What is Bitcoin?

Bitcoin (BTC) – what is undoubtedly the hottest topic as of late, is a decentralized digital currency that allows for peer-to-peer payments. While it’s not backed by any government or bank, Bitcoin has skyrocketed in popularity due to the belief of many supporters that it’s the currency of the future.

Bitcoin is like that brand new, shiny roller coaster that everyone wants to ride but ends up getting sick after. Bitcoin, and investing in Bitcoin, is well-known to be volatile, but everyone still seems to want a piece.

Bitcoin (BTC) is a decentralized digital currency that allows for peer-to-peer payments. While it’s not backed by any government or bank, Bitcoin has skyrocketed in popularity due to the belief of many supporters that it’s the currency of the future, because of its decentralized and secure nature.

How does Bitcoin Work?

While Bitcoin may now be a common word in everyone’s daily vocabulary, it still may be difficult to understand for some. Let’s break it down: Bitcoin is made up of nodes that store its blockchain. Blockchain is a collection of blocks and in each block is a collection of transactions. Because the ledger is completely decentralized and transparent, no one can cheat the system, which enforces Bitcoin’s security.

Bitcoin keys – long strings of numbers and letters created through encryption – are used to keep ownership of each Bitcoin. There is a pairing of a private and public key to have access or own Bitcoin – the private key is kept secret by the owner, and the public key is used as an address where others can send Bitcoins. You might also hear the term Bitcoin wallet, which refers to the digital device that allows for trading and tracking of Bitcoin. Bitcoin wallets are not insured, unlike bank accounts.

While Bitcoin promotes the fact that it’s ultra-secure, it’s still a target for hackers. Hackers or thieves may try to gain access to digital storage accounts where private keys are kept, and if they succeed in gaining access they may be able to transfer the Bitcoin into their own accounts. This is why many opt to keep their Bitcoin keeps stored separately, disconnected from the internet.

While there are no physical Bitcoins, the currency (and its transactions) are kept on a public ledger and is verified by computing power. The public ledger allows for transparent access.

Currently, Bitcoin is not backed by any banks or governments, but Bitcoin can also be exchanged for traditional currency if an investor wishes.

How is Bitcoin Mined?

Bitcoin mining is the process of creating Bitcoins and releasing them into circulation. Bitcoin miners essentially solve a complex puzzle to discover and add a block to the blockchain. As more blocks are added to the blockchain, transaction records are verified and miners receive Bitcoins as a reward. The reward for mining is halved every 210,000 blocks; in 2009 the reward for mining was 50 Bitcoins. The reward was halved for a third time on May 11, 2020 to 6.25 Bitcoins. There are currently 21 million Bitcoins in existence.

Mining Bitcoin efficiently requires high-powered processers and specific computer chips called Application-Specific Integrated Circuits (ASIC); these processors are more widely known as mining rigs.

What is the history of Bitcoin?

Bitcoin was created in early 2009 by a person that goes by the name of Satoshi Nakamoto. In late 2008, Satoshi Nakamoto released a white paper detailing the technology behind Bitcoin, and thus Bitcoin was born in early 2009. The identity of this person is still a mystery to this day. There are several theories as to why this person wants to stay anonymous:

  • Security purposes due to the amount of Bitcoin he/she holds.
  • The legal threat if Bitcoin is widely adopted that it would make regulated currencies moot.

Whether Satoshi Nakamoto is just one person (more likely several people), there were a few similar predecessors invented before the creation of Bitcoin. These include:

  • Hashcash by Adam Back (1997)
  • B-money by Wei Dai
  • Bit gold by Nick Szabo
  • Reusable Proof of Work by Hal Finney

Can Bitcoin be used as payment?

Bitcoin is becoming more widely accepted as a means of payment. Stores only need to install the required terminal or wallet address through QR codes and touch screen apps to accept Bitcoin. One of the main reasons it’s becoming popular with small businesses as a means of payment is because there are no fees for transactions, unlike credit card transactions. Bitcoin can be used to book a stay at a hotel on Expedia, shop for furniture on Overstock and even buy Xbox games.

In addition, more and more FinTech companies are also introducing Bitcoin to their platforms. For example, PayPal (PYPL) recently introduced the ability to buy, sell and hold Bitcoin, among other cryptocurrencies, on its platform.

Are there any regulations for Bitcoin?

Bitcoin is unregulated at the moment, but since it is seen as a rival to government currency, many believe that regulations (and potentially restrictions) are bound to take place. Governments are beginning to implement various rules around transacting with Bitcoin. For example, the New York State Department of Financial Services implemented a rule that companies dealing with Bitcoin are required to record the identities of customers, among other rules.

How can I Invest in Bitcoin?

There are many ways to invest in Bitcoin. Bitcoin trades just like any other investment – so the principle of buying low and selling high on an exchange applies. Bitcoin is traded on marketplaces called Bitcoin exchanges, which allows people to trade using various currencies. Some Bitcoin focused exchanges include Coinbase, Binance, Rain and Bisq. Others include eToro, Robinhood, Cash App and PayPal. But before you invest, remember that investing in Bitcoin can be extremely volatile and requires a good amount of education and risk appetite.

What is Forex Trading?

Chances are that if you have travelled internationally, you have probably exchanged your currency for the local currency. Forex trading is the trading of currencies within the foreign exchange market. The exchanging or currencies can happen for a variety of reasons, including commerce or tourism; and forex trading determines those rates.

Chances are that if you have travelled internationally, you have probably exchanged your currency for the local currency. Have you ever wondered who (or what) decides the currency value and exchange rates? Forex (sometimes referred to as FX or foreign exchange) does just that.

What is the foreign exchange market?

The foreign exchange market is an over-the-counter (OTC) market for trading currencies that is ran by a global network of banks. This market determines the foreign exchange rates for currencies and is the largest market in the world, followed by the credit market. This means that forex markets offer the most liquidity, making it easy for investors to enter and exit at the drop of a hat. It is one of the most actively traded markets in the world with an average daily trading volume of $5 trillion. The forex market is spread across four major forex trading centres: London, New York, Sydney and Tokyo.

What is forex trading?

Forex trading is the trading of currencies within the foreign exchange market. The exchanging or currencies can happen for a variety of reasons, including commerce or tourism; and forex trading determines those rates. Since the trading occurs over-the-counter, all trades take place on computer networks between traders 24 hours a day five and a half days per week. Since trades take place almost any time of the day, the market can be extremely active and price quotes are constantly changing.

What is the history of Forex Trading?

Forex trading doesn’t have a long history compared to stock markets, which dates back to the 1600s, but the beginning of forex trading can be traced back to when countries began using and minting their currencies. The modern forex market began in 1971 after the accord at Bretton Woods in 1971 was passed, which initiated the Bretton Woods Agreement and System, creating an official foreign exchange system. It used to be very difficult to get started in forex trading as an individual investor as it required a large amount of capital. But now with the introduction of new platforms aimed at individual investors, forex trading has become much more accessible.

How do you trade forex?

Those who want to trade forex typically hire a commercial broker or investment bank to trade for them, but, individual or professional investors can also trade.

There are three different markets for forex trading:

  • The spot market
  • The forwards market
  • The futures market

The spot market is the largest and most popular since it is the underlying real asset that the other two markets are based on.

In this market currencies are bought and sold at rates according to many elements, including interest rates, political sentiment and situations, and economic performance.

For example, if there is more supply or demand for a country’s currency, or when its exports and imports are unequal, that influences the value of its currency.

The forwards and futures markets trade contracts instead of currencies that represent a future date for the contract trade settlement. The forwards market deals with two individuals who determine the terms of the contract themselves, whereas the futures market deals with contracts that have specific details and are based on a standard size and settlement date on public commodities markets. Large institutions often utilize these markets to hedge against exchange rate fluctuations since these types of markets can offer risk protection.

What are the risks of forex trading?

With any type of market and trading, there are risks, including forex trading. A high amount of leverage is allowed by banks and brokers in the forex market, which can lead to many traders becoming insolvent unexpectedly, as traders can control large positions with little money. In addition, since forex traders are trading currencies, they need to have a comprehensive understanding of economies as a whole, how certain countries are connected with others and what can drive the currency values.

How can I profit from forex trading?

With forex trading, currencies are considered an asset class whereby traders can turn a profit. As a forex trader, you can earn a profit from:

  • Changes in exchange rates
  • The interest rate differential between the two currencies you are trading

But as always, you should do your own research and build your own knowledge about trading currencies before trying to turn a profit.

What is MSCI?

MSCI wears many hats – one of which is operating the well-known MSCI Emerging Markets Index. MSCI (otherwise known as Morgan Stanley Capital International) is an investment firm that provides various investment tools and analytics such as stock indices, risk and performance analytics and governance tools. What it is most well known for are its benchmark indices such as the MSCI Frontier Markets Index and MSCI Developed Markets Index, in addition to the MSCI Emerging Markets Index. All of its indices are market cap-weighted indices, which means that the stocks included are weighted according to their market capitalization.

What is the MSCI Emerging Markets Index?

If you are investing in UAE or other MENA-based stocks or overall stock markets, MSCI Emerging Markets is something important to know about. Some unique features of the index include:

  • launched in 2001 by MSCI to measure equity market performance in emerging markets.
  • includes almost 1,400 large and mid-cap stocks across 26 emerging markets countries.
  • represents 13% of global market capitalization.

In addition to MENA countries United Arab Emirates, Egypt and Saudi Arabia, the index also includes stocks from Argentina, Brazil, Chile, China, Colombia, Czech Republic, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, South Africa and Taiwan.

The index is heavily weighted with China-based stocks at 31.55% of the index, and South Korean stocks in second place holding 12.37% of the share. Some of the well-known stocks included in the index are: Alibaba (NYSE:BABA), Tencent (NYSE:TME), Samsung (KRX:005930), Naspers (JSE:NPN), Reliance (NSE:Reliance) and JD.com (HKG:9618).

The index is reviewed four times a year and is rebalanced twice a year in May and November.

When was the UAE included in MSCI Emerging Markets?

The UAE was included in the MSCI Emerging Markets Index in 2013, after it was upgraded from frontier market status. After the country was included, it saw an unparalleled injection of capital from international investors into many of its stocks, and continues to see this as the index evolves with new stock additions. For example, in early 2020, 100 million shares of Emirates NBD were purchased by 254 investors just before its inclusion into the index.

When was Saudi Arabia included in MSCI Emerging Markets?

In 2018, MSCI upgraded Saudi Arabia from a standalone market to emerging market, and began phasing Saudi stocks into the index in two tranches with a 50% inclusion factor for each; the first inclusion in May 2018 and the second in August 2019. In 2019, after inclusion was complete, the index generated billions of dollars of foreign inflows and has helped the Saudi index make double-digit gains.

What are the advantages to being included in the MSCI Emerging Markets?

A country being included in the index could see an increase in capital to local equity markets and liquidity of domestic stocks due to international investments that weren’t accessible before.

This is beneficial to developing countries as the increase in foreign inflows can lead to local stocks having more visibility to foreign investors and greater liquidity overall for the country.

What are the disadvantages to being included in the MSCI Emerging Markets?

