics and more.
• Premium Plus ($279.99/year or $27.99/month): Scan with 650 metrics and custom metrics, ratio charts, valuation charts.

Note: Research reports cost an extra $49.99 to $99.99 per year, depending on the plan.

An Excellent Choice For

• This is just about the best stock screener for those focused on value and dividend investing.
• Investors looking for lots of data at a budget-friendly price. 

Visit Stock Rover

Read our full review of Stock Rover

6. Seeking Alpha

Seeking Alpha is a very popular stock research site with a focus on user-generated, fundamental research. Anyone can contribute research articles and opinions to the site, and readers can comment on articles too. The site arguably has the biggest collection of crowdsourced research available.

Besides the user-generated research, Seeking Alpha rates stocks on several metrics, including a quantitative rating and aggregate ratings from contributors and Wall Street analysts. You can also access analyst estimates, financial statements for the last ten years, and other data.

The Seeking Alpha stock screener is mostly based on the ratings and grades that the site assigns to each stock. Each stock gets a rating of 1 to 5 from a quantitative score, contributor scores, and Wall Street analyst Scores. There are also grades from A to F for value, growth, profitability, momentum, and EPS revisions. 

The drawback of this stock filter is that you cannot specify any specific metrics for a share when looking for the best stocks to buy. Besides the momentum rating, there are no filters related to price action or technical analysis. While this isn’t a good filter for technical traders, it can be used to complement a charting platform.

Pricing

• Basic (Free): Limited access across the platform, including new articles but no archived articles.
• Premium ($239/year): Access to all user-generated research and ideas, the screener and data and ratings for all stocks
• Pro ($499/year): Includes access to top ideas and exclusive interviews and newsletters.

An Excellent Choice For

• Any investor wanting crowd-sourced opinions will find value in this stock analysis website.
• Investors wanting a lot of information on listed and OTC stocks that are traded in North America. This includes foreign companies with American Depository Receipts (ADRs).

Visit Seeking Alpha

7. Simply Wall St

Simply Wall St is a stock analysis tool with a focus on visualization and simplicity. When it comes to displaying fundamental data graphically, this is the best site there is. Simply Wall St does not make buy and sell recommendations but seeks to give investors the tools and information to make their own decisions.

For each company, a “snowflake” graphic lets you quickly see how the stock is rated in terms of value, future growth, dividends, financial health and past performance. Apart from the snowflake, there are 27 graphics for each stock that illustrate the stock’s financial position, valuation, analyst forecasts, dividends, ownership and insider transactions. Major risks are also listed for each company.

The site covers just about every stock in the world, including US OTC stocks. The focus is on long-term investing using fundamental data, so there is very little in the way of charting. When it comes to a stock scanner, Simply Wall St once again simplifies everything. There are actually two stock screeners:

• The “Discover” tab allows you to find stocks by industry, theme or potential opportunity. 
• The “Screener” tab lets you filter stocks according to a handful of fundamental factors as well as ratings for value, future growth, dividends, financial health and past performance. 

Pricing

• Free: Requires registration and includes access to 5 free stock analysis reports per month and an unlimited watchlist.
• Premium ($120/year): 30 company reports per month and the stock screener.
• Unlimited ($240/year): Unlimited company reports per month, stock screener, and excel and pdf exports.

An Excellent Choice For

• Long-term investors who want to keep things simple.
• Anyone who prefers visualizations over tables of data.
• Traders and investors who need a tool to quickly get an overview of nearly any stock in the world’s fundamentals.

Visit Simply Wall St

8. Zacks

Zacks is an investment research website that features a unique rating system for stocks. Each stock is rated and ranked within its industry according to value, momentum, and other factors. The system places a lot of emphasis on earnings surprises and analyst forecast revisions. Zacks also publishes a lot of detailed research reports on individual stocks, which are available on the pricier subscription plans. 

The Zacks stock scanner is designed to be used in conjunction with the proprietary rating system, but you only include these scores in a scan if you subscribe to the premium version. You can also filter stocks according to a very wide range of fundamental criteria when looking for the best stocks to buy. There isn’t much point in using Zack’s screener if you aren’t interested in their rating system. The site has very little in the way of charts and technical analysis – so it’s more suitable for investors than traders.

Pricing

• Free: Basic screening but cannot include Zack’s ratings and scores or EPS estimates.
• Zack’s Premium ($249/year): Full access to the rating system and other research.
• Zack’s Investor Collection ($59/month): Includes additional research products.
• Zack’s Ultimate ($299/month): Includes even more research products.

