Finance Wiki

Finance easy explained

Why to buy Gold
What speaks for an investment in Gold?
And more important: what speaks against an investment in Gold?
The basis of all decisions in our life is to evaluate the costs and the benefits. What speaks for Gold, what against? When we listen to the so called "Experts", the only thing we learn is that the experts have different opinions. We have the "Ultra-Bears" expecting the global monetary system to implode and gold being left as the only valuable currency. On the other side we have the supporters of the capitalism. They see in gold only a small economic value and prefer to invest in stocks and bonds.
So what we need to do is to leave the so called experts behind us and have an unemotional look at the pro and contras of gold. What are the price movers of gold?
The Gold-Price-Movers
There is generally only one price mover: demand and supply.
In the short-term, the gold-market is driven by news and emotions. Thousands of financial players buy and sell gold on a daily basis driven by headlines. It is impossible to forecast the gold-price for the near future. Otherwise you have to know how the market-participants are going to react (which is impossible).
In the long-term however there are some clear and important drivers influencing the demand and supply and hence the price of gold in the long-term:

Pro Gold
Currency hedge
Currently the most heard argument to buy gold is the fear of the collapse of debt-burden currencies like Euro, Yen, Pound Sterling and US-Dollar. Gold offers protection against the impairment of paper-money. Gold has to be seen as a hedge or insurance against the worst case scenario of a currency implosion. Backed by fear and mistrust against paper-money, the gold-price rallied already extremely since the year 2000. Gold has a long history as a currency and has to be seen as the counter-pole to the USD. Whenever the USD get's weaker, the gold-price in USD surges, if the USD gets stronger, the gold-price weakens.

Inflation and Hyperinflation
An inflation is a slow devaluation of the value of money. With your money you can buy less and less goods, prices rise. A moderate inflation is not to worry, because it usually means higher interest on your savings account. With the effect of compounded interest the value of your money stored on a a savings account should remain.
A hyperinflation though, is an unstoppable increase of prices. The trust in the value of money is so damaged, that prices go up and up every week, day or even hour as everybody exchanges money into goods as soon as possible. Gold offers a very good protection against a hyperinflation in your country.

War
In war-times gold offers a solid storage of wealth and will be bought. The uncertainty about the future is very high: which sovereign-bonds, currency or equity does still have a value in the future? And what will be destroyed or expropriated? Gold in a safe offers protection against these uncertainties.

Rising physical demand
Gold is not just a financial asset it's also used as jewel and to a limited extend in industrial equipment. The rising demand from the Asian countries India and China (the biggest buyer's of gold) already pushed prices higher. A rising demand will boost the gold-price, a shrinking demand will do opposite.

Limited & unique commodity
Gold is a limited and unique commodity. Most of the available gold is already mined. Experts expect that all physical gold on earth together builds a cube of 20 meter edge length. These 8000 cubic meter gold is accompanied by a rising population of over 7 billion. Equally shared, everyone on earth would get a small gold cube of 1cm2.
With gold, wealth can be stored in a small place and it has no expiry date. Other assets are bulky or short-lived. A currency can get devalued, a bond not paid back, a stock bankrupt, a house burned down and a farm can be plagued by drought or vermin. All these qualities make gold a unique commodity.

Contra Gold
Deflation
A deflation is a constant decrease of prices in a economy. Services and goods gets cheaper over time. A deflation can be very bad for the economy as nobody invests money or buys goods because tomorrow it will be cheaper. Deflation is the opposite of inflation and can occur if a downward spiral of falling house and equity prices starts, like in Japan 1990 - 2010. Even the gold-price might decrease if a global deflation starts. According to some economists, the starter of an inflation might also be the demographic change in most economies. As many retirees at the same time start to sell their homes and equities and less and less young people are able to buy them.

Falling demand
The biggest risk for a decrease of the gold-price is a severe decrease of demand. Gold is very popular at the moment and many expectations about the future are already priced in. If the confidence in the economy and in the currencies among the investors is back, people might look at other assets then gold, like bonds and stocks. A sudden decrease of investor's demand will push the gold-price down. Also a falling physical demand for coins and jewels has influence on the gold-price.

Higher production
If through a increase in production or gold-sales by central-banks a big amount of gold comes to the market, the price is under pressure. While new gold is mined, the existing gold is not used like oil or coal. Most of the gold get's recycled and used again and again.