While there are plenty of advantages for a country to be included in the MSCI Emerging Markets Index, there can also be some disadvantages. One disadvantage is the possibility of a sell off that could happen if a natural disaster or catastrophe happens in another country that is included in the index. This could lead to adverse trading activity in emerging market Exchange Traded Funds (ETFs) that might affect all countries in the index and their respective equity markets.

How can I invest in MSCI Emerging Markets?

As always, research is your friend. Take an overall holistic view on your portfolio and what type of risk you are willing to take on before investing. Emerging markets may be a riskier investment as you might see volatile returns. But, if you are looking to diversify, it’s one to consider. There are various ways to invest in these markets, starting with what’s the most popular – ETFs.

Blackrock alone operates 18 ETFs that track MSCI Emerging Markets. The combined assets under management exceed $44 billion and average daily trading volume exceeds $3 billion of iShares Emerging Market ETFs. Compare this with iShares Frontier Markets ETF which sees only $825 million assets under management and $11 million daily trading volume.

ETFs are well known to offer an option for diversification and will (almost perfectly) track the MSCI indices that it follows. Investing in an ETF that tracks the emerging markets can be a good way to get ownership of international stocks that may otherwise not be available to you.

What is a P/E ratio?

P/E ratios – it’s that one thing that you’ve heard about a million times but have no idea what it means. Don’t worry – that’s what we’re here for. Understanding what a P/E ratio is simple once you understand where it comes from, how it’s calculated and how to use it to analyze companies.

A P/E ratio (AKA price to earnings ratio) refers to the valuation of a company based on its current share price relative to its earnings per share. Investors use this calculation to compare the value of companies shares in an ‘apples to apples’ comparison.

Why is the P/E ratio helpful?

Looking at a company’s P/E ratio can be helpful in many ways.

  • Since the P/E ratio puts companies on an even playing field by removing the effect of how many shares a company has outstanding, investors are able to analyze if a company’s share price accurately represents its projected earnings per share and if it’s a good value compared to other companies in the same industry.
  • It’s also a widely used ratio by analysts to determine a company’s stock price.
  • A company’s P/E ratio can tell you how investors view the company’s profitability – will it grow, stay the same or decline?

How to calculate the P/E ratio?

P/E ratio is calculated using a straight forward formula: simply divide a company’s share price by its earnings per share. A company’s share price can be found using the company’s ticker symbol and any finance website.

A company’s earnings per share is the amount of profit the company has for each outstanding share. Investors use earnings per share to analyze the health of a company. This is calculated by dividing a company’s profit by its outstanding shares.

How to analyze a P/E ratio?

A P/E ratio can be used to measure various metrics and various conclusions can be made including if a company is undervalued, overvalued, if investors aren’t confident in a stock, if they are overly confident and more.

While these are all conclusions that can be made, they are not necessarily the right ones. To start, you shouldn’t try comparing two companies that operate in different sectors or industries.

It’s a much better strategy to use industry peers to analyze a company’s P/E ratio. For example, companies listed on the S&P 500 historically have a P/E ratio between 13 and 15. But companies listed on the Nasdaq, which tends to reflect the broader tech industry, are typically higher to reflect elevated growth rates.

If you are analyzing Visa’s P/E ratio, you wouldn’t want to compare it to AT&T since they are not in the same industry, so the comparison would be inaccurate. What would be more useful is if you compare Visa’s P/E ratio to Mastercard’s P/E ratio. At the time of writing this, Mastercard has a P/E ratio of 50.57, and compared to the overall financial transaction industry’s average P/E ratio of 27.46, it seems quite high. This is because investors have a lot of confidence in its future earnings. Investors are expecting continued profit growth, given the company’s economic moat and immense bargaining power. On the other hand, Visa’s P/E ratio is 41.93, which still seems high compared to the industry average but is lower than Mastercard.

Another way to analyze a company’s P/E ratio is to look at how high or low the number is. The higher a P/E ratio is, the more investors are willing to pay for profitability, and vice versa. For example, Tesla’s P/E ratio is 90.82, compared to the domestic automotive industry’s P/E ratio of 27.21. This means that investors are willing to pay around $90 for every dollar of profitability.

As an investor, you can use the P/E ratio of a company to come to your own conclusions about a stock’s valuation. It’s always good practice to use more than one metric to make the best, educated decision on an investment

What are fractional shares?

Have you ever had really good pie? Like a classic apple pie. As much as you want the whole pie, you have just one slice, since that new trendy diet you’re trying is telling you no. Similarly, perhaps you want to buy a share of an expensive stock, for example Amazon at around $3,000, but your wallet is screaming “no”. Instead you buy just a piece of the company’s stock, or a fractional share, based on the amount you want to invest.

Fractional shares are exactly what they sound like – they are portions of a whole share. Originally, fractional shares were the result of mergers and acquisitions or stock splits, when the particular mechanics of such activity resulted in some investors holding an uneven portion of the company. That still happens occasionally, but nowadays many brokers specifically offer fractional shares as a financial product to make investing more affordable and accessible to everyone.

Like the automation of stock trading, fractional shares are just another extension of the increased accessibility of the stock market.

What is the history of fractional shares?

Not so long ago, during the age of mullets and corded phones, if you wanted to buy shares of a company you had to call up your broker on the trading floor. After telling them the company ticker (a nifty little code used to identify a stock), how much stock you wanted to buy, they would then head over to the trading pit and almost wrestle other traders to get your order in. If your broker was successful, you would be the proud owner of a piece of a public company.

Thanks to some clever people with computers, that chaotic method of transacting was replaced by electronic trading systems that have automated the process of price discovery. Now there are fewer shouting people and more data servers. You can swiftly buy and sell shares with the click of a button or tap of a screen.

One of the first things electronic trading systems allowed for was narrower share price trading. Before, it was too complicated to trade at smaller price increments and you were only able to transact at even-eighths, meaning the smallest price movement of a stock was $0.25. But with computers, smaller decimal points became possible. That means that as spreads (the price between the cost of buying and selling) have tightened, trading stocks has become even cheaper.

What are the advantages of fractional shares?

There are various advantages to purchasing fractional shares. Fractional shares:

  • Are useful if you have a limited amount of capital or if a stock price is too high and doesn’t fit your investment criteria.
  • Give you a viable option of buying fractions of more companies with the same amount of money (which as we’ve said before regarding diversification is a key way to reduce risk).
  • Allow you to buy as little as one thousandth of a share; others can only be bought through a stock split.
  • Some even pay dividends, so you will still be able to take advantage of any available cash flow — but only a fraction of it, of course.

How do fractional shares work in practice?

Let’s say you’re looking to buy your first shares as you begin your investment journey. You’ve got $1,000 to invest and you’ve heard that FAANG stocks are a good place to put your money to work. Before fractional shares became widely available to trade, smaller investors were only able to afford penny stocks, which are known for massive volatility and tendency to be associated with securities fraud. But now you’ve got access to everything with fractional shares.

Sorting through the stocks, you start with Facebook. Great, you can afford a couple of shares. But then comes Amazon (the whole crisp apple pie we mentioned earlier), which as of writing, has a share price of over $3,000. If your broker allows fractional shares, you could buy a portion of a share, allowing you to participate in the massive growth of this large-cap company – up 69% year-to-date.

If you want to get exposure to a handful technology stocks, you could just make it easier on yourself and look into buying fractional shares of a tech-focused exchange-traded fund (ETF).

Can fractional shares help mitigate risk?

Fractional shares are also a powerful way to mitigate risk. It’s good practice for investors to ensure that no single investment exceeds a specific percentage of their total liquid capital – up to 5% being a commonly recommended figure.

If you are only able to trade in single share increments, the risk across your portfolio might not be evenly distributed since each stock trades at a unique price. Buying fractional shares allows you precisely define how much you want to invest, allowing for greater dollar-cost-averaging symmetry.

What is market volatility?

If you are an investor, you will likely experience volatility.

Have you ever experienced turbulence on an airplane after a relatively smooth flight? From the bumps and jolts down to the nerves you feel, this can be what market volatility feels like. If you’re investing in stock markets, whether you are a short-term trader or long-term investor, you will likely see and experience volatility and uncertainty in the markets you are investing in.

What is volatility?

Market volatility is the magnitude or range of the change in a market, compared to what is an average performance for the same market. It’s usually characterized by sharp rises or falls in market performance. Measured by the standard deviation of the return on investment, volatility can range from being very volatile – which would see a high standard deviation, to stable – which would see a standard deviation closer to 0.

What creates market volatility?

It’s completely natural for markets to have volatility. There are various factors that can cause volatility, and while it’s helpful to understand some of the main factors that can cause volatility, practically anything can cause it. Earnings reports and IPOs can create minor volatility, while larger events such as U.S. interest rate hikes, pandemics (as we are currently experiencing with the COVID-19 pandemic), large weather storms, political unrest and trade wars can create larger volatility.

What is Emotional Intelligence?

Emotional intelligence, defined by Peter Salovey and John Mayer, is “the ability to engage in sophisticated information processing about one’s own and others’ emotions and the ability to use this information as a guide to thinking and behavior.” Volatility can create a range of emotions for investors, from excitement and nervousness to fear, and you may notice that your emotions can cloud your judgement. It will take discipline to be able to manage your emotions during market volatility and stay laser focused on your long-term goals.

How does volatility impact my portfolio?

Market volatility can have an impact on your portfolio, and depending on your asset allocation and diversification and the intensity of the volatility, the amount of impact it can have on your portfolio ranges.

That’s why it can help to diversify your portfolio not only by type of equities, but also by type of assets, including stocks, bonds, commodities and cash-equivalents.

Market volatility can even impact trading in certain instances. It can cause delays because of the high volumes of trading, digital issues with trading systems because of the high volumes, or incorrect quotes because the market may be changing rapidly. To help offset some of these risks, you might choose to utilize a limit order when trading, which is an order for a predetermined amount of shares at a specific price.

There may be extreme cases where you might see unprecedented market volatility, such as during the current COVID-19 pandemic. The markets plummeted in March 2020 and countries around the world have been in and out of lockdowns. The S&P 500 rebounded since it’s 33.8% drop in March, but unemployment rates are still at record highs and U.S. interest rates continue to hover at their lowest point since the 2008 financial crisis.

What can I do to protect my portfolio from volatility?

When you encounter volatility, remember to stay calm. Take a step back and relook at your portfolio and ensure you have the right diversification to minimize your risk as best as possible. Good leadership, strong balance sheets and strong track records may be good indicators that a company will be able to weather the storm. As stock prices decline, you might feel that this can actually be a good time to buy shares in a company that you have always wanted but haven’t had the chance to because of high share prices before the volatile market. But, only “buy the dip” if you believe that the stock price will recover over time and you are a long-term investor.

With market swings and volatility, some investors strategically try to sell before the market declines too much, and then buy on the market upswing. Since it’s nearly impossible to time the market, this never usually works in any one’s favor. Trends are difficult to spot when the market is extremely volatile and this could cause emotions to take over and traders to make bad investment choices, which can cause investors to lose too much and miss out on the potential growth that comes with an upswing. If you are a long-term investor, you might feel that this instance can be avoided altogether by holding on to investments throughout a period of volatility to ride out the storm.

