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Q: Has Stagflation Ever Happened?

Stagflation did occur in the United States from the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.

Jul

2024

What Is Stagflation & Will It Happen Again?

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

Stagflation is an economic term that is actually a combination of the words stagnation and inflation — and describes an economy that is both stagnant, and experiencing inflation. For investors, it’s worth being aware of what it means, because of the threat it poses to economies and markets.

Stagflation creates potentially disastrous conditions where people experiencing a decline in purchasing power also feel discouraged against investing. It can create a chain reaction of wealth-destroying events where unemployment climbs and economic output slows, contributing to a national economic malaise.

What Is Stagflation?

Stagflation is a term used to describe a situation when the economy is growing slowly (stagnation) and prices rise rapidly (inflation).

The term was coined by British Conservative Party politician Iain Norman Macleod in a 1965 speech to Parliament. At the time, the United Kingdom was in the midst of simultaneous high inflation and unemployment. In the speech to Parliament, Macleod said, “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation and history in modern terms is indeed being made.”

Usually, economists and analysts will use the unemployment rate as a proxy for economic activity when discussing stagflation. So, a period of stagflation is when unemployment rises while inflation — as measured by the consumer price index (CPI) — accelerates above normally acceptable levels of price growth.

However, like many economic concepts, there is no standard definition of stagflation. Policymakers, elected officials, and investors will use the term stagflation in various economic scenarios.

Stagflation vs Inflation

Inflation is a general increase in the average prices of goods and services. In contrast, stagflation is a combination of stagnant economic growth and rising inflation.

Low levels of inflation are normal for an economy; there’s a reason why movie theater tickets cost more today than they did in the 1950s. Inflation doesn’t become an issue until prices get out of control and spiral upwards. Policymakers within the Federal Reserve like inflation to rise about 2% each year.

You can have inflation without stagflation, but you can’t have stagflation without inflation.

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Has Stagflation Ever Happened?

Before the 1970s, economists didn’t think stagflation — a period of rising unemployment and inflation — was possible. Theoretically, inflation should decrease when unemployment increases because workers have less bargaining power to get higher wages. So, the theory goes, stagflation shouldn’t happen.

However, stagflation did occur in the United States from the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.

This stagflation cycle was part of a larger sequence of events called the Nixon Shock.

Responding to increasing inflation in 1971, President Richard Nixon imposed wage and price controls and surcharges on imports. This created a perfect-storm condition where, when the 1973 oil crisis hit, those surcharges on imports made prices at the gas pump — and across many U.S. industries — skyrocket to then-record prices. The rising prices helped lead to a wage-price spiral, where inflation led to workers asking for higher wages, which led to more inflation, and so on.

The Federal Reserve raised interest rates to combat the inflation of the early-70s, but this only created a recession and high unemployment without tamping down inflation. Thus, a prolonged economic stagnation accompanying inflation occurred — a stagflation situation.

While the economy recovered slightly in the late 1970s, inflation remained a problem for the rest of the decade. Federal Reserve chairman Paul Volcker eventually hiked interest rates to 20% by 1981, triggering a recession to get inflation under control.

Will Stagflation Happen Again?

There are debates about whether stagflation will or could occur again in the United States. There’s always a chance, but the circumstances need to be just right for it to happen.

Most recently, the economy was in a precarious situation in early 2022, with inflation running high after the fallout of the Covid-19 pandemic, and the Federal Reserve raising interest rates at a historic pace to combat it. The Fed was trying to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.

As of July 2024, inflation has moderated, and the economy has not slipped into a recession – but things can always change. So, the economy has not, so far, seen widespread stagnation, and inflation has come down – it appears that stagflation has been avoided.

While no one can predict the future, it stands to reason that events that have happened in the past can happen again. Stagflation may occur again, but this doesn’t have to be a dire situation as long as you prepare your financial situation.

How Can Stagflation Impact Investors?

Economic stagnation can have several impacts on investors. Firstly, it can lead to lower returns on investment as companies are less likely to grow and expand in a stagnant economy. This can lead to investors becoming more risk-averse as they seek out investments that are more likely to provide stability and income.

Secondly, stagnation can also lead to higher levels of unemployment, which can, in turn, lead to social unrest and political instability. This can make it more difficult for companies to operate in a given country and lead to investors losing confidence in the economy.

A slowdown of economic activity lasting several months sounds like it can only be a bad thing. But a recession does not necessarily mean the death knell for your finances. For some investors, there are, perhaps surprisingly, compelling strategies to consider when the market is down. Volatility may allow investors to buy low and then make appreciable gains as the market corrects itself.

Recommended: How to Invest During Inflation

The Takeaway

Stagflation occurs when an economy experiences simultaneous high inflation and high unemployment. It’s a situation that often leads to decreased spending by consumers and businesses, which can further stall economic growth and investment returns.

Stagflation has occurred before in the U.S. — notably during the Nixon Shock of the early 1970s — and there is no reason to think it won’t happen again at some point.

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Jul

2024

How To Fix a Declined Debit Card When You Have Money

By Dan Miller | Credit, Financial Independence, money | Comments Off

Debit cards make it easy to complete purchases without using cash, writing checks, or charging to credit. Just tap or insert your card, enter your PIN, and the funds will immediately get debited from your checking account. You then grab your goods and go. Simple, no?

