Dividends add value to a stock by offering investors a cash or stock payout simply for holding shares. Dividends are especially popular among long-term value investors since they provide a relatively stable income source, but they can also increase the value of stocks for day traders. Importantly, dividends are not free and can play an important role in the price of a stock in both the short-term and the long-term. Thus, it is important for day traders and long-term investors alike to understand where dividends come from and how they can affect stock prices.
How are Dividends Paid?
Not every company pays dividends, but those that do typically pay them as a way to thank shareholders for their investments and to encourage further investment. There is a lot of variation in how dividends are paid out by different companies, or even by the same company over time. For example, while most dividends are paid in cash, they can also be paid in stock. In addition, dividend amounts are not fixed – companies may decide to raise or lower their dividends at any time, depending on their recent profits and whether they want to use excess profits to fund a dividend or to fund other projects. Some companies that pay dividends also do so irregularly, while others do so on a set monthly or quarterly schedule.
Dividends and Short-term Price MovementsInvestor Sentiment
One of the benefits and perils of a company issuing dividends is that dividends can have a significant effect on investor sentiment about that company. A company that is known for issuing consistent dividends over many years is likely to appeal to long-term value investors and to be seen as a steady, mature, and profitable company by investors, which can help drive up the share price over time. Investor sentiment may be even more favorable, increasing demand for the stock, if the company is known for consistently increasing its dividend payouts and day traders can potentially profit off of dividend increase announcements.
On the other hand, cancelling a dividend payment, decreasing one or more dividends, or even stopping dividend increases can spook investors as a signal that the company is in trouble – regardless of whether that is actually the case, or the company simply wanted to put the dividend money towards another purpose to create future value. The ensuing drop in share prices may far exceed the lost value from reduced dividend payouts, regardless of how other fundamentals of the stock have changed. These sharp negative swings in investor sentiment due to changes in dividend payouts can provide lucrative opportunities for day and swing traders to profit.
The ex-dividend date, which is the date from which new shareholders are no longer eligible to receive the upcoming dividend payout, is an important short-term driver of a stocks’ price. A stock’s price will typically increase in the days leading up to the ex-dividend date to account for the added value of the dividend itself. On the ex-dividend date, the stock price may fall to compensate for the lost value now that the dividend payout is not included with purchasing new stock.
While the price change around ex-dividend dates may be small, trading around ex-dividend dates to collect dividends or play the anticipated change in stock price can be an effective strategy for short-term traders.
When dividends are paid out in stock rather than cash, this increases the number of shares outstanding of the company without increasing the company’s value. Thus, all current shares lose a small amount of value, which can drive the price of the stock down to adjust for the new distribution of value. The amount of value loss per share depends on the total number of new shares issued, but the effect is typically small.
Dividends and Long-term ValuationDividend Yield and Dividend Payout Ratio
The dividend yield and dividend payout ratio are two metrics used to evaluate the value of anticipated dividends from a company. The dividend yield measures the annual payout in dividends than an investor can expect to receive per share held:
Dividend Yield = Annual Dividends per Share / Price per Share
The dividend yield is typically used to compare the value of dividends between two companies for investors. However, note that the dividend yield fluctuates with share price, and may appear to decrease even as share price increases and the overall return on your investment improves.
The dividend payout ratio does a better job of indicating the financial health of a company and whether it will be able to sustain its dividends into the future:
Dividend Payout = Annual Dividends per Share / Earnings per Share
A stable dividend payout, and one that is comparable to other dividend-issuing companies in the same industry, is usually a good indicator that a company will be able to maintain its dividends. Short-term traders may view an excessively high dividend payout as a signal to short the stock in anticipation of reduced dividends in the future.
Dividends per Share
Dividends per share indicates the actual value that a company is paying out in dividends each year. Changes in the dividend per share are typically what investors look at to determine whether a company is performing well or poorly based on its dividends.
Dividends per Share = (Total Dividends – Special Dividends) / Shares Outstanding
The dividends per share can thus be used to track changes in a company’s dividends over time and can be used in combination with dividend payout to determine how what fraction of the company’s earnings per share is paid out to investors in dividends.
Dividend Discount Model
The dividend discount model, or Gordon growth model, is popular among long-term value investors as a way to determine the fair share price of a company based on its dividends. According to this conservative valuation model, stocks are essentially worth what they will pay out to investors over their lifetime. Thus, the dividend discount model is extremely dependent on assumptions about the rate of future dividend increases, future interest rates, and a company’s growth. Note also that the dividend discount model does not take into account the value of an increase in the stock’s price over time relative to what it was purchased for.
Although this model is used primarily among long-term investors, it can also be useful for short-term investors as a metric of where a stock may find support.
Dividends are an important part of stocks as they can affect both short- and long-term price movements. Dividends have a significant effect on investor sentiment and actual share value. In addition, long-term investors often look at dividends as a primary component of the fair price of a company’s shares, while short-term investors can incorporate dividend payouts into their trading strategies.
