These days very few people understand how a company works, and not understanding that, invest on hunches, feelings or advice from others. The purpose of this brief essay is to explain basic company finances and how those affect small investments, and how they are affected by larger market influences. For this I am discussing actual investing in which someone makes a long term outlay of cash in anticipation of a return, as opposed to short term "trading" ("investing" is merely the name most people use for long term trading, usually in stocks or bonds). I'm also restricting the discussion to the kind of investing that is allowed in most retirement accounts (IRA's).
Companies are the organized institutions by which people create goods and services for others. Companies charge money for these products, which is then distributed to cover the costs of provision; vendors, facilities, utilities, workers, taxes, etc. All of these transactions are (or should be) recorded for analysis. Assuming that a company keeps legitimate accounting records, a key report is the balance sheet (yes, "BS"). The balance sheet shows the company's assets and liabilities as of a specific point in time. Assets are things like savings and checking accounts, cash, equipment, inventory and amounts owed to the company. Liabilities are debts that the company owes to others. The difference between these two, assets minus liabilities, is the company's equity or net worth. Sometimes this is also called the book value.
The other critical report is the profit and loss ("P&L") report. Usually provided on a quarterly basis, this shows how the company earned and spent money over time. The net result of which is a profit or loss (for our purposes, the words earnings, net income and profits are interchangable). That profit or loss gets transferred to the balance sheet and affects the company's book value.
The balance sheet, along with the profit and loss statement, are the two most important financial documents that a company produces, and reflect the overall health of the company. No one should ever invest in any company without reviewing and understanding these documents (usually going back several years). Your life savings may depend on it. Unfortunately, these reports can't always be trusted, and the reality is that even if they are accurate and positive, the company can still fail.
The most intuitively-understood investment is a bond, but under its more common name, a loan. That's right, a bond is basically just a loan agreement between a lender and a borrower in which the lender expects to be paid back the original loan amount (the principle), plus interest, over a period of time. Bonds range from very short periods -- days or weeks -- to decades, and the methods of repayment vary, but at their heart they are basically the same thing: Loans. They also have different names -- notes, bills, paper and bonds -- usually related to the duration of the laon.
You invest in bonds -- make a loan -- by buying a bond. You might by buying it directly from the company, or from someone else who already did so. In doing this you are directly or indirectly lending money to the company. That cash goes into the company's accounts, increasing its asset value on the balance sheet. At the same time, it creates a liability for the company, because the company now owes you that money back. This is a good situation (usually) for a company because it can use the cash you have loaned it to purchase equipment so that it can make better products, more sales, etc. But it is also restrictive and potentially risky for the company because the company must repay the bond and interest according to a given schedule. If it does not, it can be sued and/or go bankrupt.
Holding a bond does not make the invester an owner in the company. However, in some cases the company can be taken over by the bondholders if it fails to meet its repayment obligations (if for no reason other than they end up holding all of the company's assets). This usually results in the liquiditation of the business, and the bondholders receive only a portion of their loan back. If a company does fail, bondholders are more likely than stock shareholders to receive any compensation. Riskier companies usually offer higher rates of interest on loans to attract lenders. Less risky companies and institutions usually offer a lower rate of return.
Buying and Selling Bonds
Bonds behave a little like stocks (discussed below) when it comes to transactions between buyers and sellers. If you own a bond -- if you've effectively lent money to a company -- you can sell that bond to someone else for a price that the two of you agree to, a market price. Unlike stocks, particular bonds rarely increase significantly in market value for the obvious reason that their maximum return is known, but they may decrease if there is economic distress of the company responsible for bond repayment appears to be failing. That is, if the bond has an intrinsic value of $1000 -- the principle plus interest owed on it -- but the company looks like it is going under, it is unlikely that another investor will pay full price for it were you to try to sell it. An investor also might not want it if inflation is increasing rapidly. For example, suppose your bond is worth $1000 in principle plus 5% per year, but inflation increased from 3% to 10%. Your bond is now actually losing money, and bond buyers will want bonds that have a higher interest rate.
Owning a stock means having ownership in a company. Imagine a small company that has $500,000 in assets and $400,000 in liabilities. 500k-400k is $100k, which is the net, or "book" value of the company. The company might have one owner, or it might have many owners who own different percentages ("shares") of the company. Let's say that one person "owns" the company; that is, 100% or all of the company's equity is attributed to him.
