While explaining the wonderful world of stock trading to one of my friends, he asked me the following question, what is the difference between a stock broker and a stock trader. My answer was “Just Google it!”. And he did, and then he came back to me, and told me that he read the answer to his question on several websites, and each website had a different answer for him.

I checked, and to my surprise, he was right, and what was even more surprising was that not a single website was accurate in differentiating between the two.

One website stated that both stock traders and stock brokers need to be licensed by FINRA (Financial Industry Regulatory Authority) which is wrong. A stock trader doesn’t have to be licensed at all, only the stock broker has to be licensed.

Another website stated that a stock broker is always envious of a stock trader, and it would be an insult to call a stock trader a stock broker (the former will be insulted, apparently) – again – this is wrong. The same website also stated that a stock broker cannot be a trader, but the reverse can be true (so a trader can be a stock broker at the same time), which doesn’t make any sense.

It’s amazing the amount of filth and misleading information you can find on the Internet these days. I wish that Google develops an algorithm that is able to distinguish between right content and wrong content.

In any case, here is a list of all the differences between the two:

  • A stock broker is someone whose job is to recommend and trade stocks on behalf of other people, a stock trader is someone who trades stocks for himself (anyone buying and selling equities/options with his own money is a stock trader).
  • A stock broker does not take any personal risks when trading stocks1 (he’s trading with other people’s money, and if he loses some of their money, then it’s too bad for them), a stock trader carries personal risk when trading stocks, because he’s trading with his own money.

  • A stock broker needs to have an educational background in finance or similar majors (for example, a university degree in finance), a stock trader doesn’t need an educational background at all.

  • A stock broker has to be licensed by the respective authority in his country, a stock trader doesn’t need to be licensed.

  • A stock broker works at an investment firm, a stock trader can work anywhere (he can even be unemployed).

  • A stock broker can trade stocks for himself, which makes him a stock trader. A stock trader, on the other hand, cannot become a stock broker unless he satisfies the educational and the licensing requirements.

I hope my post above clarified the real differences between a stock broker and a stock trader.

1Note that it’s possible for the stock broker to be sued by his clients if he loses a lot of their money.

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.

As a stock trader, you must have read the term “Book Value” at one point or the other. The book value of a stock is simply how much the stock of a company is worth purely from an accounting perspective, and thus, when a stock is trading below its book value, it is a sign that the stock is undervalued.

Now how do you calculate the book value of a stock? Well, here’s the formula:

Book Value of a Stock = (Total Assets of the Company – Total Liabilities of the Company)/(Total Number of Common Shares)

So, let’s assume that a company with stock symbol XYZ has a total assets of $2 billion, total liabilities of $1 billion, and 100 million public shares, let’s calculate it’s book value…

Book Value(XYZ) = ($2,000,000,000 – $1,000,000,000)/100,000,000 = ($1,000,000,000/100,000,000) = $10

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.

Usually, whenever I talk to someone (who doesn’t trade stocks and who hasn’t traded stocks in his life) and he discovers that I trade stocks, he expresses to me that he thinks that stock trading is fun (well, it is fun, but not if you’re losing money) and that he always wanted to be a stock trader. So we discuss stock trading in general, and then he asks me how do I trade stocks, and I answer that I trade stocks online, and then asks me this question: “Do I need a license to trade stocks online?”

It’s amazing how many people have asked me this question so far, but it seems that many (yes many) potential investors out there are reluctant to enter the exciting world of stock trading because they think that stock trading (online) requires a license. So, let me answer this in a very short and sweet way: No, you don’t need a license to trade online.

Now let’s examine why some people think that they need a license…

Apparently, most people see stock trading from the perspective of “Wall Street” (the movie) and they think that to trade stocks they need to wear a badge, hold some papers and yell at each other, and that they must be on the trading floor. Now when they know that nowadays one can trade stocks online, they think that the person must have a license in order to do so, because of all the formalities they saw in the movie. Now, what they don’t know is that the movie is about stock brokers, and stock brokers need to be licensed. Stock brokers invest money for investors (such as yourself) in the stock market, and they recommend buying or selling certain stocks. A stock trader is different than a stock broker, and people who trade online are stock traders. Stock traders don’t need a license.

