The energy boom in America is opening the door for new investments

  US-PDGov

By Donald Turner

The United States and their explosive gas and oil energy growth provide some great investment opportunities to investors. Just a few years ago, the United States was importing an increasing amount of oil and natural gas each year. Yerginstates the United States oil and gas production was in a steep decline since the 1970s providing very few investment opportunities. 

Newly developed technology has made it possible for tremendous growth in the United States gas and oil industries over the last five years. The United States will become the largest producer of oil and natural gas within the next two decades and the explosive growth in the US oil and gas production provides many opportunities to investors in most sectors of the United States economy, according to Jubak.

Current investing

US-PDGov

Carey from Forbes states that the most obvious places for investing would be with the companies that developed the new technology used for gas and oil production. These companies have seen impressive growth with some being bought out by big oil companies.

Current and near future investments

Companies in place to supply or support the oil and gas industry growth can offer prime investment opportunities through stocks or ETFs (Exchange Traded Funds). Companies that own gas and oil pipelines provide very economical means to ship the gas and oil over long distances in a timely manner. The pipelines help to ease bottle necking of the gas and oil going from the production fields to the market which can affect the price in the commodity market; another area investors can utilize. 

Transportation companies are a necessary component of the gas and oil production boom in the United States. The transportation industry hauls everything from gas and oil to market to hauling the parts for the drilling rigs to the water used for drilling. The transportation sector servicing the gas and oil production provides many opportunities to invest in by including truck and railroad companies. 

Construction companies contracted to build the infrastructure needed for the growing oil and gas production may provide great investment returns. Construction companies are building new pipeline systems to move the oil and gas supply to the markets and thus are responsible for building infrastructure necessary for the expansion.

Investments for the next few years

A great benefit being a leading oil and gas production country is lower energy costs as the lower energy costs provide the more investment opportunities and many companies will see an improved bottom line from energy cost savings. Chemical companies may receive the biggest benefit from reduced energy costs but any company that utilizes products from chemical companies will see a domino effect in their production prices giving investors a better return rate on Mutual Fund investments.

The United States gas and oil energy growth continues to explode; providing fantastic investment opportunities in many sectors of the US economy for investors. The smaller oil and gas companies that embraced the technology and took prudent action provide the most obvious investment choices. Supply and Support companies to the oil and gas industry offer many prime investment opportunities. Still, other investment opportunities can be realized in many other sectors of the US economy from reduced energy costs leading to an improved bottom line for most companies.

About the author: This article was written by Donald Turner, an avid writer of business and finance articles across the web. He writes this on behalf of US Emerald Energy, a company that has the facts about how to invest in oil.

Understanding Private Stock Offerings

Private stock offerings, also known as equity financing is the issuance of share ownership of a business or corporation through the offering of stocks through private sale. When a business entity decides to issue stock it is attempting to expand ownership and/or raise capital for business ventures. A stock offering is different from an incorporation share structure which is established when a company is formed.

Depending on the type of business the share structure may be initially limited to 100 shareholders or less in the case of a S corporation or more than 100 shareholders in the case of a C corporation. However, the number of shareholders does not necessarily have to equal the number of shares and often does not. Limited partnerships, as opposed to general limited liability partnerships may have shareholders who have only partial liability protection in relation to general partners and the number of shareholders is limited by the number of partners which tends to be quite small. 

Cross referencing share structure requirements with share offering allowances can help avoid confusion in the offering process, but generally speaking C-Corporations are the least likely to experience complications regarding number of shareholders.

Types of private stock offerings

There are three types of private stock offerings used in the United States. These are the "Private Placement Memorandum (PPM), Limited Partnership Offering (LPO) and the Small Corporate Offering Registration (SCOR)" (www.cfss.com)

The Limited Partnership Offering is designed for businesses structured and incorporated as limited partnerships and therefore this method of stock offering may not be utilized by S corporations and C corporations.

Small corporate offering registrations vary from state to state depending on state laws and procedures. Currently not all states allow this type of offering but a large number of states do. This type of offering is quite flexible in that it allows sale of stock to any interested persons rather than just "accredited" and "unaccredited" investors.

Investor accreditation is important in the Private Placement Memorandum offering which limits the number of potential investors to those with high personal wealth, experience and knowledge in the purchase of stocks and potential risks. A limited amount of additional investors are also allowed in this type of offering but they too must pass certain knowledge requirements. There are also restrictions on the amount of capital that can be raised using this method and how many times a year stock offerings can be made.

How to offer stock privately

Although issuing private stock is more simple than a public stock offering there is a fair amount of due diligence, careful though and preparation that ideally goes into the decision and process of issuing private stock. Knowing one's business inside and out, its needs, the effects of a stock offering, risks and benefits are all important factors to weigh. Additionally, understanding the process, and requirements can not only help a business owner or owners determine whether or not they require outside assistance, but also how much of that assistance may be necessary. The following is a general guideline of the some of the steps involved in private stock offerings.

• Incorporate the company as a partnership, S-Corporation or C-Corporation

• Become familiar with financial goals and capital requirements 

• Familiarize with the three types of stock offerings i.e. partnership, small business or C-Corporation

• Assess liability, legal and management risks and incorporate this into the decision making process

• Consider the benefits of legal counsel or business consulting services

• Create a detailed prospectus that includes stock, financial, legal, and business information

• Prepare additional paperwork, sale and recording items.

