INVESTMENT RISKS

Active Trading

Active trading involves buying and selling securities over a short period of time. In some cases, the holding period of a security can be as short as a few days. But, generally, the holding period is going to be somewhere between one and nine months. There are both risks and potential benefits to this type of trading. The risks are obvious. When dealing in such short term time horizons, the timing of the investment has to be correct for you to make a profit. Otherwise, you will be selling securities at a loss without giving the security time to recover. That said, there is no guarantee that any security will recover or come back to the original cost basis. So, you must assess each stock individually to determine its merits and then make your decision whether or not to take the loss or hold it in hopes that it will recover. There is a flip side too. If the timing of the investment is correct, there is a potential for a sizeable gain in a relatively short period of time. So, you need to make your own judgment as to whether or not you want to take the additional risks involved in short term trading. And, the biggest additional risk is time. Investors who have a long term time horizon (at least five years), and buy quality companies in diversified portfolios, will generally perform well. Investors with very short term time horizons (less than one year) have the potential to perform even better if the timing of their trades is correct. But, without the benefit of time, they have increased risks when compared to the "long term" investor.

There is no guarantee that actively trading securities will result in a profit. Active trading is a very risky strategy and you could lose a portion or all of your investment. Please click this link to view our Day Trading Risk Disclosures

Margin Trading

When you trade using margin, you are borrowing money from the brokerage firm to purchase securities. Using margin gives you "leverage", and leverage is a double edge sword. For example, you purchase 1000 shares of a stock trading at $100.00. The total money due for the trade is $100,000.00. When using margin, you will deposit $50,000 into your account and borrow the remaining $50,000 from the firm. If the stock then moves up 10% to $110, your account value will be worth $110,000.00. There is a $10,000 unrealized gain. While this equates to a 10% profit on the actual stock ($10,000 / $100,000 = 10%), you actually have a 20% profit on the amount you invested ($10,000 / $50,000 = 20%). This is why we use the term leverage. However, it works the other way too. If the stock goes down 10% to $90 per share, your account will have an unrealized loss of $10,000. This equates to a 20% unrealized loss on your investment. And, you can be subject to a margin call. A margin call is issued when the brokerage firm requires that you deposit additional funds into your account. So, while using margin does give you the opportunity to earn a greater potential return if you are correct about the timing of your investment, it gives you the potential for even greater losses if you are incorrect about the timing of your investment. As with any investment strategy, you need to determine if you are willing to take the increased risks associated with using margin to invest in securities.

There is no guarantee that trading securities using margin will result in a profit. Margin trading is a very risky strategy and you could actually lose more than your original investment. Please click this link to view our Margin Disclosure Statement.

Portfolio Concentration

Portfolio Concentration involves an investor having a portfolio of no more than a few positions. While it understandable that a short term trader might only want a portfolio with a few position because it is easier to manage, we do not advise it. There are bigger risks involved in having a concentrated portfolio than a diversified portfolio. In a concentrated portfolio, you run the risk of one stock causing significant damage to your portfolio. For example, you own two stocks (stock 'A' & 'B'). Each stock represents 50% of your portfolio and you have $100,000 in each. This makes your portfolio value $200,000. Stock 'A' declines 50% due to a poor earnings report and the market reaction to the earnings report. Now, your entire portfolio is worth $150,000 which is an overall 25% decline. If you had that same $200,000 portfolio invested in ten individual stocks ($20,000 per stock), and the same thing happened, you would be in a lot different shape. For example, stock 'A' declines by 50%. Since you had $20,000 invested, that represents an unrealized loss of $10,000 in your portfolio. Your portfolio would now only be down 5% as opposed to the earlier example. So, diversifying your portfolio will not guarantee profits, nor will it guarantee that you will avoid losses; however, it will reduce your overall risk. Your portfolio will still be subject to "market risk" as will any other investors portfolio. But, by diversifying your portfolio, you will reduce what we call "event driven risk".

Please remember, you should have a basket of stocks, not just one or two. Not even the best stock picker in the world picks winners every time. You should spread the risk around. Have at least two stocks from each sector you are invested in and invest in at least three sectors. Ideally, you should have stocks and bonds in four or more sectors. The more diversified you are the better. This way you will reduce the chance of one bad stock destroying your account in the event you are wrong.