Typically for day-trading purposes, inverse ETFs perform opposite of what the market is doing, allowing investors to potentially offset the volatility. Inverse ETFs profit from a decline in the value of its underlying benchmark. During the most recent bear market between February and March 2020 where the S&P 500 dropped by 33.8%, the best inverse ETF based on total return was the ProShares Short Russell 2000 (RWM).

It’s never guaranteed that stock prices will return to their previous levels during market volatility, but historically, the U.S. stock market has recovered after periods of downturns. To that end, it’s important to always keep your emotions in check and anticipate market volatility as best as you can by understanding what causes volatility. It’s natural to experience volatility while investing in the stock market and the better you can anticipate it and plan for it with diversification and staying calm, the better outcome you will see. If you do choose to trade during market volatility, ensure that you understand and remember the risks.

What is a SPAC?

What is a SPAC? So far in 2020 SPACs have raised over $30 billion. Learn more here.

Wondering where all this hype about SPACs is coming from? Well, you’re not alone, considering so far in 2020 SPACs have raised a whopping $31 billion.

A special-purpose acquisition company, otherwise known as a SPAC, is essentially a shell company with no operations other than the plans to go public to raise funds to acquire or merge with another company. Also known as “blank cheque companies,” SPACs are required to make an acquisition within two years of their initial public offering (IPO).

If you choose to invest in a SPAC, you are essentially investing in the management team leading the SPAC, who is promising to make a worthwhile acquisition on behalf of the SPAC.

How does a SPAC work?

To form a SPAC, the founders – usually investors or experts in a certain industry – will come together to form the management team and to seek underwriters and/or institutional investors for the SPAC’s IPO. Once the SPAC goes public, retail investors can buy shares in the SPAC. Investors usually don’t know what type of investment or acquisition the SPAC is planning to complete, as this is typically kept a secret as to not raise speculation that could affect the acquisition price. However, in some cases, SPAC sponsors give investors direction or a target based on industry.

The money raised from the IPO is held in a trust until the acquisition takes place. Until the SPAC acquires a company, its stock continues to trade on an exchange, usually at around its IPO price. After the SPAC goes public, it has two years to complete the acquisition, or else liquidation is required and the money is returned to shareholders.

Once a SPAC has found a company to acquire, the SPAC will usually make an announcement about the acquisition and depending on how investors feel about that specific acquisition, its stock price can move dramatically. If a SPAC chooses to make an acquisition that is valued at more than the SPAC’s value, it can raise the additional funds from PIPE deals – private investments in public equities, which have also been around for decades.

Once the acquisition is complete, the SPAC and the new company are merged into one company and the ticker symbol is changed to represent that new company.

What is the history of SPACs?

SPACs have been around for decades, but they have recently been thrust into the spotlight with their new-found popularity and attention.

Originating in the 1990s, SPACs first came to market as a way for smaller companies – those too small to IPO – to gain public market access to raise funds. They were first seen as risky, and their activity faded during the 2000s as the tech boom led to an increase in traditional IPOs. After the dot-com bubble burst, SPACs then began to increase in popularity again. Activity waned again during the financial recession in the late 2000s.

More recently, SPACs have raised huge amounts of money, including a record amount of $13.6 billion in 2019 and $31 billion so far in 2020. As MarketWatch declared, 2020 is the “Year of the SPAC.”

What are the advantages of SPACs?

There are various advantages for companies to sell to SPACs. Many private firms in recent years are choosing SPACs over IPOs as SPACs actually present fewer regulatory hurdles than IPOs and they present a faster process than IPOs. In addition, selling to a SPAC can actually add value to the sale price compared to a typical private equity deal – up to 20% more!

Since SPACs IPO to raise money, it allows retail investors to invest in acquisitions and mergers they would otherwise not be able to initially invest in.

SPACs also provide benefits to protect its investors, such as enabling pre-determined investment periods, the protection of its IPO proceeds into a trust made up of U.S. Treasuries and the option to vote for or against a deal that the management team presents.

What is the performance of SPACs?

It isn’t all rainbows and butterflies with SPACs, well at least it never used to be. SPACs have typically underperformed when compared to traditional IPOs throughout the years. But, since 2017, SPAC performance has begun to track more closely to traditional IPO performance. Building on its skyrocketing popularity, SPACs that went public in 2019 are up 14.53% to date (July 22), while so far in 2020 SPACs are up 10.96%.

What are examples of well-known SPAC acquisitions?

The most recent well-known SPAC acquisition is undoubtedly when Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million. Other recent well-known SPAC mergers include Nikola (NKLA) and DraftKings (DKNG). Bill Ackman’s Pershing Square Capital Management’s SPAC recently made its debut on the New York Stock Exchange for a cool $4 billion, making it the largest IPO for a SPAC in history.

How does oil price impact spending?

The amount that local governments and economies depend on oil affects the impact that oil price has on local spending.

Just as we rely on food and water to survive, regions around the world rely on another commodity – oil – to different extents; some more heavily than others. Countries such as Saudi Arabia, the United Arab Emirates and Iraq’s economies rely on heavily on the export of oil as oil producing nations. Conversely, economies that rely on the import of oil can see large impacts if the oil price rises or falls. As economies rely so heavily on the trade of oil and its prices, the impacts of both scenarios are felt throughout local economies.

What dictates the price of oil?

There are many factors that dictate the price of oil, ranging from geo-political tensions, weather systems, travel demand, OPEC and alternative energy options. Some of these factors can affect the supply of oil, while others can affect the demand of oil. Since these factors and variables dictate the price of oil, one could argue that local spending can be directly attributed to them and therefore the price of oil.

What is the effect of the oil price on oil producing countries?

Like a store relies on its customers to make sales, oil producing nations are heavily reliant on the income that exporting oil brings. As such, volatility in the oil price can lead to large impacts in their economies.

When the price of oil increases, the economies of oil producing countries are positively affected. As oil price increases, these countries largely benefit from increased cash from exporting. This in turn can lead to a variety of positive impacts, such as an increase in the number of jobs available, higher consumer spending, and even social achievements.

Here’s an interesting fun-fact to keep in your back pocket: between 1965 and 1985, the Middle East saw vast economic growth due to a rise in oil prices, which resulted in the halving of infant mortality rates and a rise in life expectancy rates in the region.

On the other hand, when oil price goes down, the economies of oil producing nations tends to react negatively. As oil producing countries tend to rely on high oil prices to balance budgets, the impact of low prices is felt throughout the economy.

The region is experiencing what is arguably one of its toughest years yet with the current COVID pandemic greatly impacting oil prices and demand. In addition to low oil prices, countries around the world have been entering into and out of lockdowns beginning in early 2020. With domestic and international travel restricted, businesses and industries have limited their operations, which in turn has had a direct effect on demand for oil. The good news is that local governments have begun to diversify their economies to not rely so heavily on their oil sectors, yielding great results. For example, both the United Arab Emirates and Saudi Arabia have begun to switch gears to focus on initiatives such as digital economies and tourism, while introducing many new initiatives to boost foreign visitors.

Here’s another fun fact: the top 10 oil producing countries in 2019, listed in order of oil production, are the United States, Saudi Arabia, Russia, Iraq, Iran, China, Canada, the United Arab Emirates, Kuwait and Brazil.

What is the effect of the oil price on importing countries of oil?

The opposite tends to occur with local spending in countries that are importers of oil relative to the oil price. As oil prices rise, the import cost for countries to import oil begins to increase, which largely affects the end consumer. For example, when gas prices are high it can have a knock-on effect on the economy. Consumers spend more filling up their car tanks and therefore have less money to spend on other types of commodities and goods. In addition, consumers choose to drive less, leading to less brick-and-mortar sales. But, according to Marin Software, searches for online shopping increase when oil prices increase. Higher oil prices also tends to mean that the cost to produce and import a good is higher, leading to overall higher prices for goods.

On the contrary, when the price of oil decreases, the cost of importing oil decreases, leading to a reduced cost of living and more money in consumers’ pockets. This also leads to decreased costs for transportation-focused industries such as airlines and trucking.

Currently, even though the COVID-19 pandemic has presented low oil prices, economies in importing countries of oil have yet to take advantage of the low prices because of travel restrictions and teetering lockdowns.


How do oil producers balance budgets?

With many various factors affecting oil price, balancing budgets requires a lot of *finesse*.

There’s no arguing that balancing budgets can be hard. Now imagine that you’re an oil producing nation, relying on a major commodity – oil – as a main source of revenue for your country. With many various factors affecting oil price on any given day, such as geo-political tensions, weather systems, pandemics and travel demand, balancing budgets requires a lot of formulas, models, as well as skill and *finesse*.

How does oil affect an oil producing nation’s budget?

When balancing budgets, countries look at their expenditures versus their incoming revenues.

In order for governments to function effectively, an economy requires sufficient revenue streams to finance welfare initiatives, and federal projects such as government jobs and infrastructure within the country. For many oil producing nations, it’s important to balance incoming revenue they realize from their most valuable export (oil) with their net expenditures in order achieve a fiscal balance.

If revenue per barrel falls below what is forecast, the country can operate at fiscal imbalance, a problem which would pressure governments to curb their national expenditure models or seek alternative means of financing in capital markets.

What is the effect of the breakeven oil price on country budget?

Many oil producing nations whose economies are still in their developmental stage rely heavily on their revenue from exporting oil. For example, 87% of Saudi Arabia’s budget revenue and 42% of its GDP comes from its oil sector. Countries that have a high dependency on oil revenue tend to also need a higher oil price in order to breakeven, or to attain a fiscal balance. For example, in 2019, the breakeven point for the United Arab Emirates was $67.1 per barrel.

In 2017, Nigeria’s breakeven point was $139 per barrel, the highest of any other oil producing nation. Since oil is Nigeria’s largest source of revenues, it has a very high breakeven point when it comes to its budget and oil revenue.

Are oil producing nations diversifying their economies?

With the recent decline of the oil price, COVID-19’s effect on oil demand, and regional trade wars have unfortunately led to an environment difficult to balance budgets. However, many Middle Eastern oil producing nations have recently taken steps to diversify their economy as to not rely so heavily on their oil sectors, yielding great results. For example, both the United Arab Emirates and Saudi Arabia have begun to switch gears to focus on initiatives such as digital economies and tourism, while introducing many new initiatives to boost foreign visitors.

In addition, since oil producing nations typically have very low, if not no tax systems, some have begun to implement tax initiatives to further diversify their revenues, such as the implementation of value added tax (VAT) in 2018 in the United Arab Emirates. Taking a more extreme measure, Saudi Arabia raised its VAT from 5% to 15% on goods during the COVID-19 pandemic in 2020 to offset its losses from the crashing oil price.

How is the price of oil dictated?

In this blog we do a deep dive on oil supply and demand factors, their influences on economies and oil price.

What makes the world go ‘round? To the average person, their answer may be air, water, or food. To some, they may argue that it is actually oil.

Crude oil, which is a type of fossil fuel, is a naturally occurring petroleum product comprised of hydrocarbon chains and organic materials, which can be refined to produce a variety of products including gasoline, diesel and jet fuel. These types of fuels have been traded and consumed since well before 1900 and continue to arguably be the lifeblood of the world economy. With the title of being the so-called lifeblood of the world economy, comes great responsibility – the price of oil can largely affect country and global economies.