Not always. Every once in a while, a debit transaction gets declined. This can be incredibly frustrating (and embarrassing), especially when you know there is money in the account. On a positive note, the issue is often easy to resolve. Here are some simple steps to take when a debit transaction doesn’t go through.

Make Sure Your Card Is Good

Every debit card has an expiration date. Once the date passes, the card gets blocked automatically and becomes useless to the account holder. If you’ve just started using a new debit card because your old one expired, it may not be activated yet. Until it is, you won’t be approved for any debit transactions that require a PIN.

To get your card working again, you may need to get it replaced or, if it’s new, activate the card either online or by phone. When you start using a new card, you’ll want to be sure to update any online payment information. This ensures uninterrupted services for recurring payments you have set up through your card, such as online payments for your cell phone, car loan, streaming and subscription services, and utilities.

Check Your Account Balance

While you may believe you have enough money to cover a purchase, unexpected debits, merchant holds, and pending deposits might have reduced your available balance. That’s why it’s critical to check the balance of your checking account.

You can do this by logging into your account using your banking app or computer, then looking at both your “current balance” and “available balance.” What’s the difference? Pending transactions (which have not yet posted to your account) are included in your “current balance” but not in your “available balance.” It may look like you have enough funds to cover a purchase, but if the money isn’t part of your available balance, you can’t spend it.

If your available balance is lower than you thought, scan your recent transactions and look for:

• Pending deposits: You may have deposited a check or have a direct deposit that has not fully cleared yet. This means the bank is still verifying that the incoming deposit is valid.

• Merchant holds: A hold is a way for merchants to reserve a certain amount of funds in a customer’s account to ensure a future transaction can be processed successfully. This can happen for transactions where you won’t know the final amount of the charge until later, such as hotel reservations or a car rental, and can temporarily lower your available balance.

• Recent withdrawals: Look for any recent withdrawals or debits that you might have forgotten.

• Errors or fraudulent activity: Check for any errors or unauthorized transactions that could have depleted your funds. If you notice any, reach out to your bank right away.

Know Your Debit Card’s Purchase Limit

If you’ve made some particularly large purchases in the last 24 hours, your debit card might be denied because you’ve reached your daily purchase limit. Banks set daily purchase limits on debit cards to minimize risk if the card is lost or stolen.

The daily purchase limit for a debit card can range anywhere from $300 to $50,000 per day, depending on the financial institution. You may be able to request a temporary limit increase on your debit card to complete your purchase by calling your bank. For security purposes, the representative will ask you to verify your identity.

Check for Holds or Blocks on Your Card

Banks and merchants will sometimes place temporary holds or blocks on someone’s bank account for various reasons. These can temporarily restrict access to your funds, even if you have a sufficient balance.

Here are some reasons why your bank may have put a hold on your debit card or decline a particular transaction.

• You repeatedly typed in the wrong PIN: If you enter the wrong password three times, your ATM card may get blocked. If this happens, you can generally just wait for 24 hours and your card will be unblocked automatically.

• Suspected fraud: If your bank detects any suspicious activity on your card, such as an unusually large purchase or unusual use patterns, they may automatically block your card to protect against fraud. Using your card in a new location, especially internationally, can also trigger a security block.

• Institutional security issue: If there is a security issue at the bank or credit union that holds your account, it may block your debit card to protect your money and details. In such cases, the bank will issue a new card to its customers, free of cost.

The best way to get to the bottom of a card hold or block is to speak with a customer service representative at your financial institution. In some cases, explaining that the purchase is legitimate or that you are currently traveling, and confirming your identity will immediately resolve the problem.

Informing your bank in advance about debit card usage that will be outside your regular routine can help avoid temporary holds and declines.

Recommended: Why Credit Cards Get Declined

Consider Alternate Payment Methods

If you can’t immediately resolve a declined debit card and have a crucial transaction that you don’t want to walk away from, you may need to use an alternate payment method. Here are some options to consider.

• Credit card: Even if you prefer debit over credit, having a credit card in your wallet can serve as a backup if your debit card fails.

• Cash: Though not every place of business accepts cash, it can be useful to have cash on hand to cover necessary transactions in the event your debit card fails.

• Mobile payment app: If you have a payment app on your phone that is connected to a credit card or linked directly to your bank account, you may be able to use that instead of your debit card.

• Bank transfer: For larger transactions, you may be able to make the payment by transferring money from your savings or checking account directly to the recipient.

The Takeaway

Dealing with a declined debit card can be annoying and stressful. To get to the root of the problem, you’ll want to first make sure your card is up to date and, if it is, check your account balance to confirm there are sufficient available funds to cover the purchase.

If you have enough funds, you might next call your bank to see if there’s a temporary hold on your card due to any security issues. By confirming that the transaction is legitimate and verifying your identity, they may lift the hold.

Being proactive and keeping a close eye on day-to-day activity in your checking account can minimize debit card declines and ensure smooth transactions in the future.

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FAQ

Why would a debit card be declined even if I have money in my account?

A debit card may be declined even if you have enough money in your account to cover the transaction due to various reasons. These include:

• Exceeding daily transaction limits

• Multiple incorrect PIN entries

• Using an expired card

• Using a new card that hasn’t yet been activated

• Suspected fraud

If your debit card gets declined despite sufficient funds, it’s a good idea to contact your bank. You may be able to quickly resolve the problem and get your card working again.

What should I do if my debit card is declined due to suspected fraud?

