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Get Started With Investment Funds

I nvesting in the stock market is risky, but the return can be well worth it. If you’re looking to invest in something a little less risky but that still gives you a decent chance of a return, then an investment fund might be for you. Learn more about the types of investment funds, their benefits, and how to get started investing in them.

Key Takeaways:

  • Investment funds are securities purchased by a group of investors that are overseen by a fund manager.
  • Open-end funds have no supply and demand, keeping things pretty even keel. Closed-end funds have supply and demand and mimic stocks.
  • Investment funds include mutual funds, exchange-traded funds, money market funds, and hedge funds.
  • Benefits of investment funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing.
  • Investment funds can spread your investments among high, medium, and low-risk companies, resulting in less risk over an extended period of time.

What Are Investment Funds?

Image via Flickr by photosteve101

Investment funds can be described as pooling your money with other investors to purchase securities collectively. Even though you’re investing as a group, each investor retains ownership and control over their shares. However, as the fund grows and makes a profit, each individual does not have a say in how those funds are invested.

An investor can choose a fund based on risk, goals, fees, and other factors. From there, a fund manager will oversee the rest of the decision-making process. The fund manager will determine which securities to hold and in what quantities. The fund manager will also decide when securities should be bought and sold.

Investment funds are the most popular investment choice in the United States.

Open-End Funds Vs. Closed-End Funds

You have some options when it comes to investment funds. The safer and most popular is the open-end fund. An open-end fund issues new shares as more money is added to the pool. As investors redeem shares, the shares will retire. There’s no supply and demand, resulting in a direct reflection of the underlying asset. Open-end funds do not keep producing more shares. These funds are typically priced at the end of the trading day.

Closed-end funds are more reflective of stocks. These have supply and demand, meaning there’s a fixed number of shares to buy and trade on. This can result in closed-end funds trading at a premium or a discount to its net asset value.

Types of Investment Funds

There are several different types of investment funds for consideration. They include:

  • Mutual funds:Mutual funds are pools of money by investors that buy equities and other securities. Mutual funds are typically on a lower scale as far as investment funds are concerned. You can either passively or actively manage mutual funds.
  • Exchange-traded funds (ETFs): These investment funds were developed as an alternative to mutual funds because traders were looking for more flexibility with their investment funds. ETFs trade on exchanges and are priced and available for trading throughout the day. This is similar to closed-end funds. An advantage of ETFs is that they have a slightly lower expense ratio when compared to mutual funds. ETFs are a rapidly increasing fund option.
  • Money markets: Money markets have a high degree of safety with relatively low rates of return. These funds trade in very short-term debt investments. Banks can open money market accounts, and an individual investor can purchase money market funds at the retail level. On a wholesale level, money markets involve large-volume trades between institutions and traders. Most money market transactions are completed this way.
  • Hedge funds: These funds are quite different from mutual funds and ETFs. They are available to accredited investors and are actively managed. Hedge funds have fewer federal regulations, resulting in the ability to invest in a variety of asset classes. Hedge funds tend to be a little riskier than ETFs and mutual funds.

Which fund is best for you will depend on what your financial goals are, the time period you plan to invest the funds, and the activity level you desire.

Benefits of Investment Funds

If you’re just getting into the stock market, it might be wise to place some of your money into investment funds. With investment funds, your money is managed professionally. This takes out all of the work on your end. Fund managers complete the research, buy and sell the securities, monitor the securities, and reinvest for you.

If you’re the type of person who likes to take a risk but have a safety net in place, investment funds can do just that. Investment funds allow you to split up your investments into many different companies. This provides a sense of security since you know that if a company fails you have other companies to rely on in your portfolio. Investment funds don’t require a large sum of money to get started or for subsequent investments. If you’re looking to start small, investment funds allow just that. They also enable you to cash in your shares at any time.

There are a variety of benefits to investment funds. Some of these advantages include:

  • Advanced portfolio management: For a small fee, a professional portfolio manager will manage your investments, including buying and selling stocks and bonds.
  • Dividend reinvestment: As your securities grow and you accumulate interest income, you can purchase more shares in the funds.
  • Risk reduction: Most investment funds will invest in 50 to 200 different securities, thus reducing risk by diversifying your portfolio.
  • Convenience and fair pricing: Investment funds are easy to buy and easy to understand. They also are only traded once per day at the closing net asset values, which alleviates the stress of price fluctuations throughout the day.

