Fadi El-Eter

Sometimes you’re in a dilemma, you have debt and you have stocks – selling your stocks might pay off your debt in full or it might lower your debt to a manageable level. But the question is, is it a good move? The answer is, it depends on the debt and it depends on the stocks:

If the debt is non-manageable

In this case, you should do your best to reduce your debt to a manageable level by using all the means possible, including selling all the stocks that you have. One buys stocks to make money and to protect himself from inflation, if your debt is causing you to bleed money, then you must dispose of all the stocks that you have in order to settle as much debt as possible. Additionally, if you have unmanageable debt, then most likely you’ll be making all the bad decisions about your trades (for example, sell when you should hold, and buy when you should sell) – this is because you’ll most likely be subject to fear, which is one of the two vices in stock trading.

Generally, you should sell anything that you have to reduce your debt to a manageable level. (PS: Writing this paragraph reminded when I was in my early twenties, and my father had a huge unmanageable debt, and I was opposed to selling one of my father’s estates. However, a bank adviser told me something that made me change my mind and accept to sell: “sell it now, and in the future you’ll have money and buy a better one“).

If the debt is manageable

The decision in this situation is a bit hard and may be the cause of a dilemma: “should I sell my stocks to pay off my debt” or “should I make more money on my stocks and settle my debt as initially planned”… That decision, however, could be simplified by reading the below:

• Was the debt accumulated to purchase your stocks?: In other words, does the debt consist of taking money from the bank just to buy stocks (or bonds)? If this is the case, then the interest on that debt is tax deductible, which will substantially reduce your effective interest rate on the money that you’ve borrowed. You may need to take that into consideration when making your decision.
• Does the debt solely consist of your mortgage?: Interest on mortgage is also tax deductible. So, if you settle your debt you will lower these tax deductions.
• Are you currently losing money on your stocks?: Remember that stock trading has its ups and downs (like any other form of trading), and if you’re losing money today, then it might not mean that you are going to lose money tomorrow. It’s better not to sell in this situation and wait until your stocks improve (except if your portfolio has no good stocks at all).
• Are you currently making money on your stocks?: If your stocks are in the green, then it’s better to sell part of them in order to settle part of your debt (especially if you took the money in order to trade stocks). Here’s what I do in this case: Every end of the month I check how much net money (after commissions and other fees) I made on my trades. Let’s say I made $5,000. I sell shares equivalent to half that amount ($2,500) and I take the money and settle some of my debts, that’s in addition to the monthly payment I owe to the bank. If, by the end of the month, I didn’t make any money or I lost money, then I only make the monthly payment. This will allow my investment in the stock market to grow, and will substantially decrease my debt and my interest rate over time.

It’s important to remember that, with the exception of the mortgage rate, all owing interest rates will increase with time (especially if the bank notices that you’re doing your best to settle your loan as fast as possible), so a debt that is currently manageable may not be manageable in a few months from now (Just for the records, TD Bank has increased my interest rate by 3.75% on one of my loans – in one shot! But that’s a different subject and I will definitely write more about it later).

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.

I had a walk downtown yesterday, and I ended up buying the Samsung Galaxy Tab 10.1. A really, really nice machine. While paying, the person on the counter told me “good choice, much better than iPad”. I knew it was a good choice, but I wasn’t expecting that someone at that store would tell me that it was better than iPad. I thought that was interesting, so I asked him, “are you currently selling a lot of iPads?”. He told me that they sold many iPads back in the holiday season, but nowadays they’re not selling that much – people are preferring Android tables over iPads. I asked him what was the reason behind that. He gave me five reasons:

• You need to have a account on iTunes in order to activate your iPad (something that you don’t have to do with Android tablets).
• iPad’s camera quality is complete trash (he told that it was lower than 1 megapixel for both the front and the rear cameras)
• iPads are more expensive than Androids, yet they offer comparable (or even lower quality)
• Most apps on iPad are paid apps.
• The screen’s quality is not that good.

So, a simple and short visit to my local electronics store (it’s a big chain) revealed that iPads are not selling as before, which means that Apple as a company, is not going to have blow-out results as it did last quarter. Of course, the downward trend in sales will need to catch-up worldwide (especially in Asia) before it really affects Apple – so the effects might be minimal on AAPL this quarter, but most likely the third quarter will be classified as “fell below analysts’ expectations”.

