Stock Options Continue, Despite Scandals

The stock-option backdating scandal has hit over 150 companies nationally as of October 2006. The financial advisory firm Glass Lewis has said that over $10 billion is involved in the various companies charged with backdating stock options. The analysis was in Glass Lewis' weekly ``Trend Alert'' advisory.

Stock-options generally are a perfectly legal option for companies to reward their employees by giving them a discounted option to buy stock. The idea is to bind the employee closer to the success or failure of the company, and reward him or her for better performance, by being able to tangibly share in the company's shareholder value.

Some companies choose to have broad-based employee stock option plans. These plans give most employees the right to participate. An employee stock ownership plan (ESOP) is a type of employee benefit plan. The company contributes its own shares to the ESOP plan and arranges for this to provide tax benefits for the company and its employees. Many of these plans involve companies that have not "gone public" and are closely held. Probably as many as 10 million employees in the United States participate in stock option plans. Other plans allow employees to buy stock through payroll deduction plans, through a substantial, 15 percent or more, discount. ESOPs from a legal standpoint are different from straight employee stock option plans, in that they are much more broad based. The scandals involving stock options involve leading executives who are allowed to buy stock at a price that has been dated in some cases years before the present, so they can make an immediate profit selling stock of over 50 percent.

A 401k plan involves stock ownership by employees, but in a diversified portfolio of stocks. Some of these plans include a matching plan where the employees pay over time for an amount of company stock for their retirement fund.

Stock options in various forms are a big time business. Take the case of Microsoft. Microsoft receives cash by issuing employee stock options, after which the company then receives billions of dollars in tax deductions. This can be pretty strange, but it is definitely significant. A large portion of the salaries that Microsoft pays out are in the form of stock options. These options allow employees to buy stock at a fraction of the market price. The employees only pay taxes on the portion of the stock price they pay that is discounted from the market price. Microsoft made over $5 billion off the stock market in one year, tax-free.

Stock Market Strategies For Investors

Investors can use a number of strategies to invest in the stock market. To begin with, they need to analyze market trends, learn about the market in which the companies they are interested in operate, and purchase shares at an appropriate time.

Usually, good companies announce their profits, or their status in the market, at certain times of the year. The prices of their shares tend to increase before such announcements are made. Therefore, investors need to watch out for these periods, and not purchase shares at this time. In other words, it is important to wait for the right �Market Timing' for trading in shares. Some basic stock market strategies for investors are listed below: -

Make a well-planned investment portfolio that satisfies a particular level of risk tolerance.

Keep reviewing and updating the investment portfolio to keep up with market trends.

The technical analysis of stocks helps in gaining better knowledge about a company: its profits, its market capitalization, and its future growth prospects. Equally important is to be able to understand and apply the quantitative measures of the stock market.

Since investing in the stock market is complex, inexperienced investors should always seek help from financial advisors and stock market analysts before committing themselves and their money.

The motto being "Buy Low and Sell High", always buy shares when their prices are low, and sell them when the price goes up.

Invest intelligently. A sharp sense of the market, along with a good knowledge of the company you plan to invest in, helps in making better investment decisions. Investors should thoroughly research the market in which the chosen company operates.

Long-term vision and planning is vital. Investors should evaluate their capital strength, and set their tolerance limits, before investing in a company. This means, knowing when to hold on to the shares, and when to quit.

It is generally advised to devise and apply an exit strategy cautiously. Investors can make their exit when they have gained good returns over a certain period.

The returns gained from selling the shares of a company can be re-invested in some other, promising higher profits.

Investors should also set their tolerance limit for the amount of loss that they are ready to bear when the market is down. They can exit when their losses approach or cross this predetermined limit. This strategy of limiting the amount of loss an investor can withstand is commonly known as "Stop Loss Limit".

Another strategy investors can follow is to �Buy and Change Frequently'. Market research shows that every company has some limit on the expected gains from their shares. Investors can therefore move out of a stock when they have achieved maximum returns from shares accordingly. It is important to invest in a variety of companies to withstand the losses of a few.