If your debit card is declined due to suspected fraud, you’ll want to immediately contact your bank’s customer service department. They will review recent transactions with you and, if necessary, cancel that card and issue a new one.

Once you receive the new debit card, you’ll want to change your PIN and monitor your account for any further suspicious activity. Banks often have fraud protection services to assist and safeguard your funds.

How long does it typically take to resolve a debit card decline issue?

The length of time it takes to resolve a debit card decline will depend on the cause. If the problem is insufficient funds, you may be able to quickly fix it by transferring money from another account. If the issue is suspected fraud, you may be able to clear it up right away by calling customer service, verifying your identity, and letting them know that the charge is legitimate.

Other scenarios may take longer. For example, if your debit card has been compromised or has expired, you may have to wait until you receive a new card in the mail.

Photo credit: iStock/Jacob Wackerhausen

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Jul

2024

Should You Open a Joint Brokerage Account?

By Michael Flannelly | Family Finances, invest, Investing | No Comments

Determining whether to open a joint brokerage account with another person, whether a romantic partner, business associate, or relative, can be a difficult decision. Couples often use joint brokerage accounts to simplify household finances and build wealth together. However, this doesn’t mean they are suitable for everyone.

Two or more people may own and manage joint brokerage accounts. These accounts are used to combine investment activities with multiple people. But before investing together using a joint brokerage account with a spouse or partner, it’s essential to understand how joint ownership works and its potential impacts on your finances.

🛈 SoFi currently does not offer joint brokerage accounts.

Investing Together

The reason many couples decide to invest together is fairly simple: they live together, manage a household, and are planning a future together. It can make sense then, not just from a financial perspective but for a healthy relationship, to invest together to build wealth for future goals.

If you’re planning for these long-term financial goals together, like retirement or buying a house, then that might mean having a joint brokerage account in order to plan for your shared desires. But that doesn’t mean couples have to invest together; it could make sense for you to share some accounts as a couple and to keep some separate.

But opening a joint brokerage account to buy and sell stocks or other securities may also be practical in terms of financial returns. Combining your money to invest can potentially help your money grow faster than if investing individually, as you invest a larger initial pool of funds.

What Is a Joint Brokerage Account?

A joint brokerage account is a brokerage account shared by two or more people. Couples, relatives, and business partners typically use joint brokerage accounts to manage investments and finances together. However, any two adults can open a joint brokerage account.

Joint brokerage accounts typically allow anyone named on the account to access and manage its investments. There are multiple ways people can establish joint brokerage accounts, each with specific rules for how account owners can access funds or how the account contents are handled after one of the joint holders passes away.

In contrast, retirement accounts like 401(k)s or individual retirement accounts (IRAs) do not allow joint ownership, unlike many taxable brokerage accounts.

Advantages of Joint Brokerage Accounts for Couples

There are several advantages that couples may benefit from by establishing and using joint brokerage accounts.

Single Investment Manager

One person can be responsible for all of the investment decisions and transactions within the account. This can be useful when only one member of a couple has interest in managing financial affairs.

Recommended: Should I Hire a Money Manager?

Combined Resources

As mentioned above, combining resources can be beneficial as investment decisions are made with a larger pool of money that can be used to increase compounding returns. Additionally, combining resources into a single account may help reduce costs and investment fees, as opposed to managing multiple brokerage accounts.

Simplified Estate Planning

A joint brokerage account can also help simplify estate planning. With certain types of joint brokerage accounts, the surviving account owner will automatically receive the proceeds of the account if one account holder dies. This significantly simplifies estate planning and may allow the surviving account holder to avoid a costly legal battle to maintain ownership.

Challenges of Joint Brokerage Accounts for Couples

There are a few challenges that come with joint brokerage accounts for couples.

Transparency and Trust

Both parties who own a joint brokerage account need to be comfortable with the level of transparency that comes with shared ownership. This means that both partners need to be comfortable with sharing information about their investment objectives, financial goals, and risk tolerance.

Additionally, owners of a joint brokerage account must trust one another. Because the other account holder is an equal owner of the assets and can make changes to the account without your permission, they can make unadvised investment decisions or even empty out the account without the other’s consent.

Breaking Up

It’s important to remember that a joint brokerage account is a joint asset. This means that if the relationship between the account holders sours, the account will need to be divided between the two parties. This can be a complex and time-consuming process, so it’s important to be sure that both partners are prepared for this possibility.

Tax Issues

If you open a joint brokerage account with someone other than a spouse, any deposits you make into the joint account could be deemed a gift to the other account holder, which could trigger gift tax liabilities.

Recommended: A Guide to Tax-Efficient Investing

Things to Know About Joint Brokerage Accounts

Before opening a brokerage account with a partner, business associate, or relative, it’s important to understand the differences between the types of accounts.

There are several types of joint brokerage accounts, each with specific nuances regarding ownership. If you are planning on opening a joint brokerage account, pay close attention to these different types of ownership so you can open one that fits your particular circumstances.

Type of Account	Ownership	Death of Owner	Probate Treatment
Tenancy by Entirety	Only married couples can utilize this type of account. Each spouse has equal ownership rights to the account.	If one spouse dies, the other spouse gets full ownership of the account.	Avoids probate.
Joint Tenants With Rights of Survivorship	Each owner has equal rights to the account.	If one owner dies, the ownership interest is passed to surviving owners.	Avoids probate.
Tenancy in Common	Owners may have different ownership shares of account.	If one owner dies, the ownership share passes to their estate or a beneficiary.	May be subject to probate court.