But what if you’re trading with millions of dollars, do you still need a license?

The answer is, again, no. Even if you’re trading with billions of dollars, and even if you’re doing thousands of trades per day, and as long as you’re doing the trading for yourself and not (officially) for other people, you don’t need a license to trade online.

But shouldn’t the regulator require stock traders to earn a license?

The answer to this question is highly subjective… If you want my opinion, I think the market is already overly regulated and it doesn’t need more regulations. Stock traders are people who use their money to trade stocks and who are taking all the risk themselves. On the other hand, one can think that some stock traders can be very abusive of the system (and thus stock traders need to be licensed), but again, that abuse is handled by different regulations and has nothing to do with whether the stock trader has a license or not.

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.

November 28, 2011 | In: General

What Is a Lockup Period?

A friend asked me the other day: “What is a lockup period?” He told me that he heard of the term lockup period while reading an article about the LinkedIn IPO.

I thought I write an article to explain, in details, what is a lockup period.

Definition of the lockup period

A lockup period is a specific period of time immediately after the IPO (Initial Public Offering) during which insiders and associates of the company are prohibited to sell their shares in the company. These people are only allowed to sell their shares when the lockup period ends.

How long is the lockup period?

The lockup period varies from one company to the other, but typically it’s 6 months (180 days). So, if the IPO is set to be on January 1st, 2012 then insiders and company’s associates cannot sell their shares until June 29th, 2012 (180 days are a little less than 6 months). The lockup period can be as low as 3 months (90 days) and as long as a few years. The longer the lockup period, the more trustworthy (in my opinion) the company is.

Why is there a lockup period?

Imagine you are one of the co-founders of LinkedIn and you own something like 20% of LinkedIn. The day that LinkedIn was listed, you expected the stock to be trading at $5 (which is still 10 times the stock’s worth) but rather it touched $120. What you do is you get out of the game and you sell all your shares immediately, substantially lowering the price of the share after your sale, and making other investors lose a lot of money.

Now imagine that you are one of the co-founders of Dang, a company that is an Amazon clone in China. You knew Dang wasn’t worth $30 on the first day of trading, and you could have sold your shares then, but you had to wait for 6 months to do that. Note that Dang is now trading at $4.62, which his very close to the price I thought that the stock was worth when I wrote about it before.

In short, a lockup period exists to prevent owners and other insiders/associates from scamming investors by selling their shares (which they gave to themselves prior to the IPO) on the first few days of trading (it is a know fact that most stocks pop in the first few days of trading).

Who enforces the lockup period?

The lockup period is enforced by the market regulator (the SEC in the case of the American markets). Note that trades done by insiders are public and are published on the stock’s fact sheet (that exists on Yahoo finance, for example).

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.

November 18, 2011 | In: Opinion

Will Apple Stock Split?

I have correctly predicted that IRE will reverse split three months before it did (by the way, I think that for IRE another reverse split will happen or even a complete delisting from the stock market – at least the US market), so this time I will discuss AAPL, to see whether it’ll split or not.

As I’ve already pointed out before, a split is most likely to happen when the stock becomes very expensive, which is the case of Apple. It is currently one of the top 10 most expensive stocks (Note: This list is now a bit outdated, but you can have a clear idea where AAPL stands).

So, technically, AAPL is splittable, at least 10:1 (10 stocks in the new system will be equivalent to 1 stock in the old system), and for the past year or so, there were many rumors claiming an imminent split for the Apple stock.

But let’s look at the split from the eyes of Apple’s executives:

  • They know that the current bullish trend is not sustainable, especially with all the competition jumping in to clone their pads and their smart phones (which are not that smart anymore when compared to the latest Android models).
  • AAPL, as a stock, has already a huge daily volume (about 19 million shares traded every day), so, splitting the stock just to allow smaller investors to buy Apple stocks is not a valid point.

  • It is a prestige for AAPL to remain in the top 10 most expensive stocks. By splitting the stock, Apple will lose the prestige and it may take a while (a long while) to regain it (if it’s ever to regain it).

