Using Limit Orders

When it comes to placing an order to buy or sell a security, you must always place a limit price to buy or sell at.  For low volume stocks such as penny stocks in the USA or stocks listed on the TSX Venture Exchange, limits are a must to make sure you, the trader, do not get ripped off.

Brokers may send your order to one of many clearing-houses which may not offer you the best price available.  Therefore, when you place a market order to sell or buy 1000 shares for $1, you may end up buying or selling the stock with a $1 premium.  Therefore, you either sell 1000 shares for $999 or buy 1000 shares for $1001.  From that, the broker get a kickback from the clearing-house.

This kickback which can be a penny, more or less, from one client is a thank-you for bringing us the business.  Therefore, from the perspective of a trader who placed a limit order, as long as the trade goes through at a limit price set by the trader, the extra kickback is meaningless.  If the kickback is due from a margin call or market order, that can cause an uproar if enough traders voice their displeasure.

https://www.cnbc.com/2017/08/15/massachusetts-investigating-top-u-s-brokers-for-kickback-conflict.html

Playing the Derivative Market while Minimizing Risk

Using Morningstar’s ETF finder, Choose Alternative from the drop down list under Global Broad Category.

From there, you will get a list of ETFs that are leveraged (magnifies the gains or losses by 2x), Bull (securities going up), Bear, (securities going down), inverse (goes in opposite direction of the securities tracked).

The advantage of using derivative ETFs is that the losses are limited to the money you invested in the ETF.  When it comes to derivatives, if the price goes in the opposite direction of your bet, you will have to have enough money to cover the rising cost of the bet.  Furthermore, without understanding the derivatives market, your losses can leave you bankrupt.  Therefore, derivative ETFs are a good choice for people wanting to magnify his/her gains if he/she thinks the market is heading in a specific direction.  He/she will have to determine when to sell the derivative ETF since it is designed for short-term investors.

HFU.TO doubles the gains of the S&P/TSX CAPPED FINANCIALS index.  The MER is 2.18%/year as written in the fund summary.  So, there is a higher cost to try to double your gains.

How to trade using a broker

What is an inverse ETF

Buying Stocks within an Index Tracking ETF

BMO’s Canadian Banks Index

S&P/TSX Capped Telecommunication Services Index

When it comes to deciding between purchasing the whole index or just stock picking within an index, there are ETFs that contain a couple of companies.  Therefore, if an investor has the money, he/she can save the MER (fees) and just buy all the companies within an index using the percentages provided in the ETF prospectus.

ZEB.TO shown above has an MER of 0.62%/year.  There are 6 banks in the index.  Therefore, it is better to save the fees and just buy an equal amount in dollars or shares of the 6 banks in Canada.

The S&P/TSX Capped Telecommunication Services Index has 3 companies.  If there is an ETF that tracks this index, I prefer just to buy an equal amount in dollars or shares of each telecommunication company.

As for rebalancing the holdings within an ETF, an ETF can rebalance the holdings up to once a year.  Therefore, it is good to check back monthly to see if an ETF rebalanced its holdings since the list of holdings is public.

Actively managed ETFs can rebalance every 3 months or more often, so a sharp drop in a stock price can mean that the ETF dropped the stock from its portfolio.

ETF Rebalancing: An Issue Not To Be Overlooked (KOL, PBJ, ANR, PEP)

 

Determining the fair price of an ETF

The NAV, net asset value of all the companies the ETF holds, is calculated at the end of every day.  Therefore, an ETF can be sold at a discount, lower than current NAV, or premium, higher than current NAV, of the underlying securities.  Unfortunately, the NAV is not calculated throughout the day.  Therefore, the discount/premium compared to the underlying securities is inaccurate.

Fortunately, there is an AP (Authorized participant). His/her job is to make sure that the ETF price accurately reflects the NAV of the underlying securities throughout the day.  Therefore, I will not be concerned about overpaying for an ETF.  Nevertheless, I always use the limit order when buying or selling ETFs.

What is Net Asset Value

Authorized Participant

Trading in the Canadian Derivatives Market

The Canadian Derivatives market is for the advanced traders that understand statistics and probability.

At first glance, the derivatives markets looks like an online gambling site until you look at the different instruments available.  Upon closer inspection, it becomes clear that the traders are looking at current and/or past events to determine what the future price of a security may be.  Derivatives are much riskier, and anyone wanting to trade in the derivatives market is encouraged to thoroughly understand the different types of derivatives and specialize on one derivative type.  Use the virtual trading platform to test your skills to ensure that you do understand since the risk of loss of capital is greater for an uneducated investor.

I have no experience in the derivatives market, but ensure that you use limits when placing an order.

Derivatives is where traders will buy insurance on their stock to minimize loss.

TMX’s Montreal Exchange Derivatives Free Courses

The TSX virtual trading platform with Derivatives

Investopedia’s free derivatives course

Mutual Fund, Segregated Fund, or ETF

People have asked me which one should I choose.  Unfortunately, I cannot give a definite answer since the type of fund you will choose will depend on your preference, as well as, knowledge of the securities market.

The two articles below from investopedia.com should give you the knowledge you need to determine which of the three is best for you.

In a nutshell, segregated funds protects part or all of the principal invested, but that protection comes with an additional cost.  Mutual funds do not protect the principal invested, but the fee to manage the mutual fund is lower.  An index-tracking ETF is cheap, but you must have knowledge of stock trading.  Therefore, there is no one-size-fits-all option.

My purpose of writing articles and providing links to other articles on stock trading is to provide you the knowledge to minimize the fees you will pay since you will have an understanding of how the stock market works.

Segregated Funds: Investment Protection For Canadian Citizens

Mutual Fund Vs ETF: Which is Right For You?

 

The Different Types of ETFs

ETFs started with ETFs that track the basic indexes.  ETFs can now be purchased that contain a specific sets of rules to buy and sell.  Furthermore, ETFs can be purchased where an ETF manager is buying and selling securities on behalf of the owners of the ETF.

With this, investors will have to decide which strategy fits his/her best.  The MER, management expense ratio will vary greatly depending on the ETF type, furthermore, there is no guarantee that the history will be the future results.

Index tracking ETFs – Copies what is in the main indexes

Smart beta ETFs – Holds securities based on a specific set of rules

Actively managed ETFs – A fund manager buys and sells to try to beat the index

Advisor series ETFs – ETFs that have an extra 1% MER/year attached to pay the advisor for his/her services.  The 1% is a standard fee, and I have not seen a lower or higher fee on any other ETFs.

ETFs with a Beta less than 1 will fluctuate less than the overall market, but the returns are usually less than the overall market.  Furthermore, ETFs with a Beta greater than 1 will fluctuate more than the overall market, but the returns are usually greater than the overall market.  ETFs with a negative Beta moves in the opposite direction of the overall market.

I have a mix of both in my portfolio.  Safe investing resulted in minimal returns while the more volatile investing strategy resulted in greater returns.  Of course, the risk of loss is much greater in the process with the more volatile investing strategy.