Two high-yield Canadian stocks that could takeoff in 2013

US-PDGov

By Roger Conrad

The appeal of Canadian stocks’ dividends is as great in 2013 as it was in 2012 and the world’s highest payouts are arguably even more attractive now that sudden US austerity and a major recession are off the table. If 2013 turns out to be a turning point in the global recovery, the energy and high-yield groups will produce the biggest winners.

Two companies that I’m particularly bullish on are Ag Growth International Inc (TSX: AFN, OTC: AGGZF) and Atlantic Power Corp (TSX: ATP, NYSE: AT). Both companies have been dramatically expanding their businesses in recent years.

Ag Growth’s annual sales have surged by better than a third the past three years, as it’s taken its grain-handling equipment business global.

Atlantic Power’s revenue is up 120 percent over that same time, thanks to a series of acquisitions of power plants operating in wholesale markets under long-term contracts.

Each company stumbled a bit in 2012. Ag Growth’s US sales were down 20 percent in the third quarter from year-earlier levels due to reduced harvests from an historic drought. Dry conditions are expected to extend in many parts of the country, which accounted for roughly 60 percent of 2012 sales, through at least the first quarter 2013.

Atlantic Power, meanwhile, has been unable to renew contracts set to expire in July and December for the power sold by two natural gas-fired plants in Florida. Last month management announced it would take a USD50 million charge to fourth-quarter 2012 earnings to reflect the impairment of those plants.

The move won’t directly affect cash flow and the ability to pay dividends. But it reaffirms management’s warning that it will face “substantial decreases” in returns from the plants, which it will have to replace by adding new assets. But both companies remain well on track to continue growing their businesses and building shareholder wealth in the process.

Ag Growth's sales outside of North America, for example, actually now exceed its sales in Canada. And with improved profitability selling to agricultural centers in Russia and Ukraine, the company is well on its way toward reaching 30 percent of sales from international sources.

Going global limits Ag Growth’s exposure to adverse weather conditions in North America, which inhibit harvests and, consequently, demand for grain-handling equipment. But the company is also growing its worldwide distribution network to meet high-capacity demand more cheaply, even as it enjoys more repeat sales and relies less on what it calls “transactional business.”

The result is Ag Growth’s sales are far more resilient overall than they were just a few years ago, when a severe drought in the US could have crushed them. Coupled with extremely conservative balance-sheet management, that’s strong protection for the dividend despite the past year’s adverse weather event and its temporary negative impact on distributable cash flows.

As for Atlantic Power, a steep loss of revenue from the Florida plants starting in the third quarter isn’t what management had hoped for. But neither was it unexpected, given recent years’ weakness in wholesale power markets. In fact management has been preparing against it the past several years. Atlantic Power’s acquisition last year of the former Capital Power LP, for example, more than doubled both generating capacity and revenue. That dramatically reduced the Florida plants’ share of overall profits.

In December 2012, the company achieved two additional milestones. First, it closed the previously announced acquisition of Ridgeline Energy, the renewable power assets of Veolia Environment SA (France: VIE, NYSE: VE) in North America. The USD88 million purchase adds 150 megawatts of operating wind power capacity as well as a development pipeline of 20 wind and solar projects totaling 1,000 megawatts of potential capacity.

The latter became a lot more valuable earlier this year, as Congress extended the wind power tax credit for another year. Meanwhile, management has also announced its Canadian Hills wind project in Oklahoma became fully operational Dec. 22, 2012, on time and within budget. The plant is now selling power under a 20-year contract to OG&E Energy Corp (NYSE: OGE).

Getting Canadian Hills running by the end of 2012 was no longer critical once the wind credits won another year of life. But completing the largest project in the company’s history does demonstrate Atlantic Power’s proficiency as a wind power developer, which is very promising for the continued development of the Ridgeline project pipeline. And the more scale the company achieves in this area the easier its expansion efforts are likely to become.

Financing has been challenging for expanding companies since early 2012. Here too, however, Atlantic Power has demonstrated success, closing a CAD101 million convertible bond offering last month to fund the Ridgeline purchase. That security doesn’t mature until Dec. 31, 2019, and carries a competitive annual interest rate of 6 percent. The company has now also fully repaid the USD272 million construction loan used to finance completion of Canadian Hills, using tax equity funds mostly drawn from a consortium of four institutional equity investors. The total cost of that 300 megawatt project was USD470 million.

Canadian Hills is expected to generate USD16 million to USD19 million in annual cash flows through the end of 2020, with “higher amounts” for the remaining 12 years of the OG&E contract. Expectations for Ridgeline, meanwhile, are for operations to generate an additional USD9 million to USD12 million in cash flow starting in 2013, with more thereafter as the new project pipeline is developed.

In addition, the biomass-fueled Piedmont project is set to come on stream in the first quarter of 2013, while the company’s 50 percent interest in the Orlando project will be producing additional megawatts in 2014. That adds up to USD38 million to USD47 million in new cash flow. It also increases the average life of Atlantic’s power plants’ sales contracts to 9.9 years, insulating profits from likely continued weakness in wholesale electricity prices the next few years.

That closes a substantial portion of the gap left by the loss of cash flow from expired Florida plant contracts. It’s also worth noting that these plants’ debt fully amortizes when their contracts end, so they’ll be unencumbered assets and therefore easier to sell, as management has indicated is its preference. The company is also selling its Path 15 transmission line in California.

Atlantic Power plans to invest CAD300 million to CAD400 million a year of equity capital in transactions utilizing roughly 50 percent debt. That adds up to CAD600 million to CAD800 million in new assets every year in renewable and gas-fired power plants, all secured by long-term contracts. As CEO Barry Welch noted during Atlantic Power’s third-quarter conference call, “We’re confident in our ability to sustain the current dividend level.” In fact the more assets are expanded the more room the company has to increase its payout.

That’s also what I expect to see at Ag Growth, as it expands global revenue over time. Moreover, neither company has any debt coming due before mid-2014, ensuring financial flexibility. What can go wrong at these companies? Even a full-on recession in North America wouldn’t immediately hit their profitability. Both companies actually raised dividends in 2008, as they were able to continue building cash flows in their respective niches despite the chaos around them.

Sluggish economic growth would keep downward pressure on wholesale electricity prices in 2013, making it difficult for Atlantic Power to re-contract the Florida plants. But after taking a USD50 million writeoff in the fourth quarter, the worst is already in the numbers.

Renewable energy contracts, meanwhile, enjoy favorable terms by law. And the Ridgeline acquisition gives the company considerable opportunity for expansion. Rather, the primary risk at Atlantic Power is if management fails to execute on its expansion plans. The delay in the startup of the Piedmont plant into 2013 won’t critically affect cash flow going forward. But it did raise the payout ratio in 2012 and demonstrates clearly the risks involved with construction.

A rise in interest rates could also make it more difficult for Atlantic Power to follow through on project expansion plans by increasing the cost of borrowing. Meaningfully higher rates, however, aren’t likely unless there is a revival of economic growth, which in turn would improve cash flow at the company’s operating projects as well as potential selling prices for assets like Path 15.

