Posts Tagged ‘stocks’

Should We Let Computers Make Our Investing Decisions?

Wednesday, July 21st, 2010

Dissatisfied with human beings’ powers of intelligence, several firms are trying to use AI to create the ultimate investor.

  • Using a branch of artificial intelligence called “machine learning,” some investors are trying to create an AI that can analyze market data, make predictions about the future, decide which stocks to buy and sell, and learn from its mistakes.
  • The advantage of using an AI program is that it can process huge amounts of data in a short time. But there is no guarantee that the program’s calculations will remain accurate if fundamental market conditions change.
  • One of the companies pioneering this type of AI is Rebellion Research, a small hedge fund based in New York run by a quartet of investors in their 20′s. In recent years, the company has performed better than both the Dow and the S&P 500.

Facts & Figures

  • Rebellion Research has beaten the S&P 500 index by an average of about 10% a year since 2007.
  • In 2009, the hedge fund increased by 41%, whereas the Dow only increased by 19%.
  • Star, Rebellion Research’s AI program, keeps track of approximately 30 factors that affect a stock’s market performance. It usually holds between 60 and 70 stocks at any given moment.

Best Quote

“It’s pretty clear that human beings aren’t improving.But computers and algorithms are only getting faster and more robust.” – Spencer Greenberg, one of the founders of Rebellion Research

The Dow Jones Industrial Average is…

Wednesday, June 23rd, 2010

The Dow Jones Industrial Average (or DJIA) gets its name from Charles Dow, the man who first created it in 1897. In the beginning, Mr. Dow made an index of the 11 most prosperous and most widely traded industrial stocks on the market. Currently, the Dow is made up of 30 stocks from all sectors of the market – not just industrial stocks. The companies in the current Dow index are chosen by the editors of the Wall Street Journal (which is owned by Dow Jones and Company). These stocks are intended to reflect how the largest U.S. companies are doing in the stock market.

An Exchange-Traded Fund (ETF) is…

Monday, March 8th, 2010

An exchange-traded fund (or ETF) is a fund that owns a basket of  financial instruments (e.g., stocks or commodities) that reflect the composition of a market index (e.g., the Dow Jones Industrial Average). Somebody looking to buy ETF shares would do so the same way he or she would buy stocks, that is, on a stock exchange, with the help of a broker who charges a nominal fee.

What’s the difference between stocks and bonds?

Wednesday, January 13th, 2010

When you buy stock, you own equity – that is, you are actually buying partial ownership of a company in the form of shares. The percentage of the company’s total shares that you own is how much of the company you own – for example, if the company has 100 shares and you buy 50 of them, you own 50% of the company. This means that you share the company’s ups and downs: if the company does well, your stock becomes worth more than what you paid for it, and you make a profit, but if the company does badly, its stock decreases in value, and you suffer a loss. Equity holders are last in line among creditors if the company’s value goes to zero. This is why the stock market always has a certain amount of risk attached: you can never know for sure what’s going to happen to your stock.

With bonds, on the other hand, you virtually always know exactly what you’re going to get. Bonds are not shares, so they don’t give you any ownership. Rather, when an institution wants to raise money, it sells bonds, which are like IOUs; they’re basically promises to pay your money back later, with interest in the meantime. The interest rates are usually fixed, so you can calculate your profits. For example, a company could sell you a bond for $1,000, and under the terms of the agreement, you’d get 5% of that $1,000 every year for the next ten years, and then your original $1,000 back at the end of that decade. Of course, this means you’re only going to make a profit of $500 over ten years, but you are guaranteed that money.  If the company goes bankrupt, bond holders are usually first in line to be paid among those owed money. So people who prefer bonds like the security they offer, and people who prefer stocks like their potential to make their owners an incredible profit in the future.

One final note – there are three main types of bond: government, municipal, and corporate. Government bonds are sold by the government, municipal bonds by cities, and corporate bonds by companies. Government bonds are the most secure, followed by municipal, then corporate (because a company is much more likely to go bankrupt than a government is). However, because corporate bonds are the most risky, they also offer the highest rates of interest.

Why do some stocks pay dividends while others don’t?

Monday, August 10th, 2009

A dividend is something “extra” that you get for being an investor or shareholder. It comes from additional money a company has after its normal profits are tallied. When a company makes these extra profits, it has two choices: pay dividends to its investors or reinvest it back into the company.

If a company is young and on the move, it usually chooses to reinvest these profits. That’s because it still has a lot of potential to grow and grow quickly. These extra funds would help it do so.

On the other hand, when a company has already built a reputation, it typically uses the profits to pay dividends to its shareholders instead. Investors often interpret the choice to offer dividends as a sign of a company’s confidence in its business. Other investors specifically invest in dividend yielding stocks as a strategy. Even though the company may not be growing by leaps and bounds, it can still deliver top-notch value to its investors, hence, the dividend. For instance, a long-standing company like Johnson & Johnson (JNJ) might pay a dividend while a faster moving company like Google might choose to reinvest those funds.

Short Skirts and Stocks – From History’s Hidden Engine

Monday, July 13th, 2009

Pervy market analysts have studied the “hemline indicator” for decades.

Just as your personal finances say something about who you are, financial markets can reflect seemingly unrelated phenomena in society. This video reveals a correlation between fashion and finances that is really quite cool.

This three minute clip from the new documentary History’s Hidden Engine reveals the real significance of what’s in style. You can watch the full-length documentary for free by clicking the link above.