The objective of any investment is to maximize returns while minimizing risks. Diversification helps in maximizing returns from investments in stocks and bonds by managing risks better. Investors ought to distribute their investments across several categories like foreign securities and mutual funds to be on the safe side, and in the process enjoy good returns.

The Buy and Hold Investors' Nightmare

Being a Buy and Hold investor is like living through a nightmare where you find yourself the main character of the Greek "Myth of Sisyphus."
Futile and Hopeless Labor: In this myth, Sisyphus is condemned by the god Zeus to an eternity of futile and hopeless labor. He must roll a heavy stone to the top of a mountain. But then the stone rolls all the way back down � and Sisyphus has to push the stone back up again to the top.
A sentence of "futile and hopeless labor" is similar to the situation that Buy and Hold investors have faced during many periods of stock market history. Since "Bull" Markets are inevitably followed by "Bear" Markets, the investor's hard-won gains from the Bull Market up-cycle evaporate as market prices fall during the Bear Market down-cycle.
That's not to say the stock market hasn't gone up over time. Looked at over hundreds of years, the market has grown at a 7% average growth rate. You might say: What's the matter with 7%? The problem is that in order to have a statistically high probability of achieving an average growth rate that high, you should expect a potential wait of as long as 20 to 40 years!
Bear Markets Appear at Regular Intervals: Looking at the past 200 year historical record as author John Mauldin does in his book Bull's Eye Investing, there have been 7 "secular" bull market cycles and 7 secular bear cycles � the bulls averaging 14 years in length and the bears 15 years. The word secular means "era" as in a long time.
Bull and bear cycles are long enough to consume a major portion of your earning years. Look at the cycles of the past century: The Depression-era bear market cycle lasted from 1929 to 1945. Then the bull cycle after World War II lasted from 1946 to 1964. After that, a new bear market cycle lasted from 1965 until 1981. The most recent bull cycle lasted from 1982 to 2000.
� 15 to 20 years is a long time to wait for nothing better than a zero or negative return.
We are Now in a Secular Bear Market Cycle: Bull market cycles are preceded by very low stock market valuations (low P/E ratios); and bear cycles begin after periods of very high valuation.
� The "bubble" peak year of 2000 saw record-high P/E ratios reflecting manic levels of bullish hysteria at the end of an 18-year secular bull cycle.
It is quite reasonable to view the 3-year bear market that began in 2000 as just the opening act in a new secular bear cycle that could easily last until about 2015 if you assume an historical average.
� But secular bear cycles will include bullish interludes � just as bullish eras have included regular bearish phases.
Secular Bear Cycles have Plenty of Ups and Downs: In fact, during the average bear market cycle, roughly 42% of the years have been up years according to John Mauldin in Bull's Eye Investing. The intermediate up-cycles last about 2 years on average. On the flip side, secular bull cycles show a similar but opposite tendency. Since 1900, about 17% of the years during secular bulls have been down years.
The current bullish phase in the stock market is most likely just one of those bullish intermediate up-cycles that usually appear in the middle of secular bear cycles where the predominant, long term trend is down. So the current bull market period is likely to roll over into a continuation of the secular bear down-cycle that began in 2000.
A Nightmare for Buy and Hold Investors: So far in this decade, Buy and Hold investors have probably felt like the mythical Sisyphus. After making fantastic gains during the Roaring 90's, many investors lost between 30% and 70% on their stock market portfolios during the bear market of 2000 to 2003. Then a bullish interlude began in 2003. If an investor was fully invested at the beginning of this phase, they have probably recouped about 70% of what they had lost.
� Almost 7 years into the new secular bear market cycle and the average Buy and Hold investor is still down about 15%, in spite of the recent bull market interlude.
The Nightmare has only Just Begun: The current bullish interlude is likely running out of steam. At nearly 4 years in duration, this bull is getting "long in the tooth" by historical standards. Looking forward from where we stand today, the average investor can expect a pattern of more frequent and punishing Bear Market periods in between Bull Market interludes.
