High-Powered Investing All-in-One For Dummies

747 Pages·2013·15.88 MB·english

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High-Powered
Investing
ALL-IN-ONE
2nd Edition
by Jason W. Best; Amine Bouchentouf;
Zak Cassady-Dorion; Brian Dolan;
Joe Duarte, MD; Janet Haley;
Faleel Jamaldeen, DBA; Ann C. Logue, MBA;
Paul Mladjenovic; Sherwood Neiss; Optionetics;
Kerry Pechter; Barbara Rockefeller;
Peter J. Sander, MBA; and Russell Wild, MBA
High-Powered Investing All-in-One For Dummies®, 2nd Edition
Published by:
John Wiley & Sons, Inc.,
111 River Street,
Hoboken, NJ 07030-5774,
www.wiley.com
Copyright © 2014 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permit-
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sion of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions
Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone],
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Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book.
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Library of Congress Control Number: 2013952424
ISBN 978-1-118-72467-4 (pbk); ISBN 978-1-118-75599-0 (ebk); ISBN 978-1-118-75613-3 (ebk)
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents at a Glance
Introduction ................................................................ 1
Book I: Getting Started with High-Powered Investing ..... 5
Chapter 1: What Every Investor Should Know ...............................................................7
Chapter 2: Playing the Market: Stocks and Bonds .......................................................21
Chapter 3: Getting to Know Mutual Funds and ETFs ..................................................47
Chapter 4: All about Annuities .......................................................................................73
Book II: Futures and Options ...................................... 87
Chapter 1: Futures and Options Fundamentals ...........................................................89
Chapter 2: Being a Savvy Futures and Options Trader .............................................107
Chapter 3: Basic Trading Strategies ............................................................................121
Chapter 4: Advanced Speculation Strategies .............................................................135
Book III: Commodities .............................................. 155
Chapter 1: Getting an Overview of Commodities ......................................................157
Chapter 2: Adding Commodities to Your Portfolio ...................................................171
Chapter 3: The Power House: Making Money in Energy ...........................................183
Chapter 4: Pedal to the Metal: Investing in Metals ....................................................203
Chapter 5: Down on the Farm: Trading Agricultural Products ................................219
Book IV: Foreign Currency Trading ............................ 231
Chapter 1: Your Forex Need-to-Know Guide ..............................................................233
Chapter 2: Major and Minor Currency Pairs ..............................................................255
Chapter 3: Gathering and Interpreting Economic Data.............................................279
Chapter 4: Advice for Successful Forex Trading ........................................................293
Chapter 5: Putting Your Trading Plan in Action ........................................................305
Book V: Hedge Funds ............................................... 319
Chapter 1: Getting the 411 on Hedge Funds ...............................................................321
Chapter 2: Taking the Plunge with Hedge Funds .......................................................337
Chapter 3: A Potpourri of Hedge Fund Strategies......................................................353
Chapter 4: Evaluating Hedge Fund Performance .......................................................373
Book VI: Emerging Markets ...................................... 385
Chapter 1: Introducing Emerging Market Investing ..................................................387
Chapter 2: A Guided Tour through the World’s Emerging Markets ........................403
Chapter 3: Picking Bonds, Stocks, and Mutual Funds in Emerging Markets ..........419
Chapter 4: High Finance in Emerging Markets ...........................................................435
Book VII: Value Investing ......................................... 445
Chapter 1: An Introduction to Value Investing ..........................................................447
Chapter 2: A Value Investor’s Guide to Financial Statements ..................................457
Chapter 3: Using Ratios as a Valuation Tool ..............................................................479
Chapter 4: Valuing a Business ......................................................................................491
Book VIII: Socially Responsible Investing .................. 517
Chapter 1: Making Your Investments Match Your Values ........................................519
Chapter 2: The Socially Responsible Enterprise: Evaluating Companies ...............527
Chapter 3: Introducing the Islamic Capital Market ...................................................545
Chapter 4: Managing Assets in Islamic Investments .................................................557
Book IX: Crowdfund Investing ................................... 573
Chapter 1: Getting the Lowdown on Crowdfund Investing ......................................575
Chapter 2: Evaluating Crowdfund Investing Opportunities .....................................583
Chapter 3: Committing Your Capital and Adding Value ...........................................595
Book X: Technical Analysis ....................................... 615
Chapter 1: Wrapping Your Brain around Technical Analysis ..................................617
Chapter 2: Bars and Bar Reading .................................................................................633
Chapter 3: Charting the Market with Candlesticks....................................................649
Chapter 4: Seeing Patterns and Drawing Trendlines .................................................659
Chapter 5: Transforming Techniques into Trades ....................................................675
Index ...................................................................... 693
Table of Contents
Introduction ................................................................. 1
About This Book ..............................................................................................1
Foolish Assumptions .......................................................................................2
Icons Used in This Book .................................................................................3