And then I left, and while walking home I passed by a movie theater, which is by the far the most important movie theater in my city. I started a conversation with the guy at the counter: “what’s new”, “what are the good movies”, etc… And then I asked him, compared to last year this time, do you think that the number of people attending movies has increased or not. He told me that the number is definitely decreasing, so I asked him why. He told me take a look at the posters on the wall there, do you see any good movies? I looked and he was right, their “best” movie was called The Artist, and that’s saying something when it comes to the (low) quality of available movies. I then asked him, aren’t you guys expecting any good movies in the next month or so? He shrugged his head in despair and he told me that there are no good movies at all in 2012 – nothing, zero, zilch!

I then thought to myself, what are the companies that are directly affected by the movie theater business? Well, the first company on top of my head was IMAX (which I believe to be currently overvalued). IMAX (the stock) will most likely be slaughtered at the end of this quarter when they will release their earnings…

As you can see, it’s not hard at all to predict stocks, you’re not even predicting at this point, you are actually getting information equivalent to insider information, and the best thing that it’s fully legal.

We stock traders are really, really lazy people, we don’t want to do any field research and we expect to make money all the time on our stocks by using some (rather naive) educated guesses. So, do you still think it’s hard to predict stocks? If you still do, then you probably need a good walk, downtown!

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.

A common question among new investors is “how many trades can I make per day?” or “is there a limit to the number of trades I can make per day?”. The answer to the first question is “you can make unlimited trades per day”, which means that the answer to the second question is “no, there’s no limit whatsoever on the number of trades you can make per day”.

Now, that we know that there is no regulation to limit the number of trades per day to a specific number, let’s try to find out how many trades can be done per day? Well, if you’re using a machine to do the trades for you (buying and selling), then you can do tens of thousands of trades per day (this would be called High Frequency Trading [HFT], where a computer software will automatically buy and sell stocks based on quantitative data – usually the time between buying and selling is a second or even less).

However, if you’re doing the trades yourself (which is the case of 99.99999% of the traders out there), then you trading is limited to the below factors:

• Your average fill time (sometimes it can take a long time to get your order filled, see what is the average fill time of an order?). This can take about 5 seconds on average.
• The time you take to make a decision about a stock, including the time to research a stock. Note that if you know the stock well, you can eliminate the time it takes you to research a stock. This step can take up to 15 minutes.
• The time it takes you to find a good opportunity for buying and selling. This can take up to 10 minutes if you have the right tools that will find you these good opportunities. If you don’t have the tools, then this can take you up to 20 minutes (on average). The time for this step can be reduced to 5 minutes if you know the stock well and you’re trading the same stock over and over again (sell when up, buy when down).
• The time it takes you to actually do a trade (filling in the necessary information and making sure that all the filled in information is correct). This can take up to 5 minutes.

As you can see, there are many limiting factors to how many trades you can make per day. A trade every 15 minutes or so can be done in case you’re familiar with the stocks that you’re trading and in case these stocks are very volatile (there are many buying and selling opportunities for these stocks every day), which means that in a full trading day (consisting of 6 hours and 30 minutes), you can do about 26 trades/day. However, please note that it’s possible for a few investors to go above this number. I have personally reached about 40 trades on one day last year, which meant I was making a trade every 10 minutes (not all of these trades were profitable though!).

Note that being a high frequency trader does not mean that you’re a day trader. A day trader (by definition) is someone whose stock portfolio is completely emptied by the end of the day.

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.

Last week, I have published a list of the top 100 companies listed in the US markets by market capitalization. The list had Exxon on the top, and Apple below it, there was a difference of only $5 billion between the two companies. I said back then that Apple might be able to fill the gap within a few weeks, or even within a few days. Well, I was right. A few days after, Apple dethroned Exxon to become the most valuable company in the US markets (but not the world though, there are non-listed companies such as Aramco that are worth trillions). AAPL is currently trading at $456.61 (for a total market cap of $425.97 billion) while XOM is currently trading at $84.24 (for a total market cap of $397.42 billion). In just a few days, Apple managed to top Exxon by nearly $30 billion!

But, how long can Apple hold this position for?