Limited use of gold
With the exemption of a small industrial usage, gold has no real use than to be gold. Although it's beautiful to look at, the human has no real use of the commodity. You can not eat it like rice or corn, you can not burn it like wood or oil, you can not build a house with it or have an stable income of its interests and dividends. The only thing you can do with gold is hoarding it and hope its value remains. But nobody can guarantee that you can buy a bushel of wheat with your gold in a real crisis. If you are extremely concerned about the future and want to prepare yourself, you should consider a house with a big garden, a farm or a forest.

There are four different ways how to invest in gold.
Each way has it's pro's and contras.
We show you how they work:

1. physical gold (gold bars and gold coins)
2. gold etfs (investment funds holding physical gold)
3. gold derivatives (options, futures, certificates and structured products)
4. gold stocks (stocks from gold mining companies)

All these four possibilities offer different security, availability and costs.
Each way is used different:
Physical gold qualifies as alternative currency and protection from a collapse of the financial system.
Gold etfs offer a good possibility to invest bigger sums into gold and some of them grant a currency hedge against the USD.
Gold derivatives are suited for traders and gamblers, seeking for leveraged investments in order to gain a huge sum with a small investment. Or - for conservative investors willing to protect their gold against a price decrease.
Gold stocks offer an additional form to profit from rising gold prices. They pay investors a dividend and offer protection against a gold ban by the government forbidding the people to own gold.

Tips for first-time-investors
Beginners, who just start to buy gold should consider the following advice:
If you want to buy gold, consider it as a life-time investment and insurance against worst-case-scenarios. The timing should not be too important. Buy some gold from time to time in order to achieve a good average price. If you want to have gold for protection, buy physical gold. Go to the bank or the metals-dealer and buy some of the usual standard gold coins or bars.
Store your gold in a vault or safe place offering protection against theft and losing. An additional advantage is, that you do not recognize the daily price movements. For long term investors, daily movements are just not relevant!
Just invest money you really do not need. Keep enough cash to be liquid. Never buy gold on credit. Your gold treasure should be an emergency-reserve you don't have to touch.



Physical Gold
Gold in physical form like gold-bars, gold-coins, nuggets or jewellery

Gold bars
The most noble and purest form of gold ownership is to invest in physical gold you can hold in your hand. Most common are gold-bars, so called standard-bars with a fineness of 999.9 (99.99% pure gold). There are different sizes of gold-bars: from tiny 1 gram which is about EUR 50, to 5 kilo bars worth EUR 200'000. Furthermore you get 2gr, 5gr, 10gr, 20gr, 1 ounce, 50gr, 100 gr, 250gr, 500gr, 1 kg and 5 kg gold bars.
Usually gold bars are being traded with a spread between buyer and seller price. This spread is the traders commission. Additional costs are not common. The spread is about 10% in the small gold bars of several grams. On a kilo-bar the spread is much smaller, about 1%. Small bars are more expensive then big bars. But in a currency-crisis, small bars might more conveniently be exchanged into goods. A 5-KG-Bar, having the value of a family-house, will cause troubles to get change for. Big bars however have the advantage of a easy, long-term wealth storage not even absorbing a lot of space. When buying gold bars, please go to a trusted metal-dealer or bank, and just buy gold minted by an accepted assayer or melter. A list of accepted assayers is published by the London Bullion Market Association.

Gold coins
Also very popular are gold coins. There are different modern coins and also a variety of ancient coins. While modern, new-age coins are being traded at the gold value solely, ancient coins have an additional collector's value. The Trading with gold coins is called "Bullion Coins". A disadvantage of coins is, that they have an even bigger spread then small gold-bars. But they are nice to look at and an ideal gift for grandchildren. Usually banks offer fair prices, but a comparison is always recommended. For bigger purchases a gold-trading-house might be a good choice. Also in the internet you find many gold dealers. But just go for reputable brokers, watch out for shipment and insurance costs. A reliable dealer will never sell gold at discount prices. Gold has it's value!

Standard Gold Coins, (Bullion Coins) traded at the pure gold value:

South Africa: Krugerrand 1 OZ, ½ OZ, ¼ OZ and 1/10 OZ
Canada: Maple Leaf 1 OZ, ½ OZ, ¼ OZ and 1/10 OZ
USA: American Eagle, 1 OZ, ½ OZ, ¼ OZ and 1/10 OZ
Australia: Nugget 1 OZ
UK: Britannia 1 OZ, 1 Pound old and new Sovereigns
Austria: Philharmonic 1 OZ, 100 Kronen, 1 Dukat and 4 Dukat
Switzerland: 10 Francs and 20 Francs Vreneli, 20 Francs Helvetia, 20 Francs Napoleon
Italy: 20 Lira
Mexico: 50 Pesos

Other physical gold investments
Furthermore you can buy gold nuggets, gold jewellery or gold watches. With these investments you have to carefully check the gold content (fineness) of these objects. Otherwise you pay too much. Cheap jewellery and watches are not much more worth than the gold they contain. If you want to have something more exclusive, keeping it's additional value, you have to invest more. Swiss luxury watches like Rolex, IWC or Breguet store there value for years or even increase in value over time. They should be able to maintain the premium to the gold value over time.