Ensuring the company is following through on its expansion plans is my primary concern whenever I study numbers and new developments at Atlantic. And it’s true there are more moving parts at this company than, say, at fellow power company Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF). At this point, however, Atlantic Power is succeeding both in growing its business and returning substantial cash to shareholders. The strategy has provoked skepticism from more conventionally minded analysts, particularly in Canada. But so long as it does succeed, it will reliably build wealth over time.

As for Ag Growth, business would suffer from a sharp drop in prices of agricultural commodities, should that convince farmers to do less planting. Given the growing appetite of Asians and demand for ethanol, however, that doesn’t appear a likely development anytime soon.

Weather conditions are always a threat to derail profits in a given quarter or even fiscal year. But here too the impact is always temporary and likely to be reversed the next year. Even an attempt by the Canada Revenue Agency to collect back taxes resulting from the company’s corporate conversion wouldn’t affect cash flow enough to endanger dividends.

Rather, as with Atlantic Power, the greatest threat to Ag Growth’s dividends lies with management’s effectiveness growing the business. That’s why we have to continue looking at the numbers every quarter. But at least here in February Ag Growth looks like a great candidate for a big capital gain in 2013 as it continues to measure up to the challenges. See my free report for more of my favorite Canadian income investments for 2013.

About the author: Roger Conrad writes a weekly column on dividend investing for Investing Daily.

Becoming a better trader by using a stock trading journal spreadsheet

By Trade Analyzer

What is a stock trading spreadsheet?
A stock trading spreadsheet is a tool that helps traders keep track of their performance. The goal is to determine which trading strategies have been successful in the past, and which have not, and why. Many stock trading spreadsheets are based on widely-used programs like Excel and are customizable for different kinds of products, such as stocks, options, futures, Forex, ETFs and equities. Stock trading spreadsheets allow users to keep abreast of market trends, plan and track trades, print data reports and make use of financial reference tools. Performance data can be used to identify stock patterns, trader “errors” and trader “strengths.”

What does it do?
Stock trading spreadsheet programs can backtest trading strategies to show whether or not they’re likely to produce a profit. Traders can avoid making a costly guess; they can move forward based on data rather than hope. For example, if a trader believes that a stock or group of stocks will perform a certain way under certain market conditions, he can test his guess to see if it’s performed that way in the past before he commits his money. Some stock trading spreadsheet programs also calculate the odds of a trader making or losing money at any given time based on factors such as the amount of money invested, the risks assumed, and the number of trades, among others. Some programs provide trading flags to alert traders to risk or opportunity. Others offer analysis based on data entered. Spreadsheet programs may also help traders stick to their chosen strategies when they’re tempted to trade on emotion, especially if the data shows that trading on emotion didn’t work out in the past.

What are the advantages?
The main benefit of a stock trading spreadsheet program is that it tells traders how well, or how poorly, they’re doing in the stock market. It may keep some traders from throwing good money after bad, or inspire them to study the market more before committing their money to trades. The program may prompt traders to think about why they’re making trades, and to base those decisions based on facts rather than feelings. The standard disclaimer, “past performance is not an indicator of future results” still holds true, but a stock trading spreadsheet program may force some inexperienced traders to analyze risk and the odds of success before plunging into the market.

Download MyTradeAnalyzer's free trial and try the stock trading spreadsheet risk-free today.

Pros and cons of economic value added

Effect of regulation on Economic Value Added

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Economic Value Added (EVA) is a term referring to financial gain in excess of profit expectations. In other words, EVA  measures the extra value profits yield for an organization after deducting cost of capital such as dividends to shareholders. Although EVA is an acronym used across multiple industries with different meanings, its significance in finance is specific. Moreover, the usage of EVA often refers to a proprietary version of the calculation claimed to have been created by the Business Advisory Firm Stern Stewart & Co in the late 1980s.

Uses

The EVA metric is primarily used as a business valuation tool. Some proponents of EVA such as P.C. Narayan of the Indian Institute of Management at Bangalore advocate EVA over other profitability metrics because it demonstrates potential future earnings. This according to Narayan, is because measurements such as Earnings Per Share (EPS) only provide a snapshot of how well a company has met stock-holder's past financial expectations and does not reflect potential for capital reinvestment.

Calculation

In terms of the Stern, Steward & Co. formula, EVA is the result of subtracting taxes and weighted average cost of debt and equity capital from net operating profit. This however, is not the only way to determine EVA because the cost of capital calculation varies between businesses. For example, the United States Postal Service version of EVA indexes its operating cost to inflation to more accurately reflect costs after rate increases. Other companies may not need to adjust costs to inflation based on corporate policies and accounting methods. The Stern Steward  & Co EVA formula is shown below:

EVA= (Net Operating Profit-Tax)-(Weighted Average Cost of Equity and Debt)

Advantages

The advantages of EVA are it supplements financial data from other methods of business assessment and valuation. Moreover, it reflects businesses' cost management and demonstrates availability working capital after its original opportunity cost has been deducted. Another benefit of EVA is it can be used as a managerial incentive that helps assure the continued performance of a business. It also evades problems associated with percentage calculations by using specific values according to Aswath Damodaran, a Finance Professor at the New York Stern School of Business.

Disadvantages

Economic value added cannot measure how well capital asset managers utilize retained earnings via project management and other business ventures. Moreover, capital asset managers may squander liquid reserves instead of effectively increasing the future return on capital by  reinvesting it with the aim of lowering operational costs via profitability instead of cost cutting. Economic value added also cannot valuate return on expenses such as research and development. Moreover, despite being an income statement operating expense, research and development actually has the potential to yield  future earnings not measured by EVA.

Guide to dividend payments

Diagram: How corporations allocate dividends

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Shareholder dividends are a form of monetary distribution most commonly paid to owners of business stock and mutual funds. The dividends for company stock are made from corporate earnings and income earned from mutual funds. In the case of mutual funds, how the dividend is treated depends on the type of investments made by the fund. For example, bond funds are sometimes exempt to state tax because they invest in tax free bonds. In the case of corporations, the issuance or increase of a dividend sometimes leads to an increase in stock trading activity.

Corporate dividends are issued by boards of directors, and increases or decreases to dividend amounts are typically announced via quarterly reports. To qualify for a dividend payment the shareholder has to own the shares by a specific date. This date is called the record date. In addition to owning the shares by the record date, the shareholder must hold the shares until the ex-dividend date, the day of dividend distribution.

When dividend payments are made, they are either deposited directly into a Federal Deposit Insurance Corporation (FDIC) insured account such as a money market account or a FDIC defined non-insured investment sweep account. As an alternative to having funds deposited into a sweep account, dividends can be reinvested into the issuing corporation via a Dividend Reinvestment Plan or DRIP. Dividends may also be paid into retirement accounts and life insurance polices that hold shares in either stocks or mutual funds.