Well, there are a few things to watch for:

1. The oil price, which may go up to $150 if something bad, really bad happens in the Middle East. We all know that oil price is directly proportional to XOM’s price.
2. Apple’s current quarter results, which will be nowhere near as good as last quarter’s results. Last quarter’s results were great because Apple struck new deals with 3 new wireless companies, and it benefited from a very hot holiday season. I doubt that these new deals will have the same effect on Apple as they did in the last quarter.
3. Android phones and pads are eating more and more market share from Apple.
4. Apple missed the clients’ expectations with the release of the iPhone 4S instead of the iPhone 5. However, the clients apparently were oblivious to this fact (probably because of drinking the Apple kool-aid) because they haven’t noticed that Apple didn’t deliver anything new in its new phone, it just changed the name and inflated the price. I doubt that Apple’s clients will be as stupid as they were when they swallowed the release of the iPhone 4S as a great achievement when Apple releases another copy-cat of the iPhone 4 and brands it as iPhone 5 (or maybe iPhone 4 SII, as in Samsung Galaxy SII).

While #1 in the above list might happen, #2 is bound to happen. Apple just can’t meet the investors’ expectations this quarter. It really did set the bar high, very high in its current results. #3 and #4 are already happening, it’ll just take some time for the mass media to notice (the mass media will only notice when large investors dump their shares in Apple, which will happen right before the release of this quarter’s results).

Does Apple deserve this position?

For many Apple fans, the answer is a definitive yes. For me, the answer is a definitive no. Apple is doing nothing to the well-being of the American economy – in fact, Apple is sucking money from the US and pumping money into China. It is also filling the (very deep) pockets of its executives and shareholders. Everytime someone buys an Apple or an iPad, he’s contributing to the continuity of slave labor and nothing to his own economy. Although Exxon is an oil company (and we all know that oil companies are usually associated with greed), Exxon does create a lot of high paying opportunities for Americans inside and outside the US. Exxon prioritizes American labor over any other labor, and doesn’t search for cheap labor to maximize profitability and artificially pump the value of its shares. That’s a company that everyone should respect, as opposed to a company that creates high-priced phones manufactured by people who commit suicide because of poor working conditions. Gordon Gecko said “Greed is good” – probably that should be Apple’s motto from now on.

Congratulations Apple! This is the first time that you became the #1 company in the US based on market capitalization. You have fought hard for this and now you’ve won! But don’t enjoy it – because we all know that you cheated all the way to the top and that it will not last for long!

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.

Many bank advisers tell you the complete opposite of what the title of this article states. They tell you that mutual funds are better than stocks, and they use the following myths as arguments:

Myth #1: Mutual funds are safer than stocks: Bank advisers use this as the first strategy to lure first time investors who are afraid of risking their money in the open market. They tell them that mutual funds are safer than stock trading, that the potential of loss is minimal when compared to stock trading and the chance of making moderate money with a mutual fund investment is really high. What they don’t say is that a mutual fund consists of a group of stocks, either in the same industry or in diversified industries, and that many mutual funds lose, and some lose big, like 20%/year.

Myth #2: Your are in control in your money when you’re investing in mutual funds: This is the biggest lie ever, you’re in control of nothing when you invest in mutual funds. In fact, the fund manager (who manages your fund as well as thousands of other funds) is the one in control of this fund. He’s responsible for choosing the stocks that will constitute your fund, and he shuffles the contribution of each stock in the fund (he may also remove/add stocks) depending on the market. You do nothing, you just login to your mutual fund account every day and see how much money you’ve won or lost every day. Just a quick note here, the fund manager couldn’t care less about your money – the only reason he wants you to make money is because he wants to look good and get more money from the bank as a bonus. Another thing to mention is that fund managers rarely, if every, invest in the mutual fund they create/control.

Myth #3: You can make a lot of money with mutual funds, almost as much as stocks: Another big lie, show me a fund (other than gold funds) that made a decent amount of money last year. All mutual funds, if they make money, make anything between 0.1% and 5%, which means that for a very successful mutual fund, you’re only breaking even with the inflation rate.

Myth #4: Mutual funds are flexible: Bank advisers tell you that it’s easy to switch from one mutual fund to another. Now of course, you would probably believe that, but once you really want to move from one fund to another, then expect a total delay of at least 2 weeks to do that. You will first need to sell, the money will take a week to return to your bank account, then you will have to buy, and the process of buying will most likely take at least another week. Also note that you will be charged a redemption fee (another way banks can steal money from you) if you decide to sell your mutual fund within 30 days of purchase. That redemption fee is around 2%. So, let’s say you invest $10,000 in a mutual fund, and then a couple of weeks later you decide you do not want it, you will lose 2% of your investment, which is around $200 (the decision to leave the fund become especially hard when you’re losing money on the fund). I don’t see that as flexible.

