Frequently Asked Questions Archive

Are there any risks involved in choosing a broker offering low commission rates and a small minimum deposit amount?

If a broker offers exceptionally low commission rates and a small minimum deposit, it might be too good to be true. They could be making money in some other way or may not be financially stable or well-regulated. Always ensure to choose a reputable broker.

Are there brokers that don’t require a minimum number of trades per month?

Yes, some brokers don’t require a minimum number of trades per month. But those who do might charge an inactivity fee if the quota is not met.

Can I use any broker regardless of my location?

With the internet, you can access markets worldwide, regardless of your location. However, always ensure that the broker you select is regulated and permitted to operate in your country.

What is the importance of aligning the broker with your investment approach?

Aligning your broker with your investment approach ensures that you have the services, costs, and trading environment that best fit your investment strategy and goals.

Why is the choice of a broker a highly personal decision?

The choice of a broker depends on individual investment strategies, financial goals, comfort with the trading platform, and personal preferences regarding customer service.

Where can I find comparisons of different brokers?

A great resource for broker comparisons is the website brokerage-review.com, which offers a comprehensive review and ranking of various brokers.

How can I judge the quality of customer service provided by the broker?

You can gauge customer service quality by contacting them with queries and assessing their promptness, patience, communication skills, and overall willingness to assist.

How important is it for the broker to offer a range of products and markets?

A wider range of products and markets offers more investment opportunities. For instance, some brokers offer global market access, while others focus on specific markets.

Why should I consider the broker’s trading platform?

The trading platform is where all transactions occur, so it should be user-friendly and have reliable charting software. It may also be beneficial if there’s an app for easy transactions.

What are margin rates?

Margin rates are the interest charged by brokers on loans extended to traders for purchasing stocks.

What is the typical minimum deposit required by brokers?

Most brokers require a minimum deposit of about $2,000 to $3,000, although it’s always best to check.

How important is it to check if a broker is financially stable and regulated?

It is crucial to ensure that your broker is reputable, financially stable, and regulated by appropriate authorities to safeguard your investment.

What are additional charges I should look out for?

Brokers may charge for additional services like data feeds, access to trading charts, or a custodian fee for holding shares on your behalf.

Do all brokers have the same commission structure?

No, the commission structure can vary between brokers. Some charge a fixed rate per transaction, while others may charge per share.

How does the commission rate impact a trader?

For a short-term trader who conducts numerous transactions each month, commission rates can be a significant expense. Thus, choosing a broker with reasonable rates is crucial.

What are commission rates?

Commission rates are fees that your broker charges for every transaction made. These can vary based on the broker and the type of transaction.

Why do I need a stockbroker?

To trade shares in stock markets, you need a stockbroker. They are the intermediary that enables you to buy and sell shares.

How do online stock brokerages work?

Online stock brokerages provide an online platform where you can trade shares with just a few clicks. After opening and verifying your account and funding it, you can start trading.

What is a stockbroker?

A stockbroker is a professional or firm that buys and sells stocks and other securities on behalf of clients.

Should you follow analysts’ recommendations blindly?

No, blind faith in analysts’ recommendations can lead to financial disasters. It is crucial to conduct your own research and not base your investment decisions solely on analysts’ reports.

Why is it important to stay within your circle of competence in investing?

Staying within your circle of competence is paramount in investing because it encourages you to only invest in what you understand. Warren Buffett advises that it doesn’t matter how big your circle of competence is, what matters is staying within it.

How does discipline factor into investing?

Discipline in investing involves sticking to your investment plan and not making hasty decisions based on what others are doing. Even if top investors are buying a certain stock, you should only consider buying it after conducting your own research and assessing if it meets your investment criteria.

How does hard work relate to investing?

Hard work is a fundamental rule in successful investing. The success in the stock market often reflects your work ethic. Investing requires hours of effort in researching and analyzing businesses, studying the charts, and crafting a portfolio.

Has Warren Buffett ever cut his losses?

Yes, even Warren Buffett, known for his buy-and-hold approach, knows when to cut his losses. He is quick to admit his mistakes, devoid of ego and emotional attachment to his investments.

How important is knowing when to quit an investment?

Recognizing when a good company turns bad and knowing when to quit an investment is crucial. Small losses can rapidly spiral into huge losses if you let your ego or emotions dictate your investment decisions.

What is a common misconception about losses in investing?

A common misconception is that until you sell, it’s only a ‘paper loss.’ However, this is misguided because if you wouldn’t buy the stock at its current price, knowing that it’s in a downtrend or a lousy company, you shouldn’t be holding onto it.

What is a “sunk cost” mentality?

A “sunk cost” mentality refers to investors holding onto an underperforming stock because they can’t bear to realize a loss. They resist selling at a lower price than the purchase price, even though the market value of the stock has already decreased.

What does flexibility mean in the context of investing?