An Excellent Choice For

• With its emphasis on earnings estimates, this is a particularly good screener for growth investors and momentum traders.
• The best screener around to use during earnings season.

Visit Zacks

9. TrendSpider

TrendSpider is primarily a technical analysis platform but includes a very powerful stock scanner. The platform is steadily building a community of loyal users who speak very highly of the product. The charting platform includes some new and innovative features not available elsewhere, including raindrop charts that take candlestick charting to a new level. The charts include automated and AI-powered features to point you in the direction of some of the best stocks to buy or sell. You can also find out about the seasonality of any asset price. 

TrendSpider’s stock market scanner is focused on charts and price action, so there are very few fundamental filters. That said, this is one of the most advanced and fastest platforms to find stocks with the pattern you are looking for. A useful feature is an ability to scan across every market and time frame for a specific pattern. This platform does require some commitment as the learning curve is steep. But there are a lot of education and support resources available. You can get one-on-one coaching from seasoned experts or refer to hundreds of YouTube tutorials. 

Pricing

• Premium ($33/month or $396/year): Most functions are available, but limited results for each scan and limited alerts.
• Elite ($65/month or $780/year): Includes backtesting of ideas, multifactor alerts, earnings data. 
• Advanced ($97/month or $1,164/year): Includes more alerts and more results for each scan.

An Excellent Choice For

• Traders looking for some of the most advanced technical analysis charts and tools around.
• Active traders trading on any time frame, and particularly those who analyze stocks on multiple timeframes.

Visit Trend Spider

10. TradingView

TradingView is primarily a technical analysis platform, but it includes a very capable stock scanner. The platform’s technical analysis capabilities include numerous indicators, custom indicators, and different timeframes. You can also keep track of stocks with multiple watchlists.

The platform includes data for almost every tradable asset in the world, including stocks, OTC shares and ETFs. You can also include economic indicators in your analysis. TradingView has also evolved into a social network for traders and now has a large community engaging on the platform. You can share ideas and charts, and you can follow and communicate with individual contributors.

The screener is one of the best around if you want to combine fundamental filters with technical indicators to screen stocks. Results are displayed in a table that can easily be sorted by a specific field or filtered further. If there are any drawbacks, it may be the potential for information overload. At this stage, you cannot incorporate custom indicators like an S&P500 relative chart in a scan.

Pricing

• Basic (Free): Ad-supported with limits on alerts, chart tabs and indicators
• Pro (14.95/month or $126/year): 2 charts per tab, 5 indicators per chart, 20 alerts.
• Pro+ (29.95/month or $215.4/year): 4 charts per tab, 10 indicators per chart, 100 alerts, and other features.
• Premium (59.95/month or $360/year): 8 charts per tab, 25 indicators per chart, 400 alerts, and other advanced features.

An Excellent Choice For

• Anyone who likes to combine technical and fundamental indicators in a scanning tool.
• Traders and investors who trade lots of different asset classes.
• Traders who want to be part of a community and keep tabs on what other traders think about a stock.
• TradingView is also good for day trading and swing trading.

Visit TradingView

Read our full review of TradingView

Compare the two stock screeners integrated within technical analysis platforms: TrendSpider vs TradingView.

11. TC2000

TC2000 is one of the oldest stock screeners around but remains popular, particularly amongst day traders. The platform combines a trading platform with charting and a stock filter that also covers ETFs and options. TC2000’s tools can be accessed using a browser, a desktop application, or a mobile app.

TC2000 is especially well suited to day trading as you can manage your positions, orders, charts and the market scanner on one page. This allows you to easily manage your workflow when time is a critical factor. You can also trade directly via the platform if you open a TC2000 Brokerage account.

The screener is useful for running intraday scans for gaps and stocks with heavy volumes. You can also set up sophisticated scans based on a sequence of events that need to occur. Stocks that meet certain conditions can also be highlighted on a watchlist. If you want to get the most out of the stock screeners, you will need to subscribe to the Gold or Platinum plan.

Pricing

• Silver ($9.99/month): Most charting, watchlist and portfolio tools.
• Gold ($29.99/month): Includes EasyScan® wizard, trend lines and Fibonacci levels, and 100 alerts.
• Platinum ($89.98/month): Includes conditional idea backtesting and historical scans.

Note: Additional fees apply to real-time data feeds, extra alerts and extra scans.

