Basics of stock trading 101: Stock traders and Mono to me!

[Drakken]

Okey, let's take this one as an example.

As one big egotistical bastard who doesn't care about the environment, but rather in business venues, one field that interests me is the Oil sand industry in Alberta.

Looking on ETF lists, I found this one that I found interesting: Claymore Oil Sands Sector ETF (TSX-CLO).

http://cxa.marketwatch.com/tsx/en/market/quote.aspx?symbol=CLO

As instructed, I checked the P/R ratio, but it is not available over the market watch. The latest available dividend rating, however, is 0.073. Does it mean that, last time, it payed 0.073 of the funds exchange value per share to shareholders?

However, I checked the price history and its current price is rather low at around 16.60, while it reached as high as 30.00 in mid 2008. So even with a 1000$, I could directly buy betw. 50-75 shares, depending on the price at the time of the purchase. This volume is rather lower to the average number of shares sold daily of this ETF, though. Would it be considered an odd lot?

As I know that Alberta has huge reserves of Oil sands and the economy is picking up, both in Canada and the US, demand for oil from Alberta will certainly increase and, with time, thrive again. That makes it interesting in my eyes as a long-term investment plan.

Am I raving mad or something? I just want to understand what I am reading.

[Drakken]

1. Do everything online.
- Found that my bank does offer direct transaction accounts. So I'll take this one and follow my judgement.

2. Start reading the news daily.

3. Live below your means. 
- Already do, that is why I can usually muster around 500$ per month in savings.

4. Remember: high risk, high return; low risk, low return. 
- Always on my mind. But how is risk evaluated? What indicators must I keep watching?

5. Anyone who tells you otherwise is lying.
- Gotcha.

6. Don't lend money to friends and relatives, or in fact any individual.
- I don't lend, except at usury rates.

7. Your investment strategy should help you achieve your overall objectives in life.
- What if my objective in life is to hoard as much money as I can and get rich?

8. Always keep at least 3 months of expenses in cash, preferrably more.
- Thank God my GF pays half.

9. Don't start business partnerships with anyone and expect to make money by doing nothing except contributing capital. 
- Wouldn't that be tieing yourself to the success of one venue anyway? I can see giving loans or buying shares, but not to the point of a business partnership.

10. No one can beat the market in the long-run.
- What does that mean? Simply that one day, it is inescapable that I will sell at loss?

11. Diversification is an effective means to reduce risk.
- Yep. Not all eggs in one basket.

12. Fees and expenses matter hugely.
- Hence why I'll follow your advice and follow my own judgement, rather than some broker or advisor.

13. Never buy life insurance.
- As in life insurance policy, or don't invest in the life insurance policy?

14. All get-rich-quick schemes are scams, and there is no exception to this.
- As we have had two huge investment scandals in Quebec last year, this issue is saillant. Gotcha.

15. A camel can beat a financial professional in picking stocks.
- Yep, doesn't beat randomness.

16. Default risk is real.
- Again, what signs or indicators should I be watching to detect these, if possible.

17. No one is interested in your financial well-being except yourself.
- Already selfish. Gotcha.

18. Never grant discretionary mandates to anyone, especially your spouse.
- I wouldn't even give her a check.

19. Financial professionals always have their own interests in mind, not yours.
20. Long-term investment is no gurantee of success.
- I don't understand this one. Do you mean that the interest return won't be worth the wait over long-term?

21. Never invest on margin.
- I invest only with money earned with the toil of my sweat, no borrowed money.

22. Pay down debt before investing.
- I'm still paying my student loans, but these are accounted in my monthly expenses.

23. Avoid trading odd lots.
- Does that mean I should get weary of stocks daily volume under 100 ?

24. Automation is your friend - set up your accounts so that you pay your bills automatically, and stash your money away automatically.
- Gotcha.

25. Figure out what your risk tolerance level is, and invest accordingly.
- Gotcha.

26. Passive investing beats active investing most of the time.
- That I seem to gather from the Malthus vs Tamas debate.

27. Allocation of asset classes matter hugely.
- Don't understand that one.

28. Stock dividends matter - the value of a stock is the discounted value of its future dividend stream.
- When I have a dividend ratio (like the above 0.073 for CLO), how should I read it? What would be the formula?