What is the history of oil?

The history of oil goes way back. How long exactly, you ask? The first commercial oil well was drilled in Azerbaijan almost two centuries ago – in 1847. The world’s top producer of oil (the United States) discovered oil approximately 12 years later with the first oil discovery in Pennsylvania. Initially, early demand for oil was quite low, but soon after the first commercial well that was capable of mass production was drilled in Texas, producing more than 100,000 barrels of oil in one day. In the Middle East, oil was first discovered in Iran in the early 20th century, and shortly after the first large-scale drilling projects began in 1908.

Oil was, and continues to be a hot commodity, given the dependence of countries’ economies on their energy sectors and large volumes of consumption throughout the last century.

The Energy Information Administration (EIA) estimates that global consumption for petroleum and liquid fuels averaged 93.4 million barrels per day in July 2020.

What are the supply factors to the price of oil?

With any type of market, there are various different supply factors that can affect the price, including the price of oil. Some supply factors are The Organization of the Petroleum (OPEC), non-OPEC factors and external supply shocks.

We are sure you have heard of OPEC at one point or another. If you haven’t, don’t worry, that’s what we’re here for. Here’s a quick background: Established in 1960 at a conference in Baghdad, OPEC is a permanent intergovernmental organization of 13 oil exporting nations that coordinates and unifies the petroleum policies of its members countries. OPEC, which controls approximately 40% of global oil supply, aims to unify a view on oil production quotas to protect against overproduction and rapid price depletion of oil, which therefore ensures the stabilization of its prices in international markets. But, nothing is perfect. Imperfections in OPEC’s policy do continue to exist including unexpected outages, regional politics driving for market share or non-compliance by member states to adhere to the agreed upon quotas.

Countries that are not members of OPEC, such as the United States, can also have huge effects on oil prices. For example, the United States went from one of the world’s largest consumers of energy to one of the world’s largest producers of energy. They didn’t stop there – they are now the world’s top oil producing country in the world. This has been achieved largely because of its shale oil production in the last decade, giving them a lot of power over oil prices.

Events that are not directly related to supply can also have an effect on oil price, ranging from geo-political events – such major weather events – to geopolitical or regional instability. The Arab oil embargo of 1973, also known as the first “oil shock,” saw the oil price rally by approximately 230%. More recently, in 2017 OPEC decided to curtail its production, which also led to an oil price rally approximately 7%.

Major weather events can not only cause major destruction to infrastructure and markets, but they can also affect the oil price. A recent example of this is when Hurricane Katrina barreled through the United States in 2005, causing major damage to oil supply infrastructure in the region, leading to a supply shock to global markets.

What are the demand factors to the price of oil?

In addition to supply factors, there are various different demand factors that can affect the price of oil. This includes most notably the performance of the world’s biggest economies, market sentiment and alternative energy.

Economies that provide major demand for oil in the world include the United States, China, Europe and India. Healthy economies typically lead to increased demand for oil, while stagnating economies usually have a limited demand for oil. Therefore, if there are any factors impacting healthy economies, the oil market will surely feel it in the form of a demand shock. The most recent example of a demand shock has been the COVID-19 pandemic, which has seen countries enter into and out of lockdowns beginning in early 2020. With domestic and international travel restricted, businesses and industries have limited their operations, which in turn has had a direct effect on demand for oil.

Market sentiment and speculation in the market is often another major contributing factor to the price of oil. The oil market is highly sensitive to speculation driven by factors such as economic indicators or rumors. This includes any speculation about future events, such as impending sanctions being placed on an oil producing nation, which would in theory equate to a cut in oil supply and in turn raise the price of oil. On the other hand, news of an OPEC announcement to increase production would lead to an increase in the oil supply to market and the result would lead to a decrease in the oil price.

Green energy, or alternative energy, is also beginning to present itself as a major factor affecting oil demand. In the last ten years, alternative energy has made its way to center stage and governments have been increasingly looking to sustainable energy given the positive impacts on the environment, among other reasons. Technological developments in sustainable energy sectors are making it an increasingly viable option and this trend is expected to grow over the next few decades.

What is investment correlation?

Find out what investment correlation means and why it’s important for your portfolio.

Relationships. We all have them – positive ones, negative ones, random ones. Guess what else can have a relationship? Stocks, bonds, commodities, and more! We call the relationship between two assets investment correlation.

To be concise, investment correlation is the relationship between the average of two assets. Assets can have positive correlation, negative correlation or no correlation. Correlation can be measured between different types of securities, such as bonds, commodities and stocks, but can also be measured for the same type of security, for example between two different stocks. But why is correlation important to understand? You might have guessed by now, correlation is an important factor to diversifying your portfolio.

How is correlation calculated?

Let’s get technical. The correlation coefficient is the calculation for investment correlation. To find the correlation coefficient, take the standard deviation of asset X multiplied by the standard deviation of asset Y, and divide the covariance of both assets by that number. You can use the correlation coefficient to identify a correlation between two assets, specifically, if they are positively correlated, negatively correlated or uncorrelated.

What does positive correlation mean?

Positive correlation happens when the performance of two assets move with each other. Have you ever thrown two tennis balls in the air at the same time? When doing so, they both fall at the same time. That means that they are positively correlated.

When two assets are completely correlated with each other, they have a correlation of 1.0. Typically, you’ll see references to assets that have high correlation with a number just under 1.0.

An example of two assets that have positive correlation are Uber Technologies (UBER) and Lyft Inc (LYFT) between 1 January 2020 and 1 September 2020. Both companies are technology companies focusing on ride sharing. If you compare both their stock performance for 2020, both have had similar performances throughout the year thus far.

Graph 1: LYFT https://www.marketwatch.com/investing/stock/lyft
Graph 2: UBER https://www.marketwatch.com/investing/stock/UBER

What does negative correlation mean?

Negative correlation happens when the performance of two assets move against each other.

Think back to your childhood days playing on a playground. Have you ever been on a see-saw? When one side goes up, the other side goes down. This is negative correlation.

If two assets are completely negatively correlated, they have a correlation of -1.0. Typically, you’ll see references to assets that have negative correlation with a number just above -1.0.

An example of two assets that have negative correlation are U.S. Oil Fund (USO) and U.S. Global Jets ETF (JETS). Let’s take their performance during the past three months as an example, between 1 June 2020 to 1 September 2020. It’s evident in the charts that these two assets are negatively correlated.



Chart 3: USO https://www.marketwatch.com/investing/fund/uso
Chart 4: JETS https://www.marketwatch.com/investing/fund/jets

What does no investment correlation mean?

When two assets have no investment correlation, it is when their correlation is close to 0. Have you ever watched the way that a small litter of puppies run around in random directions? This is a great example of something having no correlation.

As much as we all love puppies, a (more relevant) example of two assets that have no correlation are SPDR Gold Shares (GLD) and Moderna, Inc. (MRNA) between 1 August 2020 and 1 September 2020. SPDR Gold Shares tracks the performance of gold, and Moderna, Inc. is a biotechnology company, most notably developing a vaccine candidate for COVID-19. In the graphs below you will see that they don’t have much of a correlation to each other during this time frame, therefore they are uncorrelated.

Graph 5: GLD https://finance.yahoo.com/quote/GLD/
Graph 6: MRNA https://finance.yahoo.com/quote/mrna?ltr=1

What does investment correlation mean for diversification?

Correlation is important when thinking about your portfolio and how to diversify stocks. Some assets do well and some do poorly during the same macroeconomic factors. Let’s take the current COVID pandemic as an example. We have seen tech stocks soaring, while airline stocks have dropped.

The modern portfolio theory argues that by reducing the correlation between assets within a portfolio, investors can diversify and reduce their risk.

Finding uncorrelated assets can help you manage risk to ensure you have the right mix of securities so that your portfolio is less susceptible to substantial moves in the market.

Keep in mind that correlation of certain securities can change, especially within different time periods. January of 2019 compared to January of 2020 for the same two assets may be completely different. But, if two assets have been correlated over a long period of time, you can probably guess that they’ll continue to be relatively correlated for the near future, if there are no major macroeconomic factors affecting each.

What is the DFM?

The Dubai Financial Market was established in 2000 and has about 66 companies currently listed.

What does the Burj Khalifa and the Dubai Financial Market (DFM) have in common? They are both reaching for the stars. The DFM – a stock exchange located in Dubai, UAE, for investors to buy and sell securities – was established in 2000 and has since implemented various measures and initiatives with a goal of becoming a well-known exchange globally.

Regulated by the Securities & Commodities Authority (SCA), the Dubai Financial Market currently has a market capitalization of AED 294 billion with 66 companies listed on the exchange. About 75% of companies listed on the DFM are in the financial or real estate sectors. The DFM continues to see increased interest from foreign investors, with foreign ownership as a percentage of market cap up almost 1% from 2019 at 18.2%.

What is the history of DFM?

Established in 2000 as a government owned-exchange, the Dubai Financial Market became the first regional exchange to be publicly listed in 2007. In 2013, the United Arab Emirates leveled up and was upgraded by MSCI to Emerging Market status, with selected stocks from DFM included in MSCI Emerging Markets Index in May 2014, which gave the market a boost at the time. In 2015, DFM launched a new interface redesign called DFM Marketwatch to help investors monitor investments and markets.

What is the DFM General Index?

With 66 companies listed on the DFM, it would take all day to figure out how the market is performing by looking through 66 stock performance charts. The good news is there is one place you can look to see the DFM’s performance – it’s called the DFM General Index. The DFM General Index is a market index that tracks the general market performance of the Dubai Financial Market. This is what you should look to find out how the Dubai Financial Market is performing.

What is the performance of the DFM General Index?

In 2018, the DFM had its worst performance in a decade, after seeing a loss of approximately 25%. In 2019, the index rose by approximately 10%.

What are the DFM index sectors and weights?

The majority of companies listed on the Dubai Financial Market are in the Financial (60.7%) sector and Real Estate and Construction (17.1%) sectors.

Its other sectors include Telecommunications (8.9%), Transportation (7.6%) Services (2.7%) Industrials (1.9%) and Consumer Staples (1.1%). This is unlike the Dubai economy, which has a healthy mix of a variety of sectors. As an example, the Financial sector represents only approximately 11.6% of Dubai GDP.

Recent IPOs on the DFM

While there hasn’t been an IPO listed on the DFM since 2017, the DFM has implemented several reforms and made efforts to entice local firms to list domestically rather than abroad, including enabling companies based in Dubai’s free zones to access the DFM and encouraging family offices to list on the exchange. Prior to the drought, DFM’s last IPO was in late 2017 when Emaar Development sold $1.3 billion in new shares.

What is the ADX?

The Abu Dhabi Securities Exchange is a stock exchange located in Abu Dhabi.

The Abu Dhabi Securities Exchange (ADX) is a stock exchange located in Abu Dhabi. With approximately 65 listings, the ADX has a market cap of $693 billion. The exchange is regulated by the Securities and Commodities Authority (SCA), which is a federal authority in the United Arab Emirates.

Like its twin brother DFM, the ADX is a market for trading securities, including shares issued by public joint stock companies, debt instruments issued by governments or corporations, exchange traded funds, and other financial instruments. Formerly called the Abu Dhabi Securites Market, the ADX mainly lists stocks from companies based in the UAE, with several listings from companies located in neighboring countries.

