February 12, 2012 | In: Opinion

Are Banks a Ponzi Scheme?

We use them everyday – we deposit checks in them, we withdraw money from them, we transfer our salaries to them, they charge us outrageous interests and fees and we seem to be always grateful, regardless of how much they’re using us. They are called banks, and their job, apparently, is to facilitate our transactions and our day-to-day monetary activities – but we all know that they solely exist to suck the living blood out of us. The only people that are able to make money from the banks are those that don’t need them as much as the banks need them…

Banks have been in existence for more than 4,000 years now, which probably makes banking the second oldest profession in the world (and we all know what the first one is, don’t we?). Of course, there is no bank that is 4,000 years old, because, as we all know, banks come and go.

So, enough history and philosophy, and let’s get to the crust of the subject. Are banks a Ponzi scheme yes or no? Well, before answering a question, let’s explain what a Ponzi scheme is.

A Ponzi scheme is when you take money from someone, pretending that you are going to invest this money, and give that someone interest on his money every year (until he withdraws all his money). Now, of course, as a Ponzi schemer, you’re not really making money yourself from that person’s money, so, in 20 year years you’ll be out of money if you’re giving him 5% on his money every year (let’s assume that you’re not paying interest on interest to simplify calculations). But just when you thought that you will be caught in a maximum of 20 years (the number of years will be much less, realistically, because you’ll most likely living a lavish life by spending that poor man’s money), another sucker walks to you, and willingly gives you double the amount that the first person invested, in exchange for yearly interest on his money. And then, before you know it, the third sucker comes in with a bag full of money, and then the fourth sucker, and so forth… At one point you’ll be having a steady flow of suckers putting money in and financing all the so called investments of the previous suckers, and, at the same time, guaranteeing you a life full of, you know, life!

Now, all of a sudden, an important media outlet (funded by a rival Ponzi schemer), releases information about your business, and correctly describes your business as a scam. All of a sudden, many of those suckers that invested their monies with you want their investments back. You start giving money back to your “investors”, and then you realize that you’re almost out of money. So you appear TV and reassure everyone that everything’s under control and that all the money is safe, and that everyone is welcome to withdraw his investment but there is no need to, as, again, everything is under control. To your surprise people keep flooding and continue withdrawing their investments. And then you’ll reach the point where you don’t have any money to give, and so you declare bankruptcy, blaming the bad economy, bad investments, and, of course, mismanagement. You fire all your employees, you hide behind chapter 11, and you start “restructuring” (or, in other words, launching another Ponzi scheme).

Now that we know what a Ponzi scheme is, let’s try to find out whether banks run a Ponzi scheme or not… Here’s what we know about banks:

  • They take the money from you and give you an interest on your money (same thing with a Ponzi scheme, although their interest tends to increase with time).
  • Your money is split into three parts: one part to fund your interest, one part to fund loans to other people (at small interest rates at first, but their interest rates on their owing loans tend to increase with time), and one part to fund their stockholders’, as well as their own’s pockets… (also same thing as a Ponzi scheme, with the exception of the loans that are given to other people).
  • They incur too much overhead, such as employee and other operations expenses, bad investments, bad loans, etc… that they will lose all the money that they make from their loans. Which is worse than the average Ponzi scheme, as the overhead of a Ponzi scheme is much smaller than a bank’s overhead.
  • They can invest with more money than they own. Banks have access to money much beyond their current assets in order to make investments and pay other people. In other words, banks can literally create money out of thin air. That money, however, remains in thin air, and this is how a bank is potentially much more dangerous than a Ponzi scheme.

Now, as you can see from the above, banks may be a Ponzi scheme, but an organized and legalized one that is. But, I can’t generalize, there are some banks that are solid, that are actually making profits, and that have low external debt (due to bad investments), and that have a ow amount of bad debt. So, now that we know that there are some banks that are a Ponzi scheme and some that are not, how can we tell one which ones are Ponzis?

