1. finance
2. investing
3. stocks

®
MONTHLY
MARKET PSYCHOLOGY
How to
Avoid
Brain
Freeze
PART 1
DIVIDE & CONQUER
INVESTOR INSIGHT
FLIPPING INFLATION
THE BIRD
GEAR HEAD
COME PLAY WITH
THE NEWEST TOYS
TRADER ARCHIVE
NOW YOU SEE IT,
NOW YOU DON’T
02
Words By
Kira Brecht
PHOTOGRAPH BY FREDIK BRODÉN
06
12
19
24
STOCKPICKING
02
THE
TICKER TAPE
MONTHLY
Market Psychology
(PART 1)
HOW TO AVOID
BRAIN FREEZE
THE CURE FOR BRAIN FREEZE
Fear isn’t something you can manage by tinkering
with watchlists or chart indicators. Even
market veterans aren’t immune to the mental
paralysis that can hit during tumultuous times.
But there are ways you can get your mind right.
“Ninety percent of this game is half mental.” —Yogi Berra
W
e can’t say for sure if dear oldYogi, the Baseball
Hall of Famer, ever dabbled in the markets.
But malapropisms aside, he may have been on
to something investors can appreciate.There’s
no doubt what your most valuable tool is (hint:
it’s between your ears).Yet, the mind plays tricks, and during volatile markets when confusion and conflicting signals
abound, failure to pull the trigger when needed makes you
akin to that proverbial deer destined for a date with someone’s headlights.
Brain freeze can happen at most any time—right before you’re about to
make a trading or investing decision, or maybe right after. Ask market vets
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03
THE
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MONTHLY
Your Brain,
Explained
So-called brain freeze has roots
in the “fight or flight” response
hardwired into humans over millennia, stretching back to when
our ancestors were dodging
saber-toothed tigers and other
predators.
In a fight or flight situation, the
limbic system, the older part of
our brain that evolved first, shuts
down certain processes so the
body’s energy is devoted to the
large muscle groups.
Analytical functions are set
aside and the body’s energy
is focused on the threat.
Physiological reactions include
increased heart rate, sweating, nausea and dry mouth as
salivary glands shut down.
This response “is in our DNA,”
said Gary Dayton, a psychologist and independent trader. “It is
a survival mechanism. The body,
through our evolution, does not
want us to be thinking and comparing, it just wants us to deal
with the threat.”
Market Psychology
(PART 1)
HOW TO AVOID
BRAIN FREEZE
such as Don Kaufman, Director of the Trader Group at TD Ameritrade,
and they can recall vividly when this debilitating phenomenon gripped
them. For Kaufman, the 2008 global financial crisis comes to mind.
It was October 10 of that year, Kaufman said, and the Standard & Poor’s
500 Index, the Dow, and pretty much everything else was down sharply.
Kaufman had a large position in place and couldn’t evaluate the risk amid
the wildly whipsawing market.
“It looked like the whole financial system was coming apart that day,”
Kaufman said. “I just froze up. I just sat back, closed my laptop and walked
away. I was frozen for a good 25 minutes. I felt like I was in a chess game
with no way out,” he said. “Leaving your positions to chance is not trading!” Fortunately, by the end of that day, the markets had stabilized, and he
lived to trade another day.
Fear is the biggest cause of brain freeze, said Brett Pattison, Educational
Resource Manager at Investools®, a TD Ameritrade education affiliate.
“Losing money hurts more than making money,” he said. So what’s the
solution? Fortunately, there are several simple and straightforward principles investors and traders can follow to mentally prepare.
1. KEEP IT SMALL
Position size is “the number one thing,” Kaufman said. “Put risk at the
forefront of what you are thinking, and your directional bias second. Size
positions much smaller than you are actually capable of taking on.”
Patrick Mullaly, education coach and instructor for Investools, suggests
risking no more than 1% to 2% of your total capital on any one position.
Functions available on the tdameritrade.com secure trading site can help
you monitor account balances and your “buying power” (see figure 1).