Advantages of private stock offerings

There are several unique advantages to issuing private stock. Most notably, the great amount of capital infusion into a business that has the potential to be cheaper than bank loans or other forms of debt financing. Some of the benefits of private stock offerings are listed below:

• No Securities and Exchange Commission (SEC) registration required

• In the case of SCOR offerings, stocks can be resold in stock exchanges

• Capital generation and infusion into the corporation

• Less publicity of corporate financial records, strategies and operations

• Taxation of earnings may be limited to shareholders

Disadvantages of private stock offerings

There are also potential disadvantages to private stock offerings, specifically in some cases liability, decline in the value of stock and therefore equity capital, and greater management accountability.

• Loss of complete ownership

• Increase in paperwork, and accounting record keeping requirements

• Increased responsibility to shareholders

• Dividends may be a requirement and/or expectation of investors

• Potential for lawsuit in some instances of business malpractice

Choosing to issue stock privately can be a big step in a businesses growth and is a decision that is left in the hands of the business owner(s). This decision may be best thought out carefully in terms of business goals, objectives and profitability. Understanding potential liability risks and benefits to the business in addition to the requirements and changes to the business operation that are subsequent to the offering are important. The information in this article provides a brief acclimation to the private stock offering process and may serve as a starting point or reference to the procedure of private stock offering and various attributes pertaining to it.

Sources:

1. http://www.jbv.com/lessons/lesson24.htm
2. http://www.cfss.com/stockofferingbasics.htm

Investing in Health Care Stocks

Health care stocks are ownership shares of companies that provide a broad range of medical services, equipment and pharmaceuticals. Health care stocks are different to bio-pharmaceuticals because they include a wider range of companies. The Health care industry is a very large employing millions of people and generating billions of dollars per year in revenue. Investing in health care can be in companies such as hospitals, ambulatory services, hospice care, medical diagnostics and medical treatment including physician services. A few health care companies are illustrated below:

Healthcare companies

Medtronic (MDT): Medtronic is a medical equipment company founded in 1949, with its headquarters in the State of Minnesota. The company distributes its medical devices worldwide. Medical areas in which this equipment is used include heart related disorders, diabetes and spinal applications among others. The company is quite old having been founded in 1949.

Universal Health Services Inc. (UHS): Universal Health Services Inc. is a hospital and acute care facility owner and manager. It's hospitals provide a wide array of health care services throughout much of the Eastern United States in addition to several other states including California, Texas Washington State and Nevada. This company was founded in 1978 and has appreciated in value considerably since then.

Merck (MRK): Merck & Co., Inc. is largely a health care pharmaceuticals company well known for its Viox drug that was recalled in September 2004 due to claims the drug increased the risk of heart attacks. Merck produces many other leading drugs that are used in the health care industry and is a global leader in drug research and manufacturing.

Benefits of healthcare stocks

The health care industry can be considered an inelastic industry. That is to say, due to the high level of specialization and strong demand, changes in prices within this industry are often not met with a decline in demand for medical services. For this reason, the health care industry can be considered to have significant pricing power which is to its advantage.

Another benefit of the owning stocks in the health care industry is the steady demand for health care services. Health care doesn't go out of style and often improvements in the industry spur new demand for specialized technologies domestically and internationally. U.S. Surgeons and various branches of U.S. Health Care are considered some of the best in the World and consequently also draw in revenue from international sources.

Disadvantages of healthcare stocks

There are also potential disadvantages to health care stocks. When health care becomes a political issue and talk of cutting Government support to health care or budgeting health care financing, this can affect the industry in a negative way. Just as government contracts may improve a companies stability, so can removal or redesigning health care financing.

Depending on which branch of health care one is investing in, each has its own particular risks. In the case of ambulatory services, gas prices may reduce profit margins; drug companies may experience bad results in clinical trials leading to a failed research project; hospital may experience heavier than normal emergency related expenses and so forth. When choosing health care stocks it is important to look into these types of details when ascertaining the profitability and performance of the company.

Key metrics

In addition to investigating companies' business operations, they can also be assessed using financial analysis techniques and measurements. A few such measurements that could be of use when determining financial performance of Health care stocks are as follows.

• Price/Sales Ratio: This ratio illustrates how many multiples a company's capital is in relation to its sales. For example, if Company Rx, a large health care services provider, has average capital investments of $64 billion and its annual sales are $12 billion 300 thousand. Its price/sales ratio would be $64billion/12.3 billion=5.2. This means the company's investment financing is over 5 times that of its annual sales. The closer to one this value is the better return a company is making on its invested capital.

• Basis Earning Power (BEP): Basic earning power is a percentage measure of profitability. The percent result is determined by dividing the value of a companies total assets by the value of the company's earnings before interest and tax. In the example of company Rx, their total assets are worth $19.512 billion and their earnings before interest in tax were $3.743 Billion. The resulting BEP outcome is $19.512/$3.743=5.21%. That is to say, the earnings before interest and tax are 5.21% of the total value of assets. Naturally, the higher BEP percentages are more advantageous for a company and its shareholders.

Understanding High Beta Stocks

A high 'beta' stock has price movements similar to a larger group of stocks known as an index. The beta, also known as the 'beta coefficient', is a mathematical result calculated by recording changes in stock price over time and comparing those changes with changes a group of other stocks. For example, if XYZ has a beta value of 1 as measured against an index of stocks in the same industry, then XYZ has price movements similar to the average or weighted average of the larger group of stocks; this relationship is called correlation.

How beta is interpreted is also important as simply knowing a financial security has a high correlation with other securities only says that financial instrument performs in an average way in comparison to other financial instruments. For this reason understanding what high beta stocks are also involves interpretation of the beta value in each particular measurement.

• How a high beta stock is defined

To illustrate a high beta stock, suppose there is a company with an unknown historical price performance in relation to a broad based market index. That company has a 52 week price range of $10-$40 per share which in and of itself is an indication of past price volatility. However, if that volatility closely matches that of 100 other companies all in different sectors of the economy, then the probability increases the beta is indicating an overall market movement rather than a company specific matter.