Qualified dividends

Qualified dividends are paid to investors at a lower tax rate and generally dividends issued by U.S. Corporations. Moreover, qualified dividends are taxed at a maximum rate of 15 percent per the Internal Revenue Service (IRS). Income earners in the lowest tax bracket pay less than 15 percent according to the brokerage firm Fidelity Investments. Qualified dividends earnings are are reported on a Form 1099-Div that is typically sent to taxpayers in January of each year and use for tax filing purposes on IRS Schedule-D.

Ordinary dividends

The IRS describes ordinary dividends as payments made from the earnings of corporations that do not qualify for the net capital gains tax rate. One such qualification is the holding period of shares. For example, when shares are not held by investors for a certain amount of time they are paid as ordinary dividends. According to Fairmark, mutual funds that are owned for 60 days or less don't qualify for lower tax rates. Since ordinary dividends are not subject to a maximum of 15 percent tax, they are taxed at the regular income tax rate.

Special dividends

Special dividends are usually one time, larger than average dividends paid to shareholders when corporations have extra earnings. In the case of public companies, these dividends are reported to the Securities and Exchange Commission (SEC) using a Form 8-K. It is important to note that share prices can drop proportionate to the size of the dividend on the ex-dividend date. For example, if Company A has a share price of $100 and issues a $10 special dividend per share on January 26, then the share price opens for trading at $90 on that ex dividend date, it is most likely due to the special dividend according to the Motley Fool.

Pros and cons of online securities trading

US-PDGov

The ability to utilize expertise and resources to acquire capital gains is essential to the success of individual traders of financial instruments. In this sense it is the responsibility of traders to discern between poor and prosperous techniques and strategy. Numerous drawbacks befall even the best and most talented of industry experts. However, once a trader becomes experienced, knowledgeable, and refined in his or her practices, avoiding the financial pitfalls associated with online securities transactions becomes more possible.

Opportunity

A key factor that draws millions of people to online securities trading is the substantial opportunity to increase personal wealth. Monetary gains on well implemented trades often yield returns far above more conservative forms of money management such as federal treasury bonds. The potential to earn hundreds, thousands and even millions is possible via online securities trading and via several financial instruments such as spread betting on currency pairs.

Experience

A key benefit of trading financial instruments online is the acquisition of tactical knowledge and ability to implement learned trading strategy. Using brokerage tools helps develop awareness of the affects of market forces such as volume and economic events on asset prices. Furthermore, the trading process and simulations help acclimate brokerage account holders with the best trading mechanisms to use at specific times. For instance, in intraday arbitrage, knowing when to buy or sell using limit orders vs market orders and all or nothing trades, is important, if not essential to a well implemented transaction.

Value

Another important benefit of securities trading is the value provided by online brokers. For example, discount brokers that only charge transaction fees and exclude commissions via self-directed accounts often only cost pennies on the dollar. Moreover, the larger the transaction amount is, the smaller the proportional cost associated with that trade becomes. In addition, a wide range of complementary digital tools such as a spread betting demo account assist traders learn how to make the most of their money.

Risk

Online securities trading is risky. The financial products are not typically insured and market volatility has a dramatic affect on the price of securities. When combined with leverage or margin, capital losses are multiplied and substantially lower asset worth if prices go the wrong direction. Reducing risk exposure entails locating financial instruments that have higher yield for the least amount of risk. Ideal risk management also involves allocating assets in such a way that overall portfolio yield rises despite any capital losses on riskier assets.

Complexity

There is a significant learning curve associated with online securities trading. If trading platforms are simplified, they do not necessarily make up for a lack of market knowledge and experience. Moreover, most digital brokerage services provide glossaries, demonstration accounts and tutorials precisely because there is a level of complexity involved with the trading process. Not being fully aware of the pitfalls of online trading such as failing to use a stop-loss order, or using too much leverage on risky buy order makes it that much easier to make a small, but costly error.

Guest post: A personal review of Barron's Magazine - Reasons to unsubscribe from Forbes

By: James Geddens

I have recently cancelled by subscription to Forbes Magazine and have instead started subscribing to Barron’s Magazine, simply due to the fact that I found it hard to keep up with some of the analysis.  The editorial articles inside Barron’s are extremely well authored and offer a superb perspective on what happened during the prior week’s financial world.  It also includes sections which tell you what is going to be happening during the following week’s stock market trading.

Get the Latest Stock Market Prices & Tables

The Market Laboratory pull out section is essential too because this includes all the latest stock and bond prices for the next 7 days, although it can be a little bit too in-depth and you can tend to get this detail off the web anyway.  However, it’s still handy to have all the stock tables in front of you as one easy read.  Since making the switch from Forbes I have found that I have actually been able to read every single weekly edition of Barron’s.  It makes a change to having magazine piled up on my desk that I never get around to reading! 

Get Invaluable Investment Leads Like the Professionals Do

One of the other reasons that I subscribe to Barron’s Magazine is that I like to know what the business leaders are reading.  According to research, the average worth a Barron’s reader is $3 Million US Dollars.  Whilst I don’t have that much money, it’s still pretty cool to know that I can benefit from the same investment leads that those guys get each week.  Over the course of my subscription to Barron’s I have seen my own stock portfolio’s value rise by 21% as I owe a lot of that down to the advice that I get inside the different pages by the expert columnists.  A lot of the commentary in the magazine is also quite humorous and makes a change from the rather staid and stuffy reporting seen in rival publications. 

Value for Money with Up to Date Finance News

Barron’s Magazine might be quite expensive but it does come weekly which make the annual $99 Dollars subscription fee offer value for money in my view.  If you are an investor like me then you will already be aware of the importance of getting the most timely financial information – and Barron’s certainly seems to offer that.  Whether you want to know the latest oil prices, details on the latest corporate takeover, or what’s hot or not in finance, then it should tick all the boxes for you. 

No Over the Top Advertising Space

Another plus point to Barron’s is the fact that it does not have large and over the top advertising space on any of the pages.  There are a few ads, but these are always placed contextually and don’t interfere with your reading.  The ads usually blend quite well into the articles so you almost tend not to notice them. 

It’s Like Forbes Magazine but Without the “Fluff”

How I like to describe Barron’s Magazine, is that it is like the Wall Street Journal or Forbes… but without all the fluff.  You can either subscribe to it via post in traditional magazine format, or get it via email with a login to the Barrons.com website.  In the most simple terms possible I would say that Barron’s Magazine is a must read for people who love stock market numbers.  If you want to keep ahead of the competition and make better investment choices and picks then it could work for you.  Personally I love it and could not do without it nowadays. 

Author Bio: James Geddens is a 32 year old investment trader based in New York who reads Barron’s Magazine each week.  If you want to know more about Barron’s then you should click here for more info on this independent subscriptions website that hosts information about most financial magazines.

Advantages and Disadvantages of Investing in Warrants

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Warrants are a type of financial instrument similar to stock options. They offer the choice to purchase underlying financial securities such as stock at a specific price. If a company is destined to grow along with its price per share, a favorably priced warrant is a reasonable investment, but is not without its disadvantages.

Complete article link: http://www.helium.com/items/2332037-are-warrants-worth-investing-in

The best and worst weekdays to buy and sell stocks

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In historical research it has been demonstrated that some days of the week have indeed been better than others for buying and selling shares. However, since finance and economics is generally not a pure science, conditions for verifying such a pattern are limited to scenarios that are not necessarily perpetually accurate or realistic representations of broader market conditions.