29. Take advantage of all tax incentive schemes.
- Hence the TFSA offer we have for yearly investment under 5000$.

30. Never listen to financial advice from anyone.  Including me.
- Well, not as in follow slavishly advice like a drone. After all, I am my own master.

[Monoriu]

Okey, let's take this one as an example.

As one big egotistical bastard who doesn't care about the environment, but rather in business venues, one field that interests me is the Oil sand industry in Alberta.

Looking on ETF lists, I found this one that I found interesting: Claymore Oil Sands Sector ETF (TSX-CLO).

http://cxa.marketwatch.com/tsx/en/market/quote.aspx?symbol=CLO

As instructed, I checked the P/R ratio, but it is not available over the market watch. The latest available dividend rating, however, is 0.073. Does it mean that, last time, it payed 0.073 of the funds exchange value to shareholders?

However, I checked the price history and its current price is rather low at around 16.60, while it reached as high as 30.00 in mid 2008. So even with a 1000$, I could directly buy betw. 50-75 shares, depending on the price at the time of the purchase. And this volume is rather close to the average number of shares sold daily of this ETF.

As I know that Alberta has huge reserves of Oil sands and the economy is picking up, both in Canada and the US, demand for oil from Alberta will certainly increase and, with time, thrive again. That makes it interesting in my eyes as a long-term investment plan.

Am I raving mad or something? I just want to understand what I am reading.

http://www.claymoreinvestments.ca/etf/fund/clo

This is what you are looking for.  The average P/E of the companies in the index 18.5, which is slightly on the high side.  But I have no idea how they calculate it, e.g. whether it is weighted or it is just a simple average of all P/Es of the stocks the fund owns.

Dividend - the dividend is distributed quarterly.  So if I understand correctly, in the last quarter the fund distributed $0.073 for each fund unit.  On an annual basis, that's about 1.76%, which is on the low side.  In HK at least, some funds distribute the dividend in cash, while others actually distribute additional fund units.  You better check. 

[Drakken]

This is what you are looking for.  The average P/E of the companies in the index 18.5, which is slightly on the high side.  But I have no idea how they calculate it, e.g. whether it is weighted or it is just a simple average of all P/Es of the stocks the fund owns.

So, basically, for each 1$ of net income, investors are ready to pay 18.50$? Does that mean that small investors like me are disavantaged because of our limited number of shares?

Still, if for each dollar they are ready to pay 18.50$, at 16.xx dollars it seems rather advantageous currently at below the 18.50 threshold, or I read it wrong?

Dividend - the dividend is distributed quarterly.  So if I understand correctly, in the last quarter the fund distributed $0.073 for each fund unit.  On an annual basis, that's about 1.76%, which is on the low side.  In HK at least, some funds distribute the dividend in cash, while others actually distribute additional fund units.  You better check.

I'm trying to find that information over the investor's home page, but I find nothing specific about this information. Any tips on where to look?

Also, that means that if I invest 1000$, at the current dividend yield I would gather around 17,60 per quarter, have I got it right?

[Monoriu]

This is what you are looking for.  The average P/E of the companies in the index 18.5, which is slightly on the high side.  But I have no idea how they calculate it, e.g. whether it is weighted or it is just a simple average of all P/Es of the stocks the fund owns.

So, basically, for each 1$ of net income, investors are ready to pay 18.50$? Does that mean that small investors like me are disavantaged because of our limited number of shares?

Dividend - the dividend is distributed quarterly.  So if I understand correctly, in the last quarter the fund distributed $0.073 for each fund unit.  On an annual basis, that's about 1.76%, which is on the low side.  In HK at least, some funds distribute the dividend in cash, while others actually distribute additional fund units.  You better check.

I'm trying to find that information over the investor's home page, but I find nothing specific about this information. Any tips on where to look?

Also, that means that if I invest 1000$, at the current dividend yield I would gather around 17,60 per quarter, have I got it right?