Storage of gold
The biggest disadvantage of gold is the storage. Buried in your garden you might not remember with 80. The house-safe will be robbed first! That might speak for a bank vault, where your gold is safely stored, unless the bank gets robbed too. A further threat to your gold is the state forbidding you to hold gold and taking it away from you. The state has the power to pass laws in this direction as happened in Germany 1936-1939 and in the US 1933-1974. If you want to store your phyical gold safely, you should not store all gold in the same bank, the same place or even in the same country.

Availability and trading of physical gold
An other disadvantage of gold is the limited availability. If you store your gold in a bank-vault or safe, you can not immediately place sell-orders if gold crashes. You first have to get your gold out of the hiding-place...
Some gold-bullion dealers offer online trading in physical bars (i.e. Bullion Vault). Please check if these brokers really offer physical gold, the gold is held in your name and in which country the cold is stored.
Also available for traders are metal-accounts. This is an account with a bank in the currency XAU, the symbol for gold. Amounts on this accounts are a gold claim against the bank which are at risk when the bank goes bankrupt.
Furthermore physical gold offers no USD currency hedge. Gold is traded in USD. If you bet, that the gold price in USD goes up, but you have no clue if the gold price in your currency goes up as well, you want to have a USD-hedge on your gold. Gold ETF's offer this to investors.

Pro
• life-time wealth-storage
• alternative currency
• pleasure to collect
Contra
• expensive spreads
• limited availability for trading
• gold ban
• no FX-currency-hedge


Gold ETF
Exchange Traded Gold Funds (Gold ETFs)
A new and popular way to invest in gold is the so called Gold ETF. ETF stands for Exchange Traded Fund. As the name suggests, an ETF can easily be bought over a stock exchange by individual investors. ETF's are passively managed investment funds with low costs. A Gold-ETF buys with it's entire money physical gold, being stored in a huge vault. Therefore a unit of a gold-etfs represents a gold ownership and moves along with the gold-price. Because a fund normally diversifies its assets among different investments, a gold etf is something between a fund-investment and an online traded physical gold-bar.

The Gold ETF has a huge advantage against the classic gold coin: it's online-trading combined with the security of physical gold. Important: Please check carefully if your fund is really investing in physical gold, or if the gold-price is just replicated with a so called SWAP. A swap-based gold-investment is a payment-promise to pay the gold-price. But this payment-promise is worth nothing, if the counter-party (bank or broker) goes bankrupt. Therefore a Gold ETF investing in 100% physical gold offers much more security. The fund itself is a own legal entity (fund or investment-trust) and is off the balance-sheet of the bank/broker running the fund.

Besides being heavily traded during trading-hours, Gold ETF's can offer an other advantage: Currency hedge. The gold price is traded in USD. If you believe in a rising gold price in USD terms but the USD is not your investment currency, you might want to have a currency hedge. Otherwise the investment performance in USD might get destroyed by a falling value of the USD against your investment currency.
Gold ETFs attract more and more investor's money because they are so easy and so secure. That leads to the fact, that Gold ETFs are among the biggest holders of physical gold reserves and have over 2000 metric tons of gold in their vaults. That's more than half of Germany's gold reserves (3401 t).
Gold ETFs also offer the possibility to have a gold-investment on the other side of the globe. Among the biggest Gold ETFs you find US, British, Swiss, South-African and Canadian based ETFs.

Pros:
• Exchange traded
• high security
• low costs
• suitable for bigger investments
• currency hedge possible
• no issuer-risk (separate assets)

Cons:
• Swap-based products have the issuer-risk
• yearly management-fee
• physical delivery of gold just possible under certain terms



Gold Derivatives
Gold Certificates - Gold Trackers - Gold Options and Gold Structured Products
What are Gold Derivatives?
Gold Derivatives are Contracts and nothing else than contractual agreements, linked to the development of the gold-price. Derivatives are not physical gold, but only a claim against a counter-party (broker, bank). This claim is dependent on the solvency of the counter-party. In case of bankruptcy investors have to calculate with a total loss. Hence Gold Derivatives are not recommended to invest in gold on a long term. But they offer a wide range of opportunities for short term oriented traders and hedgers, as they offer leverage or downside-protection.

