October 11, 2011 | In: General

Why Buy Stocks With No Dividend?

Often, new investors think why would anyone buy stocks that pay no dividends? After all, dividends are how you can make money out of stocks, no? Well, dividends are one way that you can make money out of stocks, there are other ways, mainly selling stocks when they go higher. In fact, real investors don’t rely at all on dividends that are just a few percentage points to make money out of stocks, they rely on the appreciation of stocks with time.

In the old days, companies used to go public and then they would start paying dividends as soon as they start making money out of their new investments. Dividends, back then, were the reason why investors bought stocks. The game has changed since then, noawadays, investors don’t care about dividends as before, they’re lending money to the company so that it can grow, because they know that the growth of the company is proportional to the appreciation of its stock. In fact, companies now understand this shift in investors’ thinking, and many of the listed companies nowadays are non-dividend paying companies. Apple, the hottest company listed on the NASDAQ and the American stock exchange in general, pays no dividends. Not only that, the last time that Apple paid dividends was back in 1995, that was 16 years ago, and I’m sure that we all agree that Apple is doing much better right now than it was doing 16 years ago, when it was selling ugly Macs for die-hard fans and graphic designers. Google is also one of the hottest stocks in the US market, and it doesn’t pay any dividends (not only that, Google has never ever paid any dividends).

Now, just for fun, let’s assume that both Apple and Google pay each 4% dividend every year (by the way, 4% is a very good dividend – note that high dividends are not usually a good sign). Let’s see if the stocks did not appreciate throughout the years, would it have been better for investors if these two companies only paid dividends? Let’s see…

Apple started trading at $4 back in 1981, if again, the dividend was 4% every year and the stock did not appreciate, then investors would have made a whopping $4.8 (16 cents every year) in 30 years! That’s 120%! The stock right now is trading at $400, so you do the math (nearly 10000% increase). I think it’s clear that relying on the appreciation of the stock was much better than relying on the dividends.

Google started trading at $100 back in 2004, so, for a 4% dividend, investors would have made $28 over the course of 7 years, which is much less than the $445 they would have made (per stock) if they relied on the growth of Google.

Call me a greedy investor, but between dividends and stock appreciation, I’d go with the latter. So yes, there is a reason why investors buy stocks with no dividend, that’s because these stocks tend to appreciate exponentially.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

It seems that Mark Zuckerberg keeps on delaying the Facebook IPO, the last time I checked he said it’s going to take place sometime in 2012. His argument is that Facebook is not ready for an IPO, his real argument is that the whole world is going through a financial crisis, and that an IPO now will not make him (and his investors) as much money as it would in 2012. I think he’s wrong, and here’s why:

  • Facebook is a website after all: Not only Facebook is a website, it is a website that can be cloned (although not easily cloned, but still cloning Facebook is feasible). Facebook, unlike Google, doesn’t have ultra intelligent algorithms (such as the famous PageRank algorithm developed by Google and powering its search engine). Some people think that it magically knows who your friends are and suggests them to you in the “People you may know” box, but in reality, there is no magic there, those profiles listed in the “People you may know box” are either friends of friends or just people that searched for you and viewed your profile on Facebook.
  • People may get sick of Facebook: Although many good things happen on Facebook (such as meeting your future wife), there are so many bad things that happen there, such as harassment, stalking, etc… Not to mention that people may just lose interest (MySpace, anyone?)…

  • Facebook may be replaced by another concept: The whole concept of social networking may be replaced with another concept that might be much more interesting to people. It is very possible in this truly dynamic world.

  • Google wants a piece of the pie: Google has created Google+, and although I have said before that it has already failed, it seems that Google is very aggressive in pushing their new social platform and stealing some market share from Facebook. Google has the money, after all, to promote anything that it wants, the way it wants. I remember that they even advertised Google+ on their homepage (which receives millions of impressions per hour) for a few days before removing the ad.