  • Splitting the stock will create extra administrative work on Apple as a company (especially its finance/accounting divisions), and will confuse investors for some time.

  • It is not the time to split stocks, especially in this very, very volatile market (Apple has crossed the $400 price barrier several times before, and then it retreated below that number).

  • GOOG did not split (and Google doesn’t seem to have any plan to split it in the foreseeable future), so why should AAPL split?

As you can see from the above, and from Apple’s executives perspective, there are no benefits whatsoever from splitting the stock. In fact, splitting now may cause more harm than good.

So, as a conclusion, Apple will not split, at least not in the next few years. It just doesn’t have to and it doesn’t want to!

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.

November 17, 2011 | In: General

Stock Market Best Kept Secrets

Like any other profession, trading in the stock market has its best kept secrets that will make you money. Here they are:

  • The January Effect: Rare are those who know about the January Effect, when stocks go down in December and then go up until mid February (see the best time to buy stocks).
  • The commodities yo-yo: Unlike what many investors think, commodities ETFs are the best and the safest way to make money in the stock market, this is because commodities experience cycles all the time: They go up and then they go down and they go up… If you don’t believe this, look at oil and gold ETF stocks. Note that I have discussed how you can take advantage of this yo-yo in my article about HOU and HOD.

  • Sure shorts: There are many sure shorts out there, including, but not limited to NFLX, YHOO, RIMM. We all know that the future of these companies is very dim, and they are already trading at a much higher price than the one they should be currently trading at. Take advantage of them and short them.

  • The 2012 curse for bank stocks: Is the recession over? Apparently not, and Europe has now caught the virus: Financial experts all over Europe are sure that next year will be a recession and there will be lots of defaults in the European banks. What does that mean? That means smart investors are avoiding bank stocks and smarter investors are shorting them!

  • The hammered stocks and the sure rebound: A hammered stock is ultimately set for a rebound if it has been hammered for the wrong reasons and yet its company’s fundamentals are great. Buy it and wait for it to make you rich!

  • The married puts: Married puts are one of the most practiced “secrets” that smart investors take advantage of in order to protect their investments in the stock market.

  • Contrarian investing: When everyone is telling you to jump in, get out. This is the time when the market decision makers are selling, and they want to sell at the highest price. Alternatively, when everyone is saying to avoid a stock like the plague, then jump in, this is the time when the big players want to buy! Be sure to apply these rules only in commodities ETFs (oil and gold).

  • A confident you: Last, but not least, the best kept secret in the stock market is your confidence. You should be confident in your stock picking skills (you’ve done your research back when you bought the stock, didn’t you?). You shouldn’t be afraid. Leave fear, greed for other investors and always be patient and confident.

  • 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.

If you don’t have time to read the rest of the article then here’s the answer: “The best time to invest in the stock market is the middle of December of any year”.

Now, let me explain to you if you have the time to read on…

There are many small and casual investors that lose money on their stock investments. One thing that they can do to diminish their losses is to sell their stocks and then claim their loss in the stock market as a “capital loss” in their tax statement. Now, when do these investors sell their stocks? Well, for the majority, they start selling their stocks near the end of they year (they cling to hope until the very last moment). By the end of December, every one of these investors would have already sold his losing shares. So this means that, around that time, the underperforming stocks (the stocks that these investors lost money in) will reach a bottom.

Now, once the taxation year ends (which is the same as the end of the Gregorian year for most of us), these small investors start re-buying the shares they have sold in December. The buy transactions usually happen from January until mid February.

This phenomenon (investors selling their losing shares in December and buying them back in January-February) is called the January Effect.

As you can see from the above, the January effect provides investors with the best buying and selling opportunities. Buy in the middle of December at low prices (when everyone is selling and prices are at bottom) and sell near the end of January/beginning of February (when the buying spree is almost over and prices are very high).

It’s amazing to see that this trick works all the time, and yet very few investors take advantage of it…

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.

November 14, 2011 | In: Opinion

Will Nintendo Go Bankrupt?

I used to love Nintendo. I remember I had a few Nintendo games when I was a kid (you know, these games that consisted of two screens, such as “Donkey Kong”, “Green House”, “Mickey and Donald”, “Octopus” – now I remember, these games were called “Game and Watch”).