Broad economic factors routinely have a jolting influence on the stock market, forcing traders to react both quickly and over time to adjust to new market conditions. Understanding the types of economic factors that affect the market and how they influence it can go a long way toward improving your profitability as a trader.
Why Traders Should Care
While some traders might find economic announcements and global news inherently interesting, there are a variety of reasons why every trader – from day traders to long-term investors – should pay attention to the economic factors that impact the stock market.
First, the more you understand about the economy, the more likely you are to succeed as a trader. Economic factors are in many cases the large-scale drivers of the stock market’s fortunes, whether in specific sectors or across the market as a whole. Recognizing the economic forces at play over both the short- and long-terms can help you hone your trading strategy and set positions that ride the larger economic current rather than fight it.
Even day traders who don’t hold positions overnight should pay attention to economic factors. Announcements about interest rate changes or the release of reports about job and wage growth can cause large, sudden intra-day shifts in the way the markets are trading. At the same time, sustained economic movements can dramatically affect the way that the markets are trading from day to day – for example, economic factors may influence whether the stock market is highly volatile or trending strongly.
Economic FactorsInterest Rates
Interest rates are one of the most important sets of numbers across the entire economy, including the stock market. Interest rates are set by the Federal Reserve as a way to make borrowing money more or less expensive, and in the process keep currency inflation to within an established target rate.
Changes in interest rates affect the entire economy in myriad ways. When interest rates are high, it is more expensive for consumers and businesses alike to borrow money – which can cause people to think twice about buying a home or a car or to borrow money to hire more employees or purchase new equipment. On the other hand, low interest rates can make it easier for the economy to expand.
It may be unsurprising, then, that interest rates have a big affect on the stock market – after all, stocks’ values are ultimately tied to how profitable their underlying companies are, and profitability may be restricted when interest rates are high and consumers and businesses are buying less stuff. Thus, interest rate announcements by the Federal Reserve can cause huge swings in intra-day trading and can cause the stock market to trend strongly upward – in response to lowered interest rates – or downward – in response to raised interest rates – for months afterward.
Traders can keep an eye on interest rates by watching for announcements by the Federal Reserve. Typically, the Federal Reserve gives several days’ notice of any upcoming announcement, at which point rumors about potential changes will begin to circulate.
Inflation is the rate at which a currency devalues each year. For example, an inflation rate of 1% means that today’s $100 bill will only be worth the equivalent of $99 in one year’s time. While economists have some difficult pinning down the exact causes of inflation, raising interest rates is one of the best methods the Federal Reserve has to prevent inflation rates form skyrocketing.
Like interest rates, inflation rates have a number of effects on the economy that can be hard to tease apart. Interest rates that are too low can shake consumer confidence, which hurts businesses, while interest rates that are too high can make it too expensive for consumers to purchase goods. High inflation is particularly bad for businesses because it also devalues their monetary gains.
The stock market expects some small changes in inflation rates, so not every announcement of inflation rates will cause a market change if the announcement is in line with expectations. However, inflation announcements are typically negative for the market, both intra-day and potentially over a period of weeks or longer, if they greatly exceed the changes expected by investors.
Traders can track changes in inflation rate through the Bureau of Labor Statistic’s Consumer Price Index, which is released monthly.
Politics, both domestic and international, can have a large influence on the stock market.
In terms of domestic politics, this can best be seen when major elections – like the mid-term or presidential elections – occur. Typically, investors see one candidate as better than the other as offering better policies for increasing corporate and shareholder profits or for improving the overall economy, which can cause large multi-day spikes in the way the market is trending.
The US’s trade war with China is an example of how international politics can also dramatically affect the marketplace. Uncertainty about the economic ramifications of this political fight – which has specifically been fought with tariffs, which affect the price of good for consumers and businesses – has translated into volatility and negative price movements in the stock market.
Unlike interest or inflation rates, politics is not always overtly economic, which can make it difficult for traders to parse out what political news will have an impact on the market and what news will not. The best resources for following how politics may affect the stock market, and whether that impact will be positive or negative and short-lived or long-term, are often financial news outlets.
The health of foreign markets – in Europe, Asia, or elsewhere – can sometimes, but not always, have an impact on US markets.
The main determinant of whether foreign markets will affect US markets, and how dramatic that impact may be, is how dependent US corporations or consumers are on those foreign markets. In many cases, investors worry that crisis in one country or market may spread because of the global nature of the companies that make up the large US exchanges and the potential increase in the costs of foreign goods if a currency is destabilized. In other cases, such as has been the case when financial distress has hit China, investors worry that the growth of US companies will slow as their global marketplace becomes less valuable.