How To Get Started With Investment Funds

Getting started with investment funds is relatively simple. Try using these steps:

  1. Decide whether you want to invest actively or passively. You can choose to have a professional actively manage your investments to beat the market, however, since a person is involved, this option tends to have higher fees. Passively managed accounts are on the rise. These funds are cheaper to purchase, and there are fewer fees. This approach is less hands-on, but both methods show similar results.
  2. Determine how much money you’re able to invest. The money you choose to invest should be untouched for at least five years. This will allow for your investments to ride out any storms that may arise. Once you have your budget in mind, determining how much risk you want to take is the next thing to consider. Your age and how close you are to retirement can help you determine how risky you should be.
  3. Open a brokerage account. If your place of employment offers a 401(k) or other employer-sponsored retirement, chances are you have already invested in an investment fund. If that’s the case, you could purchase additional funds through these companies. However, they may not have as many options. You could also buy from an online broker. This will give you a more comprehensive range of options. Some things to consider when taking this route are affordability, fund options, knowing what educational and research tools the company offers, and how easy the use of their website or app is.
  4. Look at the fees. This goes back to the first consideration of whether you want to invest in an active or passive account. Both types will have fees associated with them, but actively managed accounts have higher fees. Ensuring you understand the fees involved will help you keep your profits at the highest possible return. Some brokerages offer no-transaction-fees mutual funds. These could be a good starting point. However, the return on these investments is not always as high.
  5. Start to invest. Building and managing your investment portfolio is essential. Have goals in mind and stick with them. Having your portfolio examined and rebalanced every year will help keep your portfolio in check.

Investment funds are popular in the United States. They provide an outlet for people wanting to invest their money by using a more secure method. Investment funds also allow people the opportunity to dabble in the stock market without having to put forth a lot of money to start. By pooling your money with other investors and having the advantage of someone monitoring your investments for you, it’s well worth the small fee.

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.

What Is the IPO Process?

A n IPO is the process that a privately owned corporation takes to issue its stock to the public. An IPO often gives a company a large financial boost, which it can use to promote organizational growth. Buying shares as soon as a company holds an IPO is a great way to get in on the ground floor, but it can also pose a few risks. Getting to know the IPO process can help you decide when you want to invest in a new public company.

KEY TAKEAWAYS

  • To hold an IPO, the company must meet varying requirements by individual exchanges and the Securities and Exchange Commission.
  • IPOs are excellent opportunities for private companies to gain more capital for growth and expansion.
  • Companies almost always use underwriters to make the process go smoothly.
  • An IPO is a way for the early investors and founders to maximize profits from their initial investment as an exit strategy.

How Does an IPO Work?

Corporations are privately owned by a number of investors, like venture capitalists, angel investors, company founders, and the founders’ circle of family and friends, prior to the IPO. As a private company grows, it may reach a point where it needs capital to continue its growth. If the company’s at a maturity point that can handle the requirements set by the SEC and can fulfill all duties to the shareholders, it can begin to publicize their intent of launching an IPO.

Commonly, when a company reaches a value of about $1 billion (aka unicorn status), they’re at an excellent stage to consider an IPO.

The time to offer an IPO is not a hard and fast rule. Various factors make a company qualified for an IPO at different valuations depending on the current market and requirements.

An IPO is a major step for any company providing capital for expansion. The transparency inherent in going public can also help improve any loans the company may need to take on in the future.

The underwriting done by the investment bank hired to help the company with an IPO will determine the initial pricing on an IPO. After going public, any shares owned by the private shareholders becomes publicly traded shares valued at the determined IPO value. The underwriting can also provide any additional amenities or benefits for the private investors as the company goes public.

Underwriting the IPO

Underwriting is the process in which an investment bank acts as a broker between the company and public investors. There are a few different types of underwriting agreements that the investment bank may offer. First is the firm commitment agreement in which the underwriting investment bank purchases the entire initial offering and then resells the shares to the public. This method allows a guarantee that a certain amount of money will be raised, thus trading greater potential for less risk.