Examples of companies currently listed on ADX include Etisalat, Abu Dhabi Commercial Bank, First Abu Dhabi Bank and Aldar Properties.

What is the history of the ADX?

The Abu Dhabi Securities Exchange was established in November 2000 and in 2010 it launched its first exchange-traded fund (ETF), NBAD One Share Dow Jones UAE 25 ETF, which measures the performance of 25 of the largest, most-frequently traded UAE securities.

Jumping on the growth trend, the exchange has introduced new laws and measures encouraging further growth in recent years. In February 2020, a new draft law was established to encourage family-owned businesses to join the financial market and for UAE nationals to invest in public shareholding companies by granting them with necessary statutory protection. Looking forward, the exchange is looking to offer additional product offerings such as derivatives to appeal to more foreign investment.

What is the ADX General Index?

The ADX General Index is a market index that tracks the performance of all companies listed on the Abu Dhabi Securities Exchange. The index uses a market-capitalization-weighted methodology of stocks listed on the exchange. Since it tracks the performance of all companies listed on the ADX, it’s a good place to start if you’re looking to find out the overall performance of the ADX.

How has the ADX General Index performed?

Launched shortly after the establishment of the ADX, the ADX General Index launched in January 2003 with a base value of 1000.

In 2018, the ADX General Index climbed approximately 13% which put it among the world’s best performing indices.

The index had a solid year in 2019 ending the year at just above 5000. So far in 2020, the index plummeted during the COVID pandemic – like most others – but has since recovered to its early 2018 levels trading at around 4500.

What are the ADX general index sectors and weights?

The sectors included in the ADX General Index include banks, insurance, consumer staples, services, real estate, industrial, energy, telecommunication, investment and financial sectors. Its top four sectors in terms of weights include banks at approximately 45%, telecommunication at approximately 33%, energy at approximately 9%, and real estate at approximately 4%. The index’s weights are reviewed twice a year so these are prone to fluctuating. Likewise, its methodology is also reviewed once per year to ensure that it remains reflective of the exchange.

How did the ADNOC IPO perform?

The big debut: in 2017, ADX’s largest IPO was revealed – ADNOC. As ADX’s first international offering, the company raised $851 million from the sale of 1.25 billion shares, and its share price rose 16% on its first day of trading. ADNOC’s IPO was the first on ADX since 2011 and the largest in the last 10 years.

What is the tadawul?

There are many stock exchanges in the GCC region and the most well-known is undoubtedly Tadawul.

While there are many stock exchanges in the GCC region, the most well-known is undoubtedly Tadawul. Saudi Arabia is one of the largest economies in the Middle East so it’s no surprise that its stock exchange is ranked in the top 10 largest in the world by market capitalization, mainly due to the recent initial public offering (IPO) of Saudi Aramco.

Tadawul – known as the Saudi Stock Exchange – was officially formed in 2007 and is the sole entity authorized in Saudi Arabia to act as a stock exchange. Tadawul offers equities, Islamic bonds, exchange-traded funds and mutual funds, and it currently has approximately 150 companies listed for trading on the exchange. It is regulated and operated by the Capital Market Authority. Only established institutional foreign investors or global institutions located in Saudi Arabia are allowed to trade and invest in securities listed on Tadawul.

Some of the companies that are listed on Tadawul include Arab National Bank and Almarai, and recent additions to Tadawul include Ataa Educational Co. in July 2019, Saudi Aramco in December 2019 and Dr. Sulaiman Al Habib Medical Services Group in March 2020. The exchange has listed six new companies so far in 2020.

Since Saudi Arabia’s economy is reliant on oil, many of the companies that are listed on Tadawul are in this industry. But, in recent years, the country began diversifying its economy in a bid to become less reliant on oil revenue.

With Saudi Vision 2030, the Kingdom has a focus on accelerating and focusing on digital projects. Tadawul saw its first listing in the IT sector in April of 2019 – Al Moammar Information Systems Company. The company was the exchange’s 201st listing at the time.

What is the Tadawul Index?

The Tadawul All Share Index (TASI) is a market index that tracks the performance of the companies listed on the Saudi Stock Exchange. If you are looking to see how the Tadawul is performing, you would look at the Tadawul All Share Index.

What are the Tadawul sectors and weights?

TASI is a capped index, meaning that it has a limit on the weight of any single security within the index to prevent any security from having a dominating influence on the index. TASI has a variety of different sectors each with their own weights. Its top five sectors and weights are estimated as financials at 40%, materials at 26%, communication at 11%, consumer staples at 6% and energy at 5%. Other sectors include consumer discretionary, health care, utilities, real estate, industrials and cash and/or derivatives.

How did the Saudi Aramco IPO perform?

On 11 December, 2019, Saudi Aramco’s IPO debuted as the country’s – and the world’s – largest IPO, surpassing Alibaba’s IPO in 2014, after it raised $25.6 billion. Shares of Saudi Aramco rose to approximately 10% on its first day of trading on Tadawul, hitting its daily limit and giving it a valuation of $1.88 trillion – making it the largest listed company in the world. While the state-owned oil company only listed 1.5% of its shares on Tadawul, the IPO still moved Tadawul to fourth globally for capital raising in 2019. For Saudi Aramco’s IPO, Tadawul introduced its equity index weight limit of 15% to reduce large companies’ dominance on the Tadawul All Share Index performance. Since the company’s initial listing, its shares fell below IPO for the first time in March mainly due to an OPEC deal failure and the COVID pandemic.

What is the Tadawul’s market cap?

At the time of writing this article (September 21), the Tadawul market cap stands at 9.35 billion Saudi Riyals. In December 2019, the exchange’s market cap jumped 389.4%, due to Saudi Aramco’s IPO on December 11. Prior to the IPO, Tadawul’s market cap floated around 2 billion Saudi Riyals during 2019.

What are bull and bear markets?

What do animals have to do with financial markets, and specifically, a bull and a bear?

Maybe you’ve heard a reporter refer to a declining bear market on the news, or maybe you’ve seen the Charging Bull statue near the New York Stock Exchange in New York City. But what do animals have to do with financial markets, and specifically, a bull and a bear?

Simply put, a bull market is when the market is in an upward trend, and a bear market is when the market is in a downward trend. Both bull and bear markets have a substantial impact on investors’ portfolios, so it’s important to be aware of what they both mean and the impact of both.

What is a bull market?

When the market is a “bull” market, the market has positive momentum and is on an incline. This happens when market conditions are favorable and investors begin to have more confidence in the market. This can be due to a variety of reasons that cause bull markets, which we will go into in a bit. Growth of at least 20% in average stock prices has to be registered by several stock exchanges for a market cycle to be categorized as a bull market.

Some examples of bull markets include the 1990-1999 bull market when the S&P 500 rose 417% over the span of 113.4 months and the 2009-2020 bull market when the S&P 500 rose 400.5% over the span of 131.4 months, the latter being the longest bull market in history thus far.

What are the characteristics of a bull market?

A bull market is typically defined by an upward continuing trend with a sustained increase in stock prices. High consumer confidence levels lead to more revenue generated by companies, which in turn leads to higher profits for companies and shareholders, therefore increasing share prices and investor confidence.

Some specific characteristics of bull markets include:

  • Strong employment rates
  • Increase in Gross Domestic Product (GDP)
  • Strong demand for securities
  • Strong economy
  • High investor confidence and optimism
  • Increase in Initial Public Offerings (IPOs)

What causes a bull market to turn into a bear market?

There can be many reasons and causes behind a bull market transitioning into a bear market. Typically, a decline in growth prospects can lead to a decline in stock prices, which usually reflects future expectations of cash flows.

There can also be external factors that trigger a bear market, for example, intervention by government in the economy such as changes in tax rates, political unrest, natural disasters, and pandemics – as we have seen with the COVID pandemic and the corresponding bear market in February to March 2020.

What is a bear market?

On the other hand, when the market is a “bear” market, the market has negative momentum and is in a decline. Opposite to a bull market, there should be a decline of at least 20% or more in average stock prices for a market cycle to be considered a bear market.

During a bear market, investors begin to disengage their investments and sell positions because they start to see the value of the securities that they hold dropping, diluting the market with many shares and therefore leading to an overall decrease in share prices.

Some examples of bear markets include the 1929 – 1932 bear market (The Great Depression) where the S&P 500 declined 86.2% over the span of 32.8 months and the 2007-2009 bull market (The Great Recession) where the S&P 500 declined 56.8% over the span of 17 months.

What are the characteristics of a bear market?

A bear market is typically defined by a downward trend with sustained decrease in prices. Some specific characteristics of bear markets can include:

  • Weak employment rates
  • Decrease in GDP
  • Weak demand for securities
  • Weak economy
  • Low investor confidence and pessimism
  • Decrease in IPOs

Where did the terms bull and bear markets come from?

There are a few theories about where the terms bull and bear markets are derived from. The first theory comes from the way bulls attack – by thrusting their horns upwards, and the downwards swinging of a bear’s claws when they attack.

The second theory is derived from the eighteenth century, when middlemen in the sales of bearskins sold skins they didn’t yet receive, speculating on the future price of the skins, hoping the trappers would drop their price. These middlemen became known as bears, and because bulls are the opposite of bears, the terms bull market and bear market were formed.

How do bull and bear markets affect the economy?

Since the economy and the stock market are strongly correlated, in general you can expect that if the economy is doing poorly, it is probably a bear market, and if the economy is doing well, it is probably a bull market.

But, there are instances where the opposite can occur, such as during COVID-19 pandemic. After the stock market reached its lowest point in March 2020, the stock market began to defy odds and rally. Investors speculate that this is because big tech stocks – like Netflix (NFLX) and Amazon (AMZN) – have outperformed as people quarantined at home, and since they are included in many market indexes and have some of the largest weights in those indexes, such as the S&P 500, they have caused the market to become bullish.

What is a stock market index?

A stock market index is a quick way of looking at the average of a market performance.

A stock market index tracks the financial performance of a specific market. It’s a quick way to look at the average of a market performance to see how it is performing. Simply put, each index is the average performance of a group of companies.

For example, the S&P 500 measures the performance of the 500 largest U.S. publicly-traded companies, the Nasdaq tracks the performance of the Nasdaq stock exchange, and the Dow Jones measures the performance of the 30 largest U.S. companies traded on the Nasdaq and New York Stock Exchange.

Since stock market indexes such as the S&P 500 and the Nasdaq are only representations of the performance of a grouping of stocks, investors can’t trade them, but they can trade index funds or exchange traded funds (ETFs) that track these indexes, such as the Vanguard 500 Fund which tracks the S&P 500.

Many other countries have their own stock market indexes. For example, The ADX General Index is a stock market index which tracks the performance of stocks listed on the Abu Dhabi Securities Exchange.

What is the S&P 500?

The Standard & Poor’s 500 Index – known as the S&P 500 – is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies, which basically means that it is a measure of the average performance of 500 U.S.-based companies’ stock.