Well, one way to tell is to wait until a massive withdrawal happens at that bank (because of bad publicity, for example), and then see if the bank goes bankrupt when the amount of withdrawals reaches a point that is sharply less than the total amount of invested money (the money that people put in that bank) minus the amount of loans. This means that the bank is not able to sustain its business, which means that this bank is just a Ponzi scheme.

Again, there are some banks that employ a Ponzi scheme in order to attract more investors, but, most of these banks were eliminated in the 2008-2009 crisis/recession. There are some banks, however, that are solid – but we all know that no bank is here to stay (except, maybe, for the Monte dei Paschi di Siena bank). Banks existed for 4,000 years now and I can’t see no bank that is 1,000 years old, let alone 4,000 years.

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.

February 6, 2012 | In: Tutorial

How Can I Buy Apple Stock?

Now that Apple is the most valuable company in the world, there are many people who are not investors that want to invest in Apple. I know that for a fact because I receive many questions nowadays on this website with the same title over and over again: “How can I buy Apple stock?”

Now my first answer to those who ask me this question is the following: “You can’t buy Apple stock, you buy Apple shares. There is a difference between a stock and a share. A share is a portion in the company, a stock is an index on how much each share is worth”.

Now once I’ve clarified the difference between a stock and a share, and that what you really buy is Apple shares, and not Apple stock, I move on to explaining the whole process of buying Apple shares:

Step 1: Open an investor account

If you search on Google for the following term “trade stocks online”, you will find many, many companies offering this option. These companies will allow you to create an investor’s account (also known as a trader’s account) with them, and they will also let you connect your bank account to your investor’s account, so you can transfer money from your bank account to your investor’s account and vice versa. It’s important to go with a brokerage firm that is very trustworthy and that has a good brokerage history and that won’t charge you an arm and a leg for every trade that you make. Additionally, it’s important to deal with a brokerage firm that has a 1-800 number that you can call whenever you want assistance (you will need assistance if you’re a first time trader, trust me on this one).

Another way for opening an investor/trader account is just going to your bank and opening the account there. Banks are usually very, very happy for doing this for you because they will make a lot of money from you if you’re a frequent trader. Just call your bank or go to the nearest branch and ask for opening an account that you can use to trade stocks. You may be required to sign several documents (basically saying that you’re adhering to the terms, that you’re understanding the risks associated with trading stocks, that you will never ever blame the bank for your losses, etc…)

Now once you open an investor account, you will be given the following information:

  • The URL of the trading platform
  • Your username or account number
  • Your password

Step 2 – Transfer money to your investor’s account

Before doing anything, you will need to transfer money to you investor’s account, you can usually do this online by logging in to your bank account and moving money from any account that you have with your bank to your investor’s account. This process should be fairly simple and if you have any problem you should contact your bank (and not your broker) for help with this step. Keep in mind, however, that the money transfer might not be immediate (it might take a few days), especially if your broker is not your bank or is not an entity associated with your bank.

Step 3 – Login to your investor’s account

Using the credentials given to you in Step Number 1, you will be able to login to your trading platform. Note that when you login for the first time, you might be asked additional security questions or you might need to call a number to activate your account.

Step 4 – Accept all the terms

When you sign in for your investor’s account for the first time, you will be asked to digitally sign several documents – as far as I recall there will be one for the NYSE, one for the NASDAQ, one for the SEC, and one for the TSX (in case you’re trading Canadian stocks). This process might take you about 15 minutes to finish.

Step 5 – Start trading

After you accept all the terms, you are now are ready to buy shares of any company, not just Apple! But, you only want to buy Apple. But before you do that, try to accustom yourself with the trading platform. See what you can do – and don’t be scared of exploring, everything requires a confirmation!

Now that you’re accustomed to the web interface of your broker’s trading platform, you can execute your first trade. Just click on Trading, and then click on Equities (stocks are called equities). You will see a form where you will have to enter the symbol of the stock, for Apple you should choose AAPL (as soon as you enter the symbol the bid and ask price will appear), you will also have to enter the number of shares that you want to buy (you should choose an integer, the moment you type in a number the total cost of the trade will be displayed), and then you will have to choose buy next to order type (since you are buying AAPL). The form may also contain a field where you have to enter your phone number, and you will always have to enter your password (that you used to login to this website) to execute a trade.