Dividend - no.  If you invest $1,000, you'll get $17.6 per YEAR.  This assumes that the dividend rate will remain unchanged, which is usually not the case. You also need to check if you need to pay taxes on that $17.6.  My guess is yes.

Small investors are always disadvantaged, but that has nothing to do with the P/E ratio.  As I said, I have no idea how they calculate the ratio.  A simple example.  The fund can own shares in 2 companies, A and B.  90% of the fund's assets are in company A.  10% are in company B.  Company A's P/E is 14.  Company B's P/E is 5.  You can display the fund's P/E as (14+5)/2 = 9.5 (which is a good deal).  Or you can do 0.9*14 + 0.1*5 = 13.1 (which is a much more realistic picture). 

[Drakken]

Dividend - no.  If you invest $1,000, you'll get $17.6 per YEAR.  This assumes that the dividend rate will remain unchanged, which is usually not the case. You also need to check if you need to pay taxes on that $17.6.  My guess is yes.

Right, my mistake. It's per annum.

Small investors are always disadvantaged, but that has nothing to do with the P/E ratio.  As I said, I have no idea how they calculate the ratio.  A simple example.  The fund can own shares in 2 companies, A and B.  90% of the fund's assets are in company A.  10% are in company B.  Company A's P/E is 14.  Company B's P/E is 5.  You can display the fund's P/E as (14+5)/2 = 9.5 (which is a good deal).  Or you can do 0.9*14 + 0.1*5 = 13.1 (which is a much more realistic picture).

Here are the weighting of all shares in the ETF. All are in the Energy sector:

SUNCOR ENERGY INC  8.47 % 
CONNACHER OIL & GAS LIMITED  8.32 % 
IVANHOE ENERGY INC  8.31 % 
CANADIAN NATURAL RESOURCES LTD  7.20 % 
IMPERIAL OIL LTD (I/L)  7.13 % 
CENOVUS ENERGY INC  7.12 % 
UTS ENERGY CORP  7.04 % 
BLACKPEARL RESOURCES INC  6.66 % 
CANADIAN OIL SANDS TRUST  6.60 % 
BAYTEX ENERGY TRUST  5.98 % 
PETROBANK ENERGY & RESOURCES  5.76 % 
OPTI CANADA INC  5.76 % 
OILSANDS QUEST INC  3.85 % 
HUSKY ENERGY INC  3.34 % 
NEXEN INC  3.11 % 
PENN WEST ENERGY TRUST  2.91 % 
ENERPLUS RESOURCES FUND  2.45 % 

So what I can do tomorrow, as an exercice, is search the P/E of each share contained in the fund, weight them, and and see where it is at. With Excel, it won't take me very long.

So, if the weighted P/E of each share is lower than the P/E of the ETF, it's good right?

[Monoriu]

So, if the weighted P/E of each share is lower than the P/E of the ETF, it's good right?

I don't really understand what you mean.  Another problem with the fund's P/E (in this case 18.5) is that I don't know if it is updated or not.  The stock prices change every trading day, but I'm not sure if the figure of 18.5 is updated daily. If you do the exercise, the result should be more reliable.  If your figure is different from 18.5, there could be a number of reasons, e.g. the firm is not honest, the figure is not updated, etc. 

[Drakken]

I don't really understand what you mean.  Another problem with the fund's P/E (in this case 18.5) is that I don't know if it is updated or not.  The stock prices change every trading day, but I'm not sure if the figure of 18.5 is updated daily. If you do the exercise, the result should be more reliable.  If your figure is different from 18.5, there could be a number of reasons, e.g. the firm is not honest, the figure is not updated, etc.

Simply, that the fund's multiple can be based solely on the fund's performance, but without taking in account what multiple each share part of the fund would perform if grouped together.

So if, say, the ETF's multiple is 18.5, but collectively the shares' weighted multiple would be below that, let's say at around 13.1, it would be a good deal to buy them. Yes, the fund's value on it own would be on the high side, but the multiple's value of the aggregated shares in the fund would make it more attractive, yet more cost-effective to just buy the lot via the ETF rather than each individually.