  • Facebook is currently valued at P/E of 50: Which is very scary for a website. I don’t know, will the whole concept of a website still exists 50 years from now? Unless Facebook is planning how to adapt for the next big technological advance, I think it’s safe to say that a P/E of 50 is considered to be a huge overvaluation.

Facebook is valued at a $100 billion by the market, and that’s because there is so much hype about it at the moment. Everyone wants to be part of this phenomenon. But will it still be the case in a year from now? Or will it not? Will investors still think that Facebook is a good deal at $100 billion? Or will they not?

I think they will not… And again, I think Mark Zuckerberg is wrong in delaying Facebook’s IPO, but I might be wrong myself…

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

We use the phone every day, we use it for our business, we use it to call our family, we use it complain about something, etc… It’s hard to see phone companies disappear, after all, we have used the phone for over a century now, and we will probably use it for the next century, albeit differently… So, why am I questioning their relevancy 10 years from now? As you can see from the title, I’m not questioning the relevancy of phones, but that of phone companies, and there’s a huge difference. But don’t phones need phone companies to operate, you may say? They do, at least for the moment, but slowly and surely phones are becoming independent of phone companies. Let me explain!

20 years ago when we only had fixed lines, we had to get that fixed line from a phone company and then call someone who also has another fixed line which he bought from the same or another company. Afterwards, mobile phones came into play, and we were able to buy mobile phones to call other people on their fixed lines or their mobile phones. After that, and because of the Internet, the concept evolved, and, for a small monthly fee, we were able to make phone calls from our PC to a fixed line or a mobile phone. Still, we did need a phone company because at the terminating end there was an actual phone running a service from a phone company or a mobile carrier, so phone companies were still indispensable for connecting two or more people together by phone.

Fast forward to now, my friend told me about several applications that allow you to make calls between smartphones running different operating systems (such as an Android calling an iPhone) by simply taking advantage of your Internet connection. Here’s how the process work:

- You install the application on your smartphone
- You choose a username (or a nickname)
- Your friend installs the same application
- You will be able to make calls for free whenever you are both connected to the Internet

As you can see from the above, the phone company/mobile carrier doesn’t need to provide its services for the call to happen, in other words, they are completely useless/irrelevant in these types of calls. However, we know that when you’re on the road, there’s no Internet connection (well, at least for now), so you still need the phone company to make a call. But think about it, what will happen when Internet connection is available everywhere, all the time? Is this a far fetched dream (judging by the current technological advancements, I don’t think so)? And if this dream materializes, and it most likely will, what will happen to phone companies? Will they still exist? Will they still be able to rob people by offering useless services as they do now?

In fact, I see that phone companies will, from now, receive less and less revenue for their services! That’s why they are all running (not walking) to diversify their products, they want to offer something new, they want to offer Internet services as well. But whatever they do, if it’s not big, their revenue will decline, and that’s why I recommend avoiding stocks such as Sprint and Verizon, for their future is not that bright, and in 10 years now, who knows if they’ll still exist or not? Oh and by the way, Sprint is losing money while Verizon is trading at a P/E of 16 (which means that it needs 16 years of current revenue to payback investors).

Who knew, the future will be phones without phone companies!

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

October 6, 2011 | In: Trivia

What Is the Most Traded ETF?

In my article on the definition of a spider, I mentioned that I wanted to know whether SPY was the most traded ETF or not.

Well, I did my investigation and here’s the list of top 5 most traded ETFs:

- SPY (SPDR S&P 500): Average volume of 296.83 million shares/day.
- XLF (Financial Select Sector SPDR): Average volume of 116.77 million shares/day.
- IWM (iShares Russell 2000 Index): Average volume of 85.20 million shares/day.
- QQQ (PowerShares QQQ Trust, Series 1): Average volume of 81.53 million shares/day.
- EEM (iShares MSCI Emerging Markets Index): Average volume of 77.77 million shares/day.