Beyond the Book .............................................................................................3
Where to Go from Here ...................................................................................4
Book I: Getting Started with High-Powered Investing ...... 5
Chapter 1: What Every Investor Should Know . . . . . . . . . . . . . . . . . . . . .7
Taking a Glance at Investment Options and Strategies ..............................7
Surveying traditional investment vehicles .........................................7
Considering high-end investment or speculation vehicles ..............8
Investigating investment strategies ...................................................10
Managing Investment Risks ..........................................................................11
Going for Brokers ..........................................................................................12
Distinguishing between full-service and discount brokers ............13
Picking among types of brokerage accounts....................................15
Looking at Indexes and Exchanges .............................................................16
Indexes: Tracking the market .............................................................16
Exchanges: Securities marketplaces .................................................19
Chapter 2: Playing the Market: Stocks and Bonds . . . . . . . . . . . . . . . . .21
Starting with Stock Basics ............................................................................21
Stocking Up .....................................................................................................23
Choosing growth stocks......................................................................23
Investing for income ............................................................................26
Getting Your Bond Basics .............................................................................29
Maturity choices ..................................................................................30
Investment-grade or junk bonds ........................................................30
Individual bonds versus bond funds .................................................30
Various types of yield ..........................................................................31
Total return — what matters most! ...................................................34
Exploring Your Bond Options ......................................................................35
“Risk-free” investing: U.S Treasury bonds ........................................35
Industrial returns: Corporate bonds .................................................39
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High-Powered Investing All-in-One For Dummies, 2nd Edition
Lots of protection: Agency bonds .....................................................42
(Almost) tax-free havens: Municipal bonds .....................................44
Chapter 3: Getting to Know Mutual Funds and ETFs . . . . . . . . . . . . . . .47
Going Over Mutual Fund Basics ..................................................................47
Comparing open- and closed-end funds ...........................................48
Meeting myriad types of mutual funds .............................................49
Loading up: Sales charges ..................................................................52
Being a savvy mutual fund investor ..................................................54
The ABCs of ETFs ..........................................................................................56
Looking at the positives and negatives .............................................57
Getting in on the action .......................................................................58
Managing risk with ETFs .....................................................................61
Exploring ETF options .........................................................................62
Chapter 4: All about Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Introducing Annuities ...................................................................................73
Looking at how annuities work ..........................................................74
Getting to know the participants .......................................................75
Noting common elements of all (or most) annuities .......................76
Deciding Whether an Annuity Is Right for You ..........................................77
Evaluating the pluses ..........................................................................77
Recognizing the minuses ....................................................................78
Checking Out the Main Types of Annuities ................................................80
Fixed deferred annuities .....................................................................80
Indexed annuities .................................................................................82
Variable annuities ................................................................................84
Income annuities ..................................................................................86
Book II: Futures and Options ....................................... 87
Chapter 1: Futures and Options Fundamentals . . . . . . . . . . . . . . . . . . . .89
Getting the Lowdown on Futures Trading ..................................................89
Getting used to going short ................................................................90
Decoding a futures contract ...............................................................91
Futures exchanges: Where the magic happens ...............................92
Open-cry or electronic: Futures trading systems ............................93
The individual players: Hedgers and speculators ...........................94
Choosing a futures broker ..................................................................94
Getting Up to Speed on Options ..................................................................96
Comparing call and put options.........................................................96
Uncovering an option’s value .............................................................97
vii
Table of Contents
Calculating option risks ....................................................................100
Taking stock of the U.S. options exchanges ...................................101
Creating option contracts .................................................................101
Knowing a few important options trading rules ............................104
Choosing an options broker .............................................................105
Deciding Whether to Trade Futures or Options ......................................106
Chapter 2: Being a Savvy Futures