An Excellent Choice For

• Day traders, swing traders and options traders.
• Active traders wanting a stock scanner that combines technical and fundamental factors in a stock 

Visit TC2000

12. StocksToTrade

StocksToTrade is a trading platform affiliated with well-known penny stock trader Tim Sykes. The platform is geared toward traders who need the data and tools required to trade illiquid shares. This includes level 2 market depth data, charts, watchlists, and of course, a stock scanner. The screener comes with pre-configured scans and an AI-powered scanner (called “Oracle”), which identifies the best stocks to buy each day.

Extra features include the ability to filter Twitter conversations by ticker. STT University is a vast trove of educational resources like webinars, articles and tutorials. StocksToTrade, covers US markets, including OTC stocks. The obvious drawback to this platform is the fact that it is a lot more expensive than other platforms. We would recommend further research before committing to a subscription.

Pricing

• Standard ($179.95/month or  $1,899.5/year): All standard tools and educational material.

Note: Some feeds and features (including level 2 data and the Oracle scanner) incur extra fees.

An Excellent Choice For

• Small Cap traders and investors who can justify the extra expense. 
• Short-term equity traders.

Visit StockToTrade

13. Market Gear

Market Gear is a trading platform with lots of tools divided into modules. The platform can also be connected to several brokers. The dashboard can be customized with the tools you use on a regular basis. As one would expect, there are charts, watchlists, a scanner, research and news feeds. There are also a few useful tools that are less common, including a trading journal and an entire module dedicated to options trading.

There are screeners for both stocks and options, which include a large number of pre-configured scans. Alternatively, scans based on technical and fundamental criteria, or MarketGear’s own ratings, can be created and saved. The option scanner lets you scan for multi-leg option trades that fit your criteria. MarketGear also has a social trading component, which allows you to share and collaborate on strategies and ideas. In addition, MarketGear runs regular courses on trading. MarketGear is not cheap but does include a large number of tools which may justify the price.

Pricing

• Standard ($75/month): One price includes all tools.

Note: 14-day free trial and 33% discount for first three months available.

An Excellent Choice For

• Options traders – MarketGear has one of the most comprehensive sets of options trading tools around.
• With a large array of trading tools, MarketGear is ideal for active traders.

Visit Market Gear

14. Atom Finance

Atom Finance is positioned as an advanced research and trading platform and aims to bring resources previously only available to institutions to individual investors. Atom was established in 2018, making it one of the newest stock screeners around. The stock scanner includes the most common metrics, but some traders may expect to see more. Filters can be customized by creating equations using a drop-down menu.

Atom’s more powerful features fall under modeling and analysis. You can compare stocks across a large range of financial and performance criteria to help you further narrow down a list of the best stocks to buy. You can also use Atom Hubs to create and follow dynamic watchlists and scans. Another feature, “sandbox,” lets you experiment with different scenarios and their impact on a company’s value.

Furthermore, Atom gives you access to a lot of unique information, like operational KPIs for companies, SEC filings, and ETF and fund holdings. As mentioned, Atom Finance is a new platform and is therefore evolving and growing. The platform currently covers US-listed stocks, ETFs and mutual funds. Apps are available for Android and iOS devices. 

Pricing

Atom recently moved from a freemium model to a single plan which costs $6.99 a month and gives subscribers access to all the tools on the platform. New users can sign up for a 7-day free trial.

An Excellent Choice For

• Investors wanting to go into quite a lot of detail and compare stocks before investing.
• Quantitative investors and traders.
• Pairs (long/short equity) traders.

Visit Atom Finance

15. Yahoo Finance

Yahoo Finance is one of the most popular financial market websites, particularly amongst retail investors. The site provides a lot of news and data (including real-time quotes) for individual stocks listed around the world. It also includes basic charts, watchlists, and prices for other markets.

Yahoo’s stock scanner is widely used, even though its features are somewhat limited. The screener is geared more toward fundamental data than price action data. You can filter stocks by sector, industry, and an extensive range of metrics related to financial statements. You can also find trending stocks, which are the stocks most searched for on the website.

One advantage of this screener is that once you have a shortlist of stocks, you can then access detailed financial statements for each company. The screener can also be used to find non-US stocks and OTC (over-the-counter) stocks. This means it is also a good basic penny stock screener. Yahoo also has a stock screener app for mobile devices, though its features are more limited than the full website. There are premium plans that include several advanced features, but the stock screener has the same features as the free version. 