That equity value will change over time. When the company does well -- when it is profitable -- equity increases. When it is unprofitable, it decreases. But this equity value isn't something that the owner can just take when he wants. It (usually) isn't cash sitting in safe somewhere. There are two ways that he can get money out of his ownership: By selling some or all of it, or by dividend payments.
Let us assume that our little company above makes and sells mops. And in a given year it sells one million dollars worth of mops. But in that same year it had 990k in expenses. This leaves it with 10k in profits. Those profits end up benefitting the owner in one of two ways. They'll end up increasing assets or decreasing liabilities in such a way that results in a net equity increase of 10k, or they can be distributed to the owner as cash (or a mix of the two). The latter is called a dividend distribution.
A dividend is similar to the interest payment on a loan or bond, but is more accurately understood as a kind of profit sharing. They actually make good sense and most people understand them intuitively. However, dividends are (generally) not guaranteed and they are usually taxed quite highly. Some companies agree to pay out a certain percentage of their profits in dividends. Some people specifically seek companies that distribute profits via dividends. Others prefer companies that apply profits to equity, or a combination of the two. There isn't really a "right" or "wrong" way to do this. In many cases, the company ownership actually makes the choice.
Companies that tend to distribute profits as dividends are usually called "income" investments. Those that retain profits for internal use are usually called growth companies (because they retain the funds for the purpose of growing the company).
Sometimes the owner would rather leave his money in the company than have it distributed as a dividend. Instead of receiving 10k in cash, his ownership value increases by 10k. But what good is this to the owner? You can't buy groceries or pay your bills with stocks. At some point you have to get the cash back out.
A weird kind of bondage happens to an owner. He can't simply "take" his money out of the company. He has to sell his ownership to someone else ("someone else" can be the company). His ownership is only worth as much as someone else is willing to pay for it. If no one wants it, it is worth 0. If everyone is competing to buy it, it may be worth much more than the book value. Let's imagine that this owner wants to sell some of his ownership so that he can use the money to do something else. The company has had a good year, and he says it has a book value of $110,000. He wants to sell 10% of his ownership -- let's call this 10 shares for convenience, assuming that the company's ownership is divided into 100 equal shares. 10% of $110000 book value is $11,000. How much would you pay for this?
The real question is how much is 10% of the company worth to you, how much is it worth the seller, and can the two of you come together to agree on a price? That price will become the basis for the market value of the company, and it may be significantly-different from the book value.
People buy bonds (make loans) in order to receive interest -- a "gain" -- on their money. That is the fundamental reason for investing in general. According to the accounting records, the owner made about 10% on his ownership equity this year in book value. Assuming inflation is in check, that isn't bad at all. Like any sale, the owner will suggest a price at which he is willing to sell his share, let's say $20,000 -- this is called the "ask" price. But no one is buying. Some think the company stinks, and are willing to buy 10% at $5000. The owner ignores the offer -- this is called the "bid." Then someone offers $12000. The owner doesn't like that price, but decides to counter offer it at $17000. Eventually, the seller and buyer agree to the transaction at $15000 for 10% of the company ownership.
They arrived at this price through negotiation, and through their own subjective determination of how much 10% ownership of the company is worth to them. Someone else might arrive at a very different figure.
Several things happen when this transaction occurs. They buyer becomes a 10% owner in the company. The seller now owns 90% of the company. The "market value" -- not the book value -- of the company increases immediately. Prior to the transaction, the per share value of the company was $110,000 / 100, or $1100 per share. The sale took place at $1500 per share. At that moment the company was valued by "the market" -- the collective of buyers and sellers -- at $1500 per share, much higher than the book value.
Even though the seller lost 10% of his ownership, the increase in value more than made up for the difference. The "market value" of his remaining 90 shares is now $135000, more than their $99,000 book value, and he pocketed $15000. If there are more buyers available, he might even try to sell more of his ownership at $1500 per share, or an even higher value.
But it could just as easily have gone the other way. Maybe no one was willing to pay more than $50 for a share of the company, which would be very bad for an owner trying to sell his shares. However, market value rarely approaches or falls below book value. The bad news is that book value can go to zero or even negative. Such a company is bankrupt.
The above example is that of a private company where ownership share transactions are made privately and infrequently between the buyer and seller. In the public stock market, millions of such transactions are made every day, mostly via computer, without the buyer and seller ever meeting or knowing each other.