Still, it can be hard to predict how actions in foreign markets will generate a reaction in US markets. Typically, reactions from foreign market movements are short-lived – on the order of days to months – and will not affect long-term investors, although day traders and short-term investors will need to be wary of this economic factor. While it is possible for traders to monitor foreign stock exchanges just as they would US exchanges, financial news services are a more sustainable way to keep an eye on foreign stock activity that could impact the US.
Unemployment Rate & Jobs Reports
The relationship between unemployment rates and the stock market can be complex. While it might intuitively seem as if lower unemployment is good for the economy and therefor must be associated with a bullish stock market, that is not always the case. Instead, when unemployment is low, investors tend to be more willing to pay high price-to-earnings ratios for companies, which can turn bearish since high valuations are associated with below average forward returns.
That’s not to say that high unemployment is good for the stock market, either. High unemployment typically signals that the economy is in trouble and that consumers and businesses are not likely to spend money, which is bad for corporations across the board. Thus, like for inflation rates, there is a sweet spot when it comes to matching unemployment rates to stock market outlook.
Unemployment rates are typically announced monthly by the Bureau of Labor Statistics in what have become known as jobs reports. These reports can cause wild intra-day swings in the stock market, even when there is little news or it is difficult to interpret the jobs report’s findings in the context of what it means for the broader economy. In addition, jobs reports can give investors comfort or make them wary, which can influence longer-scale changes in the stock market.
Economic Growth & Projections
Reports of economic growth and projections of future growth are a frequent trigger for intra-day and multi-day swings in the stock market. In the same way that corporations need to perform on both reported profits and projected profits during earnings reports, economic growth announcements typically need to meet investor’s expectations of both current and future growth in order to cause a significant uptick in stock prices. While disappointing economic outlook reports may not have much of an effect in a bullish market, they can have a significant effect in volatile or bearish market conditions.
Like jobs reports, economic growth reports can be difficult to interpret in the context of the both the economy as a whole and the stock market. However, investor sentiment is usually clear soon after the report’s release and the effect can be intra-day or sustained over a period of days to weeks.
Economic growth reports are typically released quarterly by the Bureau of Economic Analysis.
The stock market is one part of the overall economy, but it does not stand alone from the rest of the economy. A variety of economic factors, including interest and inflation rates, overall economic growth, unemployment, and even politics, can influence the stock market on both intra-day and longer timescales. Smart investors need to be aware of what economic factors can impact the stock market, when and where changes in these factors are announced, and how to trade around them.
Stock trading and foreign exchange, or “forex” trading, are similar in that they depend on taking advantage of constantly changing prices – but that’s where the similarities largely end. Understanding the differences between forex and stock trading can help you to decide whether one type of trading may be more suitable to your goals and style as a trader than the other. In this article, we’ll cover the basics of forex trading and detail the many ways in which it differs from equities trading.
Stock Trading and Forex Trading
Stock trading involves buying and selling shares of individual companies, whereas forex trading involves exchanging – buying and selling simultaneously – cash minted by two different countries. This means that the mechanisms underlying these two forms of trading are very different and can be advantageous under different situations. Stock trading is best when markets are rising, since low liquidity makes it difficult to short sell in falling markets. Forex trading, on the other hand, can be lucrative in any scenario since every trade involves both buying and selling and liquidity is high.
Similarities between Forex and Stocks
Although forex and stock trading are marked mostly by their differences, they do share some characteristics in common. Both forex and stock trading involve taking advantage of short-term shifts in prices to generate profit, and in the process entail risk that the stock or currency you are holding will fall-HANNA in value from the purchase price rather than rise. In addition, much like stock trading, forex traders rely heavily on technical analysis in order to identify probably price movements and inform trading behavior. Finally, trading both forex and stocks requires a strong fundamental understanding of how markets work and practice in order to turn a consistent profit.
Differences between Forex and Stocks
One of the obvious differences between stock trading and forex trading is that they are regulated by different agencies within the US. Whereas the Securities and Exchange oversees all equities and stock options trading, forex trading comes under the purview of the Commodities Futures Trading Commission – a government agency – and the non-profit National Futures Association. One of the main goals of these regulatory is are to protect individual traders and investors from fraudulent brokers, which are abundant in the forex markets of less heavily regulated countries.
The amount of leverage available in forex trading is overwhelming compared to that in stock trading, which can make forex trading both incredibly lucrative and also incredibly risky. In the US, forex trading typically operates at a 50:1 leverage, meaning that traders need to have only 2% of the value of the foreign currency they are trading available in their brokerage account. This is in contrast to the 2:1 leverage common amongst stock brokers, where traders must have 50% of the value of the stocks they are trading available as cash in their account.