Pricing

• Free: Includes stock screener, watchlists, news, 
• Yahoo Finance Plus Lite (249.96/year): Includes fewer ads, trade ideas, fair value analysis, and other features.
• Yahoo Finance Plus Essential (349.92/year): Additional charting features and fundamental data downloads.

An Excellent Choice For

• Long-term investors looking for a free stock screener and access to financial statements.
• Investors wanting information on a wide array of shares, including OTC and foreign stocks.
• Anyone wanting a good overview of the news for each stock.

Visit Yahoo Finance

What Is a Stock Screener?

A stock screener is simply a filter that narrows a long list of stocks down to a more manageable list. This is done by excluding stocks that don’t meet the required criteria or filters. Filters can usually be categorized as either descriptive, fundamental, or technical:

• Descriptive filters include criteria like market capitalization, sector and price.
• Fundamental filters include criteria like P/E ratio, return on equity and profit margin.
• Technical filters include criteria like price performance, indicator levels and trading volume.

Investors typically use stock screeners to find stocks worthy of further research. The filters applied will vary according to the investment strategy, which may lean toward growth, value, income, or another theme.

Investors can also include technical filters to find stocks with strong fundamentals that are oversold. Traders often use stock scanners to find stocks worth watching and then add those stocks to a watchlist. Momentum, volume and volatility are good criteria to use to find shares that are on the move.

Stock scanners are especially useful if you have a specific niche, like penny stocks or if you want to buy cheap stocks that the market may have overlooked.

A stock scanner will allow you to save a lot of time by immediately eliminating the stocks that do not fit your criteria.

Learn more: How Stock Screeners Can Help You Find the Best Stocks for Your Portfolio

Some stock scanning software is completely free or only requires registration. However, to get the most out of a screener, you will usually need to pay a monthly subscription fee. To get the most value for your money, it’s worth spending some time choosing the scanner that best meets your needs.

Tip: Most brokerage trading platforms have built-in stock screeners – but they are typically limited in functionality. We recommend using a standalone screener or a screener that is part of a research or analysis platform.

How to Choose a Stock Screener

The best way to choose a stock screener is to first list your requirements and then consider the various options. You will also need to decide whether a standalone screener or a screener that forms part of a larger platform. Technical analysis and fundamental stock research platforms often include a screener, but in some cases, it’s not the best screener around. Using a standalone stock scanner will give you more flexibility and you won’t need to make compromises – but this approach may also cost more. Here are some of the questions to consider when evaluating a screener:

• What markets are you interested in? 
• Are you interested in other assets like ETFs, mutual funds, options, or cryptocurrencies?
• Do you need real-time data, or will delayed or end-of-day data suffice?
• Are you more interested in fundamental or technical criteria to find the best stocks to buy – or are you looking for a balance?
• What other investment tools do you need?
• How much time will you spend scanning the market? There is no point in using a very complex scanner if you’ll only use it for 30 minutes a week.

Conclusion

Stock screeners vary considerably, and the one you choose will become a key part of your process. So, if you plan to start investing, it’s worth taking some time to find one that makes sense for you and your approach to markets.

A final point to consider is simplicity. It’s very easy to get side-tracked by all the different criteria you can use to filter stocks. A screener is a tool to help you find the stocks that fit your strategy, not a tool to create new strategies. Choose your strategy first and then use a handful of filters to find the shares that fit that strategy.

The post 15 Best Stock Screeners of 2024 (Free & Paid) appeared first on FinMasters.

More Buyers Than Sellers?

Stock market fluctuations are often attributed to the day’s news. But often the real reasons are less obvious. To really understand what causes stock prices to move, we need to look at what leads to the decisions to buy or sell stocks.

Over the long term, the value of a company is determined by its ability to earn profits. But this alone doesn’t cause the stock price to move. The price of a stock is still ultimately determined by investors deciding the price at which they will buy or sell it.

When you speculate on a stock price, you are actually speculating on the actions of other market participants. Every trade is the result of a decision by a buyer and a decision by a seller. But not every trade results in the price of the asset moving. Prices rise when buyers decide to pay a higher price, and they fall when sellers accept a lower price.

Prices don’t actually rise when there are more buyers than sellers, but when buyers are more adamant than sellers. So, we need to consider the reasons for paying up or selling at a lower price.

Price Makers and Price Takers

Price makers get to trade at the price they want to trade. Price takers have to accept the best available price.

It is the price takers who make the decision to move a price, and they usually do so when they are compelled to do so. It comes down to whether a trader needs to trade, or merely wants to trade.