Owning part or all of a company, in and of itself, is not necessarily a good thing. In fact, over the long term, it is almost always a bad thing, because all companies fail eventually. For example, of the 500 companies that originally made up the Standard and Poore's 500 index, only a handful (if any) are still on it. Those that are not either went out of business or declined so much as to no long be considered among the top 500 companies in the USA. The key is to have ownership in companies that are growing in market value or paying out substantial dividends. In theory, there is a connection between a company's actual financial performance and its market value -- increases in one correlate to the other -- but it is not always the case. Sometimes perfectly good companies lose market value while questionable ones rocket up. Over the long term -- decades -- these irregularities necessarily even out. But in the short term it can be a little exciting, confusing and even financially frustrating or harmful.
People generally purchase stocks in anticipation (hope) of their future market value, and the more sophisticated investors develop personalized formulas to help them determine what a "good price" is for a stock. An academic way of saying this is that someone is buying the company's anticipated, future earnings. And each person decides how much he is willing to pay for that. A company that has steady sales and profits each year will generally experience a steady increase in book value. If sales increase, book value usually accelerates. If profitability increases, book value accelerates even more. In theory, the best companies to own are those that are experiencing (or are likely to in the near future) both general increases in overall sales and increases in the profitability relative to sales (a trend that can't be sustained forever). Market value is usually loosely correlated to and anticipates changes in book value. Sharp deviations between the two rarely last for long (i.e., more than a few years).
But the x-factor in this (discounting dividends for the moment) is that difference between book value and subjective market value. Market sentiment may be up or down for the overall market, a particular sector, or even a specific company, depending on the news and other economic factors. Buying while the market is red hot, just before a recession for example, could doom one to having to wait 20 years or more to just break even on that particular investment. That is an expensive impulse purchase. Ignoring the subjectivity of the market for a moment, the reality is that even the best run companies can fail suddenly, losing all stock value, with little notice.
To calm worries about investing in particular companies -- having all your eggs in one basket -- people recommend diversification over several companies, industries, or even the entire market. This is wise, but trades one problem for another.
Long-term broadly-diverse investing, after accounting for inflation, is no guarantee of investment success. $1000 placed in the market in 1928, adjusted for inflation, is worth about $3500 in 2008, an average annual growth of only 1.6% over 80 years. And there were many 10-20 year periods during that time where the investment was worth half of its original value. Yes, that investment is not going to go to 0 as it could if it was placed in a single company that failed, but the return is so small that it really isn't worth the trouble.
There is a relationship between risk and return. The higher the risk of loss, the higher possible return. The lower the risk, the lower the return. Diversifying one's investments decreases risk, so the return goes down with it to the point that it is equal to or lower than the average return of the entire market. Once you account for inflation and taxes, investing in long term US treasuries -- considered the safest of all common investments -- actually comes out about the same as investing in the general stock market.
Many investment advisers talk negatively about "market timing," which means trying to find the best time to purchase a particular stock. They say that one can't know the future, so trying to time one's purchase is delusion. They are half right. One can't predict the future for a particular company, and so can't know with certainty if a specific company will succeed or fail. Waiting for the perfect moment usually means never buying.
But they are also half wrong. In any market there are jewels and dirt clods. In rising markets there are some horrible losers. And in declining markets there are some great performers. Either way, there are wrong times to buy even the best things, and that is when they are "overvalued," meaning they are likely to decrease significantly in value in the future. Historical market indexes show indisputable high and low cycles about every 20 years. Buying around a high point all but gaurantees a return somewhere between breaking even and a loss of up to half of the invested money (there are 20-year stretches where this is the case). Buying at or near a low point almost gaurantees that the invested funds may increase from 50-200% over the next 10-20 years.
What are the signs? Historically it has been good to invest in the general market indexes shortly after periods of high inflation, after inflation returns to an historical range. High inflation appears as a loss of value in the currency markets, and increasing prices in the commodity market indexes. These factors ultimately trickle through to the bond and stock markets, usually depressing share values. When the cycle has worked through the bond and stock markets, they usually return to an upward trend. The problem is that this train only appears once every 40 or so years, and right now (2008), were actually entering the high inflation period. So it may be awhile -- and by that a mean many years -- before this big ride presents itself again. In the mean time, we have to look to particular sectors, companies and commodities for investing rather than placing funds into the large market indexes that everyone says are such sure things.