Ownership

How the ownership of a joint brokerage account is divided up depends on the type of account a couple opens.

• Tenancy by Entirety: If the couple is married, they can benefit from opening an account with tenancy by the entirety. Each spouse has an equal and undivided interest in the account. It is not a 50/50 split; the spouses own 100% of the account.

• Joint Tenants with Rights of Survivorship: This type of joint account gives each owner an equal financial stake in the account.

• Tenancy in Common: A joint brokerage account with tenancy in common allows owners to have different ownership stakes in the account. For example, a couple may open a joint account with tenancy in common and establish a 70/30 ownership split of the account.

Death of Owner

When an owner of a joint brokerage account passes away, their share of the account may pass on to the surviving owners or a beneficiary, depending on the type of account.

• Tenancy by Entirety: If a spouse dies, their ownership stake passes on to the surviving spouse.

• Joint Tenants with Rights of Survivorship: If one owner dies, the ownership interest is passed onto surviving owners.

• Tenancy in Common: If one owner dies, the ownership share passes to their estate or a beneficiary.

Probate Court

In many financial dealings, it can be challenging to determine who owns what when someone passes away. These questions are often brought into the legal system, with probate courts often resolving issues of ownership for financial accounts and property. This can also occur with joint brokerage accounts, depending on the type of account a couple may open.

• Tenancy by Entirety: This type of account avoids the need for probate court, as ownership stays with one spouse if the other spouse passes away.

• Joint Tenants with Rights of Survivorship: This type of account avoids the need for probate court, as ownership interest is passed to the surviving owners when one owner dies.

• Tenancy in Common: In this type of account, if one owner passes away without a will or a state beneficiary, their ownership share will likely have to pass through probate court.

However, regardless of the type of joint brokerage account, if all owners of an account pass away at the same time, the assets in the account may still be subject to probate court if a will does not clearly state beneficiaries.

Tips for Opening a Joint Brokerage Account

Here are some tips that couples may consider before opening a joint brokerage account with a spouse or partner. These tips apply to almost everything; in the end, it’s all about communication and compromise.

• Decide on your investment goals for your joint brokerage account upfront. That means deciding what you want to build wealth for, like a house, vacation, or retirement. This can also mean determining how much money you may be willing to set aside for investing.

• Having goals for your joint brokerage accounts is advisable, but it’s also acceptable to have individual financial goals as long as you’re on the same page. You can set aside some of your discretionary income, like 1%, for each of you to spend as individual fun money. Some couples may also maintain smaller separate accounts in addition to your joint accounts.

• Take a long view of your joint financial goals. While you may disagree about buying a new couch or how to remodel a kitchen, you should agree on when you want to retire.

• Establish a system for resolving disputes before you get started investing. Even in the healthiest of relationships, there are bound to be disagreements. Before you open a joint brokerage account, decide how you will resolve disputes about whether to invest in one asset or rebalance your portfolio.

The Takeaway

Just because you’re in a relationship doesn’t mean you have to open a joint brokerage account with a partner. For some couples, combining finances to build wealth for shared goals makes sense, while other couples may benefit from keeping money issues separate from one another. What matters most is determining what’s best for you and your partner, whatever that may look like for your specific financial needs.

FAQ

Can couples open a joint brokerage account?

Yes, couples can open a joint brokerage account. However, couples are not the only people who can open a joint brokerage account. Any two people, like relatives or business partners, can open joint accounts.

What are the benefits for couples opening a joint brokerage account?

The benefits of opening a joint brokerage account for couples are that they can pool their money and resources to make investments, and they can also make joint decisions about how to manage the account.

How can you start a joint brokerage account?

There are a few ways to start a joint brokerage account. The most common way is to go to a broker and open an account together. Another way is to open an account online.

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Jul

2024

Trend Trading: A Comprehensive Strategy Guide

By MP Dunleavey | Growing Wealth, Investing | No Comments

Trend trading is when traders identify a price pattern in the market, and then buy or sell in order to profit from either an uptrend or a downtrend. Trend traders often rely on technical analysis, e.g. momentum indicators and moving averages (MA) and other tools, to find trend patterns. They also analyze charts to find areas of support and resistance.

Depending on the direction of the trend, traders may take a long position (if prices show an upward trend) or a short position (if they’re moving downward).

Trend trading is a sophisticated strategy that comes with its own risks, as there are no guarantees a trend will hold, and trends frequently reverse.

What Is Trend Trading?

Trend trading, sometimes called trend following, is an offshoot of technical analysis: using a set of tools and metrics to assess stock price movements over time. Technical analysis helps traders identify patterns to help them decide when it’s potentially a good time to buy or sell.

Traders may follow a trend over any period of time, including short- , medium-, and long-term trends.

A trend may go upward (a bullish trend), downward (a bearish trend), or sideways (a neutral or range-bound trend). Traders typically combine different types of analysis and technical tools to decide how best to profit from a trend, and how to manage the inevitable risk factors.

Trend Trading Tools

Trend-traders leverage technical analysis tools in an attempt to identify whether stock prices are moving up or down, and how fast — then use that information to decide when to enter and exit stock positions.

Generally there is an assumption that prices will continue to move in one direction unless acted upon by an event or outside influence.

Think of it a bit like the laws of inertia in physics. In physical science, an object in motion or at rest will stay in motion or at rest unless acted upon by an outside force. The same theory is applied in trend trading, and when an outside force causes a change in a stock, this moment is called a pivot.