Price makers want to trade at a specific price, but they don’t need to trade at all. On the other hand, price takers need to trade – and they may need to trade regardless of the price.

Stock market fluctuations are usually driven by people who need to trade rather than people who want to trade.

We can divide the reasons people may need to trade into three categories: psychological needs, rules-based needs, and contractual needs. In the following, we’ve listed a few examples of how each of these factors can cause stock prices to move. 

Psychological Needs of Investors

The psychological need to trade generally boils down to fear – either the fear of missing out (FOMO) or the fear of losing money. FOMO is what causes traders to chase stocks that break out of a trading range. This is one of the most powerful forces in the market and is one of the main reasons momentum strategies work.

Fear is also the factor that drives corrections and bear markets. An investor watching their portfolio decline in value will often sell stocks at irrationally low prices to make the losses stop. Capitulation occurs when a lot of investors finally give up and sell a stock. Market bottoms often coincide with capitulation, because this is the point at which everyone who was likely to sell has already sold. Fear also drives prices higher when a short squeeze takes place.

When you short sell a stock, your potential loss is theoretically unlimited. If you use leverage, as a lot of short-sellers do, the potential loss is magnified. When prices rise, those with short positions have to cover their positions or face unlimited losses. Their buying drives the price higher, causing other traders with short positions to close their positions too. This process is driven by fear of loss – and traders are forced to cover at whatever price they can. In other words, they become price takers rather than price makers.

Rules-Based Factors that Lead to Stock Market Fluctuations

An investor following a rules-based system will buy or sell stocks according to a system of rules. Rules-based systems include strategies that require periodic rebalancing, hedging strategies, and mechanical trading systems. Momentum investors and trend followers buy and sell stocks when certain conditions are met. When they execute a trade, they typically have very little discretion and trade at the market price. This is why a stock price will often move very quickly when a major trend line is broken, and then retrace back to the trendline. The initial buying or selling occurs as trend followers open or close positions, and then as soon as all those orders are satisfied the price retraces.

Automated trading systems and algorithms are just rules-based systems that run automatically. An algorithm will have the same effect on prices as momentum and trend-following strategies unless it’s a mean reversion system, in which case it may temper price movements. Action taken to reduce risk can also cause prices to move – though this will usually happen when prices have already moved. Short-term traders often use stop losses to limit losses.

When a stop loss is breached, positions are usually closed with a market order, which again puts pressure on the stock price. If traders use leverage, stop losses become even more important as losses can be magnified. The more leverage being used by those holding a stock, the more those traders will move the price when the price moves the wrong way. In this way, the use of leverage can increase the size of stock market fluctuations.

Contractual Reasons for Stock Market Fluctuations

Fund managers typically manage a portfolio according to a mandate which specifies the percentage of the portfolio that needs to be invested at all times. If the fund manager is underweight toward month-end, they will be forced to buy stocks, even if they believe the market is overvalued. This often causes stock market fluctuations at the end of a month.

One of the dilemmas fund managers often face is that they have to deal with inflows when they believe stocks are overpriced and outflows when they believe stocks are cheap. Funds can move prices significantly when they are forced to buy or sell stocks as money flows in and out of their funds. This is an example of a market participant needing, rather than wanting to trade and being forced into the position of being a price taker.

Another example of a contractual relationship leading to price-insensitive buying or selling is margin trading accounts. If you use leverage to trade, you have to maintain a certain amount of capital (margin) in your account. If a trade goes against you, you have three options: deposit more margin, close your position or have it closed for you. If you close the position, you may have some discretion over the price you trade at, but ultimately you will need to trade. If you don’t close the position and can’t meet your margin call, your broker will close the position with a market order.

Option writers are often compelled to trade to hedge positions, or if an option they sell is exercised. When the price of a stock is close to the strike price of a large number of options, anyone with a short position in one of those options will need to constantly hedge their position. If the price moves against the option sellers, a gamma squeeze, which is similar to a short squeeze, occurs.

Conclusion: Factors That Are Causing Stock Market Fluctuations

The point of this article is to show that stock market fluctuations usually occur when market participants are compelled to trade and become insensitive to price. The forces that move prices are often not connected to the daily news, but to the various needs that investors respond to.

This is just one aspect of behavioral finance that can help you understand how market psychology can affect prices. Considering the forces that may move a share price can give you a good idea of what may happen in the future. It will also help you to make proactive, rather than reactive decisions.

The post Stock Market Fluctuations: Why Do Stock Prices Change? appeared first on FinMasters.