Days of the week to buy and sell shares change with the prevailing market and share related conditions, but don't necessarily fail to demonstrate some indication as to which day of the week is better to buy or sell shares. The best day of the week to buy shares and the worst day of the week to sell shares conforms more to the logic of the time and the place than any pre-established long-term pattern.

The 'Day of the week effect'

Trends and patterns present themselves in the stock market all the time; this much is documented. For example, in the Journal of Economics and Finance, Volume 25, number 2, 2001, it was empirically demonstrated that the days of the week do not have the same volatility in price movement and also do not provide the same levels of daily returns as evident in statistical research on the S&P 500 Stock Index between 1973-1997.

According to this particular study, the days of the week with the best returns was Wednesday, and the day of lowest return was Monday with Fridays having the highest volatility. Such being the case, it would appear as though some time during Monday would be the best day to buy shares, and at some point on Wednesdays would be the best day to sell shares.  

Pattern changes over time

The findings in the aforementioned study may be convincing, but they aren't absolutely conclusive. This is because the time periods in which the measurements were made are finite within a longer market timeline. For example, in the book 'Stock Market Rules' it is claimed the market tended to drop on Mondays and rise on Fridays for a period of 37 years between 1953 and 1989. Also according to the book, this Monday decline pattern changed in the 1990s essentially providing a counter claim to any definitive long-term day of the week effect.

Trends are different across markets

A problem with quasi-scientific research is variance within the shares studies themselves. In other words, because the conditions are different across studies it is difficult to prove any universal accuracy of finding no matter how statistically valid any single study is. To demonstrate this principle, it is helpful to look at another 'day of the week effect' research study by Yelis Yalcin of the Gazi University Department of Econometrics and Eray M. Yucil of the Turkish Central Bank. The findings from this study show the best days of the week to buy and sell shares varies across multiple emerging markets indicating no one good day to buy shares or bad day to sell shares across multiple markets.

Individual financial products vary

Many studies make use of averages to verify hypotheses about particular events or subjects. In the case of days of the week for buying and selling shares this tends to exclude the individual price movements of shares. Such being the case for some shares Monday may be the best day to buy shares and the worst day to sell shares, but at a different time, or in the same market with different shares this may not be the case. This is because the underlying financial conditions of a company or financial instrument which the shares represent can vary and influence price independently of market movement. This tendency is measured by a statistic called the Beta coefficient.  

In summary, if investors or traders can act on shorter term patterns in which recognizable share price movements do occur, then there may indeed be a best day of the week to buy and a worse day of the week to sell shares in that context. The bottom line however, is that any pattern, trend or market condition can change with a multiplicity of market, economic and share specific variables that are not easily nor accurately accounted for or measured using empirical research techniques.

How technical analysis of stock prices works

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Technical analysis in stock trading refers to the evaluation of stock price changes over time. These changes are measured and plotted using formulas, charts and graphs and assessed in terms of patterns, and strength of stock price movement. A number of basic technical tools, and techniques are used to help technical analysts or chartists assess if specific indicators have occurred.

After a technical indicator has occurred, a confirmation of that indicator may follow using another technical analysis metric. Technical analysis is not an exact science, and generally shouldn't be considered as always being reliable. Rather basic technical analysis is sometimes used in stock trading to assist in substantiating or validating other methods of stock analysis.

• Moving averages

Moving averages are measured in days, usually up to 200. When longer-term moving averages have been moved through by stock prices, it sometimes indicates a significant price movement. Sometimes stock price support and resistance are formed near moving averages, and when these price levels are significantly broken it can mean a possible price momentum trend. In other words, moving averages are at times used as pivot points where a stock may have a pattern of rebounding upward or downward.  

• Candlestick charting

Candlestick charting is a form of technical analysis that began in East Asia. In this type of analysis price movements are represented by black or white candlesticks with lines at the top and bottom. Sometimes colors such as green or red replace the black and white in candlesticks. The color, length and positioning of these candles are placed on a chart and scaled in terms of time and stock price . The technical analysis of these charts will then interpret the candles based on past patterns of similar candle positioning.

• Oscillators

Oscillators are used to determine upper and lower limits of price movements. Examples of oscillators are the Relative Strength Index (RSI), and the Rate of Change (ROC) indicators. These basic stock technical analysis tools plot values on a scale between 0-100 using mathematical formulas. When certain value levels are reached, the oscillators are sometimes thought to show an increased probability of a price being close to a high or low.

• Trading levels

Trading levels constitute the amount of stock trading that takes place during a specific period of time and is another widely used basic aspect of technical analysis in stock trading. Trading levels are measured using volume and when it ncreases it can mean a growing momentum in the movement of a trend may be occurring or about to occur. Volume can also indicate overall market participation. For example, during holidays, volume can be quite low due to the absence of investing activity on those days in holiday when the stock market is open.

• Line graphs

Line graphs are also used in basic technical analysis of the stock market. When stock prices are plotted onto line graphs over time, the movement of that price can be analyzed for patterns in a similar way to candlestick charting. For example, a stock price line graph may create a pattern called 'head and shoulders', which literally takes the shape of a left and right shoulder with a head in the middle. If patterns like this become evident, stock prices sometimes follow similar movements to previous occurrences when a similar pattern was observed in that or other financial securities' line graphs.

Pros and cons of Constant Proportion Portfolio Insurance (CPPI)

Constant proportion portfolio insurance is a form of investment risk management that is based on asset allocation. In other words, it is investment insurance however it is not insured by a company that provides the insurance. According to Rama Cont and Peter Tankov of the University of Columbia Center for Financial Engineering, constant proportion portfolio insurance allows investors to make risky investments that can grow by using multiples i.e. having more 'risk-free' assets to counterbalance the riskier assets.

How it works

To insure against risky investments constant proportion portfolio insurance requires the following three  amounts and one allocation per Investment Week. In other words, one has to first define how much capital one has to invest, then decide how much is an acceptable amount to lose, then assign a percentage loss the risky allocation of assets. These measurements are entered into a formula to arrive at an amount for asset allocation.

1. Capital              Ex. $200,000 (C)
2. Risk metric       Ex. $20,000   (D)
3. Maximum loss  Ex 75%          (M)
4. Asset structure. Ex. $26,000 in Stocks, $174,000 in Treasury Bonds

In order to arrive at #4's asset structure numbers 1-3 have to be entered into the CPPI formula. This formula basically determines how much money is allowed to be invested in a high-risk asset in order to not exceed more than $20,000 loss with a maximum asset price drop of 75%. In other words, 75% of $26,000 is equal to $20,000 using the formula  (1/M)x (D)=(1/.75) x ($20,000)= $26,000. 

To illustrate further, suppose Mr. A has $200,000 and wishes to lose no more than $20,000 and expects the riskiest assets can fall as much as 75% in value. Given these parameters constant proportion portfolio insurance can be calculated using the aforementioned formula. This however, is only half the process, as there is still the question of return on investment, and asset instruments. That is to say, what investment instruments will yield a high enough return to justify a 75% risk. First it is a good idea to look at the advantages and disadvantages of CPPI.