Once all the information is filled, you will be able to see how much money (approximately – the price might change between the filling of the form and the filling of the order) including the commission you will have to pay for these Apple shares. Now click on submit. The moment you click on submit, your order will be executed and it’s pending to be filled. Since AAPL is a very, very liquid stock, your order will be filled almost immediately, provided you have enough money in your investor’s account to cover for the total cost of the trade. You can check if your order is filled by clicking on “Orders” or “Transactions” on the top menu (please note that the interface may substantially change from one broker to another). When you see that your order is filled, you can proudly say in front of your friends/family/significant other that you are now an investor in Apple.

Step 6 – Do nothing or buy extra shares

If you’re in it for the long term, then you don’t have to do anything anymore. You bought the shares and Apple’s fortune will be one with yours! The next thing to do would probably be buying more AAPL shares!

Now, if at one point you feel that you have some unmanageable debt, then you can sell your AAPL shares to settle that debt, instead of accruing interest.

How much time will the whole process of buying Apple shares for the first time take?

Normally, the process takes about 2 weeks, but I know of investors (including myself) who started trading 2 days after starting the process above. (I personally opened an investor’s account with the bank).

Some things to remember/caveats

  • The stock market is only open from 9:30 AM to 4:00 PM every weekday. The market is closed on weekends and holidays (but there are some ways to buy shares on weekends).
  • Be sure to choose the right stock symbol when filling in the form, you don’t want to be stuck with a stock that you didn’t mean to purchase.
  • Don’t wait a long time between filling in the form and submitting the form. If you do you might buy the stock at a completely different price.
  • You will rarely, if ever, buy the stock at an absolute bottom and sell it at an absolute top – don’t be greedy!
  • Apple is a very solid company, but it is currently facing competition from other manufacturers in the smartphone and the tablet area – keep an eye on Apple’s performance at all times.
  • Capital gains are taxable (when you sell shares and you make money out of the proceedings), but the taxation is different when it comes to capital gains. Here’s an article explaining how much taxes you should pay on your capital gains.
  • The stock market is an up and down game. Don’t let fear and greed control you.
  • As a shareholder in Apple, you will start receiving documents from Apple (the company), such as financial statements and board changes.

I have tried my best to explain from A to Z the process of buying Apple shares for those who have no previous trading experience whatsoever. I really hope this article will help someone, somewhere!

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.

This Friday, I have received a scary letter from CRA (Canada Revenue Agency, which is the equivalent of the IRS in the US). The letter is not copyrighted and that’s why I’ll publish it here. Please note that I will include the letter in full but I will not include the name of the person at the end of the letter (e.g. the person who sent me the letter), as well as my personal information (that goes without saying). Without further delay, here is the letter:

Dear Sir:

Re: Your 2010 income tax and benefit return

Canada’s tax system relies on voluntary compliance and self-assessment. The Canada Revenue Agency (CRA) provides Canadians with the information they need to meet their income tax obligations.

Our records show that you disposed of securities held outside a registered retirement savings plan account. You would likely have received monthly, quarterly, or annual statement(s) of your account(s) and/or Canada Revenue Agency T5008 Statement of Securities Transactions slip(s) detailing disposition(s).

The purpose of this letter is to provide information about calculating capital gains or losses that arise from dispositions of publicly-traded shares or mutual fund units. See Appendix A, attached, for information on capital gains or losses.

If you find that your capital gains or losses are accurate, you don’t have to do anything. However, if you find that some amounts were incorrect or missing, you should ask the CRA for an adjustment within 30 days of the date of this letter.

To request an adjustment, complete Form T1-ADJ, T1 Adjustment Request, available at www.cra.gc.ca/forms or by calling 1-800-959-221. Instructions for completing form T1-ADJ are on page 2 of the form. You can also make changes to your returns online at www.cra.gc.ca/myaccount. You will need to log in and follow the steps.