Of course, I don't speak investors' investobabble yet... so I hope you get what I mean. It may be overly simple for you, but for me it is a huge learning step.

As the TSX is now closed we have a fixed rating... but checking it tomorrow I will see if the multiple gets updated as the price per share evolves.

[Drakken]

In the meantime, what good stock market and financial simulator would you recommend me to practice and learn?

[Monoriu]

In the meantime, what good stock market and financial simulator would you recommend me to practice and learn?

I don't think there are good simulators out there.  Best way is "role-play" it - say, you pretend that you actually invest $ into that energy fund (without actually investing).  You then track the price movement of that fund every day or every week.  You then see the result in a few months or whatever to see how you did. 

[Monoriu]

I don't really understand what you mean.  Another problem with the fund's P/E (in this case 18.5) is that I don't know if it is updated or not.  The stock prices change every trading day, but I'm not sure if the figure of 18.5 is updated daily. If you do the exercise, the result should be more reliable.  If your figure is different from 18.5, there could be a number of reasons, e.g. the firm is not honest, the figure is not updated, etc.

Simply, that the fund's multiple can be based solely on the fund's performance, but without taking in account what multiple each share part of the fund would perform if grouped together.

So if, say, the ETF's multiple is 18.5, but collectively the shares' weighted multiple would be below that, let's say at around 13.1, it would be a good deal to buy them. Yes, the fund's value on it own would be on the high side, but the multiple's value of the aggregated shares in the fund would make it more attractive, yet more cost-effective to just buy the lot via the ETF rather than each individually.

Of course, I don't speak investors' investobabble yet... so I hope you get what I mean. It may be overly simple for you, but for me it is a huge learning step.

As the TSX is now closed we have a fixed rating... but checking it tomorrow I will see if the multiple gets updated as the price per share evolves.

I don't understand what you mean.  Regardless of whether the P/E that you calculate is higher or lower than 18.5, you won't get a "good deal" out of it.  It just means that the company's way of calculating the P/E is different from yours. 

[Tamas]

Mono is wrong, there are several brokerages out there offering demo accounts you can fool around with, usually with a 15 minutes delay on stock prices, but thats a non-issue for you.

As for oil sand. Would not those sites need the price of oil to be quite higher to make them profitable? I remember that when oil price peaked people said at least now it is profitable to work with oil sand fields.

[Drakken]

I don't understand what you mean.  Regardless of whether the P/E that you calculate is higher or lower than 18.5, you won't get a "good deal" out of it.  It just means that the company's way of calculating the P/E is different from yours.

Gotcha. So if there is a difference, I will take that in account without judging if it is better or worse. After all, it is only one indicator.

So what would be a good average for P/E to aim for when I search for a decent share to stake in? I know it depends of the share price, but what would be an "acceptable" multiple, or an "acceptable" dividend yield? 

[Drakken]

As for oil sand. Would not those sites need the price of oil to be quite higher to make them profitable? I remember that when oil price peaked people said at least now it is profitable to work with oil sand fields.

Yes, the cost of producing oil from oil sand is rather prohibitive, and it becomes interesting profit-wise only when the oil price peaks. That is why Alberta was suddenly hit with a deficit when the crisis arrived and the oil price fell down.

However, with the recession past us and as demand for oil increases back again, chances are good the oil will peak again within a reasonable time frame. Hence why I like the fact that I could seize the chance while the price is still rather low and keep it, let's say, for 1-2 years and see.

[Admiral Yi]

You're wasting your time looking for market inefficiences Drakken.  The P/E of a fund is the price per share divided by the total earnings per share.

There's different ways to look at P/E.  A high P/E could mean that the market thinks earnings will increase in the future (since P/E is calculated on past earnings) or it could mean risk is very very low.  Utilities used to have high P/Es because they delivered the same dividend year in year out (might have changed since deregulation).

I think it's more intuitive to look at the inverse of P/E, because earnings per share is like the percentage yeild that we're already used to looking at with bank deposits.  For example your coal sands fund's E/P is 5.4%