We can also look at the company's financial performance and make a subjective determination regarding its value and whether its current price is higher or lower than that value. We do this all the time in our basic, personal shopping. We try to find the best "values" -- the best quality at a reasonable price. We pick the stores and brands that we desire. We sometimes wait for or buy more when there is a sale. If milk A costs $2 for a gallon and milk B costs $5, but they are both basically the same and there is nothing wrong with milk A, we buy milk A. We don't say, "my advisers are against timing my purchases so as to get the best value, so I'll buy the more expensive milk." Of course, there may be a very good reason that milk A is priced down -- maybe it is going to go sour in an hour. Then again, maybe it is just overstocked. Likewise, maybe the company is fine, or maybe it is on the verge of hidden collapse. Either way, this doesn't gaurantee that company won't be wiped out next month or next year, and some people argue that trying to find good deals is like trying to outsmart the market, which they say can't be done.
Gambling and Risk Control
Like it or not, there are strong similarities between participating in the stock market and gambling. First the house always wins in the long run; whether you profit or not, other parties make money from your activities. Brokerage fees erode capital as surely as inflation and taxation. There is a fee for opening a trade, a fee for closing it, a fee if you add covered calls, a fee if they are executed, and sometimes annual maintenance fees. In each and every trade, these fees will total at least $20 with a most discount brokers, and perhaps as much as $60 if you consider each step involved and are with a $15/per trade broker. That means that on every trade, you have to make $20-$60 just to break even. This may sound stupid, but in a $2000 account, $60 is 3% of the available capital, so each trade puts you 3% in the hole. There really isn't any overcoming that. Consequently, stock investing really isn't a good financial decision unless you have a much larger capital base to leverage (at least 10x as much).
There is no one perfect investing strategy. There are thousands. Each can work when properly applied. You have to select the strategy (or strategies) that work for you, taking into consideration your available time, personality, account balance, interests, discipline, etc., and the overall market. For one person, the best thing to do will be to place everything in an inflation-adjusted bond fund. For someone else, long term index investing. For someone else, picking and timing stocks. For others, options, commodities, currencies or any of a whole menu of other choices. None of these are right or wrong, better or worse, but some will work better than others, depending on the person and market environment.
Whatever approach you take, you need to know when to take a break; desperately attempting to recover from a loss by making emotional investments usually just makes things worse. You need to protect your capital; invest in such a way that only a small part of your reserve is at risk in an particular investment. This means setting a stop loss point -- a price at which you will sell and eat any losses. Assume that a company is presently trading at $35 and you believe it is only going to improve (why else would you buy it?). You have to recognize that any investment could turn against you and need to set in advance the price at which you will sell out. Let's say that is $25; if the share price drops to that point you get out. You have $10,000 to invest and decide you won't risk more than 2% of your capital on this stock, or $200. That doesn't mean that you only buy 5-6 shares, ($200/35), but 20 shares. Your risk is $10 per share (assuming something doesn't go just horribly wrong), so you can purchase 200/10, or 20 shares. Of course, if you fail to get out at 25, you may end up losing $700 instead of $200.
The point at which you set the stop is a subjective one. It should be far enough outside of the present trading range that it doesn't get triggered by normal market volatility, but close enough that you don't lose more than was necessary. The distance depends on the specific stock and its historical price characteristics. It often works to just look at the lowest value in the last 3 months to year, depending on how much freedom you want to give it.
Multiple, successive small losses using this approach means that the general market sentiment is turned down, and you need to pick rising sectors or get out of that particular market entirely until sentiment turns around. Other indicators such as inflation, bond yield curve and the like can be used to confirm this.
Another risk consideration is the relatedness between stocks. If you are invested in 10 different stocks with 2% at risk in each, but all are in the same industry or sector, that is hardly diffent from having 20% of your capital at risk in a single stock. Large fund investors move funds in and out of entire industries, not necessarily individual small companies, and the share value of every company in an industry can be affected by large movements like that. Rather than investing in multiple companies in the same industry, pick one or two of the best companies in different industries.
Margin is money you borrow from the brokerage to fund investements. Investing on margin allows you to acheive more gains (or losses) than you otherwise could. Margin investing, short selling and most options/derivatives, are not allowed in most retirement accounts, so I don't go into these here except for...
(What follows is a gross oversimplification for the purpose of developing a proper basic understanding of the relationship between options and stocks.)
An "option" is an agreement to execute a transaction at a certain price within a certain period of time. The option buyer has the opportunity, but not the obligation to execute the option. The seller must honor the decision of the option buyer. There are two kinds of common options; calls and puts. Buying a put is like buying insurance. People often buy puts if they want to hold onto a stock for some reason, but want protection should it collapse unexpectedly.