More information about the CRA, such as the Voluntary Disclosure Program and available payment options, can be found at www.cra.gc.ca or by calling our individual income tax enquiries line at 1-800-959-8281. You can also consult our web page developed for this letter at www.cra.gc.ca/audit.

Thank you for your cooperation.

Note: The remaining pages of the letter explain how to calculate capital gains/losses on the tax return, which I will explain on this article myself. However, I think it’s worthy to mention this line from the Appendix A mentioned above:

If you do not report capital gains on Schedule 3, the CRA may take a second closer look at your tax return because brokerage and fund companies send us an electronic copy of all their T5008 slips.

In case you were not able to understand what the above statement means, let me explain it to you. CRA knows about every single trade that you make because all brokerage companies you deal with send them all the information they have about your trades. In other words, the CRA people already know how much you owe them even if you don’t report this information, they’re just giving you the benefit of the doubt though…

I went through several mood swings when I read the letter:

1 – Fear: I felt very afraid when I first opened the letter. I thought that I made a mistake in my tax return for 2010 and that the CRA discovered that mistake. Obviously the letter is related to my stock trading activities back in 2010 which I was sure I reported properly, but still, there’s always the chance that I might have missed something. I searched my (physical) documents for my 2010 tax return, and I found the documents sent to me by BMO (The Bank of Montreal) Investorline at the end of the year. There was a trading summary (listing every trade I made back in 2010, grouped by stock name), and there was another form, which was investment form summary (none of them looked like an official document that might be needed to report taxes), and the final document was called a T5 form, which was an official document and which I have already included in my tax return (it contained my Interest from Canadian sources in box number 13 (all Canadians know what boxes mean in the tax return). Now that I am sure that I have reported my capital gains in my tax return, my mood changed to…

2 – Relaxation: I became more relaxed once I knew that I’ve reported my capital gains on my tax return. And what gave me more comfort is the statement “if you find that your capital gains are accurate…”. Obviously, that was a generic letter sent to anyone who did stock trading in the year before. And because 2010 was my first year of stock trading, it was natural that I would receive such a letter at this time… At that point, I felt there was no need for me to worry and I can now go to sleep. And so I did, but the moment I have closed my eyes I moved to the next stage which is…

3 – Anxiety: I started thinking, why would CRA send me such a document? Is it really generic and is it really sent to anyone who did stock trading? And how come they mentioned the dreadful word audit in their letter. So I left the bed, and I re-read the document, as well as the attached form on how to report taxes on capital gains (or losses). It turns out that I have to report every disposition of shares that lead to capital gains (or losses) after accounting for the different broker fees (such as commission fees). Apparently, the bank should have sent me a form called T5008 (which I haven’t received) that contained all these numbers in organized format (so that I won’t have to do anything). At this point my mood changed to…

4 – Anger: I know that it’s my responsibility to report any income on my taxes, but I have expected the bank to facilitate the work on my behalf and provide me with the appropriate tax statements (with the appropriate boxes filled in). What the bank has provided me was literally 6 pages of small-font characters and numbers. These 6 pages contained all the trades that I made, the date that I made these trades on, the number/quantity of shares that I bought, my average fill price, and the total cost/disposition resulting from that trade. All the trades were grouped by the stock name. On the other hand, CRA wants all the trades that resulted from the disposition of shares, the average cost (or book price) per share, the number of shares disposed of, and the gain/loss resulting from the disposition of these shares. The information that the bank gave me can give me the information that the CRA need, but it does take a lot of time to do all the calculation by myself. I felt and I still feel very angry at the bank for not providing me with the information in the exact format that CRA needs. Is it that hard for them to develop a program that will calculate the average buy price (including the commission fees) of a stock, the number of shares that I have disposed of for that particular stock, the proceeds from the settlement of that disposition, and the capital gain/loss from that disposition?