With an average volume of nearly 300 million shares/day, SPY is by far the most traded ETF in the US stock market, and most likely the most traded stock in all the US market. SPY’s average volume is 60 million shares short of the combined volume of the remaining top 5 ETFs (their total average volume is around 360 million shares/day).

I think that having SPY as the most active ETF means that there’s a lot of investors who like to play the S&P index, and prefer it over playing the NASDAQ 100 index or the Russel 2000 index.

I remember during the first months when I first started trading stocks, I woke up one day and logged in to my account on my broker’s website, and I saw that C was so delicious at around $3.80 (that was before they did the reverse split). I placed the order at around 8:00 AM, but the order was not filled immediately. I waited for 1 minute, 5 minutes, 10 minutes, and the order was still not yet filled. What made me angry was that the price of C was increasing every second, and my order is still not filled (yet I know that C is a very liquid stock, and that its fill time is way above the average fill time).

I eventually called. The adviser on the other end told me that my order cannot be filled because the market is still not open yet. So I asked, how on earth was I allowed to make the order while the market is still not open, and why is C’s price moving. He told me that this is the pre-market, and during the pre-market investors start taking their positions with respect to stocks. So investors buy/sell stocks while knowing that their orders won’t be processed until the market is open. Investors do so because of news about the stock, or because they believe that the stock is going to take a certain direction once the market is open.

In any case, and if you didn’t notice, there are some stocks that are tradeable in the pre-market while some are not (I will probably write about this in a future post) and for these stocks that are tradeable in the pre-market, you can start seeing the “pre-market” tag on their page on Google finance as of 7 AM EST. Which means that the pre-market trading begins at exactly 7 AM Eastern Standard Time.

I hope this post was of help to someone somewhere!

September 30, 2011 | In: Trivia

When Was the NASDAQ Created?

While writing an article yesterday on the difference between the NASDAQ composite and the NASDAQ 100 indexes I thought of something. When was the NASDAQ actually created? And who created it? And why is NASDAQ called NASDAQ?

So I did a research to find an answer to my question, and here’s what I found:

- The NASDAQ was created in 1971 (February 4th, 1971, to be exact). Which makes the NASDAQ now 40 years old.
- The NASDAQ was founded by the National Association of Securities Dealers (NASD) which was later called the Financial Industry Regulatory Authority (or FINRA – yes, you’re right, there’s no reason for the N to exist in the acronym, but FINRA is a nicer name than FIRA). FINRA was founded back 1939.
- It is called NASDAQ because it stands for National Association of Securities Dealers Automated Quotations

Some investors believe that the NASDAQ composite index is the same as the NASDAQ 100 index. So are these investors right, and if there is a difference, what is it?

To answer the first question, these investors are wrong, the NASDAQ composite is different the NASDAQ 100, but what is the difference?

Well the difference is that while the NASDAQ composite index tracks all the companies listed on the NASDAQ, the NASDAQ 100 follows only the top 100 companies with the largest market cap that are listed on the NASDAQ. Additionally, the NASDAQ 100 index excludes international financial companies.

So, you can say that the NASDAQ 100 index is a sub-index of the NASDAQ composite index, because all the companies tracked by the NASDAQ 100 index are already tracked by the NASDAQ composite index, but not the other away around.

Some of the most important companies followed by the NASDAQ 100 index are Apple, Adobe, Baidu, Cisco, Dell, Mattel, Netflix, Oracle, Sirius, and Yahoo.

Note that the stock QQQ (NASDAQ:QQQ) is tied to the performance of the NASDAQ 100 index.