Myth #5: Mutual funds are guaranteed investments: Some (not all) bank advisers claim that a mutual fund is backed by the government in case something really bad happens and you lose all your money invested in this fund. This is a lie! Mutual funds are not guaranteed as no government in the world would guarantee securities.

Myth #6: Mutual funds are taxed less than stocks: Another big myth used to lure investors into buying mutual funds instead of investing in the stock market. The reason why bank advisers say that mutual funds are taxed less is because most people invest in mutual funds for at least a year (making them pay the least amount of taxes on capital gains, see this article on taxation on capital gains). Taxes on mutual funds are no lower and no higher than those on stocks, they are exactly the same.

Myth #7: Mutual funds are not stressful: Mutual funds are even more stressful than stock trading in my opinion, because there is nothing you can do when you see your mutual fund losing money day after day after day. If you’re trading stocks, you can sell a portion, you can buy puts, you can buy more shares of the same stock to even your losses and maximize your profits when the stock rebounds – the opportunities are endless!

Myth #8: Mutual funds carry no fees: As I explained above, there are fees associated with closing/transferring a mutual fund account. Additionally, some banks make you pay some fees in order to open a mutual fund account.

Myth #9: There is no minimum for investing in a mutual fund: Every bank forces a minimum for investing in mutual funds, that minimum can range from $100 to $10,000 – depending on the bank and the fund.

Myth #10: You get to keep all the gains for yourself: For me this is the biggest drawback in a mutual fund. Let me tell you something that you most likely don’t know about mutual funds. Each fund carries a management fee that you don’t pay directly. The management fee is a percentage of the whole fund that will go to the fund manager and the issuing bank. The better the fund manager, the higher the fee is. The management fee can be as high as 5%. So, let’s say, for example, that your mutual fund made a raw profit of 4% and your management fee is 5%. This means that you will lose 1% on your mutual fund, because in order for you to make money in the fund, the fund has to make something above 5%.

Now, here’s why stocks are better than mutual funds:

Fact #1: Stocks are only unsafe for those who like to gamble: If you do the necessary due diligence on the company before purchasing shares of its stock, then most likely you won’t lose any money. If you just make a random guess or if you’re blindly following a trend, then be prepared to lose a lot of money.

Fact #2: You, and only you, are in control of your stock portfolio: Unlike mutual funds, you can sell/buy stocks whenever you want. If you think that you have made enough money on a stock, then you can sell it and search for a bargain stock to make more money with.

Fact #3: You can make an infinite amount of money on stocks: If you always make the right move (buy on time/sell on time), and if you’re patient, non greedy, and non fearful, then you should make a lot of money on stocks. Some investors quadruple their capital every year.

Fact #4: Stock trading is flexible: In addition to what is mentioned in Fact #2 (buy/sell any stock at any time), the money is immediately available to you to re-invest when you buy/sell shares. Also, you can get out of the stock market whenever you want, at no fees! You just take your gains (or losses) and that’s it – no questions asked!

Fact #5: Stocks are not a guaranteed investment: But why care? Why should the government fund your investment endeavors? This is a free market and you should enjoy it as it is. Government presence and intervention in any market is bad!

Fact #6: Taxes on stock gains are not as much as you think: Most people think that taxes on capital gains are something like 50%. In fact, taxes on capital gains can be even less than taxes on their own (the people’s) income taxes. Not only that, if you don’t make a lot of money then you don’t pay any taxes on your capital gains, and if you hold your shares for more than a year, then you are capped at a maximum of 15% taxes regardless of the amount of money you make.

Fact #7: Stock trading is stressful: There is no denying it, stock trading can be very stressful, but it’s also fun! And, you get to feel like you’re an important person, and it’ll change something in you. You’ll be able to take risks in your life. Whether these risks is positive or negative is another story, but you’ll still be able to take risks to advance your life. What is life without risks?

Fact #8: There are no hidden fees in stock trading: All the fees when you trade stocks are communicated to you before your first trade, and you don’t pay a penny other than these fees. What’s even more interesting is that the more trades you make, the less you pay in fees as you will be considered an active trader (here’s a comparison of active trader programs in Canadian banks in case you want to lean more about the subject).