There are two different kind of transaction types with a wide range of designs. You can separate Gold Derivatives in:
• OTC trades
• Securitised certificates
On OTC trade is a so called over-the-counter trade. That means, that you as an investor go into an agreement directly with a counter-party (bank). Your the one and only with exactly this trade. The trade is not done on an exchange but directly "over-the-counter". You can not sell your contracts on a exchange are deeply dependent on your counter-party offering you the possibility to close or sell your contracts. (Example CFD-Contracts or OTC-Options)

In contrast to OTC's we have the Securitised Certificates or so called Structured Products. In this case a bank is issuing a series of identical certificates. All of them have the same terms. The certificate gets a security identification number and get's sold to hundreds of investors. After issuance a secondary market over the bank or the stock exchange is offered. That means that the certificates can be sold anytime during market hours.

Fees and costs
Certificates are not for free even though they are often offered without sales commission. The bank earns on every issuance as it constructs the certificate out of different components such as options, futures, zero-bonds by calculating profit-margin for itself. So you should compare different offers before you buy a certificate.

Types of Gold Derivatives
Leveraged-Products
With Leveraged-Products investors can turn a small amount into a huge sum - or into nothing. Usually (except short selling of options and futures) you can only loose as much as you invest. But if the gold-price goes into your direction, the performance can be multiplied. If a Gold Warrant has a leverage factor of 10, the certificate goes +10% for every +1% the gold-price moves (and vice versa). But if the gold-price goes sideways over a long time, the certificate will go down due to fees. That's due to a loss of time-value or negative roll-yields. Hence leveraged-products are best suited for speculative short term trading ideas and not for long-term investments.
You can either bet on rising or falling gold-prices. But Leveraged-Products can also be used to hedge an existing gold position against losses.
Option based derivatives are called Warrants. Future based derivatives are called Mini-Futures, Speeders or Turbo-Call-Warrant. Credit financed derivatives are called Contact for Difference CFD or Forwards. They all have in common to offer a big potential gain with only a limited amount of invested money.

Protection-Products
They have a wide range of design and names! In common they offer a certain capital protection or limited downside risk. Some of them offer a 100% capital protection as of expiry, other just a protection on the first 25% of downside. After that, you suffer the whole downside of the gold-price. As a"price" for the protection the investor is willing to accept a limited upside potential. His maximum return is defined in advance. If the gold-price is going +100%, the investor is left with a max of +5% (as an example). But they offer also a good return in sideways markets. The most common types are discount-certificates, barrier revers convertibles, capital protected notes.

Pros:
• Leverage possible
• Capital protection possible
• Profit in sideways markets possible
• Profit from falling markets possible
Cons:
• high complexity
• issuer risk (in bankruptcy total loss)
• trading and liquidity limited
• intransparent fee and cost structure



Equities from Gold Miners
Stocks from Gold Mining Companies are another possibility to profit from a rising gold price. These Companies explore and dig gold and sell the metal with a profit on the market. These earnings are paid out to investors via a dividend. So it is possible to earn money with gold stocks even if the gold price is going sideways. But Gold Stocks go particularly well, if the gold price is rising.
Another advantage is, that gold stocks are no gold and can therefore not be banned and controlled by the state (as long as the gold-mine is not nationalized by the producing country.

But it's not so easy to find the right Gold Stock. Investors often get tricked by high performance promises from "gurus" and newsletters. But those penny-stocks are high risk, as they often have no gold-mine in place but just a lot of costs to explore a hidden treasure. Think about: Why would a guru give YOU an excellent investment advice other than just driving a stock's price higher he owns and wants to sell to you?
Therefore it's recommended to invest into the larger producers who have several mines in place. The biggest gold stocks are: Barrick Gold, Goldcorp, Newmont Mining, Newcrest Mining, Anglogold Ashanti, Kinross Gold, Goldfields, Yamana Gold, Eldorado Gold and Rangold Resources. There are also investment funds and ETFs on the market who invest in all of these gold stocks.