Advantages

1. Does not require derivatives

Since constant proportion portfolio insurance is more of a formula or technique the financial instruments used to fulfill the requirements of that technique are flexible. This means an investor can choose investments he or she feels comfortable with rather than something more complicated or unknown.

2. Fewer management expenses

Since derivatives are not required and flexibility is allowable within the CPPI formula, financial instruments that have lower management expenses, commissions and fees can be selected to optimize the portfolios cost effectiveness.

3. Adjustable risk and reward

Another advantage of constant proportion portfolio insurance is it can be periodically adjusted. For example, if an investors risk level or total investment capital changes, the formula can easily be recalculated and assets reapportioned to suit that change.

Disadvantages

There are a few disadvantages to constant proportion portfolio insurance. These disadvantages can be minimized with effective decision making, and accurate assessment of market risk but should be addressed to properly meet financial objectives, risk tolerance and goals.

1. Upside ROI may be unknown

Risky investments tend to not have fixed rates of return which means the portfolio could lose value and not gain a cent. For someone seeking steady consistent growth this type of asset insurance allocation is less likely to be acceptable. However, this does not have to be the case, CPPI can still be used with fixed rates of return and very low risk levels but then becomes somewhat pointless as there is nothing to really insure against.

2. Risk level estimate may be wrong

Another potential problem with CPPI is the risk level estimate may be wrong. For example, the market may drop more than the investor expects for a given asset. Moreover, a faulty risk assessment can dampen the potential ROI or cause the investor to lose more than thought possible. In light of this, it is important to balance realistic expectation  about what the market can do, and what is also most likely to occur.

3. Opportunity cost of insurance

A third problem with constant proportion portfolio insurance is the opportunity cost. Money used to insure risky assets is money not invested in other risky assets. Granted that opportunity cost may actually amount to opportunity savings if those risky assets do not perform. However, there may also be safer assets with higher returns that increase the cost of financial opportunity provided by CPPI.

Options Trading: Collar Strategy Overview

The 'collar' is one of several types of stock options techniques, and is a relatively conservative way to insure investment  gains in corporate shares, and in some cases, a way to multiply dividend profit. The option involves three simultaneous transactions per the Options Industry Council. This  stock option strategy in effect locks in capital gains, for a time, without having to sell shares.  For example, if a shareholder has experienced an increase of .20 cents per share on 100 shares and believes the price of Coca-Cola shares could fall, writing a 'call option' against those 100 shares  pays for the premium of buying the protective put option which increases in value when the share price falls.

In order to fully grasp this stock option strategy it is necessary to understand the component parts of the collar strategy i.e. the long-put and call option. A put option is a bet that increases in value as share prices fall. These transactions can either be 'written' or 'bought'. The writer of a put option buys shares on margin or owns underlying shares, then charges a fee or premium to the buyer. Each stock option is 100 shares and gives the buyer of the option to sell shares at a pre-determined price. If the price per share falls, the buyer of the put option can sell for a profit at the expense of the option writer.

A call option is the inverse of a put option and allows the option holder to buy shares at pre-determined amount. For example, Mr. A buys 10 call options to buy ABC Corporation at $1.00 per share for a cost of .10 cents per share. This means the premium will be 1000 x .10 cents= $100. In order to make a profit above unrealized gains for a call option alone, the price per share must increase more than .10 cents per share. When purchased, a call option is a form of leveraging to higher level than might be possible than buying on margin. However in a collar, the call is leveraged by the underlying shares owned by the seller and the premium is used to purchase the put.

The Options Industry Council states collar options are good for protecting 'unrealized gains'. In other words, if the share price falls, the collar option covers the cost of that fall while allowing the shareholder to continue holding the underlying shares. It's a slightly bullish strategy and can also be used to claim dividends without risk according to  Michael Thomsett of Minyanville. In both cases the strike price of the options and the cost of the collar premiums is going to be an important factor in determining whether or not the options is a profitable technique to use.

To be profitable and work, the premium from writing the call option should be close to the premium for buying the put option. Additionally, the strike price for both options should be equidistant from the out-of-the-money price which should be the same for both options. For example, if Mr. A writes a call option for ABC Corporation and purchases a 'long-put' option, the out of the money price is ideally $1.00 per share for both option contracts. Moreover, the option cost is also ideally the same; for example, .10 cents per share.

Jim Cramer Says Correction Could be 'Temporary'

June 2011 started out with a big drop in the stock market. Many investors had anticipated a correction based on shaky economic data, however Jim Cramer of CNBC's 'Mad Money' thinks the correction in the market may be temporary. Cramer often seems to look for the bright spots in the stock market which isn't necessarily bad, but the word 'temporary' is a little vague.

Earlier in the day Rick Santelli, also of CNBC seemed to think the market drop "is continuing to be more than just a soft patch but as 'many' say, a soft trajectory of lower economic activity." Key concerns are the Greek debt downgrade by Moody's, the May ADP National Employment Report, and the end of the Federal Reserve Bank's QE 2 Stimulus  this month.

Whether Thursday will be another down day is up to the market to decide. Some think there will be a move into defensive stocks and selling of stock positions to hedge bets. The technical patterns indicate new resistance and support levels, but the overall feel seems to be one of caution and concern about a potentially slowing economy and lack of market momentum.

Benefits of Listing a Company on the Stock Exchange

Image attribution: Freedigitalphotos.net; standard royalty free license

 Registering a business to be listed on a stock exchange does not necessarily require the business to be a huge billion dollar equity company. This is so as laws that enable smaller businesses to offer stocks on secondary exchanges such as the Chicago Stock Exchange or Arca Exchange allow those companies to remain private. 

Smaller public companies that wish to be listed on a stock exchange but do not meet larger exchange requirements may also have the option of listing on regional exchanges. If a company is private, the small corporate offering registration (SCOR) requirements within U.S. States is a specific form of stock offering that facilitates remaining a private company while still being able to gain access to stock exchange listing. The listing requirements and benefits vary form exchange to exchange, however finding and registering for an appropriate exchange may be well worth the cost for a number of reasons outlined in this article.

Listing requirements

Each stock exchange has different listing requirements such as historical earnings bars, share volume and stock capitalization value. These requirements may be determined by a Board of Directors and/or Executive group. Generally, the larger the exchange, the higher such bars are set but this does not necessarily exclude smaller businesses from being listed on an exchange. Rather, it determines which exchanges smaller businesses may have the opportunity to become listed on.

To illustrate, the Nasdaq stock exchange requires a minimum earnings of $11 million over three consecutive years prior to listing in addition to a minimum of one and a quarter million share float. By contrast, the Chicago Stock exchange has a tiered structure of requirements defined in part by business asset value. For example, a business with $4 million in assets must have net income of at least $400,000 in the last two years and share capitalization of $300 million for 500,000 shares with a minimum of 800 shareholders or 1 million shares with a minimum of 400 shareholders.