Since beta values often range from -1 to +1 with +1 meaning high correlation, and the inverse for the negative, then a number close to +1 would be 'high beta'. I the company performs negatively when the overall market does well, then the chances the company has a specific problem increase and the beta has a lower value. Thus, beta should not only be understood as a variable in and of itself, but also in relation to other financial and economic situations.

• Why high beta stock assessments are useful

Beta values are used by investors, financial analysts, and other financial aficionados to better understand risk, potential and performance of financial instruments such as individual company stocks. For example, an analyst may want to compare the beta value of XYZ company in relation ABC Index with the beta of EFG company in terms of the same ABC Index.

This allows the analyst to not only determine which company has most closely conformed with average price movements, but which company is more volatile and hence riskier. Beta values can be used in different ways for different assessments; they can be used when planning an investment strategy, in retirement planning, in forecasting performance and more.

• Other uses of for high beta stock values

High beta stocks may be further analyzed using the same high beta variable discussed above. This is because the beta coefficient is also used in other financial formulas and is a resulting variable of regression analysis. In other words, the beta coefficient is both a variable and an outcome depending on the financial measurement involved. Since regression analysis measures relationships between financial variables it logically follows that the beta coefficient would be a result of that technique.

In the case of the Capital Asset Pricing Model (CAPM), pricing of an asset is determined in part by measuring volatility. Beta is a variable that measures volatility in terms of comparative price movement, and is consequently widely known to be used in CAPM. A high beta stock might cause a stock measured with CAPM to be worth more if the index against which the stock is being measured is performing well, and vice versa if the situation is otherwise.

Summary:

A high beta stock is one with a value closer to +1 or higher. This value measures comparative change over time and is a historical value. Since beta is historical, it doesn't necessarily predict future price movements with great accuracy. Nevertheless, knowing the beta of a stock can be helpful when making financial decisions, especially when understood in the context in which the value is used.

A high beta stock isn't necessarily a good thing as the beta may reflect a tendency to perform on average. However, in some cases a high beta may be good, such as when one sector of the economy is performing better than other sectors and the beta for a particular stock with stocks in that sector is high.

How Are Options Traded

Options are a contract agreement between the option contract supplier and than buyer of the options. Options are purchased in time periods of about a month and can be commonly purchased as far in advance as four months. The purpose of buying options is to make a profit by exercising the contract at a favorable price. Favorable prices are determined by assessing the contract price, underlying securities price, and expected exercise price of the contract Since options contracts are derived from underlying securities such as stocks, they are termed 'derivative securities'.

How to buy options:

To buy options one must have good credit and enough money to support adverse results in the course of trading. The contracts are offered through brokerage firms and/or investment banks and each option represents 100 units or shares if the options are for stocks. The contracts are usually sold with expirations of 30 days beginning every month. 

There are two types of options contracts called 'calls' and 'puts'; calls are options that allow the contract holder to buy underlying stocks at the fixed 'strike' price whereas puts allow the trader to sell at a 'strike' price. While stock options are well known and actively trader, there are also several other types of options in several different securities markets that include the following:

• Stock Options
• Futures Options
• Foreign Currency Options
• Interest Rate Options
• Index Options

In the Money Vs Out of the Money Options Vs At the Money

Choosing options that are in the money or out of the money depend on what one believes a security will do in the time period of an option and the risk adversity of the options buyer. In the money options are considered less risky than out of the money contracts.

When options contracts are bought 'in the money', the securities purchased through the options contract are priced lower than the time of purchase if the option is a call. This worth is reflected in a higher cost of the options contract. An out of the money contract is the opposite, the underlying securities are priced higher than the actual market price of that security and this makes the call options contract cheaper. The inverse is true for put options and securities purchased through options at the money contracts are equal to or near equal to the price of the underlying security.

When to exercise options

Stock options traded on U.S. stock exchanges can be exercised at any time during the term of the contract whereas European options can only be exercised at the expiration date. The best time to exercise i.e. buy underlying stocks if it is a call option or sell underlying stocks if it is a put is when the perceived value to the trader is highest. Since prices fluctuate frequently, there is no sure way to know exactly when the best time to exercise is. For this reason it is good to have a pre-determined expectation and trading strategy in mind as it can make the options experience more palatable.

Trading strategy

Developing a trading strategy for options may take some time. Since these contracts are leveraged through credit it can be considered betting using borrowed money. For this reason a new trader of options might be advised to follow a few precautionary steps as follows:

• Only borrow within your financial means.
• Familiarize thoroughly with the trading process and financial instrument.
• Use a reliable broker that is trustworthy and has a good reputation.
• Consult family or friends if the money to be used is shared.
• Develop a trading strategy or method.

Options trading is a sophisticated form of exchanging property through derivative calculations and means. While the potential to make money using options is higher than with non-derivative securities the risk can also be higher. Options contracts are bought from brokerage firms with expirations within 30 day increments and are bought with prices calculated in terms of the underlying security. The resulting contract prices therefore become either in the money, out of the money or at the money. Exercising options is not an exact science and is often done using trading strategies.

Sources:

1. Zvi Bodie, Alex Kane and Alan J. Marcus. 'Investments' New York. 2002 McGraw-Hill Irwin. p.662-670.
2. http://www.888options.com/basics/options_pricing.jsp
3. http://www.investopedia.com/ask/answers/05/buyingoptions.asp
4. http://en.wikipedia.org/wiki/Exercise_(options)

Mutual Fund Reviews: Templeton Foreign Fund A

Templeton Foreign Fund Class A (TEMFX) is a mutual fund managed by Franklin Templeton Investments, operated out of Fort Lauderdale, Florida, and incepted in the 1982 as an international equity fund. The fund has over $5 billion dollars in assets and mostly invests, i.e. over 95%, in the stock of large European and Asian information technology, telecommunications, financial services, energy, pharmaceutical and other firms.