Pros:
• Gold Stocks offer a (Hyper) Inflation-Protection
• Gold Stocks are not physical gold and can therefore offer a protection against a gold ban
• dividend income
• market gains from new gold explorations
• a Gold-Stock-Fund offers diversification in different stocks

Cons:
• Company Risk
• political risks (war, export ban, nationalization & dispossession)
• rising production costs (energy, wages)
• declining output capacity
• no 1:1 participation on the gold price
• higher costs for holding equities and funds compared to physical gold



What is Alpha?
Definition Alpha: In finance the Greek letter Alpha (α) describes the active return of an investment. Active return means the excess return the investment generated compared to a benchmark (general market performance).
Alpha = Investment-Performance - Benchmark-Performance

Use of Alpha
In practice alpha is often used in the investment-fund industry. The alpha describes the excess return a fund achieved compared to its benchmark. If the fund achieved a better performance than the benchmark, he can deliver an outperformance (or excess-return). The alpha is positive. If The fund delivered less return than the benchmark, the alpha is negative. For a passive managed fund like Index-Funds and ETFs, the alpha is close to 0.


What is Beta?
Definition Beta: In finance the Greek letter ß describes the systematic risk of an asset compared to the broad market. Beta is an indicator for the volatility of an asset compared to a benchmark.


Use of Beta
In practice the beta-factor helps the portfolio-manager to allocate risk correctly in a portfolio. The beta-factor is a number with the following meaning:
• Beta grater than 1: The asset has a higher volatility (price fluctuations) than the market
• Beta = 1: The asset moves in line with the market
• Beta less than 1: The asset has a smaller volatility (price fluctuations) than the market
• Beta negative: The asset moves contrary to the market (if the market moves up, the asset goes down - and vice versa)

A portfolio-manager having the order to manage a portfolio as stable as possible, looks after assets with a low beta. A manager with the order for a high risk portfolio goes for assets with a high beta.


Credit-Rating (Bond-Rating)
What is a Credit-Rating?
Definition: A Credit-Rating is an evaluation of the creditworthiness of a debtor. The Credit-Rating, also known as Bond-Rating, is issued by a credit-agency specialized on the valuation of big debtors like countries and enterprises. The three most important credit-agencies are: Standard & Poor's, Moody's and Fitch.
Explanation of Credit-Ratings
This is an overview of the meaning the different ratings have:


AA-AAA = secure investments (High Grade Bonds)
BBB-A = medium - good quality
BB = speculative quality
B = highly speculative quality
D-CCC = high default risk (D = Default)

Credit-Rating Classification based on Standard & Poor's
AAA Extremely strong capacity to meet financial commitments
AA Very strong capacity to meet financial commitments
A Strong capacity to meet financial commitments, but some-what susceptible to adverse economic conditions and changes in circumstances
BBB Adequate capacity to meet financial commitments, but more subject to adverse conditions
BB Less vulnerable in the near-term, but faces major ongoing uncertainties to adverse business, financial and economic conditions
B More vulnerable to adverse business, financial and economic conditions, but has currently the capacity to meet financial commitments
CCC Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments
CC Currently highly vulnerable
C A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued
D Payment default on financial commitments



Dividend Yield
What is the Dividend Yield?
Definition: The Dividend Yield is a financial ratio for equities. The Dividend Yield shows the level of profit-distributions the company pays on a yearly basis in % of the current share price. With the Dividend Yield the investor is able to compare the dividend of different stocks.

How to calculate the Dividend Yield?
The Dividend Yield is calculated with this easy formula:

dividend payments per share
current share price

Important: if a company pays several dividends in a year you have to sum-up to the total amount of dividends per year. In order to have a up-to-date information about the dividend of a company, banks and brokers often use the expected dividend for the running business year to calculate the Dividend Yield.


Example:
The Nestlé Stock is at 63 Swiss-francs. Analysts expect a dividend of 2.05. What is the Dividend Yield?
2.05 / 63 = 0.0325 = 3.25% Dividend Yield for the Nestlé Stock

Use of the Dividend Yield
With the Dividend Yield the investor can compare the yield of the different dividends companies pay. The dividend is a important source of income for many investors. Therefore investors can chose stocks which pay a high dividend yield. High-Dividend-Stock are favored by income oriented investors and also funds and ETF's are available on stocks which pay a high dividend yield.

EPS | Earnings per Share
What's the EPS?
At the Stock Market, EPS means Earnings per Share.
The Earnings per Share is being calculated by dividing the total profit of a company by the number of shares. If a company makes 10 million USD profit and has 1 million shares, the Earnings per Share (EPS) is at 10 USD.