Forex trading is conducted 24 hours a day, in contrast to stock trading that operates on a much more limited timeframe and only during weekdays. Part of the reason for this is that forex trading does not rely on any central exchange with a physical location, but rather occurs globally over electronic communications networks. It is also critical for global trade that forex trading take place 24 hours a day since foreign currencies are in constant demand around the world. Stocks and other securities are not typically in demand enough after business hours in the country in which the companies underlying those stock reside, making it difficult to justify keeping the market open past business hours.
In general, the stock market tends to be more volatile than the forex market since currencies tend to be relatively stable in price with respect to one another when economic conditions are steady. However, this is not always the case, and forex trading has a reputation for periods of extreme volatility – which may or may not coincide with periods of extreme volatility in national stock markets.
While stocks may be traded globally, the market for equities is largely national rather than international. Forex, on the other hand, operates on a global market. This is aided by the fact that forex trading occurs 24 hours a day, so that it is possible for forex traders to trader across any currency depending on the time of day and what brokers are active. On the other hand, while there are typically thousands of stocks to choose from on a single exchange, forex trading revolves largely around 18 pairs of currencies that have particularly high liquidity.
Compared to stocks, forex is highly and consistently liquid. The reason for this is that stocks are limited in supply to a greater or lesser extent since they represent shares of a company. Blue chip stocks typically have many shares available and thus have high liquidity, while penny stocks typically have a low number of available shares and thus have low liquidity. On the other hand, while currencies are finite in supply, they are essentially infinite for the purposes of trading under normal economic conditions.
Catalysts and Price Influencers
The types of news that influences the prices of forex and stocks also differ somewhat. Forex prices are predominantly shifted by global news, whereas stock prices are most often responding to news about the company underlying the stock or its respective sector. Both forex and stock prices may respond to news about large-scale shifts in economic conditions within a country or to political news that traders believe will have an impact on the economy in the near future.
Which is Better for You?
Whether stock trading or forex trading is better for you largely depends on your goals as a trader, on your trading style, and on your tolerance for risk. Forex trading involves far more leverage and far less regulation than stock trading, which makes it both highly lucrative and highly risky. On the other hand, tracking forex market is often easier than tracking stock markets since there are only 18 common pairs of currencies to trade rather than thousands of potential stocks. One unusual drawback to forex trading compared to stock trading is that it takes place 24 hours a day, which means that you may need to be working at odd hours to realize certain trades and that the market is still changing whenever you are not working. Ultimately, practicing both forex trading and stock trading to find which form of trading fits you better is the best way to choose between them.
Forex and stock trading are highly divergent forms of trading based on short-term price action. Forex and stock trading differ in terms of the regulations surrounding trades, the size of the markets and hours of trading, the liquidity and volatility of prices, and even the types of news that prices respond to. Understanding both forex and stock trading can help you determine which type of trading better fits your goals and trading style.
Pump and dump schemes are illegal, yet prevalent in today’s digital trading world where anyone can quickly and easily put money into “hot” investments. In this article, we’ll cover the basics of how a pump and dump scheme works, how to spot them, and how to profit when you see an illegal pump and dump happening.
What is a Pump and Dump Scheme?
A pump and dump scheme occurs when a firm, a group of investors, or an investment influencer artificially inflates the price of a particular stock of which they already hold a large volume by convincing other investors to buy it. Once the price has risen, the person or group behind the scheme rapidly sells their shares at the new, higher price and triggers a sharp price drop that can leave other investors who were convinced by the scheme holding the stock at a much lower price than what they originally paid for it.
How Does a Pump and Dump Scheme Work?
A pump and dump scheme begins when an investor or group loads up on shares of a particular stock. Most often, schemers target penny stocks or micro-cap stocks since it is relatively easy to influence the price of these stocks with only a small capital infusion from outside investors.
The schemers then promote the stock that they own to other investors with the message that the stock is “hot” and about to take off in price. Traditionally, this promotion was done in so-called boiler rooms by brokers over the phone or by physical mailers, but now commonly takes the form of spam emails. If this promotion is successful, outside investors will also buy the stock, causing its price to rise rapidly based solely on hype and demand rather than solid business fundamentals.
Once the stock price rises, the schemers sell their shares for a profit, in the process triggering a rapid drop in the stock price. Panic selling among investors who were convinced to purchase the stock typically ensues, dropping the price even further. The result is that investors who were convinced to buy the stock at an inflated price are left holding shares that are worth far less than what they paid for them.
How to Spot a Pump and Dump Scheme
The key to identifying a pump and dump scheme so that you don’t get wrapped up into it is to think carefully and research thoroughly any stock that is being promoted as “hot” by someone who you don’t necessarily know or trust. Whenever you encounter a promotion that looks enticing, go beyond just the promotion itself – see if the same group has promoted other stocks in the recent past, and how those predictions have turned out. It is also a smart move to check Twitter to see if others are talking about the promotion as a pump and dump scheme or to Google the company to see if they have a good reputation or have been implicated in schemes in the past.