Fund, performance and risk

This mutual fund has never been ranked higher than 3 stars by the Morningstar rating system. Nevertheless, a 3 star rating from Morningstar qualifies as above average according to the company. Approximately 350 competing mutual funds exist for the Templeton foreign class A fund (finance.yahoo.com) and the fund has returned an average return of 9.88% after sales charges since its beginning (franklintempleton.com) The fund has an annual dividend of .315 cents per share in addition to any accumulated capital appreciation as of the creation of this review. This dividend is the second highest of all 5 classes of the Templeton Foreign Fund series.

For the most part, the Templeton Foreign Fund Class A has outperformed funds in the same category for a number of years according to yahoo finance. Almost two thirds of the years in which the fund has existed have been gainful for the fund with the remainder of the years incurring annual capital depreciation. (finance.yahoo.com) The fund has experienced both double digit return losses and gains in various years of its performance and has tended to follow/correlate overall market performance.

Cost and fee structure

The Templeton Foreign Class A fund has a different fee structure than class B. The fund has a front-end load fee of 5.75% and an expense ratio of 1.14% of investment worth. (Morningstar.com) The combined 1st year fee would consequently be 6.89% of the investment with subsequent years being closer to the 1.14% management and operational fees. The minimum investment for this fund is $1000.00 with lower required amounts for Individual Retirement Accounts and 'Annual Incentive Plan Accounts' (Morningstar.com)

Managment

As of the date of this article, the Templeton Foreign Fund, Class A was managed by 3 professional chartered financial analysts named Tucker Scott, Lisa Myers and Cynthia L. Sweeting, all of who have been employed by Templeton Global Advisors Limited since 1996 or 1997. According to the 2008 annual report of the Templeton mutual fund, the fund seeks value in its investments in relation to their estimated/projected long-term performance. These managers were selected by the parent company of the fund for their capacity to operate and maintain foreign funds.

Summary

For investors seeking a diversified, moderate risk, mutual fund investment with long term returns of close to 10%, the Templeton Foreign Fund Class A may be worth considering. The company in which the fund is managed is a long-standing and reputable financial services firm with a track record consisting of multiple mutual funds for investors. 

Consultation with a financial advisor, planner, accountant or Franklin-Templeton representative may assist with the decision to purchase shares in the Templeton Foreign Fund Class A. Since financial plans, age, risk tolerance, investment goals and other factors vary between investors, deciding whether or not the Templeton Foreign Fund Class A is the right fund to invest may be both a personal and informed financial decision.

Sources:

1. https://www.franklintempleton.com/retail/jsp_app/products/fund_facts.jsp?fundNumber=104
2. https://www.franklintempleton.com/share/pdf/products/semi_ann/annual/104s.pdf
3. http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&Symbol=TEMFX
4. http://finance.yahoo.com/q?s=TEMFX

Pros and Cons of Stock Buybacks

Stock buybacks occur when a corporation uses available cash to repurchase shares of itself either from shareholders or from the market in which available shares circulate. There are a number of advantages when corporations buy back stocks, however there are also a few disadvantages. Knowing and recognizing when a stock buyback is genuinely good for a company can help distinguish between the pros and cons of stock buybacks. 

Pros of stock buybacks:

• Reduces dilution of shares

Unless a company is about to reissue a different class of shares or resell shares at a future point the medium to long-term affect of share repurchases is a reduction of outstanding available shares. Investors tend to favor stock repurchases because the affect is usually a dilution of available shares which can increase both price and demand.
• Can increase Earnings Per Share (EPS)

When a share repurchase takes place, Earnings Per Share (EPS) can increase. This means a higher percentage of a company's retained income is proportional to the outstanding shares of that company. For example, Company A reduces its shares from 1 million to 500 thousand, and its income is $10 million in the fiscal quarter before and after the share repurchase. Before the share repurchase EPS is $10 per share; after the repurchase, EPS is $20 per share.

• Lessens risk of corporate raiders

If a company is both profitable and undervalued the threat of an aggressive acquisition of that firm may increase via purchase of a controlling amount of the company's shares by another company or investor(s). To avoid this, the company may realize its shares are deal and buy them back to both obtain a future profit on the shares and to avoid an aggressive takeover by a third party.

Cons of stock buybacks:

• Increased opportunity cost

Share repurchases aren't always good according to Investopedia, a Forbes Corporation. This is because the money used to buyback shares may have a more optimal use that could create a Higher Return on Assets (ROA) and EPS. For example, if a company's earnings remain the same with a share repurchase, EPS rises, but if the company's earnings rise yielding an EPS higher than EPS after the stock buyback, then the share repurchase is less advantageous. 

• Higher debt ratio

Even though share repurchases can have a positive affect on some financial metrics, it can have a negative affect on others. For example, a reduction in shares by 500,000 from 1 million in a company that has $1 million in total debt will lead to an increase in the company's debt ratio. This means the company becomes more of a credit risk when it seeks to borrow capital due to less assets from buying the shares.

• Shrinking company

If  a company's earnings experience a simultaneously and proportionate drop in relation to the share repurchase, the affect of the share repurchase will be nullified in terms of Earnings Per Share. In such case the share repurchase is indicative of a shrinking company because not only have the number of shares been reduced, so have the amount of available assets and income. So with lowered earnings EPS stays the same or lowers, ROA decreases, and the debt ratio increases.