How is the EPS used?
In practice the Earnings per Share (EPS) is an important figure to calculate many financial ratios used for the valuation of stocks. The EPS is used to get this ratio:
• PE Ratio (Price to Earnigns Ratio)
• PEG-Ratio (Price-Earnigns to Growth Ratio)
• EPS-Growth-Rate (year over year growth of the EPS)
The EPS shows the real earnings for each and every share and is crutial to value the stockprice of a company. The total profit is a nice headline but much more important is the EPS, because the number of shares can change over time. Share-Buybacks are reducing the number of shares which usually leads to a higher EPS. A capital increase does the opposite: it expands the number of shares, the EPS goes down.



Floating Rate Note FRN (Floater)
What is a Floating Rate Note?
Definition: A Floating Rate Note is a bond without fixed interest coupons like a Straight-Bond. Instead the interest coupon is subject to the level of a reference-interest-rate like LIBOR, EURIBOR or Swap-Rates. A Floating Rate Notes pays the reference-rate plus a little premium according to the credit quality of the debtor.
The big advantage of a Floating Rate Note is, that the investors always gets a fair interest inline with the market. Hence an investor has no risk of changing interests; if the interests move up, he will get a higher coupon too. Floating Rate Notes are recommendable when interests go up. However, if interests move down, the investor gets a lower coupon and would be better of with a Fixed-Coupon-Bond.

Example of a Floating-Rate-Note:
ISIN: DE0003933941
Debtor: Deutsche Bank AG (subordinated)
Lifespan: 09.03.2005 - 09.03.2017
Currency: EUR
Interest-Rate: 3-month-Euribor-Rate + 0.76%
Issue-Price: 99.86%
Repayment: 100.0%
In the prospectus one can find the terms of this bond. In this example the interest is payed 4 times a year: 9th of March, June, September and December. Relevant is the level of the official EURIBOR-3-m-Rate. Additionally the investors get a premium of 0.76%. If the 3m-Euribor is at 1%, the coupon would be 1.76%.


High Grade Bonds
What are High Grade Bonds?
Definition: High Grade Bonds are bonds with the highest credit rating (AAA and AA). High Grade Bonds offer the best possible security, because the credit quality of the debtor has been proofed as outstanding.

Importance of High Grade Bonds
High Grade Bonds count as safe haven in the financial universe. Big investors like pension funds and asset manager invest mainly in High Grade Bonds, in order to place the entrusted money as safe as possible. High Grade Bonds are an asset class of huge size and importance. They are used as collateral in credit transactions and swaps. The yield of High Grade Bonds is considered as the risk-free benchmark-rate.


Selection of High Grade Issuers
(as of 2012-08-14)
AAA-Rating:
• Germany
• Switzerland
• Australia
• Canada
• Denmark
• Norway
• Sweden
• EUROPEAN INVESTMENT BANK
• EUROPEAN UNION
• NORDIC INVESTMENT BANK
• ASIAN DEVELOPMENT BANK
• WORLDBANK
AA-Rating:
• United States of America
• Austria
• France
• New Zealand
• GENERAL ELECTRIC
• NIPPON TELEGR & TELEPH
• RABOBANK NEDERLAND
• ALLIANZ FINANCE



High Yield Bonds (Junk Bonds)
What are High-Yield-Bonds?
Definition: High-Yield-Bonds are bonds issued by debtors with a lower credit-quality. The bondrating is not in the safe investment-grade range, but in the rather speculative high-yield range. These debtors have a higher debt level and/or lower earning power. Investors are getting a higher interest-yield, which compensates the higher default-risk of high-yield-bonds. High-Yield-Bonds are also known as "Junk-Bonds", because of the low credit-quality, referring to junk (trash).

The High-Yield Bond-Market
High-Yield-Bonds enjoy a growing popularity among investors because of the high interest they offer. In order to benefit from this higher yield, and also minimizing the default-risk at the same time, private investors should invest in different bonds to diversify the risk. This can easily be done with a High-Yield-Bond-Fund. They offer a broad diversification and risk control through a professional manager.
The risk involved in these speculative bond-market is significant and comparable to the equity market. If the repayment of a bond is at risk, the market-price will drop to 50% ore even below; but will go all the way back to 100% if the repayment comes. During the lifetime of a bond, the liquidity can be very bad and you might not be able to sell your bond.
For the valuation of high-yield-bonds, investors are looking at the pick-up these bonds pay compared to a risk-free-investment. This pick-up is known as Spread. The spread is normally between +3 and +5% but can also change to +5 to +10% in a recession, when the default-risk and the uncertainty increases. A change in the spreads will always lead to a price-change of the bond: if the spreads go higher, the bond goes lower.
If a bond is in default, the price of the bond will only be a fraction of its nominal value. Specialized Investors trade with these papers. These papers are known as distressed debt.