Let's say that you just bought 100 shares of XYZ stock and paid $50 per share. You think XYZ is going to grow by leaps and bounds, but you want to be protected should something happen without your knowledge. Instead of entering a stop-loss order, you decide to buy insurance -- a put option -- on XYZ. This is called a "married" put because it is related (married) to your stock. It wasn't purchased for some other speculative reason.
Just like you can buy different amounts of insurance for your house, car or person, you can buy different levels for your stock. The higher the insured amount, the more it costs. Suppose that you want $45 of insurance on your $50 shares. This means that your put option will have a strike price of $45. This isn't how much the put costs you -- this is threshold for action. If XYZ falls below $45, you have the right, but not the obligation, to sell your shares at $45. If XYZ stays above $45, your put will expire, and like common insurance you'll have to buy another one to continue your coverage.
How much does this insurance program cost? It varies. Remember how a company's stock has a "book" value but also a "market" value? Options are similar; they have an "intrinsic" value, and a "premium," which together add to make the market value. Whether discussing stocks or options, you can think of the premium as the difference between the book, or intrinsic value, and the actual price it is going for in the market.
The intrinsic value of an option is its value as it relates to the stock price. For a put option, its intrinsic value roughly equals the strike price minus the stock price. If the stock is higher than the put strike, then the put has no intrinsic value. If it is lower than the strike, then the put will have intrinsic value. XYZ is at $50, higher than our put strike price, so our put has no intrinsic value. However, now we have to consider the "premium" cost.
The premium of an option is proportional to the time until expiration, the volatility of the related stock (often called the "underlying"), the distance between the current stock price and the strike value, and general market excitement (sometimes called implied volatility). For boring, tame stocks that don't move much, the premium can be very small. For psycho-stocks that bounce all over, premiums can be high. Premiums for options with strikes close to the current stock value will be higher. The longer the life of the option, the higher the premium.
For the sake of argument, let's say that this 45-strike put costs $1. This means that it costs $1 to insure your $50 share of stock should it fall below $45. Puts are also available at higher and lower strikes, usually in $5 increments. The $55-strike put might have a market value of $6; $5 of intrinsic value plus $1 of premium. The $60-strike put might have a value of $10.50; $10 intrinsic value and 50 cents premium. Conversely, the $40-strike put might only cost 50 cents, all premium.
Why buy a put? Why not just set a stop-loss order and avoid paying the premium? Using a put allows you more control of the situation. Stop-loss orders can be missed, might be filled far from the trigger price, can be fired due to a strange downward spike, etc., resulting in an unnecessary sell and loss. With a put you have time to decide what to do if the stock goes down. But it is at a cost.
But the problem is that insurance can be expensive! To offset the cost of a married put, investors often sell a call -- a different kind of option -- on the same held stock. The buyer of a call option has the right, but not the obligation, to buy a stock at a set price within a set amount of time. Continuing the above example, you sell a call option with a strike price of $55. This means that, if XYZ goes above $55 -- even if it is at $60, $70 or $200 -- the call owner has a right to buy XYZ away from you at $55.
Like put options, the call option has an intrinsic and premium value. This call is "out of the money," it has no intrinsic value, because the current stock price is below the strike price at which the call can be executed. However, it will still have premium value. Let's say $1, just like the put.
So you have 100 shares of XYZ that you bought at $50 per share. You paid $1 per share to buy a put (insurance), and covered that cost by selling a call option on your shares at $1 per share. If XYZ goes below $45, you can sell it for $45 (and may need to buy back your calls so they don't become "naked," but they'll probably be worth much less than you already received for them). If it goes above $55, someone can buy it from you for $55 (and probably will); you could then sell your put back to the market for a little extra.
It is usually better to just close out the option positions than it is to allow them to be exercised. Brokers often charge a lot for exercise fees. If the premium has disappeared from the options, time to get rid of them or risk likely assignment.
If XYZ is pretty stable, increases slowly, or has dividends, this isn't a horrible deal. You'll miss out on any explosive upward move because of the call at 55. To improve the situation, you can play with the expiration dates of the options as follows.