Another agreement is the best efforts agreement, which stipulates that the underwriter offers no guarantees on the amount that will be raised but instead is just selling the shares for the company. They may include an optional all-or-none-agreement where either all shares must be sold or the entire offering is canceled.

Finally, if there are multiple underwriters, one is chosen to be the lead manager. In this scenario, a syndicate of underwriters forms, and each underwriter sells a portion of the IPO.

IPO Process

Here’s a very basic overview of the process of an IPO:

1. The company solicits and evaluates the various proposals presented by underwriters

These proposals consist of what their services entail, the best security to issue, the potential offering price, the number of shares to release, and an approximate time frame for the market offering. After the evaluation period, the company chooses its underwriter(s) and officially enters into a contractual relationship.

2. The Company Forms Teams of Underwriters, Lawyers, CPAs, and SEC Experts

The IPO team gathers the required information for the requisite IPO documentation. The main IPO document is the S-1 Registration Statement. This consists of the privately held filing information as well as the prospectus. Both parts of the S-1 are living documents that are consistently updated and revised throughout the process. Also included in the S-1 is the preliminary data of the upcoming filing.

The team also needs to create marketing materials. Underwriters, with the assistance of the executives, analyze the market to approximate demand and determine an offering price. As this process continues, they update this information.

3. The Company Creates a Board of Directors

The board will create and verify procedures for the reporting of auditable financial statements and accounting information every quarter.

4. The Company Goes Public

The team Issues shares on the official IPO date. Capital from the sales is received as cash by the company and reported as stockholder’s equity. Post-IPO provisions also occur, such as underwriters having an extended period to buy more shares after the initial IPO.

Financial Advantages of an IPO for the Corporation

Image via Flickr by Damian Gadal

The primary purpose of the IPO is to generate capital, but there are other advantages an IPO presents.

  • Companies have access to the entire public investment market.
  • It’s easier to determine the value of an acquisition target.
  • Increased transparency and quarterly reporting can lead to better rates on borrowed funds.
  • Secondary offerings after the initial IPO can generate further capital.
  • It gives the company the ability to offer stock options to prospective employees to attract and keep better management and high-end employees.
  • IPOs offer increased exposure, prestige, and public image, generating more sales and more profits.

Disadvantages of an IPO

As lucrative as an IPO can be, there are potential downsides as well.

  • The process is costly, and there are costs beyond the typical price of doing business when the company is publicly traded.
  • A publicly traded company must disclose financial, tax, accounting, and any other business information.
  • The requisite reporting requires additional effort and staff hours to prepare, which is an additional cost to the company.
  • Potential funding not being generated if the IPO price was not accepted by the market and shares were not purchased.
  • There is a potential loss of control to the new shareholders who have acquired voting rights.
  • There could be an increased risk via private securities class action lawsuits and actions of the shareholders.
  • Stock value fluctuations can be a distraction and lead companies to change direction, perhaps prematurely.
  • Specific methods used to increase the value of the shares, i.e., using excessive debt for stock buybacks, can lead to instability of the company.
  • A board of directors that is overbearing can lead to difficulties in acquiring and retaining forward-thinking executives.

There is a great deal of inherent expense, risks, and effort associated with becoming a publicly traded company. This risk may be more than a company is willing to take, so it can continue to remain private. Companies can also seek buyouts as an alternative.

Alternatives to the Traditional IPO

The traditional IPO is the most common way for companies to go public. However, some companies might try the following:

Direct Listing

A direct listing occurs when an IPO happens without assistance from underwriters. This method increases the risk of failure but can also lead to a higher initial price. This method is only relevant for a company that is already well known with an attractive and established brand.

Dutch Auction

Another alternative to a traditional IPO is a Dutch auction, which is when the IPO price has not been set ahead of time. Instead, potential investors bid based on what they’re willing to pay and the number of shares they want. Those who bid the highest price are awarded the available shares. Alphabet (parent company of Google) used this type in 2004 for its initial public offering.