Understanding corporate motives for share repurchases is important in knowing if the stock buyback will be a pro, rather than con, for the company. To do so involves studying the industry sector, market conditions, revenue and earnings trends in addition to price movements of the share price among other things. If the financial indicators point to the share repurchase being a pro, then it is more likely to benefit stockholders.

Sources:

1. http://bit.ly/boNRw8 (Businessweek)
2. http://bit.ly/a7EWJY (Investopedia)
3. http://bit.ly/aI416j (Rightline)
4. http://bit.ly/9xAqHI (Langsdorf)

Best Small Cap Stocks That Pay Dividends

A 'Small-Cap' stock has a share price that after being multiplied by the share float amounts to between $300 million and $2 billion in value. Several small-cap stocks currently have dividend values in excess of 10 percent.(1)

Defining what the 'best' among these small-cap stocks is a little more subjective. This is because stock performance can be evaluated using a wide range of indicators and metrics making the evaluation as good as the tools used to make the assessment. Having said that, here is a list of 5 stocks that issue high dividends.

1. Administradora de Fondos de Pen (PVD) 11.10 percent

When assessing the performance of the above small-cap company, one can begin with annual revenue. For example, Administradorea de Fondos de Pen had a huge jump in revenue between 2008-2009; more specifically from $278.233 million to $213.609 billion.(1) This kind of revenue jump could be  a one time jump or an indicator of the company's capacity to generate growth. Annual revenue however, is just the tip of the iceberg when it comes ot performance evaluation.

2. Alon Holdings (BSI) 12.40 percent

12.40 percent may seem like an attractive dividend, and it is in relation to many stocks with lower dividends. Alon Holdings also maintained stable revenue during 2008 and 2009 and is in the black for a number of metrics including return on equity, profit margin and operating margin as of August, 2010. Keep in mind, share volume has been quite low for this company.

3. Anworth Mortgage Asset Corporation (ANH) 14.50 percent

Dividend yields as high as the one for this company make it potentially profitable if share values don't decline more than the value made possible through the dividend. In a sense the high dividend is a hedge against the companies' performance and share price. If the company can maintain its share price, a 14.50 percent dividend represents an interesting small-cap investment.

4. Apollo Investment Corporation (AINV) 11.20 percent

Apollo Investment Corporation is fairly valued at a an August 11, 2010 price of $9.36 per share if one considers book value an indicator of fair valuation. That is to say, as of this date, Apollo's price to book values was .96. This could be good if the Forward Price to Earnings Ratio wasn't quite so low at  8.35. Nevertheless, profit margin of 77.66% and operating margin of 66.40% may warrant a second look at this company.

5. BGC Partners, Inc. (BGCP) 10.30 percent

To reduce the need for a dividend hedge, and increase the estimated probability of potential return on investment, one would do well to look at more than just an eye-catching dividend but the company itself. BGC Partners' 52 week price range as of August  11, 2010 was between $3.72 and $6.97; this means if bought at its highest price and sold at its lowest , a little over 53% of  one's capital investment would be lost. This would wipe out any benefits from a dividend so assuming a revisit of 52 week price lows doesn't occur, a purchase of this company remains hedged at a $6.97 purchase price until the price reaches approximately $6.25.

Summary

If an investor is looking at dividends alone, a high dividend could mean a good stock, but in most cases it is unwise to determine a company's investment worth purely on dividend. Such being the case, other more fundamental factors become important in assessing what the best stocks with high dividends actually are. The companies in this article are not necessarily the best companies with high dividends, but may under some financial conditions present an investment opportunity that is among the best of small-cap companies with high dividends.

Source: http://yhoo.it/4sm5Xi (Yahoo finance)

What is Naked Short-Selling?

Naked short selling can mean one of two things depending on the interpretation of the language. It can either mean 1) selling shares short that don't actually exist or 2) writing a naked call option that is exercised. This is financial semantics because each are similar in meaning and can be called 'naked short selling' except the latter is legal naked short selling whereas the former is illegal naked short selling.

The word naked is key here because in one sense it means 'uncovered' or 'uninsured' and in the other it means non-existent. To understand what naked short selling is, it helps to first understand what short selling is, and then to see short selling in the event of naked short selling.

• Short selling:

Shares or company stock are sold short when the shares that are sold are done via a 'stock option' which is essentially a credit agreement between the seller and the broker in which the seller sells stocks that may later be bought from the broker or option writer. If the option is not exercised however, the buyer of the put option who purchased the right to sell loses the option fee paid for the right to sell.

• Naked short selling via uncovered call options:

Naked short selling via uncovered call options involves writing an uncovered call option that is exercised by the option buyer. What this actually means is an investor, trader or broker decides they are going to bet on the price of a stock going down in value. They make the bet by writing a call option which means the buyer of the call option buys from the seller. However, if the underlying stock rises in price, the writer of the call option must still sell at the lower price leading to a potential loss for the seller. Since selling short is betting on a price decline, this is also naked short selling.



1. Example of naked calls

In light of this, the writer of the call option has to buy at the market price of the stock when the call option is exercised by the buyer. For example, Mr. Jones writes 1 call option for ABC company with a strike price of $10.00. This means Mr. Jones must sell 100 shares of ABC company at $10.00 when the buyer of the call option decides to exercise his or her write to buy the 100 shares. If the shares fall below $10.00, to $7.00, and the option is not exercised Mr. Jones simply does not exercise his right to sell the option and recovers the cost of writing for the buyer.