Another important step before trusting any promotion is to research the company in question yourself using the resources and technical indicators you would normally rely on before investing in a company. If the company’s business fundamentals show that it truly is undervalued, then you may be on to something. However, if the numbers indicate that the company is valued appropriately or even overvalued, then the promotion is likely false.
The last thing to check is the volume chart for the stock in question. A hallmark of pump and dump schemes is that the trading volume for a stock will go from nearly zero to extremely high right at the start of the price rise. Although this can happen even when a pump and dump scheme is not underway, identifying this pattern adds more information for you to decide about the stock.
How to Trade Pump and Dumps
Even if you think that a pump and dump scheme is happening, there is still opportunity for profit to be had in trading the stock. Just remember that, given the “dump” portion of the scheme, trading can be extremely risky since the stock price is likely to end at or below where it started. However, since the price should rise during the “pump” phase, there is potential to profit by buying high and selling higher as long as you sell ahead of the crash and do not allow yourself to be sucked into the hype as you see the price continue to rise.
Another possibility is to short the stock since you expect the price to crash once the schemers dump it. However, be cautious when attempting to short since high demand for the stock may mean that your borrowed shares are called back in by your broker before the dump begins, in which case you would likely suffer a loss.
Illegal pump and dump schemes can be extremely dangerous for investors who fail to recognize that they are happening and who are left holding the bag after a dump occurs. Although it is difficult to be certain that a scheme is underway, a little research into the person or group promoting a stock and the company behind the stock itself can go a long way towards protecting yourself against inflated hype. In addition, for those who can recognize a pump and dump scheme is likely occurring and who are willing to take a significant risk, there is excellent potential for profit.
Insider buying and selling occurs whenever someone who is considered to be an insider of a company – an executive, manager, beneficiary who owns more than 10% of the company’s stock, or employee with knowledge of important company activity – buys or sells stock of their own company. Insider buying and selling can be a good indicator of whether a company will enter a bullish or bearish trend, since insiders have a very strong understanding of a company’s position and outlook in the market. Insider buys and sells are reported publicly to maintain transparency in the markets and these trades are commonly taken by outside investors as indicators of a stock’s future price trends.
Insider Buying and Selling vs. “Insider Trading”
Insider buying and selling is distinct from “insider trading,” which is illegal and monitored closely by the SEC. It is not illegal for insiders to buy and sell shares of a company. “Insider trading” occurs when an insider buys or sells stock of their company based on information that is not available to the public – for example, an upcoming product announcement or unreleased news of a data breach. Insider buying and selling, on the other hand, are trades based on publicly available information about the company and are completely legal as long as they are reported to the SEC appropriately. Executives may buy stock when they feel the public has undervalued the company based on their last quarterly report, for example, or sell stock when they expect a future decline in prices.
Who Counts as an Insider?
Any executive, high-level manager, or beneficiary who owns more than 10% of a company’s voting stock is considered an insider by the SEC when it comes to insider buying and selling. However, with respect to illegal insider trading, the SEC’s definition of who is an insider is relatively broad – it expands to include any employee with knowledge of important non-public company activity and anyone not associated with the company who receives a tip about future activity from an insider.
How to Track Insider Buying and Selling
Insider buying and selling must be reported to the SEC within two business days of the transaction, typically through SEC Forms 3, 4, and 5. Transactions listed on Form 4 – which covers the majority of insider buying and selling – are then posted to the SEC’s online EDGAR database for public viewing. In addition, there are many sites, both free and fee-based, that collate the insider buying and selling data posted to the EDGAR database to make it more easily searchable or offer a daily digest of insider transactions.
What Does Insider Buying and Selling Mean?
Insider buying and selling is commonly used by outside investors as a signal of future trends in a company’s stock price. When insiders buy more shares of their company’s stock, it can be seen as a show of good faith in the company. When insiders sell, it may be viewed as a lack of faith in the company.
However, before relying too heavily on insider buying and selling as trading signals, realize that insider buying and selling is completely normal and may have nothing to do with price predictions. For example, many corporate executives are compensated in stock and may need to sell in order to convert stock to liquid cash.
One way to gauge the difference between this type of selling and bearish insider selling is the size of the transaction relative to the insider’s total stock holdings. If an executive holds several million shares of a company, their selling several thousand shares is more likely a cash conversion than a bet that the company’s stock price will decline significantly in the future. Large insider buys can indicate faith in the company or a feeling that the stock is undervalued by the public, both of which signal a belief in future bullish activity. Large insider sells, on the other hand, may indicate that competition is picking up or that the stock is overvalued and are indicative of future bearish activity.
Insider buying and selling of a significant number of a company’s shares can be a strong indicator that the company’s leadership is expecting bullish or bearish price action in the future. Insider buying and selling is reported to the public, making these trades visible to traders to use as an indicator when making trading decisions. Although insider buying and selling is not a perfect gauge of future price activity, it is commonly cited by expert traders as an important component in decisions to place trades on a company.