Since the stocks included in the S&P 500 are weighted, they each have different amounts of impact on the index performance. For example, a company that has a 6% weighting has a greater impact on the index performance than a company that has a 1% weighting. The top three largest components of the S&P 500, as of June 30, 2020, include Microsoft Corp. (MSFT) with an index weighting of 6%, Apple Inc. (AAPL) with an index weighting of 5.8% and Amazon.com Inc (AMZN) with an index weighting of 4.5%.

Most investment professionals use the S&P 500 as their benchmark, since it includes stocks in all sectors, and the 500 stocks account for approximately 80% of the market value of the U.S. equities market.

When you hear investors say things like “the market is up today!”, they’re probably referring to the S&P 500’s performance that day.

You’re probably wondering, how does the S&P measure the average performance? The S&P 500 uses a specific calculation, but fortunately, the total market cap for the overall S&P 500 as well as the market caps of individual companies are published often on financial websites.

All indexes regularly undergo changes to their structures, and the S&P 500 is no different. Each year the S&P 500 changes around 3% of its components – about 15-20 companies – due to mergers or acquisition strategies of companies or when smaller companies are replaced with larger ones.

What is the Nasdaq?

The Nasdaq is a stock exchange located in the United States, and includes approximately 3,300 listings. The Nasdaq Stock Exchange was actually the first stock exchange allowing investors to trade over a computer. In its early days, the Nasdaq used to primarily include only tech stocks, such as Apple and Google, but now includes stocks from a variety of industries.

The term Nasdaq is also used to refer to the Nasdaq Composite which is an index of more than 3,000 listings on the Nasdaq.

The Nasdaq Composite Index – like the S&P 500 – uses a market capitalization weighting methodology. To be eligible for the Nasdaq Composite Index, the security’s U.S. listing must be exclusively on the Nasdaq Stock Market and – unlike the S&P 500 – can be either an American depositary receipt, common stock, limited partnership interest, ordinary share, real estate investment trust, share of beneficial interest or trading stock.

What is diversification?

Have you heard of the saying “don’t put all your eggs in one basket?” Learn about diversification here.

Have you ever heard the term “don’t put all your eggs in one basket?” This piece of advice relates to diversification, or, the lack thereof.

Investment diversification is a risk management technique that involves increasing the variety of investments in your portfolio. By diversifying and investing in differing types of assets, many investment professionals agree that doing so is an important component to reducing investment portfolio risk. It’s important to remember though that investment risk may never be eliminated completely.

You can diversify across different types of companies and industries. For example, an investment portfolio can diversify by companies and can include shares in Apple (AAPL), Microsoft (MSFT) and Google (GOOG), but these are all the technology industry. To diversify even further, investments in other industries could be included such as stocks related to the healthcare or transportation industries. You can even diversify by location, by choosing investments in different countries.

Additionally, you can diversify across different types of asset classes, not just different types of companies or industries. Assets such as bonds and stocks react in different ways to adverse events, and diversifying across different types of asset classes so will help reduce your portfolio’s sensitivity to stock market swings. The different asset classes that you can diversify your portfolio with include stocks, bonds, real estate, exchange traded funds (ETFs), commodities and cash and short-term cash equivalents.

What is risk?

Your investment portfolio can be exposed to a variety of risk, depending on the type(s) of assets that are included. There are two main types of risk when investing: the first is undiversifiable – also known as systematic or market risk and caused by variables such as inflation, political instability and exchange rates, and the second type of risk is diversifiable – also known as unsystematic risk and specific to variables such as a company, industry, market. Like we mentioned before, investment risk may never be eliminated completely, a portfolio can be vulnerable to more risk if it’s not diversified. As an investor, you can ask yourself how much risk you are willing to take on, and that can help you decide how much you should diversify in order to properly to reach your investment goals.

Why is Diversification Important

When you diversify, you’re making sure all your eggs are not in one basket, they’re spread out over many different baskets – depending on how much you have diversified.

If you don’t diversify, certain market conditions could change rapidly and affect your investment performance. For example, if you have a portfolio that only includes airline stocks during early 2020 when the COVID-19 pandemic began to come to fruition, lockdowns started to occur leading to many flights being cancelled. Therefore, consumer demand for airlines dropped sharply and stock value dropped rapidly.

What are the advantages of diversification?

There can be many advantages to diversification. The most important is managing and reducing your investment portfolio risk through diversification.

With diversification, assets are spread over various different assets, minimizing portfolio vulnerability to major factors that affect share price or markets negatively.

To invest primarily for long-term investment goals, investors typically diversify a bit more than those looking to the short term, so that they can minimize risk to reach these investment goals.

How does diversification reduce risk?

As diversified investments perform together over time, it’s important to choose investments that are typically negatively correlated – meaning they have opposite reactions to the same market factor and they generally move together in opposite directions. So, if one asset loses value because of a negative factor, another asset may gain the loss back because of that same factor.

Taking the same example as before, if you invested in Delta Air Lines (DAL) during the COVID-19 pandemic, you would have seen the value of that share price decline. But, if your portfolio was diversified and you also held Novavax (NVAX) stock – a vaccine development company with a vaccine candidate for COVID-19 – these two stocks are negatively correlated and have had opposite reactions, therefore, your portfolio would have been diversified.

What are the Disadvantages of Diversification

Even though there can be many advantages to diversifying your portfolio, there can also be some downsides. Since diversifying means you are investing in various kinds of assets at one time, you’ll need to manage the investment of each asset in your portfolio. This can become tedious and difficult at times, especially if you have multiple holdings and investments. In addition, since diversifying helps reduce portfolio risk and vulnerability to extreme drops, the same goes for when a specific asset or market does extremely well because of a market factor. Since diversifying means the investments are spread over various assets, it can limit large gains in the short term.

What is an ETF?

This may sound like a lot to take into consideration, but don’t worry, that’s where ETFs come in. An example of an already-diversified asset option are mutual funds and ETFs. An ETF is an investment fund comprising a collection of assets that tracks an underlying asset or index. An ETF can hold a wide variety of different types of investments, ranging from stocks, bonds, commodities, and can be comprised of various indices, a collection of stocks based around a theme, and more, giving investors exposure to a wide variety of different assets with just one single investment.

But, since these are usually managed by professionals, they usually have higher fees, so ensure you weigh out the pros and cons to each investment opportunity before investing.

What is a stock exchange?

A stock exchange is a type of marketplace where securities are bought and sold.

We know you’ve seen them – the beginning of a movie that takes place on a trade floor, with hundreds of people yelling numbers and throwing papers. While most stock exchanges take place electronically now, there are still some that take place in person – we will go into that in a bit.

But first, what is a stock exchange? A stock exchange is a type of marketplace where securities are bought and sold. The types of securities traded on a stock exchange include shares of stock, bonds and cash. Other securities such as Exchange Traded Funds (ETFs) are also traded on stock exchanges.

A stock is a type of security that gives stockholders a piece or a share of ownership in a company. Many publicly-traded companies offer their shares on stock exchanges and their share prices can go up and down regularly, depending on a few factors.

For starters, every stock trade must have a buyer and a seller. It works on the basic laws of supply and demand, if there are more buyers for a specific stock than sellers, then the stock price will trend up.

What is the history of the stock exchange?

While the New York Stock Exchange is one of the most well-known and largest stock exchanges, it wasn’t the first. In the 1300’s, moneylenders in Europe traded debts between each other to fill gaps left by larger banks. The Venetians were the leaders in this field at the time.

In 1531, Belgium’s first stock exchange in Antwerp saw brokers and moneylenders meet to deal promissory notes and bonds. In the 1600’s, the Dutch East India Co. sought investors for long voyages who would receive a profit once the ship returned after a successful voyage.

The New York Stock Exchange began with the signing of the Buttonwood Agreement by 24 stockbrokers and merchants in 1792 outside a building on Wall Street.

Ahoy! In the 1300’s, moneylenders in Europe operated one of the first “stock exchanges” by trading debts between each other to fill gaps left by larger banks. The Venetians were the leaders in this field at the time.

What are some well-known stock exchanges?

Some of the most well-known stock exchanges around the world include the New York Stock Exchange, Frankfurt Stock Exchange and the Hong Kong Stock Exchange. Some stock exchanges operate and trade in person, such as the New York Stock Exchange, while others are completely digital, such as the NASDAQ Stock Market.

Here are the ten largest stock exchanges ranked by market cap:

  1. New York Stock Exchange
  2. NASDAQ Stock Market
  3. Tokyo Stock Exchange
  4. Shanghai Stock Exchange
  5. Hong Kong Stock Exchange
  6. Euronext
  7. Shenzhen Stock Exchange
  8. London Stock Exchange
  9. Toronto Stock Exchange
  10. Bombay Stock Exchange

The GCC has its own stock exchanges – the Dubai Financial Market and the Abu Dhabi Securities Exchange are stock exchanges located in the UAE. The largest stock exchange in the region is the Saudi Stock Exchange (Tadawul) based in Riyadh and home to 202 company listings. Other stock exchanges in the region include Egypt and Bahrain.

Why do companies sell shares on the stock exchange?

Generally, any private company can decide to become a public company by offering its shares to the public through a stock exchange. To do so, the company will have to hire an underwriter – usually an investment bank – to complete the Initial Public Offering (IPO).

Once a company “goes public”, its shares are traded on a stock exchange. A buyer of a company’s stock becomes a shareholder, which means they hold a piece of ownership of a company.

A stock exchange is beneficial to companies as it allows companies to raise funds for reasons such as scaling up, international expansion and new product lines and builds investor confidence. When a company is listed on a stock exchange, it helps a company’s reputation since it’s regulated.

The price of a company’s stock is primarily driven by a company’s profits and investors’ confidence in a company’s profit potential. It’s share price can be impacted both negatively and positively by external factors as well, including cost of material, changes in technology, regional labor costs, bad publicity, changes in leadership and trade policy.

Who can trade on the stock exchange?

When you buy and sell a stock on a stock exchange, you are buying it from an investor. To trade on a stock exchange, you must be a member of the exchange or belong to a member firm. In general, there are two types of investors trading on a stock exchange:

  • Institutional investors: Institutional investors are those who trade securities in large enough quantities that it qualifies for preferential treatment and lower fees. Examples of institutional investors include investment banks, hedge funds, insurance companies and private equity companies.
  • Retail investors: Retail investors are those who trade securities through an organization such as a broker or a bank.

How does a stock exchange work?

Physical stock exchanges allow market makers – a professional trader who maintains continuous bids and offers since a buyer or seller may not find each other at any given moment – to buy and sell a specific stock to brokers. Physical stock exchanges have trading floors, where the buying and selling takes place like an auction house, with bid and offer prices fluctuating throughout the day. On a digital stock exchange, buying and selling also takes place, only electronically between buyers and sellers over computers.

There are two aspects to a stock exchange – the primary market and the secondary market. The primary market is where private companies list their shares for the first time and the secondary market is where every day buying and selling of shares takes place.

Have you ever heard someone say “the stock market rose today”? This is when someone refers to specific stock market indices to know if the stock market rose or fell during a time period, since there are hundreds, sometimes thousands, of companies are traded on a stock exchange. For example, the S&P 500 measures the stock performance of the 500 largest U.S. publicly-traded companies.

What are the rules and regulations for stock exchanges?

Stock exchanges require the companies listed on their exchanges to follow a very specific set of rules, such as specific accounting practices and when and how companies report price-sensitive information, such as its quarterly earnings.