Benefits of listing on a stock exchange

Being listed on a stock exchange has many advantages that a business owner of any size might consider as part of a businesses strategic plan. Moreover, when expansion and leveraging are on the business agenda, stock exchange listing can cast a wider net into the capitalization pool i.e. the potential sources of equity funding. A few of the benefits of stock exchange listing are illustrated below.

• Market exposure

Through listing on a stock exchange a company is gaining market exposure to a broader membership of the financial community including market makers, buyers, sellers, and institutional traders, mutual funds and possibly hedge funds. Consequently, if a business is worth investing in, the listing opportunity has the potential to greatly increase capital investments. In other words, as opposed to private negotiations and networking, a listing on an exchange facilitates exposure to a larger financial market and wider range of investors.

• Advertising via market listings

Another benefit of listing a business on a stock exchange is the complimentary advertising that is included in the filing fee and registration. While this advertising may not be direct, the listing of a business on the exchange affords a business advertising through association. In other words being associated with the exchange and listed on it, a business is in effect advertising itself indirectly if not directly. What's more the cost of registration may be a good bargain because not only does it provide market exposure and advertising but the opportunity to generate capital investment.

• Improved brand equity through listing

Being listed on a stock exchange means that a business has met qualification standards set by the exchange. This can add credibility to a business and therefore brad equity, i.e. customer and/or client perception of value in a company and/or its products. Furthermore, in addition to the credibility resulting from the indirect endorsement from the listing, financial information and investor public relations may also be enhanced through contact information made available through the exchange listing.

• Potential for increased capitalization

A need for capital investment should be one of the main reasons a company lists on a stock exchange. Otherwise it might not be worth the time to be listed for the sake of advertising alone. Stock market listing is one of several sources of capital leveraging, but also happens to be one of the widest and most accessible forms of investment for both investors and businesses. It is largely in effect, a free market for buyers and sellers to meet, assess and trade capital for ownership and vice versa.

• Lower reliance on venture capital firms and debt financing

The potential for increased capitalization through wider market exposure may also reduce the need and reliance upon alternative sources of funding such as venture capital firms. This lower reliance for alternative sources of financing may improve negotiating leverage when obtaining financing from venture capital firms whether it be through less liability protection as determined by the stock ownership terms or lower cost of capital. In other words, if the market exposure gained through listing is positive, the effects on financing can also be positive.

To summarize, listing a business on a stock exchange may be a good idea for a business seeking improved market awareness, greater potential for capital investment, enhancements to brand equity and negotiating influence etc. Listing on an exchange should probably be in line with or in accordance with business strategy, otherwise the listing may be premature or unnecessary. Nevertheless, for companies that do seek stock exchange listing, the opportunity is there through multiple regional and national stock exchanges and different choices regarding business status and registration requirements with the Securities and Exchange Commission.

Sources:

1. http://www.chx.com/content/Trading_Information/Listing_standards.html
2. http://www.nasdaq.com/about/listing_information.stm
3. http://www.cftech.com/BrainBank/FINANCE/USStockExchs.html
4. http://en.wikipedia.org/wiki/Stock_exchange

Best Days to Buy and Sell Shares

Research suggests Mondays have the lowest returns and Wednesdays the highest, but no clear and definitive rule seems to prevail as to which days are consistently the best trading days.

Complete article link: http://www.helium.com/items/2127702-using-market-timeing-to-buy-and-sell-shares

Understanding Stock Dilution

Stock dilution refers to loss of common share value caused by an increase in the number of units of a company's equity ownership. As more stock become available to shareholders and potential shareholders, each share of ownership holds a smaller piece of the company via dilution. Dilution occurs because the total amount of available wealth becomes distributed over a wider number of shares. Just as whiskey becomes less concentrated when water is added, so too does wealth when ownership is added.

Stock dilution can be measured in several ways. One such measure of stock dilution is diluted earnings per share that is calculated by dividing profit by all shares that are classified as, and could be classified as common shares. Another method of measuring stock dilution is by dividing the total market capitalization after a new stock offering by total outstanding shares. Market capitalization is the total number of shares outstanding multiplied by the number of shares.

Method 1: Diluted Earnings Per Share (DEPS)
DEPS= Gross Profit / Common shares + potential common shares
Ex. $10,000 / 1000 + 100 convertible shares
=$ 10,000/ 1,100 = $9.09

• Dilution via share conversion causes a .91 cent adjustment in share value.



Method 2: Capitalized value per share (CVPS)
CVPS= Total common stock x price per share + new capital/ Total Shares
= Market capitalization + New Capital/ Total shares
Ex. 1,000 x $10.00 + $1000 / 1100
= $11,000 / 1,100 =$10.00

• Calculation does not lead to diluted value using exact same numbers as method 1.

It is evident from the above two methods, new shares can be framed to demonstrate dilution or no dilution depending on whether profit or capital is used in the formula. For investors, the better of the two methods of calculation would be method one because it is profit that is distributed to shareholders not investment capital.

The advantage of increasing the number of shareholders is an increase in capital available to a company. For example, suppose ABC Company seeks to initiate a new project that is estimated to yield 10% return on Investment. To raise the capital to embark on the project ABC company issues 100 new shares. The company now has more potential to earn via increased capital meaning a portion of present value is exchanged for potential value.

The disadvantages of stock dilution occur in the short-term when investors perceive an immediate loss. In other words not only is their wealth diluted, but their risk of ownership increases because there is no guarantee the company's new project will lead to an increase in profit margin under the increased ownership. Should the project yield a greater return than the current earnings per share, then the diluted earnings per share would be higher than the earnings per share before dilution and with pre-project profit margins.

Sources:

1. http://bit.ly/adMdy4 (Massachusetts Institute of Technology)
2. http://bit.ly/bva95I  (Investopedia)

The Pivot Point Forex Trading System

The 'Pivot point trading system' is a method of predicting the movement of a financial instrument such as currency, and is used by day traders and other market speculators.The pivot points are mathematically determined points of price support and resistance and the pivot point strategy applies trend hypotheses to the pivot points to predict future price movement. 

For example, if a currency's closing price of 1.762 is below a price average of 1.765, and the previous days close was also 1.765, today's closing price has dropped below the pivot points where support is established around the prices moving average. For a trader, this drop through the pivot point would signal a potential entry point to 'sell short' i.e. bet on the price going down.

The usefulness of the Pivot Point System

The pivot point system is useful because it gives individuals an idea of how to better allocate financial assets. The method brings a mathematically derived sense of order, to a possible free flowing series of price movement. In other words it assists in identifying patterns and price movements so the trader is better equipped to take advantage of those patterns. In the case of the pivot point system those patterns are drops and rises below and above the pivot point, support levels and resistance levels.

How the pivot points are used

When all the pivot points are determined a day trader will watch the price movement of a price throughout the day, when a suitable entry or exit point is indicated by the pivot point system, the trader may then decided to take a financial position by buying or selling. While the pivot point method is primarily a short-term method, it may in some case be applied long term if the analyst so chooses. In such an instance, an analyst may replace the previous days average price with a moving average.