• Naked short selling via non-ownership

Illegal naked short selling is short selling stocks that don't exist. For example, Mr. Jones decides to buy 1000 put options on margin from a broker. The broker is assumed to have access to the underlying shares and purchase them for the option within a specified period of time. If this does not occur the shares have been sold naked because they haven't been proven to exist in the records of the brokerage company.

2. Example of naked short selling via non-ownership

An example of naked short selling via non-ownership would be when Mr. Jones decides to buy 100 put options for which the broker through which the transaction is facilitated has not purchased underlying shares.

To illustrate further, Mr. Jones' 10 put options have a strike price of $10.00 which means he is buying the right to sell 10 options at a price of $10.00 should he so choose. If the price falls below$10.00 to $9.00 he makes $1.00 per share minus commission and/or premium. The only problem is the shares which he's selling where never actually owned by the broker or the option writer. This is the illegal or naked short selling because there theoretically was nothing to sold.

Summary

The reason naked short selling can mean two things is embedded in the terminology of options investing. Writing a naked call option means selling the right of option to buy shares to an option buyer. Naked short selling via non-ownership means shares sold short either via put options or naked call writing are unowned.

In the former case, it is both naked and short because the option writer is betting on the option's price going down so (s)he can keep the premium and also have not insured him or herself by owning the shares in case they rise in price, hence making them naked.

If the buyer of put options is buying the right to sell shares at a certain price from either an option writer or a broker, but the shares are never actually bought by the broker in regulated time allowed, then this is naked short selling that is illegal. It is illegal because 1) it can lead to market manipulation if the brokerage allows excess short selling without underlying shares and 2) because the broker never completes a transaction which is fraudulent fabrication of ownership.

Sources:

1) http://www.investopedia.com "Investopedia": Short selling, naked call, naked short selling

The Meaning of Stocks vs Shares

In a nutshell, not all shares are stocks, but all stocks are shares. Similarly by analogy, not all fruits are apples, but all apples are fruits. To explain further, stocks represent a numerical share of ownership in a company whereas shares represent investment proportion in a wider range of financial instruments such as mutual funds, exchange traded funds, and stocks.

For example, X owns 500 shares of XYX Fund, and 100 shares of EFG corporation in the form of stock. Stocks and shares are both ownership of financial instruments and the two terms are sometimes interchanged for each other, however shares have a wider range of ownership possibilities whereas stocks are definitively more limited to specific financial instruments.

Cultural and historical meaning of stock and shares

Historically shares and stocks can also be thought to hold similar meaning as present albeit imbibed with historical economic connotations. In other words, outside any specific historically unique connotations, stocks such as those representing share ownership in Joint-stock companies held similar meaning. (www.historyworld.net)

Culturally, shares and stocks are interchangeable. For example, the United Kingdom refers to stocks as shares (www.proz.com) i.e. in the United States British shares are the equivalent of American stocks. Stock may also refer to inventory as in product stock such as grain, cattle etc. This latter meaning of stock is not connected to the financial instrument of ownership via monetary means, but rather physical ownership.

Differences between stock and shares

To distinguish further stocks and shares can be classified separately in terms of what they refer to, how they are used, and where they are traded. The following illustrates features of stocks and shares as separate financial instruments and serves to draw the subtle difference in meaning.

• Common stock, and preferred stock: Corporate ownership/equity with different 'rights'. For example common stock hold voting privileges whereas preferred stock have first rights of redemption in the event of company liquidation.

• Stocks are traded on stock exchanges and owned by stock funds.

• Share ownership does not necessarily imply rights of ownership other than monetary value and in the case of commodities, underlying products.

• Shares and stocks are both measured in currency and units such as dollars and numerical quantity not necessarily limited to whole numbers ex. 15.7 shares of XYZ fund.

Investing in stocks and shares

Investing can involve stocks and/or shares. The decision to invest in one or the other or both these financial instruments in so far as they are distinguishable depends on the investors financial goals, risk tolerance and market of investment. Stocks that are managed by funds that issue shares may provide more price stability and risk management, however there may be more fees associated with this type of ownership.

Shares of stock can be issued during incorporation of a company whether it is a privately held small business, partnership, large corporation or publicly held corporation. Shares of non-profit corporations can also be held and example the publicly owned Green Bay Packers football team. In such cases, appreciation of value may be more limited than with private ownership.

Other financial instruments in which shares of stock can be held are commodities. Commodities are a part of futures trading which involves price movements based on changes in the underlying products. The relationship between value and product is thus more important to pricing than in the case of corporate ownership where fundamentals such as revenue and earnings per share hold relevance.

Summary

Stocks and shares are often considered interchangeable terms however slight distinctions can be made for purposes of better understanding the investment world and its terminology. Historically and culturally there are also some minor differences in meanings and usage of the word however, for the most part both shares and stocks generally refer to financial trading and ownership of one kind or another.

Investing in shares and stocks depends on investment variables and individual investor factors such as market of choice and investor attributes. The risk, and pricing of various stocks and/or shares are determined in part by the mechanisms by which they are exchanged and the markets and economies in which such exchange takes place.

Sources:

1. http://www.investopedia.com/ask/answers/140.asp
2. http://in.answers.yahoo.com/question/index?qid=20071202093835AA0dN3d
3. http://www.historyworld.net/wrldhis/PlainTextHistories.asp?groupid=462&HistoryID=aa49
4. http://tinyurl.com/4tes8mf

The Best High Risk Stocks to Buy

High-risk stocks to buy should ideally provide a high return on investment to compensate for the risk taken in the investment. High risk stocks to buy include stocks listed in pink sheets that are traded in the Over The Counter Bulletin Board (OTCBB), micro-cap, private stock, small cap and some mid-large cap stocks.