Many investors don’t look deeply into a company’s share structure before buying stock, but this fundamental organization of shares can affect everything from the price of a share to how prices move with buying and selling action. As a result, intelligent and savvy traders investigate the share structure of a company before opening positions. In this article, we’ll cover the basics of stock share structure and how different share structures can impact trading.
What is a Stock’s Share Structure and Why Does it Matter?
A stock’s share structure is the way in which a company chooses to issue its shares to potential investors. When going public, there are several common ways that companies can organize their shares as well as numerous less common mechanisms for distributing shares. The share structure describes everything from how many shares exist, whether all shares are created equally or come with different privileges, and whether new shares may be released to the public going forward.
Stock share structure is important because it reflects fundamental investment information not explained by stock price alone. For example, a stock’s price does not indicate whether a company is a good value unless you also understand the share structure underlying the current price. For example, two stocks that have the same price may represent different values if they have widely different numbers of shares available to investors.
Share structure also impacts how a stock’s price acts in relationship to buying and selling activity by investors. After all, bid and ask prices for stocks ultimately reflect supply and demand economics – which in this case is directly tied to the number of shares of a stock available for purchase.
Finally, understanding special shares, such as preferred and restricted shares, can help you to identify when new shares may become available on the open market. This can in turn lead to buying opportunities or help you to predict when a stock’s price may change rapidly.
Basic Share Structures
A company is required to declare how many shares of its stock it will issue in total at the time it goes public. This total number is known as the number of authorized shares a company offers. The number of authorized shares is often greater than the number of shares released at any given time, as discussed below, since this allows the company to retain a controlling stake in itself or gives it the option to sell existing shares in the future to raise money. Although the number of authorized shares can be changed, this typically requires approval from existing shareholders.
The number of shares that a company has released to shareholders at any given time is known as the number of outstanding shares. Outstanding shares includes all public shares as well as shares restricted to inside and institutional investors. The number of outstanding shares is used in the calculation of earnings-per-share and can fluctuate frequently in response to share buyback programs, releases of previously company-held shares to raise equity, or stock splits and consolidations. The number of outstanding shares cannot exceed the number of authorized shares and is typically much lower so that a company can keep shares in reserve for future employee stock benefits and raising equity.
Float describes the number of shares of a stock that are available to the public – that is, the number of outstanding shares minus those shares held by company insiders and employees and institutional investors as well as restricted shares that cannot be sold for the time being. Float is one of the most important considerations when looking into a stock’s share structure since it directly affects a stock’s price volatility. Stocks with because there are fewer shares available for changes in public supply and demand, while stocks with float approaching the number of outstanding shares tend to have less volatility.
Preferred shares blend the line between stocks and bonds since they typically offer preferential payout of dividends over common stock and provide some claim over company assets that are sold in the case of debt. Although they are often available to individual investors, preferred shares tend to be purchased in bulk by institutional investors since they provide tax advantages for these companies and have little price volatility for individual investors to profit from. Preferred shares are included in the count of a company’s outstanding shares.
Restricted shares are shares that may or may not be held by the company, but are not available for public trading. Common examples of restricted shares are shares granted to employees that have a time period restriction during which they cannot be sold and shares that are held by a company during the embargo period following an initial public offering. Restricted shares can be a source of new publicly traded common stock once restrictions are lifted on a set of shares.
A company’s stock share structure can have a significant influence on how available its stock is for public trading. This availability affects everything from earnings-per-share calculations to share price, so it is important to understand in order to determine a stock’s value and potential price response to buying and selling action. In particular, a stock’s float can be a valuable indicator of how much volatility to expect from a stock.
The stochastic oscillator was developed in the late 1950s by the trader and technical analyst George Lane. The stochastic oscillator is an indicator similar to the relative strength index (RSI) or moving average convergence divergence (MACD) indicator in that it measures a stock’s price momentum.
However, unlike the RSI and MACD, the stochastic oscillator is used primarily to gauge shifts in momentum rather than overbought and oversold levels. As Lane himself put it, the “stochastic measures the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price.” Thus, the stochastic oscillator is designed to capture this change in momentum to predict a reversal.
Stochastic as a Momentum Oscillator
As mentioned above, the stochastic oscillator differs from other indicators like the RSI and MACD in that it does not indicate overbought and oversold levels. A high or low stochastic value does not necessarily mean that a stock’s price is too high or too low relative to its mean.
Instead, stochastic operates on the assumption that a change in momentum will always precede a reversal in price action. This fundamental principle that Lane put forward has since been affirmed by numerous other successful technical traders, such as Linda Raschke. Momentum measures the rate of change in price over time – thus if a stock’s price changes by $1 over one day it has a greater momentum than if that $1 change occurred over one week.