Since the total return on stocks has typically been negative or near zero over a complete secular bear cycle, the Buy and Hold investor � who has already waited 6+ years � could easily have to wait another 6 to 7 years and still receive no positive net return.
Most investors' natural reaction would be to flee the exits and put all their money in bonds, CD's and bank accounts. But how is a growth-oriented investor to know when it is safe to get back into the market � when to take advantage of the drop in stock prices?
� Now there is an effective way to make the market's up and down cycles your friend, how to know when it is safe to get back in to the market as well as when you should get out.
Market Timing to the Rescue
Market timing has historically been a rather dubious art, particularly as practiced by a colorful variety of "market gurus" who tried to build reputations by picking market tops and bottoms.
� But computers and quantitative modeling techniques are changing the reputation of market timing. Today, increasing numbers of sophisticated investors are coming to appreciate the potential effectiveness and power of disciplined market timing techniques.
The primary benefit of a longer-term market timing model is to capture the big market trends � up and down. If you can effectively capture the up cycles and avoid the down cycles, your portfolio will be miles ahead of the Buy and Hold investor.
But You Have Heard that Market Timing Doesn't Work: Yes, that is what you've heard from the entrenched interests within the financial business � they can make more money off you as a Buy and Hold investor. But there are a growing number of financial advisors, investment newsletters and portfolio managers that are embracing the new technology simply because it works.
� And now there are several mutual fund families that cater to market timers. The two biggest are Rydex Investments and ProFunds, Inc.
One alternative to market timing is to hire an investment advisor who is a very good stock picker. The challenge will be to successfully pick stocks that continue to perform well during bear markets when an extremely high percentage of all stocks go down. That is a huge challenge and good stock pickers are very hard to find.
Another alternative is to structure your portfolio with a high percentage of bonds and cash, using a traditional asset allocation approach. This method will reduce the potential degree of loss during Bear Markets, but whatever portion you allocate to stocks could still lose 40% or more and may take you many years of patience just to reach breakeven.
The Best Alternative: Tactical Asset Allocation
You can take long term market timing one step further and build it into a disciplined asset allocation process that dynamically follows changing market trends in multiple asset classes (such as bonds, stocks and real estate).
The point is to use timing techniques for each asset class to capture the up-cycles and avoid most of the periods of under-performance and losses.
� This is the most efficient approach to asset allocation � because it mostly eliminates the long periods of under-performance that would be inevitable using a traditional asset allocation of fixed investments.
The average investor can now more easily access this sophisticated approach through multiple avenues � individual investment advisors that use the approach and investment newsletters that offer model portfolios based upon market timing techniques. In addition, several mutual fund companies, including Rydex Investments and the Hussman Funds, have introduced mutual funds based upon market timing technology.
And there is the "do it yourself" approach. An increasing number of trading software packages offer the analytic capabilities for individual investors to experiment with their own quantitative timing techniques. Many day traders have already figured this out.
But as a long term investor, your objective should be to invest heavily in the market during a period like the 1990's and then to be out of the market during a bear market like 2000 to 2003 when a huge destruction in value occurred.
� Capture the huge trends and you will mostly compound profits on top of profits and the power of long term compounding will take over to accelerate the growth of your portfolio.
We aren't in the 1990's Bull Market anymore. You will need a more sophisticated investment strategy to be successful in the years ahead ... one that can make money in spite of the inevitable bear markets. Now you can avoid the nightmare and tragedy of the Greek Sisyphus. To stay on top of the volatility observed in market cycles Mark recommends that you subscribe to a investment newsletter that provides you investing tips and advice about market timing.