In fact, any stock has the potential to be high risk, but some have a greater chance at being bad risks than others. Deciding which high-risk stocks to buy involves first defining what high risk is, and then determining why the risk should be taken. In other words, understanding how to differentiate between good high-risk stocks and bad high-risk stocks may assist in selecting the best high-risk stocks to buy.

What a high risk stock is

High-risk stocks are the shares of high-risk companies. In some cases trading activity of a stock may influence its risk, however for the most part high-risk shares stem from the company itself. High risk generally means the stock price as well as the company shareholders own has a higher than average risk of failure, hence increasing the risk of share prices dropping.

This makes the term 'best high risk stocks' seem a little paradoxical because some people associate risk with bad, in which case there are no 'best high risk stocks' to buy. The following list comprises some of the characteristics that may indicate a high-risk stock.

• Volatile price movements
• Under capitalized
• New businesses
• Badly managed
• Weak performing industry
• Overbought shares
• Unregistered and/or less regulated



How to identify a good high risk stock

Believe it or not some high-risk stocks may be quite a good investment. Just as businesses and financial institutions use risk management, individual investors can manage their risk by distinguishing between reasonable and low-profit probability stocks within the same high risk category. The trick is knowing which stocks are merely high-risk by classification and not actuality. For example, investor models, analysts and trading tools may all indicate a particular stock is high risk due to the potential for failure.

This does not mean the company will fail however, just that the probability of it failing is higher. To find a good high-risk stock involves knowing what to look for. For example, a company with all the characteristics of a high-risk stock may also be a good high-risk stock for the following reasons.

• High growth industry
• Strong quarterly reports
• Innovative technology, product, service etc.
• In demand i.e. non-saturated market
• Competitive edge
• Good value

How to identify a bad high risk stock

Just as some stocks may be more likely to be the best high risk stocks to buy, some may also be the worst, or not as good. Distinguishing the best stocks from the worst is important in determining what aren't the best high risk stocks to buy actually are. For starters, inverse patterns to that of good stocks may indicate a bad stock in addition to characteristic variables that can correlate with the downward or declining value of a company's stock price. The items below may hamper and/or prevent a high-risk stock from risking in price over time.

• Stagnant or declining industry
• Non-growth orientated
• Inefficient operations
• Conflicted organizational structure
• Non-distinguished product and/or service
• Over valuation of shares

Stock and risk analysis

No one can predict which stocks are the best with 100% accuracy, but one can identify, distinguish and differentiate some probability of stock success within the high risk category. This probability can be ascertained both quantitatively and qualitatively with a review of specific areas of performance. However, obtaining the correct information is a challenge in and of itself, especially with private and non-SEC registered corporations.

In light of this, being weary of conflicting and competing information can at times, be difficult when determining a particular stock's chance of success, be it in regard to short-term, medium-term or long-term performance The list below illustrates some of the factors and tools that can be used in analyzing a company's stock.

• Statistical data sets
• Financial fundamentals
• Technical performance
• Economics
• Strategic plan
• Operational and organizational structure
• Managerial accounting

Consideration of a high-risk stock's performance may involve additional techniques of risk analysis. For example stocks within the high-risk category may vary in risk levels based on things like the cost conversion cycle, project management, consistency of revenue, affect of business cycle on the company's solvency, debt management etc. There are many ways to review and study a company's performance that makes accurately determining a company's risk more difficult than it might sound. Nevertheless, with enough knowledge about a business, its competitors, the industry etc. an investor may have a better chances at selecting the best high risk stocks to buy.

What is the beta coefficient of a stock?

The beta coefficient, also represented by the Greek letter Beta, or the English letter B, is a measure of risk most notably in regard to an equities traded in markets such as stocks. The beta determines price movement relationships alongside broader market indicators such as an index or group of stocks.

The closer the beta value is to the integer 1, the more probable that stock is to move in tandem with broader market movements such as the index. It is important to note, the beta coefficient is calculated using historical prices and should not be interpreted to indicate an exact measurement of future price movements.

Key attributes of the beta coefficient

The beta coefficient has several functions and attributes that make it a unique and important financial equation. The beta is considered a standard statistic in financial analysis and is used in a number of other more complex formulas. A few of the specific features of the beta are listed below:

• Establishes numerical relationships between stock prices and markets over time
• Is an accurate measure of historical price volatility
• Beta is also used in the Capital asset pricing model (CAPM)
• Can be calculated quickly and easily in a number of ways
• Assists in determining price risk
• Calculated using percentage rates of return for 2 or more points in time.

How to calculate the beta coefficient

There are several ways to obtain a beta value including the Microsoft excel statistical tool, a financial calculator, an online financial analysis website or manually using a formula. It can be helpful to understand the math behind a beta in understanding what the beta is. One simple method to calculate the beta is the rise over run method (Brigham and Houston p.277) This method simply takes two historical percentage price points and subtracts them and then divides the difference between corresponding percentage price points in the index.

Beta=Rise over Run=Change in Y (Stock price)/Change in X (Index value)

For example, when company Y had a rate of return of 7% dollars, the index had a return of 5%, and when the index had a return of 2% , company Y had a return of 4%. Using the rise over run equation, the change in company Y (also plotted on the Y axis of a graph) is 3% and the change in the rate of return of the index is 2%.

The change in Y divided by the change in X is equal to 1.5 which is the beta. Since a beta of 1 represents an exact historical price correlation, values higher than 1 are less correlated i.e. numerically related than betas of 1. The further a beta gets from the value 1, the less likely the stock being measured will move with the index if the historical relationship remains constant.