Back in 2009, I bought a Nintendo DS and played New Super Mario Bros. I used to play it for only 15-20 minutes a day and that was it. I loved it for a few months, and I then put it back in its box where it’s now gathering dust.

I then bought a Wii back in April of 2010, I knew it was fun but I didn’t have the chance to play it. Of course, the graphics were not great but the gameplay with Nintendo games is always memorable and fun because of the simplicity and because Nintendo’s main philosophy behind games is that they should be entertaining, non-addictive, and non-stressful. Needless to say, the Wii is in another box at the moment, also gathering dust.

Now a couple of weeks ago, I installed angry birds on an Android powered phone, and then I knew were the hype about this game is coming from. It is so fun, and yet each level can take a maximum of 5 minutes, and it is playable on your mobile phone, something that you carry with you all the time. I don’t think that everyone out there can say the same thing about the Nintendo DS. I think you got my point, why buy a Nintendo DS when you have a smartphone?

Of course, some would say that little kids don’t carry smartphones, but even if that is 100% true, then in my opinion, Nintendo has now lost at least 90% of the adult portable gaming market to smartphones.

Additionally, every Nintendo game sells for at least $29.99. Angry birds (I have no idea why I keep writing Angree all the time before correcting it to Angry), which is by far the best game on a smartphone, is free. Additionally, the maximum amount that you pay for any Android game is $5, and there are so many free games out there.

I think it’s obvious that at best, the future of the Nintendo DS or DSi is grim at the very best. It’s only a matter of time before Nintendo gets out of the mobile gaming market (it’s sad because Nintendo stayed there for decades).

Which leaves Nintendo with the Wii, but isn’t the Wii now so passée? For kids, it’s no longer cool to own a Wii, and for adults, there’s no point of owning it in the first place (games of the same caliber and with better graphics can be even played on a smartphone). I’m not saying that no one is buying a Wii anymore, but all the technology that made the Wii so hot was borrowed by both the XBOX 360 and the PS3.

Does the stock market reflect my sentiment and my thoughts about Nintendo? Let’s see!

Nintendo’s stock for the last 5 years (courtesy of Google Finance)

Above is Nintendo’s stock over the last 5 years, you can see that it reached a top of just over JPY 70,000 (or $907) back in November of 2007, but it is now trading at only JPY 12,500 (or $162), at just a fraction of the peak price, and even at this price, Nintendo is trading at a forward P/E ratio of 170, which means that it’ll take Nintendo 170 years to buy back its stock from the market based on its current earnings. But will Nintendo exist in 10 years from now (let alone 170 years)?

I am saddened to say this, but Nintendo, as a company will go bankrupt sooner or later, and its stock should be a penny stock. If you have shares in this company that has no future, just get out, because Nintendo will go out of business, it is simply a matter of time, and there’s nothing, absolutely nothing that anyone can do to save the company (besides changing the whole vision and the array of products that the company has).

November 11, 2011 | In: General

Stocks To Own in a Recession

I have traded many stocks throughout the years, and I have to realize that some stocks are just resilient to a recession. In no order of importance, here are these stocks:

  • MCD: McDonald’s is the best stock for a recession. Think about it this way, when there is a recession, the middle class becomes poorer, which means that the middle class will no longer go to fancy restaurants during the lunch break, but rather have a quick bite at McDonald’s for a few dollars (and you don’t have to tip anyone there). MCD is even paying more dividends at the moment. Note: I have written about MCD before.
  • AAPL: Apple is a company that proved to be very resilient to the recession. The stock has quadrupled since it reached a bottom back in 2008, and it has tripled since 2007 (before even the recession hit the US). Imagine what will this stock do when the world gets out of the recession. Will it reach $1,000?

  • INTC: Intel is one of the most ignored, yet most powerful stocks out there. If you look at the 5 year chart, you can see that Intel is now trading at a price that is very close to the pre-recession level, which means that Intel is now a resilient stock. Intel’s future is bright and, unlike many listed companies, it is here to stay. INTC P/E ratio of 10 makes it very attractive, and makes INTC, at the current moment, an undervalued stock (see how to know if a stock is undervalued). Also keep in mind that Intel is buying back its shares from the market like crazy!

