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.

September 16, 2011 | In: Technology

Will Yahoo Survive?

I have written about Yahoo before, and how the company (and its stock) has no future. Some of my opinions were wrong (but some of them were right, remember that post about Netflix a few days ago before it crashed yesterday?), but do I now think that my opinion about Yahoo was wrong?

In short, no, I still stick to what I said. I think Yahoo, regardless of the shifts of CEOs, is still a hopeless company. See, the problem is with Yahoo’s business model. Yahoo is a search engine, and a bad search engine, and not only that, it is a search engine that is no longer using its technology, but rather Bing’s outdated (and maybe stolen) technology (well, if you really want to call it a technology).

Yahoo’s search results contain a lot of spam, and a lot of manipulated results. Not only that, ask any advertiser using both Yahoo and Google to advertise his products about the performance of each, and he will definitely tell you that Google is a much better performer than Yahoo. I know quite a few companies (because of my other job) that were using both Google and Yahoo for advertising, and now stopped using the latter completely.

Yahoo seems so distant from the new social networks it’s not even funny. Why would anyone on this planet think that Yahoo would still be relevant 10 years from now, unless they’re preparing the new super search engine that will return the results as soon as you’re thinking (forget about speaking) of something. So, while the company is trading at a P/E of 16, and that’s not that high, I think the price to earnings ratio should be something close to RIMM’s (around 5). Yahoo’s main business is the search engine, will anyone use it in a few years remains question (well, not for me anyway).

Yahoo investors, get out, the stock is doomed and it should be priced at a mere $4.4 to reflect the future performance of the company, in other words, YHOO is overpriced by 238% (YHOO is currently trading at $14.89).

To conclude, no, Yahoo won’t survive, it’s only a matter of time before investors realize that nothing can be done to save this company, and they will all jump ship.

New traders are often not clear on how much time it takes an order to get filled. Sometimes an order is filled instantly, sometimes it takes hours. So what is the average fill time of an order?

While there’s no scientific data on this, I think it’s safe to say that most orders are executed instantly, or within seconds. It is important to note that the fill time of an order is directly related to the following:

- The liquidity of the stock (for example, C and BAC are very liquid, while low volume stocks are not that liquid at all): The more liquid the stock, the less time it takes for the order to be executed.

- The demand on the stock: Sometimes, when there is some important news about the stock or something related to the stock, there will be huge demand on both sides, and the system for processing the orders will get choked. I remember that my order took hours when I was trading HOUs (oil bullish ETFs) when there was some very important news about oil.

Why do traders need to care about the average fill time? Well, when I bought HOUs a few months ago and my order took hours to get processed, I remember thinking that I bought them at one price and the order was executed at another, higher price. I remember also the same scenario happening, I wanted to sell HOUs, and my order took hours, and then eventually they got sold at a lower price (I couldn’t even cancel the order). I do think that banks make millions out of this game, imagine the following scenario:

- There is a huge load on the system processing the orders, but your buy order goes through anyway
- The bank doesn’t tell you that your order went through
- If, in a few hours, the stock price goes up, then the bank will make it like that the order was processed at the higher price and take the difference between the two prices
- Now If the stock price goes down in a few hours, then the bank will tell you accurately that your order was processed a few hours ago
- And that’s how banks make money!

September 14, 2011 | In: Technology

Is Amazon Overvalued?

While checking an item on Amazon (NYSE:AMZN) this morning, I thought about its stock, is it overvalued? Since Amazon is a website, it’s easy to determine whether its overvalued or not by comparing its traffic for the last 12 months to its stock price over the last month as well.

Here’s the traffic (actually I went for 13 months that’s how the traffic chart is generated by default):

Amazon traffic for the past 13 months (well, until end of July 2011)

Now here’s the stock price over the past 13 months (from July 2010 until July 2011):

AMZN stock for the past 13 months

Let’s look at the above 2 charts: You can easily see that the traffic to Amazon’s website has increased by 10 million unique visitors year over year, which is around 14%. At best, the traffic to Amazon’s website has increased by 35% in December (which is normal, Christmas season).

As for the stock, it has increased by 82% from July 2010 to July 2011, which is more than double the December spike. The stock went from $122 to $222. Hmmm…. Well, let’s give the stock the benefit of the doubt, maybe it was really undervalued before now it has reached its normal price. But the stock is now trading at a P/E ratio of almost a 100, and this is a website for God’s sake! Let’s say this again, Amazon is a website!

Is Amazon overvalued? Definitely! By how much, well, let’s just say that the stock should be trading at 1/10th of its current price, so it’s overvalued by almost 90%. But hey, how cares? Amazon is nearly identical to Netflix (a company that is worth much less than what it’s currently priced at) when it comes to being overvalued. I wonder which one will collapse first…

I have written before about Netflix, thinking the stock was way overvalued at $132 a share. Of course, whoever reads the article now will laugh, since the stock is now trading at $210!

Do I still stick to what I’ve said before? Absolutely, I think now that NFLX is a dangerous stock, that may pop any day now, regardless what all the analysts are saying. Why do I still think this way? Well, Netflix is very close to market saturation, and its P/E is as high as 53. Not to mention, of course, that competition will soon (maybe very soon) creep in.

Let us examine some numbers: Just over a year ago, when I’ve written the first article about Netlfix, the stock was trading at $132 and its customer base was 15 million subscribers. Today’s customer base is up 10 millions subscribers, to as high as 25 millions subscribers, in the United States, Canada, and Latin America (according to Netflix). This means that there was a 67% increase in the customer base. How does that reflect in the stock? Well, let’s see, 132 x 1.67 = $220, which means that investors, at this current moment, value Netflix less than what they used to value it a year ago, not by much, but enough to say that investors no longer anticipate huge growth potential in Netflix

Imagine if Netflix cannot add as many customers next year as it did this year, what will happen? Investors will definitely believe that Netflix has reached a point where it can no longer maintain the growth, and a point where its only aim is to maintain its current customers, maybe through better deals and reduced pricing, which, in its turn will reduce the profitability of the company, which in its turn reduce the price of the stock.

Now let’s think about Netlflix as a business model, will their business model survive in 10 years, 20 years, 53 years? I doubt it that the business model will survive in 10 years, with all the breakthroughs especially in the entertainment industry, and I’m confident that Netflix will cease to exist (at least in its current form) 20 years from now. So why is the market valuing it at a P/E ration of 53? No idea. Regardless of how many subscribers Netflix can add next year (or quarter), the company will not impress investors. Competition will be very fierce in that area, especially from Google (a company that wants to diversify its products) and Apple.

But how much is Netflix really worth as a company?

I don’t know for sure, but I would trade such a stock at a P/E of only 10 (the future is not as bright as the present for Netflix), which means that each stock should trade, in my opinion, at around $40. And since Netlfix has 52.54 million shares, this means that Netflix, as a company, is worth $2.10 billion, and nothing more. The $9 billion extra on its market cap are just pure hype, and you will see them quickly vanish the moment Netflix misses an estimate.

Will I short Netflix? Never, but I will never trade it either.