A trend trader will analyze price movement and trends to identify key factors influencing price movements, and to know which types of trading strategies may be most useful.

For example, if a trader believes that a stock price is on a downward trend, they might take a short position (a strategy known as short-selling), selling stock and potentially rebuying later at a lower price.

On the other hand, if a trader believes that a stock is on an upward trend, they might take a long position. In other words, they would buy a stock with the belief that it might increase in value over a certain period, and that they would be able to sell it at a higher price.

Technical Analysis and Trend Trading

Technical analysis uses price patterns to forecast future movement. It’s quite different from fundamental analysis, which examines a company’s financials, like its earnings and revenue. Professional technical analysts are called Chartered Market Technicians or CMTs.

Although the time-honored market adage holds that past performance never guarantees future results, technical analysts often take into account how market psychology, and sentiments like fear and greed, may influence trends or cause them to repeat over time.

Investor Behavior

That’s why traders, then, may consider not only price movements, but how investor behavior can have big effects on price patterns. Investors may react under certain conditions in ways that are similar to how they’ve reacted to them in the past.

Stock Charts

Trend traders typically organize their data with stock charts, including candlestick charts. These charts can cover a range of time frames, and show the patterns within the trader’s chosen period.

Momentum Indicators

Analysts can measure the strength of trends and movement in price by taking a look at momentum indicators. This indicator compares the most recent closing price to previous closing prices. The momentum indicator helps investors know whether the price of a stock is moving up or down, but, more importantly, it helps them know how fast it’s moving, which may provide insight into the strength of a trend.

In a stock chart, the momentum indicator is represented as a separate line from the price line.

Volume

Stock volume is a measure of the number of shares that are being bought and sold during a given period. Another way to look at volume is that it represents investor interest in a stock. The more stock being traded, the heavier the volume and the greater the interest.

Investors can look at volume as an indicator that prices are changing, and rising volume can be a sign that stock price is starting to move in a significant way.

That said, it is also possible that high volume can represent the end of a trend. For example, investors hoping to take advantage of a rise in a stock price may pile on just as the stock price is reaching its peak and about to fall.

Support and Resistance Levels

One of the patterns that analysts will look out for when looking at stock charts are certain thresholds at which stock prices tend to rise or fall. The support level is a point to which a stock will sink but won’t usually fall any further before rising again. It is essentially the level at which demand is strong enough to bolster the price.

Conversely, there is also frequently a price ceiling that stocks will hit that may cause prices to fall back down. This is the resistance level, the level at which selling is strong enough to prevent prices from rising. Investors may pay attention to these levels, choosing to buy when prices are near the support level or sell as prices meet the resistance level.

Moving Averages

Price movement over a given period of time can make a stock chart overwhelming to look at. The ups and downs of the line can be visually confusing and messy to look at. A way to simplify and show trends more clearly is by using a moving average.

This indicator focuses less on day-to-day movement and more on average price over time. A simple moving average (SMA) takes the sum of the closing prices over a given period of time and divides by the number of prices used. So if you were looking at a three-month period, you would add all the closing prices up over that period and divide by 90.

Types of Trend Trading

You might also notice that asset prices during rising and falling trends tend to move in waves. For example, a stock price during a rising trend might rise a little, then make a brief dip before rising again, and so on. The inverse would be true for falling trends.

The end of a rising wave is known as swing high. It’s the price peak before a downturn. The end of a falling wave is called a swing low — the low point before prices rise. Traders will often zero in on these moments, using them to their advantage, helping them make buy or sell decisions, or using them as key data points for other types of analysis.

Importance of Trend Identification

Trend lines are dynamic and frequently need adjusting. That’s because stock prices don’t move in a predictable fashion. Therefore, it’s important for investors to keep in mind that stock prices may move up and down away from the trend line and that doesn’t necessarily mean that the trend has ended. Often, additional analysis is needed.

Bullish Trends

You might hear rising trends described as “bullish” because of the way they’re moving forward. Typically during these periods, there is relatively low volatility. These periods are characterized by short pullbacks on stock price, which are also known as countertrends.

In general, however, the rising trend is a series of higher swing lows and higher swing highs, meaning the price is rising over time, despite the dips in price along the way.

Because of their low volatility, rising trends may be relatively easy for the average investor to trade in. That said, the countertrends tend to be short and shallow, which can mean it’s not always easy to know when to jump on board.

Bearish Trends

“Bearish” or falling trends are characterized by a series of lower swing lows and lower swing highs. In other words the wave pattern starts to reverse itself. The falling trend markedly differs from a rising trend because there is more volatility, and highs and lows are quick to follow each other.

Falling trends can be tricky for the average investor to negotiate due to their inherent volatility. Price movements and countertrends can be big, which can make them exciting to investors, but can also make it difficult to profit off the trend.

Neutral Trends

Neutral trends tend to represent a break between rising or falling trends during which stock price moves up and down in small increments during an extended period of time. This occurs as the price bounces back and forth between levels of support and resistance, with the range between the two possibly being more narrow than in a rising or falling trend.

Think of it a bit like ping-ponging between the floor and ceiling of supply and demand. At this point the price is moving “sideways,” and if you plot the trend lines they will look horizontal and flat.

Trend-Trading Strategies, Indicators, and Techniques

Here are a few of the most common trend-trading factors, strategies, and indicators that help traders take advantage of trends.