A n IPO can be an excellent way for a private company to grow and inject capital into its business, but it is not without risk. If you’re looking into buying shares during an IPO, carefully research the company and the steps they took to go public to make sure you’re getting the best value for your investment.

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.

 

There’s nothing I love more as a trader than a good gap.

A gap is an area where the price of a stock moves sharply up or down from the previous close. Gaps occur because of fundamental or technical factors that are influencing the market.

They are typically found around periods of news or earnings that drive the price away from where it closed the day prior. For example, if a company’s earnings are much higher than expected, the company’s stock may gap up the next day.

 

SFIX gapped up the following day after a positive earnings release this week.

 

For day traders, a gap is a highly anticipated momentum signal. Every day, these traders have the same focus… find the biggest gappers, search for a catalyst, add to a chart in their grid, and execute trades when momentum picks up.

Of course, I mainly do swing trading across my trading services, so I always look forward to that overnight gap up.

Here are two categories of gaps that we can trade.

  1. Gap Continuation
  2. Gap Fading

Today, I want to talk about 2 continuation gaps we can trade… tomorrow, I’ll share 2 fading gaps.

 

2 Types of Continuation Gaps I Trade

 

Each of the gaps have wildly different outcomes from one another.

Get our analysis incorrect, and we could be placing ourselves on the wrong side of the markets with very little time to exit the trade.

Allow me to share 2 continuation gaps that I like to look for…

Breakaway Gaps:

Breakaway gaps are typically found at the very end of a price pattern and are typically seen as a shock to traders.

These gaps are typically found when a pattern is coming to a conclusion and buyers (or sellers) stepped in and started the next trend cycle.

In this example, the major triangle pattern is finally being invalidated by traders and a new direction is being declared.

 

 

Continuation Gaps :

Continuation gaps are also known as runaway gaps.

These gaps occur in an already existing pattern signaling a rush of buyers (or sellers) who believe the stock is continuing the current trend.

This is typically fundamentally driven and has outside influences other than technical trading patterns. It is usually assumed that cash inflows are being rushed into the stock from major investment banks or institutions trying to get on the bandwagon.

 

 

Trading the Gap

 

Now that each gap is identified, let’s take a look at how we can trade the continuation gap.

Each trader has their own idea of why a gap was formed and which direction it should take.

Every gap tells its own story and therefore bears a different meaning to each trader who analyzes it.

Gap Continuation:

Gap continuation is a trade that continues in the direction of the gap. Usually gaps will continue their trend only when it’s a healthy market and the primarily buyers (or sellers) want to remain in control.

Breakaway gaps and continuation gaps are typically the only two gap patterns that will have continuation in their price action.

Pro Tip: institutions and large hedge funds will tend to pile into stocks when there is a healthy trend causing these gaps to occur or continue.

That’s why scanning for activity in the dark pools is a big part of my overall trading strategy.

 

Filling The Gap

 

Is it common for gaps to be filled? Yes and no.

Depending on the type of gap and the strength of the move, it’s possible for a gap to be filled. Both of those factors will determine if the gap can be filled that same day or if it will require more time. The speed at which a gap is filled usually depends on the ‘shock’ the gap produced in the chart.

Pro Tip: Some gaps are so strong that they can destroy technical patterns and invalidate setups.

 

Why are gaps filled?

 

It’s important to remember that gaps are caused by emotion. Due to human emotions there are many different factors that impact a stock. It’s always hard to know if a stock will fade from the open or just continue in the new direction. When a gap is filled it usually boils down to a handful of reasons.

Gaps are filled from 3 major reasons:

  • Irrational exuberance
  • Technical resistance
  • Price patterns

Irrational exuberance :

When the initial spike in price may have been overly optimistic from FOMO traders getting into the breaking news. They are exiting the trades with either a quick profit or after they have realized they made the wrong decision.

Technical resistance :

Common when a price moves up sharply. If a stock gaps up into technical resistance, it has a higher probability of reversing and filling the gap to the downside. Some examples of technical resistance are trendlines, technical patterns, support and resistance zones, 52-week high and lows, etc.

Price Pattern :

This one is important since it gives the trader the “bigger picture” as to what the stock should be doing. Price patterns are typically used to identify exhaustion and continuation gaps.

 

Author:Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.