All other things being equal, shorter term options cost more per month than long term ones. The premium is higher for long term options, but it isn't until the last few months of life that it begins to disappear rapidly. Some people think of this like a block of ice that gradually melts and accelerates as it gets smaller, or a balloon with a leak in it. You could buy a one year put at 45 for, say, $6, and sell monthlycalls at $1 per month. Over a year, you could make $6 more per share selling the calls than you lost buying the protective put. Even if XYZ goes nowhere, you made over 10%. Not bad.
Some people implement this strategy without buying the put. That is called a "covered call" strategy. It has considerable downside risk should the stock plummet, and from a profit and loss perspective is equivalent to the following approach.
Selling Cash-Secured Puts
If your IRA broker allows it -- and only a few do -- selling puts is a great way to get desired stock at a good price. For example, suppose that stock XYZ is presently at $50, but you think that is a little high. Having studied the stock, you think it would be a good buy at $40. You can move on to the next candidate, buy it at $50 anyway (because you are compulsive), or you can sell a put.
First, you'll need to have enough cash in your account so that you can buy 100 shares at 40 for each put you sell; $4000. You sell the put at a strike price of $40, and get paid a 50-cent premium per share -- $50 -- to do so. You get to keep that $50 no matter what happens next. That is the "insurance premium" somone else has paid to you in exchange for your willingness to purchase XYZ at $40 should it drop below $40.
If the stock is under $40 at expiration, your put option will automatically be exercised; your broker will use your cash to purchase $4000-worth of XYZ. If it dips under $40 before expiration, the option will not automatically execute (but it might, so make sure you always have the cash available). You could manually exercise the option if you want, or you could just buy it back and buy 100 shares of XYZ at the same time.
If XYZ isn't under $40 at expiration, and wasn't exercised beforehand, the option expires worthless, you get to keep $50 premium, and you can do it over again, month after month. If nothing else changed, you could make $600 just selling puts on $4000-worth of stock you never bought. This is one way to make some money on a stock you'd like to own before you own it, and maybe even get it at a bit of a discount.
The risk is that the stock will go below $40... and just keep on going down... maybe all the way to zero. Buying a declining stock is sometimes referred to as "catching a falling knife." If you hadn't used the put, maybe you could buy it at $35, or $30. By selling the put you have obligated yourself to pay $40 per share for the stock, no matter how low it actually is at expiration. That could result in a large loss, but you were paid to accept that risk. To control that risk, you might also buy a put with a strike at 35. Now you've sold a put at 40, and own one at 35. This is called a vertical (credit) spread. A "spread" is a combination of two or more option -- the collar, above, was a kind of spread. A "vertical" spread is one in which the options are usually of the same kind -- puts in this case -- and expire in the same month. A "credit" spread is one in which you receive a credit for the transaction. It might cost $25 to buy the 35-strike put, but that reduces your risk from $4000 to $500 -- the difference between the two strikes is $5 times 100 shares -- and it reduces the net premium credit you receive from $50 to $25. If you change to a vertical spread like this, most brokers will only require that you have enough cash/collateral to cover the maximum loss ($500).
Other Option Strategies
The above strategies are the most common ones used in IRA accounts, but there are many, many more that some brokers will allow. Each is appropriate for a different situation (and a different investor). However, options add a lot of complexity to investing, and with that comes additional risk. Options aren't for everyone. If you want to learn more about options, check out the Chicago Board of Options Exchange (CBOE).
The general stock market is made up, in a sense, of several smaller markets -- industries or sectors -- each of which consists of many individual companies. In when the overall market is trending down, there may be specific sectors or companies that are doing fine (and vice versa). However, there are also entirely other markets. In addition to bonds and stocks, the most common markets are futures/commodites, currency and real estate. These markets are related to each other, and though an IRA account can rarely invest directly in them, it is good to be aware of them. For example, there is generally an inverse relationship between the bond and general commodities markets. When commodities begin moving up sharply, bonds often start going the other way, followed within a few weeks or months by stocks. The stock market generally lags behind the bond market (sometimes as much as a year). Even if you don't invest in bonds, it is good to monitor them once or twice a month because most recessions are preceeded by clear signals in the bond market. Most of the time IRA funds can not be invested directly in these other markets unless you have a self-directed IRA. But you can invest in companies, mutual funds and exchange traded funds (ETFs) that specialize in these markets. Just keep these in mind if the general stock and bond markets look gloomy.
There are also reverse ETFs now that are like shorting an index, sector or industry. Some IRA accounts can purchase these, so you may want to check with your broker during down markets and learn about these special ETFs.
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