Advantages and disadvantages of the beta coefficient

The beta value is a useful tool to measure price relationships under various market conditions. For example, if there is a recession, a stock with a historical beta of 1 is statistically more probable to also decline in price than a stock with a beta of 2. This is because the stock with a beta of 2 does not necessarily follow market trends. There are several advantages to using beta, most importantly its ability to determine price stability over time. It can also be calculated using many points in time thereby augmenting its statistical validity.

On the other hand, the beta coefficient does have a few disadvantages. Since the calculation is limited i.e. only uses two variables as changed over time, it does not take into account other variables such as inflationary pressures, capital liquidity, financial ratios etc. Such being the case, the beta is restricted to being a potential indicator of price movement in relation to a broader index. Additionally, since market and company conditions can change over time, the beta will not take into account these future changes.

Summary

The beta coefficient is a mathematical value that represents risk of a financial instrument over time in relation to a market. The beta can be easily calculated or obtained and is a standard financial value used in financial analysis. The beta coefficient is a statistical tool based on historical trends and price movements and is therefore not an exact indicator of future price relationships. Rather, the beta coefficient is a useful estimator for determining future price relationships and risk of a particular company or stock.

The beta can be determined under various market conditions to enhance risk and return predictions for a particular asset and/or equity product and can also be calculated using an adjustable range of percentage returns over time. Since the beta value is limited by its variables, it is narrow in its predictive ability. However, the beta coefficient is also an important variable in other financial equations such as the capital asset pricing model (CAPM) and in regression analysis.

Sources:

1. Calculating Beta using excel: http://faculty.babson.edu/academic/Beta/CalculateBeta.htm
2. Eugene F. Brigham, and Joel F. Houston. Fundamentals of Financial Management 9th Ed. South-Western, 1999.p277-281.
3. Howard Bryan Bonham CPA, The complete Investment and Finance Dictionary. Avon Media Corporation, 2001.p.62
4. Zvi Bodei, Alex Kane and Alan J.Marcus. 'Investments' Mcraw-Hill Irwin. New York, 2002. P. 265-271

Comparing bonds Vs stocks as an investment

A big difference between bonds and stocks as investments are that bonds are considered 'bear' investments and stocks are considered 'bullish'. In other words, when the stock market is being flailed and vulnerable to 10-20% swings, more cautious investors may head for the bond market in which returns may be more stable and/or fluctuate less. Some investment advisers believe it is sensible to diversify investments between the two markets via portfolio ratios such as 30:70, or 40:60. In turn, this can be an indicator of a particular firms stance on the market.

Bonds and stocks really are two different breeds of investment. Bonds, especially the Government kind, are less vulnerable to recessions and weak market conditions because their value is tied to their interest rates. The value of stocks however, is generally not coupled to interest rates per se, but rather share price via economic and market conditions. While a change in the Federal reserve funds rate may influence stock prices, these changes in valuation are correlation only and not an absolute relationship as with bonds.

Risks and rewards

There are risks and rewards associated with both bonds and stocks because of principles such as opportunity cost and market timing. Time value of money is also a factor in the pricing of investments because present values of an investment are determined in part by the future flow of income and/or capital gains via stock dividends, bond interest payments, as well as changing industry and/or market conditions.

As these things change, the foreseeable value of investments can rise or decline because of better investments such as higher yielding bonds, a giant new contract for a newly financially streamlined company, or an IPO in a high demand industry. Risks and rewards associated with stocks and bonds are listed below:

• Financial Stability: In the case of bonds, an investor can generally have more peace of mind because even if interest rates do rise causing the price of bonds to lower, the percentage fluctuation in price is likely to not be as great as can occur in the valuation of stocks.

• Earnings Potential: The earnings potential is most often higher in the stock market because stock prices are essentially unlimited in how much they can rise. For example, a stock price can rise as much as 50% over the course of a few months under certain circumstances whereas the chances of this type of percentage rise affecting a bond is significantly lower.

• Opportunity Cost: If one has bought a substantial position in Bonds, such as 80% of one's investment portfolio and a dramatic improvement in economic conditions emerge, the return on stocks could prove fantastic in comparison to bonds making the opportunity cost higher of holding the bonds higher.

• Leveraging: When one has investments in Bonds one may be able to take out loans against those Bonds and in effect leverage a new position into another financial instrument. In other words, a financial institution or private lender may view paper or Government bonds held outside of an exchange as good collateral for a loan which can be used to make further investments. With stocks, such leveraging may not be as likely due to their potential volatility and nature of exchange.

• Timing: Since the primary risks involving bonds is that interest rates on bonds may rise after bonds have been purchased and vice versa, how an investor uses time in each market becomes a potential risk or reward. That is to say, if an investor does not time investments well by entering too early, or exiting too late, that investor faces timing related risks and rewards. 

In the former case, if one buys bonds with an interest rate of 3.5% fixed returns and the rate changes to 4% the value of the 3.5% bond becomes lower, the investor has in essence been affected by timing risk. The same holds true for stocks. For example, if an investor takes a position in a company that is very financially strong, if the timing is wrong, the investor may still lose. This is especially true in companies that benefit from seasonal and cyclical trends.

Deciding what to invest in:

Making the decision to invest in stocks and bonds does not have to be daunting. It is for all intents and purposes impossible to predict all financial conditions, price movements and economic conditions. While forecasting, technical analysis and fundamental analysis of financial information can assist with predicting investment outcomes, eventually an investor either decides to invest, not invest or think some more.

When choosing stocks and/or bonds one may consider the above information in determining how much of each investment would be prudent given current financial trends and data. Conditions in the stock market can affect conditions in the bond market and vice versa. Bonds often serve as a hedge against stocks, and stocks assist in capitalizing on market conditions. By investing in both, one can potentially benefit from the best of both financial markets.