For example, stocks traded on the New York Stock Exchange must follow a very specific set of rules, including that it must have a share price of at least $4 and a market capitalization of at least $4 million.

What is an IPO?

You may have noticed a lot of hype around IPOs lately. Learn what the hype means and how to analyze from an investor standpoint.

An IPO – an Initial Public Offering – is when a company decides to issue stock for the first time to raise money from external investors on a public market. This is also referred to as when a company “goes public” and officially becomes a publicly traded company. In the United States, a company needs to register with the Securities and Exchange Commission (SEC) before going public.

What is the history of IPOs?

IPOs have been taking place since the beginning of the stock market, when the Dutch conducted the first IPO by offering shares of the Dutch East India Company to the general public in 1602. Towards the end of the 1990s – the height of the dot-com boom – many startups rushed to list themselves on the stock market, leading to the dot-com bubble. After the 2008 recession, IPOs became more uncommon, only to increase again in 2010.

If a company’s private valuation hits $1 billion, they are considered a “unicorn.” When Facebook went public on May 15, 2012, its stock opened at $38 per share and raised $16 billion. Before Facebook (FB) held its IPO, it reported a net income of $1 billion in 2011. Other notable, more recent unicorn IPOs include Uber (UBER), Slack (WORK) and Pinterest (PINS).

Many stock exchanges hold a ceremony to celebrate a company’s initial public offering. At the New York Stock Exchange and London Stock Exchange, a company may be invited to ring the bell, signifying market open or close. At the Stock Exchange of Hong Kong, a company may be invited to strike the gong.

Why does a company IPO?

A company may issue an initial public offering for several reasons – to raise money for growth, to scale or to allow early shareholders to liquidate their shares. IPOs also generate publicity and boost reputation.

Alibaba (BABA) held an IPO on the New York Stock Exchange in 2014, even though it’s a foreign company. Its main reason for doing so could have been to boost its reputation with investors and position itself as real competitor to amazon.

Are there disadvantages for a company?

There are a few disadvantages to initial public offerings that a company should consider before going public. Going public requires significant costs, such as legal, accounting, reporting management and marketing costs, as well as new costs that have to do with disclosing financial and busines information on a regular basis. In addition, the company could be required to reveal business secrets and methods that could help give competitors an advantage. Since an IPO essentially allows the public to become shareholders, new shareholders can obtain voting rights and control company decisions via the board of directors.

What is the IPO process?

When a company is looking to IPO, it solicits private bids from underwriters or makes a public statement to generate interest from underwriters. Once an underwriting firm – usually an investment bank (or multiple investment banks if the IPO is big enough) – agrees to manage the IPO, they will work together to determine the IPO price based on the valuation of the company. They will also work together to determine the type of security, the optimal time to take the company public, amount of shares they will distribute and the percent ownership the company will give up.  Once all of this is decided, the investment bank will list the shares on a stock exchange for the public to buy. This process can take anywhere from six to nine months to complete.

A company also has the option of a direct listing IPO – this is when a company conducts an IPO on its own without any underwriters, typically only feasible for companies will well-known brands. Choosing a direct listing could lead to more risk if it does not go well, but the company could end up with a higher share price, benefiting the company and shareholders.

A good example of a direct listing is Spotify (SPOT). In 2018, Spotify chose to issue a direct listing when it went public. At market open, Spotify shares were trading at $165.90, up almost 26% from the reference point of $132 that was set by the New York Stock Exchange. Since it had a strong brand, the company decided it was in their best interest to do a direct listing; and it paid off.

How can I invest in an IPO?

The two ways that the public can invest in an initial public offering are:

  • If you are a client of one of the underwriter(s) involved in the IPO, or
  • By purchasing the shares when they are resold on the stock exchange in the day(s) following the IPO.

Once list day arrives – the day a company’s IPO takes place – investors can begin buying and selling shares after market open. There is typically a lot of media hype around IPOs, so it’s easy for investors’ emotions to influence trading. It’s not uncommon that share price becomes volatile and falls or rises after the IPO because of this and since there is little relationship between the offering price and the trading price of the securities.

We always recommend doing your research and due diligence before investing, and investing in an IPO is no different. If you’re interested in investing in an IPO, a good place to start is the company’s prospectus. This includes information regarding the terms of the securities offered, the company’s business, financial conditions, management and more. The company’s prospectus is found in the company’s S-1 (its registration form filed with the SEC).

What is a dividend?

Dividends are a company’s way of saying “Thank You” to their investors.

A dividend is a payment that shareholders receive from a company when it earns a profit. When a company is profitable, its management and board of directors can choose to either reinvest the profits back into the company or distribute their profits to investors in the form of dividends. Dividends are essentially a company’s way of saying “thank you” to their investors.

In general, there are two types of dividends – regular dividends, which are dividends that a company expects to pay consistently over time, and special dividends, which are dividends that are “one off” payments that are used in certain scenarios such as a string of profitable quarters.

How are dividends paid?

Dividends can be paid out as cash or in the form of additional stock. Some companies may even offer an option for an automatic dividend reinvestment plan (DRIP). DRIP is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.

Dividends are typically paid to shareholders quarterly, but some companies may choose to pay dividends at other frequencies, such as semiannually or every month.

Why are dividends important?

Dividends are important to both investors and companies alike.

For investors, dividends can enhance their portfolio by providing a steady flow of income and is a positive aspect in long term investment strategy.

This is because over time, there have consistently been steady returns from dividends, even during volatile markets. For example, since 1960, while stock prices fluctuated quite often, dividends paid by S&P 500 companies have generally increased in a straight line and have stayed relatively stable. Many investors choose to invest primarily for dividend payouts from stocks because of this reason.

Why do companies pay dividends?

There are various reasons why companies pay dividends. As mentioned before, companies pay dividends as a ‘thank you’ to investors. Companies also pay dividends to show that the company has strong cash flow, leading to strong investor confidence in the company and therefore creating additional demand for the stock. This is because investors view dividend payouts as a sign of strength and positive earnings and as a sign that company management has positive expectations for future earnings.

The argument against distributing dividends is that if a company decides to stop paying dividends to its shareholders for any reason, it could instill a lack of confidence in investors, which could lead to the stock price tumbling.

What is dividend yield?

A good way to compare dividend distributions from different companies is with dividend yield. Dividend yield is a simple calculation to tell an investor the percentage return in dividends of the investment over one year. The dividend yield is simply the total dividend amount over one year divided by the price per share.

For example, The Home Depot, Inc. (HD) has a price per share of $265.31. It’s dividend distribution for the year is $6.00. That means, its dividend yield is 2.27%, as of July 27, 2020.

What are important dates to note for dividends?

There are important dates to be aware of if you are investing for dividends. These dates help companies determine which investors will receive the dividends.

  • Announcement or Declaration Date: Dividends are announced by the company on this date.
  • Ex-Dividend Date: This is the date that dividend eligibility expires, before which investors must have purchased the company’s stock in order to receive the dividend. If an investor buys the stock on or after this date, they are not qualified to receive the dividend.
  • Record Date: This date is the ‘cut-off date’ that determines which shareholders are eligible to receive the dividend.
  • Payment Date: This is when the company issues the dividend payment to investors.

Who receives dividends?

Investors who purchase shares of stock before the dividend eligibility expiration date – called the ex-dividend date – will receive the dividends.

How does a company decide how many dividends to pay?

To determine how much to pay out to shareholders in dividends, companies develop a “dividend policy” over time, which is usually an explicit or implicit goal to pay out a certain amount of income as a dividend over time. For this reason, companies typically decide on a realistic number for its dividend payouts, so that the dividend payout isn’t volatile every year.

What are growth stocks?

On the other hand, growth stocks are those that are anticipated to grow at a rate significantly above the average growth for the same market, and therefore, typically do not offer dividends since their stock price value grows at a very high rate compared to others. Some examples of these are Facebook (FB), Amazon (AMZN) and Netflix (NFLX).

What is the difference between dividend stocks and growth stocks?

Growth stocks usually don’t pay dividends because the companies behind these stocks want to reinvest any earnings back into the company to accelerate company growth. Growth stocks can be risky and since these companies don’t offer dividends, the only time an investor can earn money is when they eventually sell their shares.

What is a stock?

What is the difference between stock, share and equity? Read on to find out!

A stock is a type of security that gives stockholders a piece or a share of ownership in a company. Stocks also are called “equities,” and the words “stock” and “share” are usually used interchangeably, since a share is the metric for a unit of stock. Companies sell goods and services and since their stock prices are tied to their underlying profit and future earnings potential, stocks have the potential to continue to grow over time as companies grow their revenue and profits. Stocks are bought and sold on a stock exchange through a brokerage.

Here’s an example of Apple Inc. (AAPL) stock price over time. You can see how their revenue and profit grew over the same period and the impact on an initial $100 investment in the same stock over that period:

The price of a stock is primarily driven by a company’s profits and investors’ confidence in a company’s profit potential but can be impacted both negatively and positively by several other factors as well. Being volatile and unpredictable in nature, stock prices can increase or decrease on any given day. As an investor, if you sell your shares on a day when the stock price is above what you paid for it, then you will make a profit. The opposite can also happen – if you sell your shares when the stock price is below what you paid for it, then you will lose money.

Prominent investors like Warren Buffett or Jack Bogle recommend that you ‘buy and hold’ stocks for the long term to benefit from their long-term value. Here’s what Warren Buffett has been quoted as saying in the past about owning stocks:

“Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value,” Buffett wrote in his 1996 letter to shareholders. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.

Why do people buy stocks?

There are various reasons why investors buy stock, including potential for growth (capital appreciation), dividend payments and the ability to vote and influence company decisions – depending on the type of stock bought. Investors buy shares when they think that a certain company will be profitable, enabling them to potentially obtain a return on investment on their stock purchase. Investors buy and sell stock based on how much they think the stock will be worth in the future.

Ownership is determined by the number of shares a person owns relative to the number of a company’s outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company’s assets and earnings.

Owning stock gives you the right to vote in shareholder meetings, receive dividends (the company’s profits), and gives you the right to sell your shares to someone else.

What is the difference between common stock and preferred stock?

There are two main kinds of stock – common stock and preferred stock. Common stock has its advantages, like how it entitles its owners to vote at shareholder meetings and receive dividends. On the other hand, preferred stockholders don’t usually have voting rights, but they receive dividend payments before common stockholders and have priority over common stockholders if a company goes bankrupt and its assets are liquidated.

When does a company issue common stock vs preferred stock?

Many companies choose to issue preferred stock over common stock because companies can get more funding with preferred shares since many investors are looking for more consistent dividends. Additionally, preferred stock allows companies to keep their debt-to-equity ratio lower and it gives less control to outsiders.

Why does a company issue stock?

Companies issue stock to raise funds for a variety of reasons, such as scaling up, expansion, launching new products and new business ventures. Generally, only public companies can issue stock on a stock exchange. Once a private company first offers its shares to the public – called an Initial Public Offering – then investors can begin buying shares of that company’s stock.

Dependent on how much capital a company is looking to raise, it can issue additional shares through a secondary offering. As the company grows and earns more profits, it can choose to pay dividends to its shareholders, or reinvest its profits back into the company, therefore increasing its market value and the value of the stock.