When I first started trading stocks, I shrugged when I heard the term spider. I had no idea what it was, and yet I felt ashamed to ask my friends because it seemed to be something taught to investors in “trading stocks 101″. In any case, I did my research, and then I discovered that a spider means “SPY“, an ETF stock that is named SPDR (hence the name Spider) S&P 500. This stock is tied to the movement of the S&P 500 index, so if the S&P 500 goes up, the stock goes up, if it goes down, SPY will go down (by nearly the same percentage – for example, yesterday, SPY was up 1.15% and the S&P index was up 1.07%)…

SPY is a stock in and for itself, and unlike other ETF stocks, it pays dividends and it has a P/E that is associated (again) with the performance and the yield of the S&P 500 index. There are just over 680 million SPY public shares, and the current yearly dividend is just over $2 (SPY is currently trading at $117 – by the way, I think SPY is currently very cheap). SPY can also be shorted.

The average volume on SPY is huge, and it’s about 300 million shares/day. It is one of the most traded ETFs in the world (maybe the most traded? I will check later…).

My personal opinion about SPY is that it’s a safer stock than a company stock, as it reflects the performance of 500 companies, and not just one. So if one company has a huge swing in a certain day, SPY will be affected, but not much. So your loss (and profit) from this swing will be minimal.

By the way, in case you’re curious to know, SPDR stands for Standard & Poors Depositary Receipts.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

September 27, 2011 | In: Technology

How Can I Buy Facebook Stock?

One of my friends asked me earlier today, “How can I buy Facebook stock”? Apparently my friend was so eager to invest in this social revolution that he forgot that he’s not a millionaire (although I wish he was). Now why am I saying that my friend needed to be a millionaire, you might ask?

Well, the reason I’m saying this is that you need to be a millionaire to buy stocks on Facebook, because currently Facebook is trading in some sort of a secondary market that only millionaires have access to, as well as large hedge funds and other investment firms. Facebook is not trading in the public market yet (NYSE, NASDAQ, or AMEX), and probably will not trade in the next year or so (Mark Zuckerberg’s decision to delay the IPO is a wrong one, in my opinion, as the more time it takes for Facebook to become public, the less the hype about it among investors will be, not to mention, of course, that there will be a huge potential that Facebook will be obsolete in a year from now and/or facing stiff competition by a new “jewel” – the same way MySpace was taken by Facebook by surprise).

There is also another way to own Facebook stock, is to get invited by Goldman Sachs to buy Facebook stock through their firm. Just keep your business phone close to you at all times, you don’t know when you might receive a call from Goldman Sachs begging you to invest some of your money in Facebook.

Note that even in this secondary market where Facebook is currently trading, there can’t be more than 500 investors (or is it entities?) owning the stock, otherwise, the company will be forced to make its earnings public and will lose the status of a private company.

Oh, but make sure you know Facebook’s stock symbol first!

I have written about RIM as a company and as a stock so many times before, and I’ve always bashed it. I always thought it was too expensive, that the company has no future, that it will go bankrupt soon, that it won’t recover, etc… I did say though, at one point, that RIM could be a target for takeover. I think all investors should be thinking about a takeover potential more than ever at the moment, mainly because RIM’s total assets are about $12.875 billion (see here), which is around $1.6 billion more than its current market capitalization of $11.29 billion!

RIM’s goodwill is only valued at half a billion, and we all know that RIM’s goodwill value is much more than that at the moment, especially outside the US. The thing is that US customers have little loyalty to brands, unlike people in Europe and the Middle East. RIM has no debt whatsoever, and is only trading at a P/E of 3.94. It really only takes one good product to turn the company around, failing that, RIM is a very, very cheap company at the moment, and whoever buys it will benefit from its market and its customers’ loyalty to blackberry.

Waiting until the dust settles for RIM means that you will lose an opportunity of making about 50% of your investment in a few days. I have always made money on RIM, and I’m sure right now that it’s really, really cheap, regardless of their bad products and their stupid marketing strategies.

RIMM is currently trading at $21.54. In my article about RIM’s takeover, I said that the takeover could happen at the $20 level, so it still have to go down around 7%, which can only be a couple of trading days away at the current trend.