Stock Valuation - The First Step Towards Intelligent Investing

Stock valuation can be considered as a tool for picking out stocks that will bring you good returns. Imagine buying a car without knowing its value, or investing thousands of dollars in property with no potential. Sounds scary? Yet, this is exactly what it amounts to if you put money into deals without assessing their value.

Intelligent investment needs a lot of effort. If you want to invest in stocks, the first thing to look out for is its valuation. Valuation of a stock means the price or �actual' value it holds. If you are doing stock valuation then you need not study the stock chart every time or worry about the trend in the market or the interest rates of the stocks. Never invest in stocks without knowing the value, because that is like going up a blind alley where you have no idea what you will end up with.

Investment in stocks without valuation is like risking your money deliberately. While the fluctuations in the stock market cannot be avoided, with the accurate valuation of a stock, you can minimize the risk factor. It will ensure that you not shoot in the dark, and make sensible investments. Use the valuation of stocks to serve as a guide for buying and selling stocks.

Instead of pouring your hard earned money into stocks without valuation, it is better to be patient and carry out a thorough research to determine the worth of stocks before buying. You do not have to be a math genius, or a stock market guru either. All you need is basic mathematical skill, and the perseverance to look for all the valuation information available.

You cannot make the most of valuation if you do not understand or appreciate its importance in the stock market. Spending a large amount in buying shares based on what others say may well result in losses. Neither should you buy based on media hype, as this may mislead you, and you may end up losing every penny you invested. Owning stocks of a company in the form of shares can be a very good wealth-building tool for you as it grants you claim on everything that the company owns. Hence, assessing the value of the company, the profit it is generating and how beneficial it can prove to you, is a worthwhile enterprise. Valuation can prove to be especially beneficial for middle class investors, as they have limited resources to overcome losses incurred in the stock market.

Therefore, valuation can be considered the key factor in buying stocks. Just as one assesses the value of anything one buys on the basis of a specified standard, stocks too need to be valued to determine whether the investment will bring you returns or not. Be aware, there are companies in the stock market that are making huge profits, but their stocks are of no value. Hence, spending time on carrying out your own research will help you pick up the right stock for your portfolio.

How To Avoid Mistakes When Investing In Shares

The promise of making a lot of money has been heard by many, and many have found out that it just is not as easy as they had heard. They lost money - sometimes a lot of it. They then turned away from the stock market and ended up totally disillusioned about it. The truth is, they may have been somewhat confused about it in the first place. They may have thought it would come to them just like it did to others - without knowing the why's or the how's. Here are some strategies that you can use in order to help you to avoid the common mistakes that others have made.

Get A Realistic View

By looking at the market with your eyes open, you can come to understand not only the profit possibilities, but also the possibility of losses. The truth is that the higher the possible gain there is, that it is always associated with the increased likelihood of loss. The safer investments always bring a lower level of profit, and the safest investments have attached to them the lowest levels of profit.

Understand The Market

One of the greatest benefits that you can have to help you avoid a lot of potential pitfalls in your investments is to understand the principles of investing. In other words, read all you can about the process, how to judge a good stock, etc. The more you know about it yourself, the wiser you will be able to invest your funds - and hopefully see a profit. You will also be able to develop a worthwhile investment strategy - both for the short term and for the long term.

Diversify

It is smart investing to place your available investment funds into a minimum of 6 different kinds of shares. Some suggest that you go as many as 20 in order to diversify safely. Spread your investments into different kinds of stock (sectors) that are not related. This way if one type of market does not do well, then the other ones should. This enables you to still make money from some of your investment.

It is usually a good idea to diversify into more than just the stock market - at least until you really understand what you are doing. The smart investor will take a portion of their investment money and put a percentage of it into secure investments like trust funds which are solid investments, and possibly also bonds, which are the most secure, but do provide less interest.

Seek Counsel From Professionals

Unless you have money to just throw away, it would be a real good idea to seek help from someone who understands the market better than you do. There are professionals out there, financial advisors, brokers, etc., that are more than willing to help you build a solid portfolio for your investments. Their expertise can spare you a lot of unnecessary loss, and get you on to the right track to some solid profit.

Make Your Investments For The Long Term

While there is different thinking about the markets and how to invest, the general idea is to make your investments for the long term. Experienced stock market experts tend not to watch the market everyday, but only check on it once a month and many of them only quarterly. Watching it everyday leads to a lot of anxiety - since the market normally fluctuates a lot from day to day. Overall, though, it generally moves upward.