A company also has the option of repurchasing its shares – this can bump the stock price up, therefore increasing its market value. There are a few reasons a company might buyback shares. It could be because the company believes the market has discounted its shares too steeply, to invest in itself or to improve its financial ratios. When a company buys back its shares, the ownership of each investor increases because there are less shares available.

What is market cap?

Market capitalization – otherwise known as market cap – refers to the total dollar market value of a company’s outstanding shares of stock, or how much a company is worth as determined by the stock market. It is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.

For example, at the time of this writing, Apple’s market cap is $1.705 trillion. With its shares trading at $393.43, that means that Apple has approximately 4.33 billion shares outstanding. If an investor owns 10,000 shares of Apple, they have .0002% ownership of Apple.

What makes a stock price go up or down?

There are many forces that can drive stock price up or down. Fundamental factors that can drive a stock price up or down include its earnings and valuation – essentially the potential future earnings an investor can make on a certain stock.

Companies are also under unavoidable influences and market factors that influence its stock price such as cost of material, changes in technology and labor costs. Other factors that can affect a company’s stock price include bad publicity, changes in leadership and trade policy.

When investors start to lose confidence and think that their shares in a company will start to lose profitability, investors may start to sell their stocks in hopes of making a profit. This drives the stock price down, and therefore the market value of a company.

Since there is such a large amount of risk and volatility when investing in stocks, we recommend diversifying your portfolio with a combination of different asset types to help offset those risks.

What is an ETF?

Imitation is the highest form of flattery. ETFs “imitate”, or track assets or indexes.

ETFs have rapidly grown in popularity since being introduced to the stock market in the early 1990s. They tend to offer diversification, low risk, low fees and strong long-term returns, and allow investors to target specific countries, regions, sectors and assets. ETFs and Index Funds are a great place to start for beginners since they provide a well-diversified portfolio with low minimum investment requirements and fees.

What is an ETF?

An ETF – an Exchange Traded Fund – is an investment fund comprising a collection of assets that tracks an underlying asset or index. An ETF can hold a wide variety of different types of investments, ranging from stocks, bonds, commodities, and can be comprised of various indices, a collection of stocks based around a theme, and more, giving investors exposure to a wide variety of different assets with just one single investment. Some ETFs are even grouped by risk level and dividend distributions.

Listed and traded on stock exchanges, most ETFs can be bought and sold throughout the day, just like stock. Because of this its share price often fluctuates throughout the day just like a single stock.

Why is it important to have diversified investments?

Since ETFs offer an investor the opportunity to invest in several underlying investments in one asset, that means they offer investors great way to diversify their portfolios.

Diversification helps investors reduce risks and maximize returns by allocating investments among various assets that would each react differently to the same event. This is also helpful in reaching long-term financial goals while greatly minimizing risk.

What are some popular ETFs?

Some of the most well-known ETFs based on indexes include the SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500 Index, and the PowerShares QQQ ETF (QQQ), which tracks the performance of the NASDAQ.[3] Popular ETFs based on commodities include the SPDR Gold Shares ETF (GLD), which tracks the performance of gold, and the iShares S&P GSCI Commodity-Indexed Trust (GSG), which tracks the performance of commodities with a heavy focus on energy resources.

What are the components of an ETF?

Dependent on the type of ETF, its components include the securities of the index that it is tracking, such as stocks, bonds and commodities. For example, the components of XLV – Health Care Select Sector SPDR Fund which tracks the performance of the healthcare sector – includes stock holdings from companies within the health care sector.

What are the differences between ETFs and index funds?

Similar to ETFs, an Index Fund is a collection of assets that tracks an underlying index. Index funds offer investors a good way to get exposure to multiple underlying indices in one financial instrument.

If an investor wanted to get exposure to the broad US market, they could buy Index Funds that track entire U.S. markets such as the Vanguard Total Stock Market Index (VTSMX), the Schwab Total Stock Market Index (SWTSX) or the iShares Russell 3000 Index Fund (IWV).

One of the differences between ETFs and Index Funds is that ETFs can be traded throughout the day, like stocks, whereas index funds can be bought and sold only at the end of each trading day.

This usually isn’t a concern for long-term investors since the timing of the trade during the day will likely have little impact on an investment in the long term.

Other differences between ETFs and Index Funds include the minimum investment required and dividend reinvestment opportunities.

Is there a minimum investment required?

ETFs usually have lower minimum investment than index funds and mutual funds. In many cases, to invest in an ETF, the requirement is to buy a single share. Some brokers, including Baraka, may offer fractional shares – the opportunity to invest in an ETF with just a fraction of the share cost.

How do ETFs track the market?

ETFs were created to offer an investment tool that tracks a specific market, sector or index. So, it’s important that an ETF replicates its underlying index. To do so, the provider of an ETF purchases all or a selection of relevant securities from within the index and weights them to best track the index. As the value of these holdings fluctuate, they track the index’s performance. This is called an ETF’s tracking difference or standard deviation, which is a measure of how well the ETF tracks its benchmark.

What type of returns can I expect with ETFs?

ETFs give investors countless options of easy-to-trade investment strategies that are great for long-term investing and growth.

Since ETFs do not seek to outperform the index, over the long-term ETFs typically produce better returns than actively managed portfolios, especially after taking fees into account.

For example, the S&P 500 ETF, known as SPY has returned 61.13% over the last five years for an annual return of 10.61%. That means that if you would have invested $100 in August 1, 2015, the value of that investment would be $161.13 as of July 25, 2020.

What are the fees for investing in ETFs?

Both ETF’s and Index Funds charge low fees to investors – called Expense Ratios – making it easy for anyone to invest in them. This is because the funds are passively managed by following a fixed formula on the index. Some examples of expense ratios on ETFs are .40% for the SPDR Gold Trust (GLD) and .68% for iShares MSCI Emerging Markets ETF (EEM) as of this writing.

In comparison, Mutual Funds are actively managed by active investors, and therefore charge higher fees – ranging from 1-2% on average – of the investor’s active balance.

How do I choose an ETF to invest in?

There are thousands of different ETFs to choose from. ETFs saw rapid growth after being introduced to the market in the early 1990s, and in 2019 alone, there were 2096 ETFs in the United States and 6,970 ETFs globally. With so many ETFs available, it might be difficult to choose which ones to invest in. To start, below are a few important metrics to look into before making an investment choice.

  • Expense Ratio: The ETF expense ratio is the annual fee that the ETF will charge the investor.
  • Holding Allocation: The holding allocation of an ETF is the percentage of weight the ETF has in each asset within the ETFs group of assets. There are several different ways ETFs structure holding allocations, such as equal weighted funds and weighting systems based on revenue, earnings or dividends.
  • Annual Dividend Yield: An ETFs annual dividend yield is how many dividends the ETF will distribute and how the dividends will be distributed. Dividends are usually distributed either as cash paid directly to investors or reinvestments in to the ETFs underlying investments.
  • Tracking Difference or Standard Deviation: Since ETFs look to replicate an underlying index’s performance, it’s important to understand how well the ETF tracks the underlying index. This can be a good measure of the returns an investor can expect to see based on the underlying index.

What is a stock market cycle?

You know the saying – what goes up must come down, but what about the stock market? Learn more.

There are often fluctuations in any type of cycle – trends and patterns that can be predicted and tracked based on past performance. With various cycles ranging anywhere from a couple of minutes to more than 10 years, the stock market cycles are no different. Its cycles have been extremely helpful in stock market predictions as short- and long-term price patterns and are regularly used by traders to manage risk, since market cycles consistently move and behave in similar ways and phases. But, while stock market cycles have clear trends, the beginning and end points are often times unclear and difficult to pinpoint.

What are the stages of a stock market?

Generally, there are four stages in a stock market cycle, including accumulation, markup, distribution and decline.

  • The accumulation stage is the first stage of a stock market cycle and starts with the end of the previous cycle when the market has leveled out at its low and some investors begin to buy again. This is usually when traders and investors begin to accumulate stocks at low prices.
  • The markup stage is when the stock market moves towards stabilization, begins to trend upwards and increases in price. This is when traders become more assertive and begin to purchase more shares as the market is becoming stronger.
  • The distribution phase is when the stock market reaches its peak and some traders begin to sell off their shares to exit. This market is usually bullish – which we’ll discuss in a later section – and a definitive feature is an increase in the volume of stocks, but not an increase in price.
  • The decline stage occurs when the market begins its downswing and stock prices fall. This is when many traders begin to sell their shares but there are not enough buyers, causing prices to decline and therefore the market to decline. Many investors tend to panic and sell, so it’s important to remember as a trader that this phase doesn’t last forever.

These cycles can be predicted by taking certain performance indicators into account, for example, seasonal weather patterns, business cycles and holidays.

What is an economic cycle?

The economic cycle is the fluctuation of the overall economy during growth and recession periods. There are many factors that contribute to the economic cycle, including employment rates, interest rates and consumer confidence. Like the stock market, the economic cycle also has four different stages, including expansion, peak, contraction and trough. Definitive features of the expansion and peak stages include high consumer spending and low unemployment rates, whereas definitive features of the contraction and trough stages include less demand and an increase in unemployment rates.

Since stock market cycles are forward looking, there is usually a slight lag in economic cycle performance. For example, during the 1970’s recession, the stock market showed signs of recovery around 1974, well before the economy began to show signs of recovery in mid-1975.

What are bull and bear markets?

Bull and bear markets are found in every stock market cycle, with each lasting a fraction of the overall cycle. Bull and bear market timeframes vary considerably between several weeks to several years.

A bull market is when the stock market increasingly rises over a period of time. This happens because of various factors, such as when the economy is strong and there are high employment levels.

A bear market, on the other hand, is when the market is in decline. This is when stock pricing drops because of a heavy sell off from investors who see more difficult days ahead, and it leads to cautious behavior by investors and trades. For example, the stock market crash of 1987 – also known as Black Monday (or Black Tuesday depending on geography) – was a bear market that lasted about three months before recovery in early 1988.

As a general rule, traders try to capitalize on bear markets by buying stocks at exceptionally low prices and selling while high during bull markets to maximize return on investment. It’s advisable to avoid the riskier stocks when there is an impending bear market as they can lead to big losses. But, as mentioned earlier, this is extremely difficult to predict. Learn more about bull and bear markets.

What are cyclical and secular markets?
In general, cyclical markets are short term and last between 4-10 years, and secular markets are long term – persisting over several market cycles – and last between 20-30 years, with the bull and bear markets lasting approximately 1-3 years and 10-20 years respectively.

What is the market impact of a stock market cycle?

The market impact of stock market cycles varies on the stage of the cycle. For example, during the mark up stage, luxury goods tend to do well as people are buying more unnecessary goods and consumer confidence and spending is at a high. On the other hand, during a decline stage, consumers are buying and will continue to buy only the necessities. These types of stocks will in general always yield stable gains regardless of the stock market cycle performance and stage. The impact a secular bull market can have on investment performance would be remarkably positive.

Since stock market cycles have a tendency to have varied amounts of volatility, in the end, it’s up to you as a trader and investor to identify the amount of risk your portfolio can withstand and adapt accordingly.