In investing, flexibility refers to the ability to adapt and change your stance when the facts at hand change. For example, if a company’s fortunes improve, your perspective on it as an investment prospect should shift accordingly.

What was the outcome of Warren Buffet’s investment strategy during the dot-com bubble?

Buffet managed to dodge the bullet when the dot-com bubble burst, thanks to his disciplined investment approach. Over the next two years, he made an 80% return while the Nasdaq and S&P 500 saw significant losses.

What can we learn from Warren Buffet’s investment strategy?

Warren Buffet exemplifies the power of discipline. During the dot-com bubble, he refused to buy technology stocks despite the prevailing hype and stuck to his rule of buying companies with positive cash flow, profitability, and undervaluation. This discipline helped him avoid significant losses when the bubble burst.

What is a common mistake many investors make?

Many investors buy due to FOMO (Fear Of Missing Out), which leads them to invest in things they don’t fully understand just because everyone else is doing it. Conversely, some investors panic sell due to negative news and regret later when the stock price bounces back.

What is the first step in the psychology of successful investors?

The first step is developing absolute discipline. This involves buying or selling stocks based on predetermined rules in an investment plan, grounded in fundamentals and technical analysis, rather than basing decisions on rumors or emotions.

What role does psychology play in business success?

While having the right strategy for running a business is essential, it is not sufficient for success. Not every MBA graduate or PhD holder in finance runs a successful company. This underscores the importance of having the right mindset and psychology in business success.

How can we compare investing success with weight loss?

Similar to investing, the strategy for weight loss is straightforward with various diets and exercise routines available. However, most people struggle with the discipline to follow through consistently. This shows that possessing the right mindset or psychology is essential for success in both fields.

Why is the psychological aspect of investing so important?

The psychological aspect contributes to about 70% of your success in any venture, including investing. It involves maintaining discipline and a correct mindset. While many people falsely believe they have the right mindset, they often lack it, which can hinder success.

What’s the significance of a company’s five-year chart?

A company’s five-year chart helps identify its stock price trend. Companies with clear, consistent uptrends are usually more promising. Conversely, if the chart shows a decline or is erratic, it often signals potential risks, making it wise to avoid such investments.

How should you further assess the filtered list of companies?

After obtaining a shortlist from the screening process, each company should be examined more deeply. One method is reviewing their five-year charts to determine if they’ve maintained an uptrend. It’s advisable to steer clear of businesses with declining or unpredictable stock price movements.

Can you use these screening criteria for International Markets?

Yes, platforms like investing.com allow stock screening for various countries, like Hong Kong. However, not all metrics available for US stocks will be accessible for international ones and vice versa. This inconsistency highlights the necessity of employing multiple criteria for a comprehensive evaluation.

How can stock screeners aid in stock selection?

Stock screeners, like the Finviz screener, can help filter companies based on various descriptive, fundamental, and technical criteria. By applying specific screening parameters, you can refine vast options to a more manageable number, aiding in deeper analysis.

Why is the Current Ratio important?

The Current Ratio assesses a company’s ability to clear its short-term liabilities with its short-term assets. A ratio over 1 is typically positive, signaling more short-term assets than liabilities.

How does the Price/Earnings to Growth (PEG) Ratio differ from the PE ratio?

While the PE ratio only considers a company’s earnings in relation to its share price, the PEG ratio also factors in the company’s anticipated earnings growth rate. A PEG ratio under 2 often points to an undervalued company.

What does consistent Sales Growth suggest about a company?

Consistent sales growth over the last five years indicates a company’s stability and an established, successful business model. Depending on your investment approach, you might set this parameter at over 5%, 10%, or even 20%.

How does Return on Equity (ROE) reflect a company’s profitability?

ROE measures a company’s profitability by showcasing the profit it generates with the money shareholders have invested. A good benchmark for ROE is between 12 to 15%. A company with an ROE exceeding 10% typically indicates efficient use of shareholder funds.

Why is a positive Growth Rate significant?

A positive growth rate indicates a company’s capability to increase its earnings. This is an essential attribute for any investment. Depending on your investment strategy, the exact growth rate percentage you’re looking for might differ. If targeting high-growth stocks, a rate above 20% might be desirable. However, for stable, predictable companies, rates above 5% or […]

What are the key metrics to screen companies with robust fundamentals?

Several metrics help in screening companies with solid fundamentals. These include the Growth Rate, Return on Equity (ROE), Sales Growth, Price/Earnings to Growth (PEG) Ratio, Earnings Growth, and Current Ratio. Each metric provides insight into the company’s financial health, profitability, and growth prospects. Depending on your investment strategy, the threshold for these metrics may vary.

How is stock screening conducted?

Stock screening involves using financial metrics to filter companies. These criteria can include growth rates, financial health, valuation, and more. The objective is to narrow down the field to companies aligning with an investor’s goals and risk tolerance.