Elements of the Indicator
The two essential elements of the stochastic oscillator are the %K line and the %D line. The %K is calculated as the difference between the current close and two-week low divided by the difference between the two-week high and two-week low. The resulting value is then converted to a percentage by multiplying by 100. The %D line is simply a three-day moving average of the %K line. Since the oscillator is a percentage, it is range-bound between 0 and 100.
The timescale of the indicator can also be changed by changing the period used in the calculation. For example, rather than use the two-week (14-day) high and low and the three-day moving average for %K and %D, respectively, it is equally valid to use the 14-month high and low and the three-month moving average.
Many applications of the stochastic oscillator rely on crossovers, which occur when the %K line crosses above or below the %D line, as a trade indicator. When the %K line crosses above the %D line, that indicates that momentum is positive and increasing and triggers a buy signal. Conversely, when the %K line crosses below the %D line, momentum is falling off and a sell is signaled. The consensus among traders who closely watch stochastic oscillator crossovers is that crossovers that occur when the %K and %D lines are closer to the extreme ends of the range – that is, closer to either 0 or to 100 – are stronger trade signals.
One of the best uses of the stochastic oscillator is as an indicator for divergence trading and predicting a reversal. Bearish divergence occurs when the stock is setting new highs, but the stochastic oscillator is not simultaneously setting new highs and may even be decreasing moderately – indicating that momentum has slowed and the stock’s upward trend may be about to reverse. Bullish divergence is the opposite, occurring when the stock is bottoming out yet the stochastic oscillator is not setting new lows as well.
The main drawback to using the stochastic oscillator is that it can give false positive signals, particularly when market conditions are choppy and a stock’s price is not trending strongly. In addition, although divergence is typically a good indicator of a forthcoming reversal, the stochastic oscillator does not provide information about the timing of a reversal – the stock price may continue to diverge for relatively long periods in some cases.
Despite these drawbacks, the stochastic oscillator can be a powerful tool for both day traders and active investors since its timescale can be customized. In general, it is best to pair the stochastic oscillator with other technical analysis tool for identifying potential reversals and proper entry and exit points.
Trade commissions charged by your brokerage every time you buy and sell stocks can quickly add up and eat into your trading profits. While you may not be able to avoid commissions altogether when trading, it is possible to lower your commissions and improve your profit margins with a few simple changes.
The Costs of Being a Trader
Trade commissions are part of the costs of being a trader. Just as a manufacturer has material costs in making a product, trade commissions are part of the cost of doing business as a stock trader. An important thing to remember about trade commissions, though, is that even if they could be lower, they should not make or break your trades. If your margins on trades are commonly narrow enough that commissions can determine whether or not your trades are profitable, you likely need to reconsider your trading strategy.
In addition, while saving money on trade commissions can be helpful in increasing your profits from trading, don’t get carried away with cutting trade commissions. Having a broker you trust, a trading style that is profitable regardless of commissions, and a strong strategy for every trade you make is far more important in the long run.
Ways to SaveFind a Better Rate
Chances are, there is a cheaper broker out there than the one you’re currently trading with. Discount brokers typically offer fewer services, particularly less human-based customer service and investment advice, but offer significantly lower trade commissions than full-service brokers. Some investor-centric discount brokers also discard the ability to trade mutual funds and ETFs in favor of offering stock trading, often at a lower price per trade than brokers that offer fund trading.
Negotiate with Your Broker
Brokers will often negotiate commissions with active traders. Unlike investors who may place a few trades per quarter, a trader is generating commissions daily. Typically, the more volume you trade with your broker the more likely you are to be able to negotiate a lower commission rate. In addition, how successful you will be when negotiating with your broker depends on factors such as the size of the brokerage, how long you have been with that brokerage, and what classes of trade commissions you are looking to reduce.
Switch to Per Share Pricing
The typical trade commission structure for stocks requires you to pay a flat fee per trade, no matter how many shares are bought or sold in that transaction. A per-share rate allows you to pay according to the number of shares you trade rather than the number of trades you make.
This type of commission can be extremely useful for day traders trading moderate volumes, especially when scaling in and scaling out of trades in multiple transactions. For example, when scaling into a position and placing four buy orders of 400 shares each at a flat commission of $5, the total commission paid is $20. However, at a per share commission of $0.005, the total commission over all four trades would only be $8.00. Over time, these savings can add up for active traders.x
Note: Per-share commissions generally have an order minimum (i.e. $2).
Some exchanges will offer a rebate for adding liquidity to the market, which can then be applied against your broker’s commissions to help offset that cost. Liquidity is considered to be added to the market when you place an order that cannot be executed immediately – for example, a limit order that is above or below its execution price. It is usually not wise to change your trading style to receive these rebates, especially since aiming to add liquidity can cause positions to go unfilled or to be filled at a disadvantageous price when prices are changing rapidly. However, it is worth keeping in mind when immediate trade execution is not essential.