and Options Trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Holding the Key: Interest Rates and the Money Supply .........................107
Respecting the role of central banks ...............................................108
Following the money supply ............................................................109
Digesting Economic Reports ......................................................................112
The employment report ....................................................................112
The Consumer Price Index ...............................................................112
The Producer Price Index .................................................................113
The purchasing managers’ reports .................................................113
Consumer confidence reports ..........................................................114
The Beige Book ..................................................................................114
Housing starts ....................................................................................114
The Index of Leading Economic Indicators ....................................115
Gross Domestic Product ...................................................................115
Oil supply data ...................................................................................115
A bevy of other reports .....................................................................116
(Psycho)-Analyzing the Market .................................................................116
Defining sentiment .............................................................................116
Watching call and put activity .........................................................117
Using volatility to measure fear .......................................................118
Adding Technical Analysis to Your Toolbox ...........................................119
Chapter 3: Basic Trading Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . .121
Trading on Margin .......................................................................................122
Looking at margin limits ...................................................................122
Mulling over the multiple meanings of “margin” ...........................123
Buying Calls ..................................................................................................123
Understanding reasons and getting
some pointers for buying calls .....................................................123
Calculating the break-even price for calls and puts ......................124
Using delta to time call-buying decisions .......................................125
Following up after buying a call option ...........................................126
Writing Calls .................................................................................................126
Choosing to be naked or covered ....................................................127
Doing your homework .......................................................................127
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High-Powered Investing All-in-One For Dummies, 2nd Edition
Protecting your trade by diversification.........................................128
Following up after writing a call .......................................................129
Considering Basic Put Option Strategies ..................................................130
Making the most of your put option buys ......................................130
Buying put options ............................................................................131
Selling naked and covered puts .......................................................131
Exercising your put option ...............................................................132
Dealing with a huge profit in a put option ......................................132
Chapter 4: Advanced Speculation Strategies . . . . . . . . . . . . . . . . . . . .135
Thinking Like a Contrarian .........................................................................135
Picking apart popular sentiment surveys .......................................136
Looking at trading volume as a sentiment indicator .....................137
Signaling a potential trend reversal: Open interest .......................139
Combining volume and open interest .............................................141
Checking out put/call ratios as sentiment indicators ...................141
Using soft sentiment signs ................................................................142
Exploring Interest Rate Futures .................................................................143
Bonding with the universe ................................................................143
Going global with interest rate futures ...........................................144
Yielding to the curve .........................................................................148
Deciding your time frame .................................................................150
Sticking to sound interest rate trading rules..................................150
Focusing on Stock Index Futures ...............................................................151
Looking into fair value .......................................................................152
Considering major stock index futures contracts .........................152
Book III: Commodities ............................................... 155
Chapter 1: Getting an Overview of Commodities . . . . . . . . . . . . . . . . .157
Defining Commodities and Their Investment Characteristics ...............158
Gaining from inelasticity ...................................................................158
Offering a safe haven for investors ..................................................159
Hedging against inflation ..................................................................159
Taking time to bring new sources online........................................160
Moving in different cycles.................................................................160
Checking Out What’s on the Menu ............................................................160
Energy..................................................................................................160
Metals ..................................................................................................161
Agricultural products ........................................................................162
Putting Risk in Perspective ........................................................................163
Looking at the pitfalls of using leverage .........................................164
Assessing the real risks behind commodities ................................164
Managing risk .....................................................................................166