Fundamental analysis (FA) is aimed at capturing both systematic risk and idiosyncratic risk associated with a given security. While the market risk encompasses the macroeconomic factors – like monetary policy, economic cycle or unemployment rate, the residual risk includes company-specific factors – like financial ratios, management style or market share. Technical analysis (TA) is a method of evaluating securities by analyzing statistics generated by market activity, such as price and volume. It does not measure the intrinsic value, but instead it uses charts to identify patterns that can predict future price activity. Knowing how to perform both fundamental and technical due diligence is essential for successful investors and traders. Continue reading ‘FA, TA or FA&TA?’
Archive for the 'Personal Finance' Category
Despite hitting the 12-year low in March 2009 at 666 points, S&P500 index managed to outperform gold’s annual return. Even though, the precious metal has been one of the hottest investment topics in 2009, the S&P 500 finished the year up 26% versus 25% for gold. As of December 31 2009, gold price closed at $1,095, rising for an unprecedented ninth year in a row after traders and central banks joined investors who turned to gold for price performance and protection. In 2009, gold price advanced about $220, a sum eclipsed in recent history only by 1979′s $286 surge. On a percentage basis gold rose 25 percent from its 2008 close, short of 2007′s 31 percent rise. Continue reading ‘Golden Fever’
Now we know how the real estate market has become a bubble and the demand side of the equation. In this episode, we will look into the supply side: the lending financial institutions. Traditionally, the subprime lending is the practice of extending credit to borrowers with high credit risk — e.g. a FICO score of less than 620, unable to access prime rate loans (hence the term “subprime”). Subprime lending became popular in the US in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to an estimated $1,300 billion in 2007. This substantial increase is mainly attributable to lending institutions which quickly realized that they could make huge profits from origination fees and from selling the asset-based securities (ABS) to investors. Continue reading ‘Home $weet Home (III)’
Having covered all details with regard to the main types of trading activities and the way a trading floor operates, let us move into the typical career path of a trader. One thing should be settled from the get-go: the hiring process for traders is extremely competitive. Depending on type of the trading branch and/or product the trader is hired for, the investment banks put more or less emphasis on the academic credentials. One can notice that more and more MBAs and PhDs are filling the trading positions. The main reason is the high degree of sophistication required by the continuously evolving products on the capital markets. Continue reading ‘Becoming A Trader (II)’
Many of my readers have become very interested in discovering the secrets around the trading world. To understand what a trader does, let us understand first how an investment bank trading floor operates. On one side, investment banks built-up expertise serving institutional clients to their own benefit via the flow trading activity. On the other side, the very same banks use their human capital to speculate market opportunities via the proprietary trading activity. The latter activity generates gains or losses from the volatility of financial assets, simply referred to as risk. Continue reading ‘Becoming A Trader (I)’
With a better understanding of the main causes behind the residential real estate bubble, we can move ahead and investigate the intrinsic mechanics of the mortgage business model. As described previously, the underlying distinction between different types of mortgages is: fixed rate and variable rate, also known as adjustable-rate mortgage (ARM). From a market perspective, there are two types of risks associated with the mortgage products: interest rate (IR) risk and currency (FX) risk. If you hold a foreign-denominated currency variable rate loan, you are exposed to both risks. Every time the borrower holds any of the aforementioned risks, the bank benefits unfairly by avoiding the hedging cost associated with mitigating that given market risk. Continue reading ‘Home $weet Home (II)’
It is very hard to pick a ground-zero for the housing bubble that pushed the whole world into The Great Recession. Allow me to begin our trip in late 1989 in Japan. The stock market – symbolized by Nikkei 225 index, peaked at approximately 39,000, while the real estate market climbed the summit at approximately $1 million per square meter. This March, Nikkei traded as low as 7,200 while the property tags lost on average 90% of their peak values. We should notice that Japan experienced a dual-bubble shock and that has been underemphasized by many economists. Continue reading ‘Home $weet Home (I)’
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