Review Your Trading Style
If you find yourself being charged a significant amount in trade commissions, in addition to your commissions being too high your trading style may be to blame. The more trades you make, the higher your commissions will be – so trading too much is very possible, especially if you are making trades that are not of high quality. Scaling in and out of positions using a large number of trades can also multiply your commissions if you are being charged a flat fee per trade, so ensure that you are balancing commissions against risk when scaling. Reviewing your trading style and identifying where the bulk of your commissions are coming from can be one of the best ways to begin the process or reducing your trade commissions.
Trade commissions are part of the costs of being a trader, but your trade commissions shouldn’t be extravagant. Although lowering commissions should not be your main focus when trading, these five changes are easy to make and will help you reduce your commissions and increase your overall profits from trading.
Small cap stocks belong to companies with small to moderate total market values. Small cap stocks have the potential to grow into large companies, and many investors consider them a great value because of their price and growth potential. At the same time, small cap stocks can also be more volatile than stocks from larger, well-established companies. In this article, we’ll cover everything you need to know about what differentiates small cap stocks from large caps and penny stocks and how to trade small cap stocks.
Small Caps vs. Large Caps
The “cap” in small and large cap stocks refers to the relative market capitalizations of the companies underlying different stocks. Market capitalization is calculated as the number of outstanding shares of a company’s stocks multiplied by the value of those stocks – not counting outstanding bonds and assets. Market capitalization can be used as an estimate of a company’s market value. Companies with market caps ranging from $300 million to $2 billion are considered small cap stocks, while companies with market caps greater than $200 billion are considered mega cap or blue chip stocks.
Small cap and large cap stocks differ in their relative growth, stability, and price. Large cap stocks tend to be from companies that are well-established in their respective industries and, as a result, tend to exhibit lower volatility. Large cap stocks also tend to be relatively pricey because of their well-established nature and correspondingly high demand. Small cap stocks, on the other hand, have much greater potential for growth, but can also exhibit more volatility in stock price as companies go through growth spurts and periods of consolidation. Small cap stocks are often less expensive per share, although they may have high price-to-earnings ratios. However, these are not hard and fast rules as even large cap stocks can experience volatility, growth, and contraction.
Small Caps vs. Penny Stocks
Although small cap stocks are small relative to large cap stocks, they are still orders of magnitude larger than penny stocks. Penny stocks, also known as micro cap stocks, belong to companies with market caps less than $300 million and often less than $100 million.
Penny stocks have a reputation for being extremely volatile and host to pump-and-dump schemes, while the same risks are not often present for small cap stocks. This is in large part because it takes a much greater amount of money for individual investors or groups of investors to move the price of small cap stocks. In addition, most small cap stocks are hosted on large exchanges like NASDAQ , whereas most penny stocks are traded directly on over-the-counter markets without a centralized exchange. While penny stocks and small cap stocks can be the same price per share, small cap stocks typically cost from several dollars to more than $20 per share as compared to less than $1 – and often a penny or less – per share for many penny stocks.
How to Trade Small Cap Stocks
One of the hallmarks of trading small cap stocks is their volatility. Compared to established blue chip companies, small companies typically have much higher growth and burn rates since they are starting with smaller sales bases. In addition, it takes less money invested by or pulled out from a group of investors or an institutional investor to move the price of a small cap stock significantly. It is not unheard of for small cap stocks to go on runs of more than 100% in either the positive or negative directions as a result of these factors.
With that volatility comes additional risk to trading small cap stocks compared to large cap stocks. To mitigate some of that risk, consider playing both sides of a trade. In that case, it is possible to place both long and short positions, using one to hedge against the other. For example, a short-term negative run may eventually be overshadowed by the long-term growth of the company, so it would make sense to place trades for both timescales.
Another strategy for trading small cap stocks is to identify points of momentum. Spikes in trading volume typically coincide with periods of added liquidity in the case of small cap stocks, which makes it easier to fill trades. In addition, increased volume can be a sign that a run is beginning or continuing.
Finally, an important difference to keep in mind when trading small cap stocks is who else is trading along with you. Whereas blue chip stock prices are largely driven by institutional investors, such as mutual funds, small cap stocks mostly do not have institutional investors involved because their investment would significantly alter the price of the stock. Instead, small retail investors dominate the small cap market and their reactions to news will largely drive share prices.
Small Cap Stocks Conclusion
Small cap stocks offered by companies with relatively small market valuations offer a wealth of different trading opportunities from those normally found in well-established stocks. Small cap stocks typically exhibit high volatility and therefore are considered riskier, but there is also the chance to trade without institutional investors driving price movements and to find an “undiscovered” company that will burgeon into the future. To offset some of the risk in trading small cap stocks, consider hedging your bets by playing both sides of a trade and keep an eye out for momentum by following periods of increased trading volume.