A selection of high-yield-debtors
They had rating below investment-grade at 2012-08-14:
• Argentina
• Bombardier
• Fiat
• Ford
• Jamaica
• Peugeot
• Renault
• Royal Caribbean Cruises
• Hungary
• Venezuela


Moving Average (MA)
What is the Moving Average?
Definition: The Moving Average is an average price of a financial-assets end-of-day-price over a certain period of days. The Moving Average is an important indicator for technical chart-analysis. The Moving Average allows to identify new market trends. The yesterdays closing price is always the latest value, while the oldest value is skipped for the calculation (therefore "moving"). Most common are Moving Averages over 20 days (MA20), 50 days (MA50) or 200 days (MA200).

Calculation and Use of the Moving Average
For the calculation of a MA20, one has to evaluate the average of the closing-prices from the last 20 days. The Moving Average has a smoother trend then the price-chart, because single day movements have far less importance.
Because of this, the Moving Average shows a better picture of an assets trend. Through adding a Moving Average to a price-chart, one can easily see, if an asset is traded above or below the average price of the last days.
Important trend signals occur, if a 50 day MA crosses a slow 200 day MA. If the MA50 crosses the MA200 above, traders call it a "Golden Cross", an important buy signal. If the MA50 crosses the MA200 below, it is a "Death Cross", a sell signal. If the market goes sideways, a lot of wrong signals can occur, because the Moving Averages cross each other a lot without a new trend in sight.

Example Moving Average
Below an example of Moving Averages in a AUD/USD Currency Candlestick-Chart with three Moving Averages: a fast MA20 (blue), a medium MA50 (pink) and a slow MA200 (orange).
The "Death-Cross" sell-signal from the 21st of March proved to be correct: the new down-trend continued thereafter.

What is the PE Ratio?
Definition: The PE Ratio is a financial ratio to valuate for the valuation of stocks. With the PE Ratio an investor can quickly see how expensive the share-price of a company in comparison to the earnings per share is. The PE allows to compare different stocks with each other.

Calculation of the PE Ratio

current share price
earnings per share

= PE Ratio

PE Calculation example: PE Apple Inc
The stock-price of Apple Inc is at US$ 590. For the current business year 2014, earnings per share of US$ 42.72 are expected.
What is the PE of Apple?
PE = 590 / 42.72 = PE 13.81

How to use the PE
PE comparison Apple vs. Samsung Electronics
A PE of 13 in our case means, that investors are currently paying 13-times the earnings of 2014 to buy an Apple stock. The Samsung stock is traded at a PE of just 7.1. You only have to pay 7-times the 2014 earnings to buy one share of the Samsung Company. That means "Samsung is cheaper valued than Apple". With the PE we can easily compare two different stocks with each other.
The lower the PE, the lower the valuation of the stock. Cheap stocks have a PE of 8-12. PEs over 15 are rather expensive.
But a high PE is often a sign of strong growth. If investors are willing to pay 20-times or 30-times the earnings, they expect the company to offer a far higher gain in the future.
A too low PE Ratio below 7 is a sign of a weak outlook and shrinking profit of that company.
The earnings per share used to calculate the PE is an assumption of the financial analysts for the current business year. These assumptions get revised on an ongoing basis and can directly influence the PE. But these assumptions are a better basis to calculate the PE, than the official earnings from last year, which is just too not up to date anymore.

PEG | PEG-Ratio | Price Earnings to Growth
What is the PEG Ratio?
Definition: The PEG Ratio is a financial ratio for the valuation of stocks. It compares the PE (price to earnings ratio) of a stock with the anual earnings growth rate. With the PEG Ratio you can evaluate, whether a stock is cheap, fair or expensive in comparison to the promised growth rate of the company (EPS Growth = earnigns per share growth per annum).

PEG Ratio Calculation

PE-Ratio
EPS Growth Rate

Example PEG Calculation:
A stock is valued at a PE of 12 and offers an anual EPS-Growth-Rate of 8% p.a. What's the PEG Ratio?
Answer: 1.5

The PEG Ratio in practice
The PEG Ratio says basically nothing else than: "a stock is fair priced, if the PE is about the same as the EPS-Growth-Rate p.a.
• PEG 0-1 = attractive valuation
• PEG close to 1 = fair valuation
• PEG above 1 = expensive valuation
The PEG Ratio is a powerful valuation ratio but get's unfortunately often times ignored by investors. The PE alone does not give you the full picture about the valuation of a stock. Only after comparing the PE with the growth of a company the picture gets clear. A Stock with PE 25 and an EPS growth of%? Cheap! (PEG 0.83). A Stock with PE 17 und growth of 7%? Expensive! (2.42).
Investors looking for growth stocks with low PEG, do not risk to buy stocks with no earnings at all. Because these stocks have no PE (if they make losses) or a very high PE of 50-100, leading to a high PEG Ratio!