FIGURE 1: KEEPING TABS. Click
the “My Account” tab on the
tdameritrade.com secure trading site
for updated account balances and
daily net changes (yellow circles), as
well as the funds you have available to
trade (red).
Source: TD Ameritrade. For
illustrative purposes only.
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04
THE
TICKER TAPE
MONTHLY
Market Psychology
(PART 1)
HOW TO AVOID
BRAIN FREEZE
2. DEFINE RISK AHEAD OF TIME
Getting
Vertical
A vertical spread strategy
aims to counterbalance risks
and rewards in a given stock
by using options at different
strike prices.
For example, a long call
vertical spread, also known
as a bull spread, is created
by buying a call at one strike
price while selling a call with
a higher strike. A short call
vertical, or bear spread, involves selling a call and buying another at a higher strike.
In theory, spread strategies such as these can
provide a measure of protection from unexpected events
for a limited amount of time
by limiting the risk of being
wrong, although the reward
is also reduced.
Click here to learn more
about options strategies.
Before you enter a trade, have a preestablished exit price. “I take a lot of
the psychology out of the market by taking defined risk option trades,”
Kaufman said. “So, I always know going in roughly what the potential loss
and potential profit could look like.”
One possible strategy is a vertical spread, which involves the buying and
selling of two options on the same underlying security with the same expiration date, but different strike prices (see “Getting Vertical” sidebar for more).
3. THINK OPPOSITE
Take a step back to assess the landscape, and make sure you’re not following the herd over a cliff. “The wise person does things at the beginning
of the trend, and the foolish or unprepared person does the same thing at
the end of the trend,” said Mullaly. “Buy when everyone is fearful and sell
when everyone is greedy.”
4. SEPARATE TRADING FROM INVESTING
Your entire portfolio “is not meant to be traded,” Pattison said. Take some
of your portfolio, and think very long-term “and be prepared to hold
through stormy weather,” he added. “Trade a smaller part of the portfolio.”
5. RELAX, SERIOUSLY
If you feel brain freeze creeping in, deep breathing can offer a psychological and physiological antidote, according to Dr. Gary Dayton, a licensed
psychologist and independent trader. Doing that “activates the parasympathetic nervous system and triggers the relaxation response,” Dayton said.
“You will still feel stress, but you want to slow your physiology down so that
your brain’s thinking centers—the prefrontal cortex—can open up.”
Dayton suggests taking in one continuous large breath—first, focus on
breathing deeply into the lower lungs, then expand your rib cage in the
middle and then into the top of the lungs. Hold it for a moment and follow
with one continuous breath out. That tells your brain that “the threat is
over and we can relax,” he said.
Ultimately, being mindful and aware is among the most critical conditions for traders and investors to learn—separating yourself from your emotions and physical sensations.
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05
THE
TICKER TAPE
MONTHLY
Market Psychology
(PART 1)
HOW TO AVOID
BRAIN FREEZE
“We need to be mindful to help us to distance ourselves from all the
stuff that is going on inside of us so we can manage the trade,” Dayton
said. “We are frequent flyers to the past and the future. Having your mind
in the present keeps you grounded.”
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.
Options trading privileges subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing
in options.
Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any
potential return.
Past performance of a security does not guarantee future results or success. The information contained in this article is not intended to be individual
investment advice and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before
attempting to place any trade.
Investools, Inc. and TD Ameritrade, Inc. are separate but affiliated companies and are not responsible for each other’s services or policies.
Investools does not provide financial advice and is not in the business of transacting trades.
TD Ameritrade and Gary Dayton are separate, unaffiliated parties and are not responsible for one another’s services or policies.
Supporting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.
Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and
The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
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06
THE
TICKER TAPE
MONTHLY
Stockpicking
Words By
Bruce Blythe
DIVIDE &
CONQUER
PHOTOGRAPH BY FREDIK BRODÉN
As the market’s
bull run gained
steam in recent
years, stock splits
have been
happening with
increasing
frequency. Is a
split a ringing vote
of confidence from
company
management?