Stock Market Screening

Wouldn't it be great if we had a magic crystal ball that would tell us just what was going to happen to the price of a stock over the next two years so that we did not have to conduct any stock market screening. Well we don't have a crystal ball that will predict the future all though we do have the opposite, the past "HISTORY". Due to the powers of the internet you and I have the ability to obtain effective stock market research position by conducting positive stock market screening. With the correct stock market screening you can download, for free, years of financial data on any company that is traded publicly. Although this is the opposite of the future if approached correctly utilizing the principles of investment strategies and stock market screening this can be used to our advantage to help establish an effective stock market research position.

The term "Lift-Off Stock" is a term that I use to describe a stock that is ready to take off in price and continue to do so over the next year or two. What is ironic about the term is the fact that while lift-off stocks do exist how do we conduct stock market screening to identify them at the beginning of their price increase? Well I bet I know what you are thinking. Now that you have this huge power of access to financial company data you can down load all the historical financial data for hundreds of companies that are all traded publicly. Then you would use the theories of stock portfolio management to identify all the companies that have had lift-off to the price of their stock. Once you have completed this you would find what they all had in common with their financial data just before and prior to lift-off. I bet you are now thinking "FANTASTIC" well make sure that you call me as soon as you finish compiling all your data. You see the problem with this plan is the amount of time, man-power, money and resources you or I would need to accomplish this is simply way beyond my means.

There is an individual though who I assume had the same idea, Investors Business Daily publisher "William J. O'Neil". And there is one huge difference between Mr. O'Neil and myself, and that is that he did have the time, man-power, money and resources at his disposal to accomplish this because that is exactly what he did. Mr. O'Neil & Co. had been analyzing stock since the 1950s with the use of computers. Due to this he had compiled a huge amount of fundament and financial data on thousands of stocks. Mr. O'Neil took the data of these stocks from the years 1953 through 1993 and identified 500 stocks that had the highest gains during this 40 year period. He then analyzed the data to identify what all these stocks had in common before they started, what I previously defined as "Lift-Off".

Now I will get back to Mr. O'Neil's findings later in this article but first I what to point out the importance the principles of investment strategies carry with regards to stock portfolio management. When we purchase stock we are purchasing a percentage of ownership in that entity. Just as a mortgage company will check our credit before lending us the money for that purchase, we should also check the credit of a company that is a candidate for future investment prior to investing. And just as a credit company has set up guidelines that determine whether or not they will lend you money so should you set up guidelines that any entity must meet before you will invest in them. If you do this with a quality amount of research and thought based on your personal financial situation you will greatly improve your return while reducing your risk for that ultimate goal of optimum return vs. risk formulation. Now there are several very good stock portfolio management strategies that have been developed and you should by all means know them fundamentally, Mr. O'Neil has developed one of them that we are going to cover. What you must do is identify which principles of investment strategies will best fit your personal financial goals and status with as little tweaking as possible. It is ok to adjust our chosen stock portfolio management strategy to fit our personal situation as long as we monitor them and make adjustments for those tweaks that are not effective. This process of adjustments is covered in my Successful Online Portfolio Management e-course in which the simple process of setting up and analyzing your investments with Excel spreadsheets is explained.

Now back to Mr. O'Neil and his findings. O'Neil identified seven characteristics that were all found in the top stock performers and then combined them all into a strategy he call "CANSLIM". He first introduced CANSLIM in his best-selling book, "How to Make Money in Stocks", I believe now to be in its 3rd edition. The foundation of CANSLIM is based on a momentum investment strategy. A momentum strategy is one that consists of fast earnings growth with a strong price chart. But O'Neil also included several requirements that are not associated with a momentum strategy. The seven financial requirements for the CANSLIM investment screening strategy are as follows:

C - (Current Quarterly Earnings) Current quarterly earnings compared to the same quarter of the previous year must have a growth of 18% or more.

A - (Annual Earnings Growth) A stock must have an annual earnings growth of 25% or more over the previous year.

N - (New High Price/Share) The stock selling price must be at or close to a new share price high.