Now, after the above rant, let me explain to how to report capital gains on your tax return:

  • Calculate your average cost per share (the so called “adjusted cost base per share”) the following way: Multiply the quantity of shares that you have bought for a particular stock by the average fill price of that quantity, and then divide the result by the total quantity. Let’s assume that you have done the following buy trades back in 2010 (note that all banks calculate-in your commission fees in the price/share):
    • Bought 20 shares of AAPL at $250/share.
    • Bought 20 shares of AAPL at $260/share.
    • Bought 20 shares of AAPL at $300/share.

    The “adjusted cost base per share” would be ((20x$250) + (20x$260) + (20x$300))/ 60 = ($5,000 + $5,200 + $6,000)/60 = $270. The formula is: ACB/share = (Σ (Total Cost of shares) + Σ (Total Commissions/Fees))/ Σ (Total Number of Shares). (Note that the formula is more complicated if you owned and partially sold shares of the same stock in previous years(s)).

  • Calculate your adjusted cost base. Let’s say that you have sold 40 shares of AAPL. Your adjusted cost base will be 40 x $270 = $10,800.
  • Calculate your capital gains. Let’s say that your 40 shares of AAPL had total proceeds of $11,280. This means that your capital gain resulting from the proceeds of this trade is: Total Proceeds – Adjusted Cost Base (ACB) = $11,280 – $10,800 = $480.
  • Go to line 132 of your schedule 3 form. Column 2 should contain the proceeds of your disposition (or $11,280), column 3 should contain your adjusted cost base ($10,800), and column 4 should contain commissions/fees that you incurred when selling your shares (this should be zero since all banks already factor-in the commissions and fees), and finally column 5 should contain your capital gains (or losses), which is $480 in our example above.

Now since I didn’t report my capital gains by following the above steps, I have to pay the penalty (for some reason I remember that episode where Daffy Duck was a host in a show called “Truth or Aaaaaa”. In that show every time the contester made a mistake, Daffy Duck used to tell him “I’m sorry, but you have to pay the penalty”. I think that episode was called The Ducksters). According to CRA, the penalty is 5%+ 1%/month which makes it about 17%. I don’t know if they have the heart to make me pay it or not yet (although I suspect they do). I’ll keep you updated…

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.

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.

January 30, 2012 | In: General

Why Is Insider Trading Illegal?

“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:

Rank Company Name Market Cap Stock Symbol Stock Price
1 Exxon Mobil Corporation 418.2B XOM 87.2415
2 Apple Inc. 413.4B AAPL 444.79
3 PetroChina Company 277.3B PTR 148.29
4 China Southern Airlines 267.8B ZNH 27.36
5 Hitachi, Ltd. 253.6B HIT 56.14
6 Microsoft Corporation 247.9B MSFT 29.54
7 GlaxoSmithKline 226.1B GSK 45.49
8 IBM 221.9B IBM 191.33
9 BHP Billiton Limited 215.6B BHP 81.02
10 Chevron Corporation 213.8B CVX 107.365
11 Wal-Mart Stores 209.3B WMT 61.11
12 Petroleo Brasileiro SA 205.3B PBR 31.47
13 General Electric 202.1B GE 19.1302
14 China Mobile Limited 201.1B CHL 50.11
15 Berkshire Hathaway 197.3B BRK-A 119300.00
16 Petroleo Brasileiro SA 189.5B PBR-A 29.06
17 Google Inc. 185.0B GOOG 570.59
18 BHP Billiton plc 183.1B BBL 68.79
19 Johnson & Johnson 179.6B JNJ 65.723
20 Procter & Gamble 179.1B PG 65.09
21 AT&T Inc. 175.1B T 29.5558
22 Pfizer, Inc. 166.0B PFE 21.60
23 Wells Fargo 155.2B WFC 29.49
24 Coca-Cola Company 154.5B KO 68.04
25 HSBC Holdings 152.6B HBC 42.36
26 JP Morgan Chase 142.6B JPM 37.51
27 Oracle Corporation 142.4B ORCL 28.325
28 BP p.l.c. 142.0B BP 44.95
29 Vodafone Group 140.5B VOD 27.48
30 Intel Corporation 135.7B INTC 26.78
31 Novartis AG 133.0B NVS 54.99
32 Total S.A. 120.1B TOT 53.30
33 Merck & Company 118.2B MRK 38.7858
34 Rio Tinto Plc 117.7B RIO 61.08
35 Toyota Motor Corporation 116.8B TM 74.517
36 Cmp. de Bebidas das Americas 116.0B ABV 37.229
37 Cisco Systems, Inc. 106.2B CSCO 19.76
38 Verizon Communications 106.2B VZ 37.5107
39 Pepsico, Inc. 104.1B PEP 66.58
40 Schlumberger Limited 102.2B SLB 76.38
41 Ecopetrol S.A 101.5B EC 50.14
42 China Petroleum & Chemical 101.5B SNP 117.32
43 McDonald’s Corporation 101.2B MCD 98.95
44 Anheuser-Busch 99.432B BUD 62.37
45 Sanofi SA 99.429B SNY 37.04
46 QUALCOMM Incorporated 97.917B QCOM 58.25
47 Unilever NV 94.306B UN 33.50
48 ConocoPhillips 92.450B COP 69.63
49 America Movil, S. 92.226B AMX 23.8101
50 America Movil 92.022B AMOV 23.7576
51 Unilever PLC 91.885B UL 32.6399
52 CNOOC Limited 91.192B CEO 204.15
53 Citigroup, Inc. 89.188B C 30.503
54 Amazon.com, Inc. 87.890B AMZN 193.27
55 AngloGold Ashanti 87.457B AU 45.27
56 Abbott Laboratories 85.398B ABT 54.82
57 China Life Insurance 85.241B LFC 44.29
58 Siemens AG 84.522B SI 96.679
59 Ing Groep NV 82.689B INZ 21.85
60 Occidental Petroleum 81.934B OXY 100.93
61 Statoil ASA 81.662B STO 25.665
62 ING Group 80.910B IND 21.38
63 ENI S.p.A. 80.788B E 44.73
64 Telefonica SA 79.160B TEF 17.5598
65 Bank of America 77.386B BAC 7.345
66 Royal Bank Of Canada 76.138B RY 52.8984
67 Taiwan Semiconductor 74.322B TSM 14.34
68 Banco Santander 73.953B STD 8.15
69 United Parcel Service 73.175B UPS 75.83
70 Caterpillar, Inc. 72.454B CAT 112.05
71 Banco Bradesco 71.852B BBD 18.82
72 ING Groep NV 71.752B ISP 18.96
73 Comcast Corporation 71.691B CMCSA 26.31
74 ING Group, N.V. 71.177B ISG 18.808
75 SAP AG ADS 71.028B SAP 59.705
76 Walt Disney Company 70.944B DIS 39.49
77 United Technologies 70.444B UTX 77.745
78 Toronto Dominion Bank 70.125B TD 77.83
79 Visa Inc. 69.748B V 101.41
80 Comcast Corporation 69.129B CMCSK 25.37
81 Home Depot, Inc. 68.893B HD 44.69
82 Westpac Banking 68.668B WBK 113.80
83 Kraft Foods Inc. 68.338B KFT 38.68
84 Novo Nordisk A/S 67.513B NVO 119.81
85 Astrazeneca PLC 63.865B AZN 48.019
86 Nippon Telegraph 63.862B NTT 25.23
87 Honda Motor Company 63.081B HMC 35.00
88 3M Company 61.464B MMM 87.70
89 Amgen Inc. 59.890B AMGN 68.325
90 Altria Group, Inc 58.885B MO 28.6685
91 American Express 58.491B AXP 50.25
92 Bank Nova Scotia 57.654B BNS 52.94
93 Goldman Sachs Group 56.767B GS 109.95
94 Boeing Company 56.018B BA 75.37
95 Kubota Corporation 55.914B KUB 44.52
96 Hewlett-Packard Company 55.910B HPQ 28.18
97 Diageo plc 55.522B DEO 89.12
98 Bristol-Myers Squibb 55.394B BMY 32.69
99 Union Pacific 55.026B UNP 114.47
100 CVS Caremark 54.786B CVS 42.09

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.