  • WMT: I have never traded Walmart before, but this is a very solid stock. Walmart has the same important characteristic as McDonald’s, it is a place where the middle class would go to when they become poorer to buy clothes and other consumer products. Walmart has no unions whatsoever in the US, which makes it invulnerable to be blackmailed by the unions.

  • PFE: Pfizer is one of the most important pharmaceutical company out there. People will always need Pfizer products (Pfizer produces the most important drugs on this planet). Pfizer was briefly affected by the recession, but it has now regained its pre-recession price.

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.

Every investor wants to invest in a stock that is undervalued, because every investor knows that an undervalued stock will pop at one point. But how can we know that a stock is really undervalued, are there some signs?

Well, there are several signs that tell us if a stock is undervalued or not, some are measurable metrics, others are non-measurable signs.

Measurable Metrics That a Stock Is Undervalued

  • Low P/E ratio with respect to the company’s industry: It is not wise to say that a stock with a low P/E ratio is a good stock (in fact, the stock with the lowest P/E is one of the worst performers on the stock market), and while it’s true that the P/E ratio is not that relevant anymore in evaluating a stock, it is still worth a look, here’s how: Just take a look at the P/E ratio of the stock, and compare it to the P/E ratio of similar companies in the same industry. If the P/E ratio is low, then it is possible to take this as a sign that the stock may be undervalued.
  • Low price per book value: The book value is the price that the company thinks its stock is worth after considering all its assets and liabilities. For example, Bank of America has a book value $20.80, while it’s current price is $6.16. This means that the price per book value is 0.29 (6.16/20.80), which is very low. A price per book value lower than 1 means that the stock is currently trading lower than what its company believes its worth. (Note: Here’s a list of high volume stocks trading below their book values).

    Low price per free cash flow ratio: The free cash flow is the money that a company generates (per share) after taking into consideration the different expenses. The higher the free cash flow the better the stance of the company is (and, consequently, its stock). The stock price per free cash flow is just the division of the stock price by the free cash flow, which means that the lower it is (since we are dividing by the free cash flow which should be high for the stock to be undervalued), the more undervalued the stock is.

Now that we have examined the measurable metrics that will tell us if a stock is undervalued, let’s check non-measurable signs.

Non-Measurable Signs That a Stock Is Undervalued

  • Strong fundamentals but poor stock: Imagine, for a moment, that Apple is performing badly, yet we know how good Apple is doing and how good it will do in the future (provided they keep the momentum). When you know for sure that a company is doing badly in the stock market, but performing well in the actual market (selling many products, excelling at customer satisfaction, etc…) then it’s a sure sign that its stock is undervalued (probably some investors decided to punish it). Although the saying “Buy the rumor, sell the news” is very valid in the stock market, it never lasts, and only the fundamentals of the stock and the company prevail.
  • Great industry: We all know that currently one of the hottest industries is the technology industry, and the hottest niche is the pads (many analysts believe that there will be more pads sold than computers within the next few years). So, if a company’s main business is in that industry, and the company is not performing well, then the stock may be undervalued.

  • Low evaluation when compared to peers: A great way to assess a stock is to compare it to its peers (a company of a similar size in the same industry doing the same business); if the stock is performing badly with respect to its peers, then the stock may be undervalued. I have written about this before when comparing RIG to NE.

  • Insiders are buying the stock: It’s a fact that insiders know more about their own company (and its stock) than the rest of the world, which means that, most of the times, they buy when they think the stock is worth buying. If you see insiders buying, then you can take this as a sign that the stock is undervalued.

Now if you want to measure how undervalued a stock is, then just add 1 for every criteria in the above list that the stock matches. The higher the total number is, the more undervalued the stock is. For example, if a stock is in a great industry (+1) and has a low P/E ratio (+1) and its company has strong fundamentals (+1), then this means that the undervaluation score is 3/6, which is not bad. A score of 7/7 means that the stock is definitely undervalued.

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.