The stronger indicator in a pivot point system is the primary pivot point such as the previous days price average in short term analysis, and the moving average in long term analysis. When a price breaks above this point, market sentiment is indicated as 'bullish' suggesting a buy may be in order. The reverse is the case for drops below the main pivot point. The resistance and support levels either confirm or dis-confirm the primary pivot points indication by following the movement trend or not i.e. if the resistance level is also broken in addition to the pivot point market sentiment is 'bullish' and if the support level as well as the pivot point are broken downward, sentiment is 'bearish''. All these indicators can be presented on charts and graphs pre-calculated by software programs for a more efficient use of pivot point system.

Calculating the Pivot Point

The main information used in this trading analysis is the 1) average price 2) support level, 3) resistance level. Once the trader knows what these indicators are (s)he may then proceed to either enter or exit a financial position in a particular stock, commodity, currency etc. as prices move through, above and below these price levels. There are several ways to calculate pivot points depending on what one wants the pivot point to measure. Below are two methods for calculating the pivot point:

Method A: Simple Average Price Method

• Calculate previous days average price by adding the high, low and close prices and then dividing by three.

•When the next days price moves above or below this level a pivot point has be established.

Method B: 'Five Point Pivot Point'

This method is called the five point pivot point method because it uses five points rather than one average price in method A. In this method the five points are the pivot point, first level of resistance, the first level of support, the second level of resistance and the second level of support.

1. The Pivot point: Using method A above will yield the pivot point calculation.

2. Resistance point 1: To calculate resistance point 1, multiply the pivot point by 2 then subtract the previous day's low.

3. Support point 1: To Determine the first support level multiply the pivot point by 2 but subtract the previous days high instead of subtracting the previous day's low.

4. Resistance point 2: Subtract the result of #3 from the result of # 2 then add the result
to #1.

5. Support point 2: Subtract the result of #3 from the result of #2, but then subtract the result of #1 instead of adding it.

These five steps gives one the five pivot points with which the trader on analyst uses to determine perceived suitable entry and exit points.

Summary

The pivot point trading system is one of many techniques used in what is called the 'technical analysis' of financial instruments. The primary purpose of the pivot point trading system is to determine whether or not a pre-determined price level has been passed through or dropped below. Several techniques of price movement interpretation have been developed around the pivot point method such as pivot point reversals and complex pivot points that are formed over a few days. 

However, these differing interpretations center around the primary idea there is a pivot point which through which prices either moved behind, past or in tandem with. The pivot point trading system is used in foreign exchange analysis but may also be applied to stock and other financial instrument's price movements. The pivot point trading system is one of many technical analysis tools available to day traders and may or may not indicate the actual future movement of a price. However, by using the pivot point trading system, a day trader is better equipped and prepared to estimate future price movements.

Sources:

1. http://www.squidoo.com/pivotpointforextrading/
2. http://ezinearticles.com/?Using-Pivot-Points-For-Greater-Profits&id=126794
3. http://www.investopedia.com/articles/technical/04/041404.asp
4. http://www.incrediblecharts.com/technical/pivot_point_reversal.htm
5. http://www.thebulltrader.com/612/strategies-for-trading-stock-pivot-points/

Naked Short Selling of Stock

Naked short selling is the selling of shares without actual exchange of shares between a buyer and a seller. Naked short selling is legal within U.S. exchanges to some extent, but is also subject to regulatory limitation based on time period, volume, settlement of shares and percentage proportion of shares that are naked short sold. An example of naked short selling would be when a broker offers shares for sale that have not been formally purchased from a dealer, the company itself or other market makers.

Theoretically, the practice of naked short selling can allow a volume of shares sold to be greater than the number of shares available for sale and potentially cause unnatural downward pressure on a security. Unsettled and excessive naked short selling is tracked by regulatory agencies and stock exchanges and information on naked short selling activity is available to the public. A key indicator used in tracking naked short sales is a metric known as the 'fail to deliver rate' that indicates how many shares of a particular company are sold without actual ownership of the security.

This article will discuss the legality of naked short selling in addition to the regulation of the practice within the United States stock exchanges. In doing so, it will illustrate the dynamics of naked short selling, what is involved and complications in assessment of the practice. Additionally, potential impacts and shareholder sources of naked short selling information will be referred to.

Legal vs illegal naked short selling:

Within U.S. exchanges, legal naked short selling is facilitated by 'market makers' i.e. large institutions that buy, hold and sell shares to assist in providing sufficient availability of shares for exchange in the market i.e. liquidity. Legal naked short selling takes place when an excess demand for shares takes place for which a 'market maker' lacks sufficient share holdings. In such case, the institutional trader/specialist may engage in naked short selling to facilitate purchase of shares even though actual purchase of shares for short sale have not been purchased by the market maker. These shares must be settled within 3 days to be legal (sec.gov/spotlight).

Contrarily, illegal naked short selling occurs when institutional brokers knowingly engage in naked short selling for 1) the motive of price manipulation and/or 2) in violation of regulation SHO of the Securities and Exchange Commission (SEC). Since the practice of illegal naked short selling can sometimes be difficult to prove, the practice is not completely regulated and therefore may or may not occur in an ongoing manner. The subject is somewhat a matter of theoretical debate and warrants both due diligence and a keen awareness of shareholders not familiar with institutional market making for particular securities.

Regulation of naked short selling within the U.S.: 

The exchange of stocks is regulated by the Securities and Exchange Act of 1934 and amendments thereafter. One such amendment is "regulation SHO" (investopedia.com) enacted by the securities and exchange commission in 2005 and further adjusted in 2007. In 2008 an Anti-Fraud rule was also proposed by the Securities and Exchange Commission (sec.gov/rules). This latter amendment proposes liability indemnification from parties engaging in illegal naked short selling. Furthermore, during the credit crisis of 2007-2008, the U.S. Federal Government via the SEC, imposed a 30 day ban on naked short selling of key financial corporations in an effort to stabilize financial conditions (USAToday) rather than limit the practice of naked short selling. While this latter action does not necessarily indicate additional government regulation of naked short selling, it does indicate the negative affect naked short selling can have on financial markets.

Moreover, due to the potential for stock manipulation and disproportional price movements associated with naked short selling, legal restrictions on naked short selling were enacted by regulation SHO of the Securities and Exchange Commission. According to regulation SHO, short sales can take place after any price movement in securities but must also comply with two rules specifically reasonable belief regarding obtaining of shares sold without supply aka 'locate rule' in addition to settling of shares within 3 days with what is effectively a 10 grace period thereafter in which the positions must be 'closed out' (investopedia.com) i.e. settled before potential public disclosure.

The result of regulation SHO is that while short sales can be performed regardless of price movements up or down, naked short sales must be performed with reasonable belief that the shares sold short without a supplier i.e. naked short selling can be found within a 3 day period and that no more than 13 days can pass before the naked short sales are closed out before being listed on a 'threshold' list. The formal definition of threshold naked short sale does not apply until 5 days have passed (nasdaqtrader.com).