Fact #9: There is no minimum for trading stocks: However, be advised that starting with anything less than $5,000 is not a great idea as bank commissions/fees will eat most of your profits. So, the minimum amount to trade stocks with is $5,000.

Fact #10: You really do get to keep all money for yourself: If a stock goes up 5%, then you will make 5%, and not 0%. If a stock goes down 1%, then you will only lose 1%, and not 6%. The money that you make in stock trading is yours, all yours. (Of course, you still have to pay taxes on it, but, as mentioned before, taxes on capital gains are very reasonable).

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.

“The more numerous the laws, the more corrupt the government.” – Gaius Cornelius Tacitu, Roman Senator

Well, first let me start by saying that the title of this post is wrong, insider trading is not illegal. Executives in any company can buy or sell shares in their company anytime they want, there is no law whatsoever barring them from doing this. In fact, Yahoo Finance has a special page listing the insider traders for every company (insider transactions are public by law).

Now there is some kind of insider trading that is illegal. Illegal insider trading happens when an insider relies on non-public information in order to make a trade. For example, let’s say that you are an executive at RIM who’s aware of a top-secret-yet-imminent deal between Microsoft and RIM in order to promote Windows 8 on RIM’s products. Clearly, this will make RIMM’s price skyrocket. Now, if you buy RIM’s shares based on your knowledge of this matter, then this is illegal.

Now here’s another example… Let’s say that you a secretary working at RIM (I’m just giving RIM as an example, it can be any company) and you were asked by your superior (who is the CFO) to prepare the most important document that a company releases to the public: its quarterly results (including the guidance). While preparing the document, you realize that RIM’s future is bright (contrary to investors’ belief). Of course, this is top secret information and it’s not public. If you buy RIMM shares based on this information, then this is considered illegal.

A third example would be if someone steals a confidential report from RIM. Even if that person does not work in RIM, then all his trades based on the information he acquired from that report would be considered illegal. Arguably, it’ll be very hard to catch the person if there is no proof of the theft.

Now, let’s get back to the main title of the post, why is insider trading illegal?

Well, let’s imagine that it’s not illegal for a moment. Let’s say that you are an insider, and that you know that something good or bad is going to happen to your company, so your purchase/sell shares in your company accordingly. That would be unfair to the market in general as it gives you a clear advantage. Now let’s imagine another, even worse scenario. As a top executive in a company, you can make all the wrong decisions to make your company’s stock drop and benefit from shorting it. Now that is even much more unethical than just buying/selling shares based on the information you (and no nobody else) know. That is considered to be market manipulation, and it’s very, very illegal.

When was insider trading made illegal?

Again, let me re-iterate the fact that only the insider trading that is based on non-public information is illegal. Now, that kind of insider trading was stated to be illegal by the SEC in 1934, right after the great depression ended. There was a huge backlash against listed companies back then (many investors were saying that there was a lot of unfair insider trading happening at these companies) and the SEC reacted by regulating insider trading the following way:

• All insider trades should be made public.
• Insider trades based on confidential (non-public) information are illegal.

Now, the big question is, how to catch illegal insider trading?

Well, there are many ways for the SEC to spot illegal insider trades (which will call for further investigation/audit of these trades), here are some:

• An insider buys many shares/call options shortly before the earnings, and the company’s stock skyrockets when the earnings are released (because of good earnings and good guidance).
• An insider sells many shares/buys put options shortly before bad earnings are released to the public.
• An insider makes several trades, some losing, and some making money before the earnings, where the ones making money will (much) more than make up for the loss of those losing money.
• Someone close to an insider performs any of the above transactions.

Of course, there are many other ways to spot illegal insider trades, but the above are the most basic ones.

I’m currently trying to imagine a stock market without regulation on insider trading. If that stock market is in this current economy, then all insiders would be shorting stocks and all companies will intentionally bleed money. Ah, the greed of man!

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.

I probably have mentioned before that I really love making these lists (so that’s why I’m making another one)! My previous list on the top 100 companies with the largest market cap is now outdated… So, for those of you wanting to know who are the top richest companies traded on the US markets in 2012, here’s an updated list:

Several things to note:

• Exxon is still the #1 company in market capitalization, although something tells me that it will be dethroned by Apple in the next few weeks (if not days).
• The market capitaliztion of the first company in this list (Exxon) has increased by 37% from the last time I created this list back in the summer of 2011.
• The 3 Canadian banks that were in this list last year still made it this year to the top 100 (although last year they were doing better).
• McDonald’s jumped 15 places in just 7 months. Expect this stock to do even better this year, unless a scandal hits their chain or the fast food industry in general.
• Both Microsoft and IBM climbed 2 places, while Google jumped 7 places.
• Bank of America fell 28 places to position #65, while Citigroup fell 19 places to position #53. The gap between the two banks is widening, although both are not doing great these days.