Smart Beta | Smart Beta ETFs
What is Smart Beta? What are Smart Beta ETFs?
An ETF is a passive instrument, tracking an underlying Index cost efficient and 1:1. The performance of an ETF is just as good as the Index it represents. An outperformance (Alpha) is per definition not possible as the ETF just delivers cheap beta (market exposure).
Smart Beta hence is an alternative approach of a classic, passive ETF mixed with an active stock selection. The ETF itself is still passive but the Index it represents is not static but smart.
While the most common Indices (i.e. MSCI World) weight their components by market-size (free-float), Smart Beta Indices are structured to weight the same components in an alternative (smart) manner in order to allow an outperformance (alpha) vis a vis the index.

Types of Smart Beta ETFs
The following Smart Beta ETF Strategies are common::
• Momentum - Stocks are being weighted by their momentum, which should lead to an outperformance
• Value - Stocks are being weighted by Value criteria in order to reach a sustainable performance.
• Low / Minimum Volatility - Stocks with the lowest volatility have the highest weight. This should lead to a less volatile performance.
• Quality - Stocks are being weighted by quality criteria.
• Equal Weight - All Index Components get the same weight in order to get a broader diversification.
• Minimum Variance - Stocks are being weighted in a risk adjusted manner in order to get the optimal diversification with the lowest possible risk.
The development of Smart Beta Strategies is not finish yet and over time we will see which strategy is worth an investment. The industry is trying new approaches but time will tell which alternative index strategies will survive.
In a simple performance comparison on USD Basis for Smart Beta Indices based on the MSCI USA (2013-06-01 to 2015-12-15) the gap of 22% is quiet large, while the classic MSCI USA is in the middle and Quality Growth and Momentum are leading.


YTM | yield to maturity
What is the yield to maturity?
The yield to maturity is a figure that is used for the valuation of bonds. The yield to maturity shows, which yield a investor gets, when he buys a bond at the market price, collects all interest payments and gets paid back at 100% at maturity.

Calculate the yield to maturity

(yield to maturity (ytm) formula, to calculate the yield of a bond)
The yield to maturity can easily and relatively accurate be calculated with this formula:

nominal - market-price
YTM = interest+ remaining time to maturity in years
(nominal + market-price)
2



Example
A bond is trading at 97.3%. The interest is 4.60% per year. The bond is due in 4.19 years.
Whats the yield to maturity?
step 1: nominal 100 - market-price 97.3 = 2.7
step 2: 2.7 / remaining life 4.19 = 0.64
step 3: interest 4.6 + 0.64 = 5.24
step 4: (nominal 100 + market-price 97.3)/2 = 98.65
step 5: 5.24 / 98.65 = 0.0531
answer: the yield to maturity is 0.0531. That's 5.31%

Use of the yield to maturity:
With the yield to maturity different bonds can be compared. Which bond yields better? A 5-year bond, trading at 101% with 4% coupon, or a 4-year bond, trading at 99% with 3% coupon?
answer: the 5-year bond has a yield to maturity of 3.78%, the 4-year bond is at 3.27%. The investor can gain transparency with the ytm and will rather buy the 5-year bond with a higher yield.


Zerobond (Zero-Coupon-Bond)
What are Zerobonds?
Definition: Zerobond is a bond which pays no interest in form of a coupon. Instead the investor gets a yield in form of a discount on the nominal value. The Zerobond is issued below nominal value and payed back at maturity at 100% of nominal. They are also known as discount-bond or deep-discount-bond.

Example Zerobond
A new Zerobond is issued at the following conditions:
Lifespan: 10 years
Interest: 0%
Nominal Value: 1.000.-
Issue Price: 750.-

Yield of a Zerobond
This Zerobond pays no coupon but is issued at 750 and payed back at 1000. This is a direct yield of 33% in 10 years. But whats the yearly yield to maturity an investor gets?

Nominal-Value ^ (1/Lifespan)
Issue-Price
=
1000 ^ (1/10) -1 = 2.92%
750