Essential Strategies and Indicators

• Breakout trading: In a market that’s displaying strong trends, either up or down, traders may look to see signs of a breakout, i.e. a change in the trend direction. One signal of a potential breakout is when previously known indicators of support and resistance now show a reversal. Depending on the momentum of the trend, this could signal a breakout.

• Retracement trading: Retracement trading occurs when there are temporary reversals in price that nonetheless present traders with an opportunity to place a trade, and take advantage of the price change when the trend resumes. Fibonacci retracements are a type of tool that some traders use to gauge the support and resistance levels for a certain stock price.

• Support and resistance trading: Trading within the bounds of known support and resistance lines is another common strategy. Support, as noted earlier, is where the price of an asset tends to stop falling and resistance is where the price tends to stop climbing.

For traders who want to take a long position, they might enter a position near a known level of support and exit within a known level of resistance. Traders interested in taking a short position, would do the opposite.

Real-World Examples of Trend Trading

Traders use trend lines plotted against a stock price chart as a sort of map to help them know when to make trades. Trend lines either connect swing lows or swing highs. The lines connecting swing lows represent uptrends, and the lines connecting swing highs represent downtrends.

As we’ve already mentioned, there can also be neutral trend lines that move sideways.

A typical chart might have multiple trend lines plotted against it, which can help traders identify opportunities to buy and sell. For example, there might be a long ascending trend line representing an upward trend in stock price.

A trader may look for short downward trends over the same period, and the points at which those short trend lines meet the long upward line could represent opportunities to buy.

The opposite may also be true — during a long downward trend, short upward trends may provide an opportunity to sell the stock position.

Important Technical Analysis Tools

As mentioned, it’s essential to employ more than one type of tool to support whatever trend trading strategy you’re using.

Stop-Loss Order

A stop-loss order is a tool investors use to help manage the risk that prices will fall. They work when you place a stop-loss order with a stockbroker, who will then automatically sell a stock when its price falls to a certain predetermined level.

For example, say you bought a stock during an uptrend at a swing low. You might then set a stop-loss order at that price — your purchase price — in case the stock price begins to fall. (A stop-loss order may execute at a price lower than the purchase price, even if it is set at the purchase price, so it is not a guarantee against losses.)

For longer-term trend trading, investors may set the stop-loss order further away from the purchase price to allow for some of the natural ups and downs that can occur during an uptrend.

Stop-loss orders help investors lower their risk by hedging against decreases in the prices of their holdings.

Momentum Indicators

One of the most important factors traders often try to identify within a trend is how strong the trend is, which helps them answer the question: Is it likely to continue? This factor is known as momentum.

Momentum indicators compare a recent closing price with a closing price from the past. The time span between the two closing prices can be any length, and the momentum indicator can be calculated using one of two methods.

The first way to calculate momentum is simply by taking the difference between the current closing price and the closing price from a previous period. When the resulting number is positive, the current closing price is higher than the previous price, and when it’s negative the current closing price is lower.

How far the difference is above or below zero is the indicator of how fast the price is moving. So a difference of 0.75 represents greater upward momentum than a difference of 0.45. Conversely, a difference of –1.50 would indicate greater downward momentum than a difference of –1.00.

The second way to calculate momentum gives you a rate of change. You divide current closing price by past closing price and multiply by 100. When the resulting percentage is above 100, the current closing price is higher than past closing price, and when it’s below 100, the current closing price is lower. How far above or below 100 is the indicator of momentum. A rate of 90%, for example, is falling faster than a rate of 95%.

Increasing or decreasing momentum can provide buy or sell signals to investors. When looking at a momentum chart, these signals may occur when the momentum line crosses above or below the zero line. Momentum can also be used to help validate trades based on other price movements.

Moving Averages

When you look at a stock price chart it can be a bit messy, and the jagged lines can be hard to read. A moving average provides a way to organize that data more smoothly by taking the average of past closing prices over a given period of time. This much simpler line can help investors spot trends more easily.

When a stock price is above its moving average, it can indicate upward trends. When it’s below the moving average, it can indicate downward movements.

Investors may encounter two different types of moving averages: simple moving averages (SMAs) and exponential moving averages (EMAs). SMAs are the basic average of closing prices, whereas EMAs give more weight to more recent closing prices and adapt more quickly to recent price changes.

Neither method is necessarily better than the other, though depending on the other strategies you’re using, one may work better.

Benefits and Risks of Trend Trading

The relative simplicity of trend trading may seem appealing to investors, but it’s always important to know the risks involved when using any strategy.

Advantages

At its best, trend trading offers traders a time-tested system for anticipating price movements. As such, it can help guide traders to enter or exit certain positions, perhaps helping to manage risk or maximize certain outcomes.

Trend analysis is somewhat adaptable as well. Traders, as well as investors, can base their trend trading strategy on a range of applicable data points. This may include market data, fundamental analysis, economic indicators, and more. In short, there’s no one way to do trend trading; it’s a matter of experience and skill.

Potential Risks

That said, trend trading offers no guarantees of success. Traders have to be disciplined in their analysis, and resist the impulse to make decisions based on sudden price movements.

In addition, trend trading as a methodology cannot possibly take into account all market movements, never mind external factors. For that reason, experienced trend traders must learn to use a combination of tools when looking for trend confirmation, and accept a certain degree of risk.