Please note that the above list is based on data coming from Yahoo finance, which sometimes has a completely different data than that coming from Google Finance. For example, Google Finance states that the market capitalization of China Southern Airlines Company is something like $6.2 billion, while Yahoo finance states that the market cap of this same company is $267 billion, making it one of the top 5 companies in the US markets when it comes to market capitalization. This is not the first time that I see a huge discrepancy between the numbers on Google Finance and those on Yahoo Finance. As Pius says to Lord Voldermort in the beginning of Harry Potter 7 – Part 1: “One hears many things my lord – whether the truth is among them it is not clear…” Or something like that!

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.

One of the stocks that I made a lot of money with is IMAX. IMAX, in case you don’t know, is a Canadian company which provides a unique theatrical experience (I wasn’t impressed myself, and I thought watching an IMAX movie was painful, regardless on how good the movie was). IMAX gets a royalty from using its technology. IMAX is a solid company, but is it worth trading at a forward P/E ratio of 21? Let’s see.

As stated earlier, IMAX makes money from royalties on movies that are using its technology, which means, the more movies we have, the more money IMAX will make. Most, if not all, important movies use the IMAX technology. Now, the question is, how many good movies do we have in 2012? Unless I have been living under a rock for the last year or so, we have only one good movie, the hobbit, which is set to be display in theaters by the end of this year. We don’t really have blockbusters movies this year (unless you call the new Snow White and the Hunstman movie a blockbuster), unlike last year where we had 2 Harry Potters, 1 Pirates of the Caribbean, and a Transformers movie. This mean that there is no way that IMAX will be able to make the same amount of money this year as last year (IMAX is one of the easiest stocks to predict, just know how many blockbusters there are and you will know the direction of the stock).

I’m not sure if good movies will be scarce in 2013 as well (well, IMAX must pay J.K.Rowling a huge sum of money to come up with the next Harry Potter series), but it seems that the whole movie business is in a decline state, at least from my perspective (maybe I’m wrong, but think about it, can you think of any unforgettable movie that you have watched lately?).

So what does that mean? It means that IMAX will disappoint investors another time (in a big way) this year (the latest big disappointment was back in June, 2011 – when IMAX had better movies). Any investor worth his salt should avoid this stock until after June of this year. The results will most likely be terrible, to say the least. In the extreme, I expect IMAX to trade in the single digit, but don’t expect IMAX to remain above the $20 past the summer – in fact, I consider it as an achievement if IMAX sustains the $15 level.

By the way, to add more to the problem, IMAX is expanding rapidly, and that expansion comes at a hefty cost. IMAX will feel it – and will make sure that its investors feel it – next June.

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’s that time of the year again, where everyone is closing the previous year (financially) and preparing for the tax season. As stock investors, we know that we have to pay taxes on our capital gains from our stock trading. In this post, I will explain for first time stock traders how much taxes they should pay on their profits, and when they have to pay taxes on their stock gains…

Let me first start by debunking a very common myth (or belief) that seems to worry many first time investors: “I have to pay taxes on my gains, regardless if I sell my shares or not, once the year is over”. Most first time traders think this way: If they bought, let’s say, 1000 shares of AAPL in the beginning of 2011 at around $350 a share, then in their tax return of 2011 (that is done in early 2012), they have to pay taxes on their gains (that amount to around $75,000 if we assume that AAPL last close price in 2011 was $425). This is incorrect, you only have to pay taxes on your stock gains if you sell your stocks. So, if you don’t sell these AAPL shares in 2011, you don’t have to pay a dime in taxes. The only thing that you have to pay taxes for is dividends (you should note that sometimes, taxes are deducted by your broker – think like “deduction at source” – when it comes to dividends). Now, let’s say that you sell only half your position in AAPL, and your profit from that sale is $37,500. This means that you only have to pay money on the gains from the sold portion of your shares, which is $37,500.