Specific requirements exist to become 'threshold listed' Those requirements include 1) share volume naked short sold i.e. 10,000 or more shares, 2) percentage proportion of outstanding shares i.e. more than of 1 percent and 3) securities of companies not listed as a "self regulatory organization" are not listed on the exchange listings (nasdaqtrader.com). These threshold lists can be obtained from exchanges themselves in addition to a number of privately run independent sources.

Impact of naked short selling on share prices

The impact of naked short selling on share prices can be mild to great depending on the exchange in which the activity takes place. For example, in the Berlin stock exchange, naked short selling is unregulated meaning no restrictions are places on the sale of stock that have not been formally exchanged. Some proponents of naked short selling contest the practice aids the liquidity of the market (sec.gov/comments) by facilitating exchange of otherwise sparsely owned and traded shares. Others however, believe the practice is not regulated enough as evident in proponents of the SEC's Anti-fraud proposition.

Since there exists a 'gray area' of motive behind short selling and price manipulation is not always easy to prove, illegal naked short selling may sometimes go unchecked. For example, if a company has relatively low volume and a sudden demand for shares to sell short arises in the market, a broker may suddenly require a need to naked short sell. This may lead to a decline in share price however the motive behind the increased demand for shares to sell short may not necessarily be connected to the market maker if such motive exists.

Information on naked short selling

To obtain a list of securities that have become 'threshold' listed, one can refer to stock exchange listings such as the NASDAQ, AMEX and NYSE. Several online websites report activity on naked short selling which can assist investors and shareholders in assessing naked short selling activity for a particular company that remains on the threshold list for more than 13 days. Naked short sales of companies that exceed the regulatory compliance restrictions set out by the Securities and Exchange Commission can be viewed at the following exchange websites.

Regulation SHO 'Threshold' Lists

• New York Stock Exchange (NYSE):
http://www.nyse.com/regulation/memberorganizations/Threshold_Securities.shtml

• Nasdaq Stock Exchange (NASDAQ):
http://www.nasdaqtrader.com/Trader.aspx?id=RegSHOThreshold

•American Stock Exchange (AMEX): http://www.amex.com/amextrader/?href=/amextrader/tradingData/RegSHO/TrDa_RegSHO.jsp

Sources:
1. http://www.investopedia.com/terms/f/failuretodeliver.asp
2. http://findarticles.com/p/articles/mi_qn4188/is_20070614/ai_n19291043
3. http://www.usatoday.com/money/markets/2008-07-15-sec-limits-short-sales_N.htm
4. http://www.sec.gov/rules/proposed/2008/34-57511fr.pdf
5. http://64.233.167.104/search?q=cache:8XdxZ9hsamwJ:www.fredlaw.com/articles/corporate/busi_0409_bm_ma.html+naked+short+selling+unregulated+in+germany&hl=en&ct=clnk&cd=1&gl=us&client=safari
6. http://www.sec.gov/spotlight/keyregshoissues.htm
7. http://tinyurl.com/6aa4qos (Freshpatents.com)
8. http://en.wikipedia.org/wiki/Naked_short_selling
9. http://www.investopedia.com/terms/n/nakedshorting.asp
10. http://www.investopedia.com/terms/r/regsho.asp

The Efficient Markets Hypothesis

The efficient markets hypothesis claims financial and industry markets quickly incorporate economic conditions, and market forces into the prices of financial instruments, an example of which are stocks. In an efficient market, financial strengths and weaknesses are quickly discovered, and then rectified via adjusted pricing.

Financial specialists are often quoted as "It's impossible to find a $20.00 bill lying on the ground for very long." In other words, if there is money to be found, it won't last long because the markets are efficient at finding money. The efficient markets hypothesis is essentially comprised of the same underlying principle, i.e. financial markets are adept and quick at finding value therefore value, whether it be high or low, quickly becomes adjusted for through financial product pricing mechanism.

• How the efficient markets hypothesis works

Market efficiency is based on 1) History and 2) Information, both of which are key determinants of price at any given time within a products pricing.(1) For example, if apples are most plentiful in the later summer and fall, there availability is more likely to be plentiful during these seasons, potentially driving the supply of apples up and the price down.

In the later winter and spring the opposite may be true. Over time a pattern emerges and the prices adjust automatically based on historical information making the market efficient.

Another factor that leads to efficiency is information. Using the example above, suppose a major bug infestation that damages Apples grown in a major apple growing region occurs. Market efficiency claims the information about the information will quickly spread throughout the network of agriculturalists, and markets thereby affecting price accordingly and that all prices include relevant information regarding a commodity or product.

• What market efficiency means for businesses and consumers

Since markets are efficient according the efficient market hypothesis, then 1) prices are always if not mostly reflective of current events, information and historical patterns, and 2) due to this efficiency, outperforming the market over time in terms of pricing, cannot be achieved since businesses cannot be more efficient than the market as a whole.

While there is some truth to the claims of market efficiency it not entirely factual as some mutual funds, hedge funds and investment managers have outperformed the markets over time. Historical performance does indicate that some, not all, mutual funds do outperform the markets, as measured by indices, over time.

To explain further, according to an excerpt from the book "Common Send on Mutual Funds: New Imperatives for the Intelligent Investor", only 6 of 258 mutual funds studied consistently outperformed market efficiency over time.(2) This is a small minority but does seem to indicate market efficiency is not 100 percent efficient.

• Evidence supporting the efficient markets hypothesis

The efficient markets hypothesis has been quantitatively and statistically tested numerous times in different markets and the findings have been quite consistent. Specifically, efficiency tests such as those referenced in this article demonstrate "weak form efficiency" i.e. market efficiency based on historical price patterns, is consistently evident whereas "strong form efficiency" i.e. market efficiency based on current information is also moderately evident and consistent.(3)

Other evidence that has claimed the validity of market efficiency is made evident in the research of Garcia, Sangiorgi and Urosevic, and published through the University of Geneva.(4) The conclusions of these researchers found market efficiency to be the result of a balance of investments decisions made by 'heterogeneous agents' i.e. diversified levels of rationale among investors.

Summary

What the efficient markets hypothesis means is "markets" be they financial markets, commodities markets, retail or otherwise quickly adjust prices of goods and/or services to account for changes in cost of goods sold, value, appreciation, depreciation, historical trends etc. These adjustments occur rapidly according to the market efficiency hypothesis and are more likely to occur quickly in cases of historical patterns than sudden information regarding a product or service.

The efficient markets hypothesis does have statistical validity as prices can and do frequently adjust to changes affecting the economy and profitability of a product or service. This is further evidenced by the performance of mutual funds over time according to the above quoted study. Nevertheless and despite the strong evidence supporting market efficiency, the market is probably not 100% efficient as there are documented cases of investors, fund managers and financial institutions that are able to "beat the market" however few and far between they may be.

Sources:

1. http://bit.ly/a1EXP9   (Investopedia)
2. http://yhoo.it/c3qJnB (Yahoo Finance)
3. http://bit.ly/94HaWO (Alvinhan.com)
4. http://bit.ly/b8Pnii      (Wikipedia)
5. http://bit.ly/9hvCne    (University of Geneva)