Last, trend trading is based on historical data, i.e., past performance. While many traders believe that insights into an asset’s future movements can be gleaned this way, others debate the merits of this strategy.

Getting Started With Trend Trading: 5 Steps

It’s relatively easy to start trend trading, and many platforms provide a learning environment that simulates actual trend trading in order to help you get the hang of it. Here are a few steps to help get you started:

1. Start by opening an account that enables DIY trading.

2. Identify what you want to trade. It’s possible to take positions in a range of markets, but less experienced investors may want to start by mastering one.

3. Decide how you want to manage risk. Commonly, trend traders might use a combination of stop-loss and different types of limit orders to minimize losses.

4. Take advantage of demo testing where available. This enables you to build skills and confidence before investing in the markets.

5. Start trading, and be sure to monitor your positions and adjust as needed.

The Takeaway

Which strategy you use when buying stocks or other securities ultimately depends on your experience and understanding of different tools and techniques. If you’re a hands-on investor, trend trading is a strategy that might help you identify when to buy and sell individual stocks. Other investors may be interested in a more hands-off approach, buying mutual funds or index funds that hold large portfolios of securities that don’t require active trading strategies or technical analysis.

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FAQ

Is trend trading a good strategy?

Trend trading can be an effective strategy, especially for experienced traders who are skilled at using various technical analysis tools. While there is always risk involved in trend trading, it might be more risky for investors who don’t understand all that’s required to anticipate price movements of various assets.

Can trend trading be profitable?

It’s possible that trend trading might be profitable, and that the careful use of technical analysis could provide an advantage when making trades. But trend trading is a high-risk endeavor, and it’s not guaranteed to deliver a profit.

What is the key to trend trading?

The key to trend trading is to use a range of technical analysis tools that give you more confidence in identifying trends and executing trades.

How do I become a trend trader?

Study the markets and assets that you want to trade, learn to read price charts, and begin trading slowly in order to master the tools you need for the types of trades you plan to make. A good trend trader also knows how to manage risk, and is familiar with different types of stop-loss and limit orders that can help minimize losses.

Photo credit: iStock/ArtistGNDphotography

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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q324-008

Jul

2024

What Are Penny Stocks & How Do They Work?

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Penny stocks are shares of companies that usually trade for less than $5 per share. They are highly speculative investments, meaning they carry a high degree of risk. Usually, traders looking for short-term gains use penny stocks, rather than long-term investors looking to build wealth.

But investors are often allured by penny stocks because they are relatively cheap and offer the prospect of high returns – but there are significant risks associated with penny stocks, too. Before trying to use penny stocks to make quick gains, investors must know how they work and the risks involved.

What Are Penny Stocks?

Penny stocks are low-priced financial securities that trade for less than $5 a share, though they often trade for less than $1.

Penny stocks are generally considered to be highly speculative, or relatively higher-risk investments. This is because most penny stocks are issued by small, unknown companies with little or no operating history. In addition, these companies often lack the financial resources to continue operating for very long and are susceptible to fraud.

Despite the risks, some investors are attracted to penny stocks because they offer the potential for significant returns over a short period of time. For example, if a penny stock’s price doubles from $0.30 per share to $0.60 per share, that’s a 100% return on investment on just a $0.30 price increase. Of course, the flip side is that you could possibly also lose all of your investment just as quickly.

Exploring Penny Stocks & How They Work

Although some penny stocks trade on major exchanges, such as the New York Stock Exchange or Nasdaq, most penny stocks trade on the over-the-counter (OTC) market, through the OTC Bulletin Board (OTCBB) or on the pink sheets.

Penny stocks that trade on the OTC market do not have the same regulatory requirements as companies listed on major exchanges. Companies that list their shares on the major exchanges are subject to a high degree of regulatory scrutiny; these publicly traded companies must meet minimum listing standards and provide regular financial reports to the Securities and Exchange Commission (SEC).

In contrast, over-the-counter stocks have fewer hoops to jump through, as they do not have to meet minimum listing requirements. However, penny stocks that trade on the OTCBB must file financial statements with the SEC, while penny stocks listed on the pink sheet are not required to do so.

Because many penny stocks do not have to report periodic financial statements to a regulatory agency, it can be difficult for investors to find adequate information to make informed investment decisions on these securities. This lack of knowledge is one of the reasons penny stocks tend to be higher-risk investments.

Penny Stocks Are Highly Speculative

As noted above, penny stocks are highly speculative investments often bought and sold by traders who want to make short-term gains. Because of this potential for significant, short-term gains, many people view penny stocks as a way to generate outsized returns quickly. However, this is far from the case; penny stocks tend to carry a high degree of risk and, as such, may be better investment options for investors with the time, money, and risk tolerance to dabble in this market.

Who Can Buy Penny Stocks?

Anyone can buy and sell penny stocks, though it is recommended that they have the appropriate risk tolerance before investing in these speculative securities.

To trade penny stocks, you’ll need to open an account with a brokerage that offers OTC trading. Many online brokers offer this service, but do your research before selecting one, including what kind of fees they charge. Once you have an account, you can start buying and selling penny stocks.

Pros of Penny Stocks

Penny stocks may be attractive to investors for a couple of key reasons.

High Reward Potential

There is a belief by some penny stock traders that these small securities have more room to grow than large stocks, thus resulting in significant, short-term price appreciation. The potential for short-term gains means that penny stocks may provide high rewards, despite their risks, especially if traders utilize buying on margin to make their trades.