Now, let’s say that you have purchased 100 shares of NFLX at $300 each. When the stock hit $100 a few months ago, you felt frustrated, and you sold half your position, for a total loss of $10,000 (50 shares x $200 loss/share). This means that you can claim $10,000 as a capital loss on your tax return. You can’t claim capital loss for the unsold portion of your shares.

So, in other words, you only have to care about the sold portion of your portfolio when it comes to taxes (whether you’re declaring capital gains or you’re claiming capital losses).

Now, how much taxes do you pay on your capital gains from the stock market?

Now that we have established when you have to pay taxes on your capital gains from the stock market, let’s discuss how much taxes you should pay…

In order to know how much you should pay, you should ask yourself, am I a long term investor or a short term investor? This question is crucial as the IRS classifies investors as short term or long term investors and taxes them on their capital gains accordingly. Long term investors pay considerably less taxes than short term investors (it seems that the IRS want taxpayers to be long term investors): long term investors don’t pay any taxes if they fall in the 15% tax bracket (or lower), and they pay a flat tax rate of 15% if they’re anywhere above the 15% tax bracket. So, if you’re a long term investor, and you have sold shares for a total profit of $20,000, and your tax bracket is 35%, then you will only pay 15% of your capital gains on stocks, which is $3,000.

Short term investors, on the other hand, pay taxes according to their tax bracket. For example, if a short term investor falls in the 35% tax bracket, and has made $10,000 in capital gains from the stock market in 2011, then he has to pay $3,500. (notice that you are paying more taxes than what a long term stock investor is paying for double your capital gains)

Now, you might be wondering by now who is a short term investor and who is a long term investor? Well, a short term investor (from IRS perspective) is one who holds a stock for less than a year, and a long term investor is someone who holds a stock for more than a year. For example, someone who bought shares on October 15^th, 2010 and then sold them on July 15^th, 2011 is considered to be a short term investor. Now if someone bought shares on December 10^th, 2010 and then sold them on December 28^th, 2011, he is considered to be a long term investor.

To sum it all, if you are a short term investor, then you pay taxes according to your tax bracket, if you are a long term investor, then you don’t pay any taxes if you fall in the 15% or below tax bracket, and you only pay 15% on your capital gains if you belong to anything above the 15% tax bracket.

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.

Unless you are still in holiday mood, you would have probably noticed that Bank of America’s stock has skyrocketed since the beginning of the year. BAC is up about 31% this year so far and the month of January is not even over yet. So, what’s the deal? And should investors jump in to buy shares in this bank?

Well, let’s first remember that it’s January, and we all know of the January Effect in the Stock Market. BAC is a stock that is known to have a very healthy January, simply because it consistently have had bad years. 2011 was no different for BAC. In fact BAC’s stock lost about 60% of its value in 2011, where it started trading at $15.25 and ended the year at almost $5 (briefly touching $4.92 back in December). What is happening right now is that all these small investors who sold their positions in BAC back in December of 2011 for tax reasons (to claim their loss on the stock as capital loss) are now re-buying their positions, simply because they are very hopeful (or simply because they are greedy and they don’t accept that losing is part of the stock trading game).

The point here is that nothing has changed in the fundamentals of Bank of America for the stock to go up dramatically (the management is still the same – and will most likely not change in 2012). But, when will the bullish trend stop? Well, as soon as we hear some bad news about Bank of America or Europe, which shouldn’t take a long time to happen. The situation in Europe is worsening everyday and officials there are using duct tape for quick fixes – which is not a long term solution.

We all know that 2012 is a very bad year for banks, but it seems that we never learn, and nor do we care to learn…

Beware Bank of America, as you will lose more money on this stock than you can ever imagine, especially if you were suckered into buying this stock near the end of the January Effect. Wait until the beginning of March to get into BAC if you really want to, but even then you will still lose money, as the stock will continue its decline throughout the year (but your losses will be much lower than if you buy the stock today, for example).

In my opinion, BAC will try to test the $10 by mid-February, only to become a penny stock sometime this year. A BAC reverse split is imminent this year, for it is not in the interest of management to see the stock price drop lower than $5 for a long time. We all know though that reverse splits carry a curse: any stock that is reverse splitted once will be reverse splitted forever (or the company will just go bankrupt).

By the way, some investors claim that BAC will no longer exist by the end of the year. And I’m talking about investors who predicted the fall of very large financial institutions, long before anyone imagined that these institutions would actually fall.

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.