S - (Supply VS. Demand) Shares of stock outstanding must be no more than 25 million.

L - (Leader in Industry) 12 - Month Relative Strength must be 80 or higher.

I - (Institutional Ownership) Institutional Ownership is the percentage of shares of stock outstanding owned by institutions i.e. mutual funds, pension plans, insurance companies, etc. O'Neil wanted percentage of shares outstanding held by institutions to be low, although he does not give a parameter for this I would suggest anywhere from 5% to 35%.

M - (Market Direction) O'Neil advises against using the CANSLIM strategy in a weak market because momentum stocks go down when the market drops. There are several theories on what determines a weak market for momentum stocks and you should come to your own conclusion. One that I particularly like is using the Russell 2000 Index 200 day average as a benchmark. If the Russell 2000 is trading below its 200 day average then it is considered a weak market if above it is a strong market.
This is a stock portfolio management screening strategy that I like, with a few alteration, to use when looking for lift-off stocks. If you would like to know more about the CANSLIM principles of investment strategies read the book "How to Make Money in Stocks" by William J. O'Neil in which these strategies are covered in much more detail. One thing that I would like to point out is this, while the CANSLIM strategy is a very legitimate strategy worth your time to look at, there are several other very legitimate strategies also and you should develop a basic understanding of them as well to ensure that you develop a strategy that is based on your personal financial situation. Remember we should have a portfolio of diversification which not only includes different entities classifications but also different risk structures based on what our individual goals are and how our personal financial structure is composed.

Scott G. Henderson and Strategic Resolutions, LLC do not have nor have had any affiliation with Investors Business Daily and the CANSLIM organization and does not represent any entity associated with them. The contents of this article are entirely the opinions of Scott G. Henderson and he has received no compensation from these entities or any entity associated with them.

Learn to Buy and Sell Stocks Online

Technology has widened the scope for tremendous growth in the stock market. Stock dealing on the Internet involves only execution of the orders. You can buy or sell your stocks from more than 100 online brokers instantly. Online trading is the quickest and the most convenient way of dealing in stocks.

Steps to trade stocks online:

- The first step involves identifying a good online broker, to avail of inexpensive services and tools.

- Make sure that the online broker has an easy to navigate website. The web pages must load quickly, since you may have to look at more than one chart while you wait for the right price to buy or sell the stocks.

-The trading screen should be well organized for you to double-check all the information before trading.

- Do not opt for delayed quotes. A delay of 15�20 minutes can affect your chances of profit. Ensure that you avail of real time quotes. A good online broker will execute your interests as quickly as the stock moves a point. If there is an unnecessary delay in filling in the order, you could stand to lose.

- Take time to choose the best online broker because the wrong choice can turn online trading into a nightmare. It pays to access the stock trading forums and conduct thorough research.

-Reputed online brokers are equipped to provide quick confirmations on orders and offer account balance information and current portfolio updates.

- Look for an undervalued company. Do not just buy the first over publicized share you come across in the headlines of the local business newspaper. Because publicity may increase the price and the market capital of a stock but it may not be beneficial for you as a buyer.

- When the stock market drives down the price of a stock, you can make big money on the investment made after identifying that stock. This is due to the fact that stocks that fall hard are observed to bounce back and show good quarters for investors.

- Your losses can be limited in the fast moving stock market, if you gather sufficient information on the stocks you intend to buy and the investment risk attached. Consider the long-term growth opportunities of a particular company before buying stocks online.

- According to the wall street journal, if you have your stocks in a great company then the best time to sell your stocks is �never'. If you cancel the online trade, immediately contact your firm to ensure that the original transaction was not executed.

- Always remember that trading of stocks online is not an instantaneous process. Technological �choke points' like a slow or faulty Internet Service Provider or computer can slow down the process of your orders reaching the firm. You can also avail of telephone trade or faxing your order. However, these alternatives also come with similar delays.

When a number of investors trade at the same time, prices change and delays become unavoidable. As an investor, you could suffer unexpected loss. You should make sure that you understand all the nuances of buying and selling stocks online, before you make any move.