Enjoyment

Just as some people like to gamble, others like to trade stocks and other securities for fun. Plenty of people would consider analyzing stock charts, reading up on unknown companies, and making bets as one of their hobbies. Traders like this might consider penny stocks as “fun spending,” not necessarily a part of a long-term investing strategy.

Cons of Penny Stocks

Penny stocks also have some drawbacks that investors should be aware of.

Small Likelihood of Success

Making money on a penny stock can be a rare occurrence. Investors should be aware of this, despite the tales of sudden wealth they may hear. Also, finding success trading penny stocks may often take longer than some investors expect or anticipate.

Possibility of Losing it All

A small likelihood of success means that there will inevitably be many failures. It is common for small, unestablished businesses to fold and go under, flounder, or have unsuccessful stock. When stocks become worthless, investors effectively lose all of their investment.

Lack of Liquidity

Penny stocks usually do not have a lot of liquidity, meaning it can be challenging to find buyers when you want to sell. This can make it hard to get out of a position if the stock price declines.

Volatility

Penny stocks tend to be highly volatile, which means that their prices can change a lot, rapidly. This can happen in either direction, making them a difficult tool for building long-term wealth.

Scammers

The penny stock segment of the market is often rife with scammers and fraudsters. Numerous penny stock newsletters promise big wins, and penny stock “investors” manipulate both the market and potential customers.

Researching Penny Stocks to Buy

It’s often difficult for investors to adequately research what penny stocks to buy and sell. Because many penny stock companies do not have to file reports to regulators, investors do not always have great information about the company’s finances, management, and operations.

One of the first things investors should do is check online resources like the OTC Markets website to search for company information on the penny stocks you’re interested in. Once you’ve done that, you can see if the companies have filed reports with the SEC through its EDGAR database. Using this company and financial information, you can develop a sense of the company’s finances and business practices.

Also, it may help to look at penny stocks that trade on exchanges such as the NYSE or NASDAQ. Because these stocks are required to file regular financial reports to the SEC, there is more easily accessible research investors can use to make investment decisions. Additionally, these companies are usually more stable and have more liquidity than penny stocks trading on the pink sheets or OTCBB.

Overall, you’d want to review as much public information as possible when researching penny stocks to buy and sell. When you make investment decisions with inadequate public information, you may open yourself up to relying on shady information that could come from paid promoters or fraudsters looking to pump and dump a stock.

The Takeaway

The allure of making significant, short-term gains by trading penny stocks draws many people into the market. But with the potential of high rewards comes the increased risk and a probability that gains will be hard to come by. Before diving into penny stock trading, assessing your risk tolerance is essential to see if this strategy is right for you.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Can you make money with penny stocks?

While making money with penny stocks is possible, it is also possible to lose money. Penny stocks are generally considered a high-risk investment, and as such, they may not be suitable for all investors.

Are penny stocks good for beginners?

Trading penny stocks is likely not advisable for beginners, as they are often very volatile, difficult to research, and can be challenging to trade. It may be best to consult with a financial professional before trading penny stocks.

Are penny stocks popular investments?

Penny stocks are sometimes popular investments for traders looking for high-risk, high-reward investments. These stocks are typically very volatile, which can lead to significant profits or losses.

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SOIN-Q324-001

What Is Stagflation & Will It Happen Again?

What Is Stagflation?

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Stagflation vs Inflation

Has Stagflation Ever Happened?

Will Stagflation Happen Again?

How Can Stagflation Impact Investors?

The Takeaway

How To Fix a Declined Debit Card When You Have Money

Make Sure Your Card Is Good

Check Your Account Balance

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Know Your Debit Card’s Purchase Limit

Check for Holds or Blocks on Your Card

Consider Alternate Payment Methods

The Takeaway

FAQ

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What should I do if my debit card is declined due to suspected fraud?

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Should You Open a Joint Brokerage Account?

Investing Together

What Is a Joint Brokerage Account?

Advantages of Joint Brokerage Accounts for Couples

Single Investment Manager

Combined Resources

Simplified Estate Planning

Challenges of Joint Brokerage Accounts for Couples

Transparency and Trust

Breaking Up

Tax Issues

Things to Know About Joint Brokerage Accounts

Ownership

Death of Owner

Probate Court

Tips for Opening a Joint Brokerage Account

The Takeaway

FAQ

Can couples open a joint brokerage account?

What are the benefits for couples opening a joint brokerage account?

How can you start a joint brokerage account?

Trend Trading: A Comprehensive Strategy Guide

What Is Trend Trading?

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Trend Trading Tools

Technical Analysis and Trend Trading

Investor Behavior

Stock Charts

Momentum Indicators

Volume

Support and Resistance Levels

Moving Averages

Types of Trend Trading

Importance of Trend Identification

Bullish Trends

Bearish Trends

Neutral Trends

Trend-Trading Strategies, Indicators, and Techniques

Essential Strategies and Indicators

Real-World Examples of Trend Trading

Important Technical Analysis Tools

Stop-Loss Order

Momentum Indicators

Moving Averages

Benefits and Risks of Trend Trading

Advantages

Potential Risks

Getting Started With Trend Trading: 5 Steps

The Takeaway

FAQ

Is trend trading a good strategy?

Can trend trading be profitable?

What is the key to trend trading?

How do I become a trend trader?

What Are Penny Stocks & How Do They Work?

What Are Penny Stocks?

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