Or just eye candy
for investors?
Here are a few
things you need
to know.
tdameritrade.com
07
THE
TICKER TAPE
MONTHLY
Stockpicking
DIVIDE AND CONQUER
Take that
pile of stock
in front of you and double it, or triple it—heck, let’s
get a little crazy and multiply it times 10. That’s essentially what happens when a company splits its shares.
You have a lot more than you had before, at least in terms
of one number on your account statement. But are you
actually richer or otherwise better off? The short answer:
Not necessarily.
Like the dividend payout, the split is a decades-old practice U.S. corporations keep handy when they want to throw a bone to the market. In a
two-for-one split, one common scenario, investors receive one additional
share for each share they already own; the stock price is halved—$50 becomes $25, for example—and the number of shares outstanding doubles.
Otherwise, not much else changes—the company’s market capitalization and other key financial metrics remain the same. Market professionals
have long debated the merits of splits and whether investors realize any
benefit, a narrative amplified recently by soaring prices for high-profile
technology stocks.
One thing appears to be certain: U.S. companies are increasingly going
“splitsville” with their shareholders. Through the first five months of 2014,
approximately 27 U.S.-based corporations split their shares, compared
with 32 for all of 2013, according to Schaeffer’s Investment Research. At
that rate, this year’s total may reach the mid-60s, the highest since 2007
(though still well below the 1990s heyday). Check the calendar function
on Trade Architect® for stock split dates (see figure 1).
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08
THE
TICKER TAPE
MONTHLY
FIGURE 1: SAVE THE DATES.
The Trade Architect® calendar
function can tell you how many stock
splits (purple rectangles) and other
corporate events are scheduled for a
particular day.
Source: TD Ameritrade. For illustrative purposes only.
Stockpicking
DIVIDE AND CONQUER
There
were six
stock splits
on April 7.
HEAD GAMES
Calendar
Check
To find a schedule of
share splits, launch
Trade Architect.
Go to the Ideas tab >
Go to the Events tab >
Click on the Splits button
for a list of specific
companies on specific dates.
Why do companies split shares? Psychology, for one. As a stock climbs and
climbs, some investors, particularly smaller ones, may view the shares as
too expensive and out of reach. A split, in theory, takes the price down to
what may be a more attractive or accessible level, while also feeding a notion
among existing shareholders that they have “more” than they did before.
Splits “allow people to buy more shares,” said Ryan Campbell, Content
Manager with Investools®, an education affiliate of TD Ameritrade. When
investors believe they can buy more shares at a lower price, “they seem to
perceive that as some kind of a ‘deal’ for the stock, even though the value
hasn’t really changed.”
Splits often pick up during strong periods for the broader market, as
was the case in the ’90s and, more recently, in the current bull market that
notched its fifth birthday in March.
“The theory is, a lower-priced stock makes it more affordable,” said
Ryan Detrick, an analyst with Schaeffer’s, “although most serious traders
would probably say it is all smoke and mirrors. My take is, splits do nothing in terms of adding value.”
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09
THE
TICKER TAPE
MONTHLY
Stockpicking
DIVIDE AND CONQUER
Stock Split
Mechanics
Stock splits can take many
forms, although the most
common are 2-for-1,
3-for-1 and 3-for-2.
A company’s management and its board must
approve a split, then
publicly announce their intention to do so; the actual
split usually takes place
within a few days or weeks.
If you’re an investor in a
company that does a 2-for1 split, you’ll receive one
additional share for each
share you already own,
likely deposited directly
into your brokerage account (because the stock
price is split accordingly,
the value of your stake
won’t really change due to
the physical split alone).
Less common is the
reverse split, in which a
corporation reduces the
number of outstanding
shares, often in an attempt
to prop up a sagging stock
price.
FUEL FOR BULLS?
Despite the skeptics, there is evidence that a split presents a bona fide
“buy” signal. Since 1990, stocks averaged a return of 21% during the 12
months following a split, against an average gain of 8.9% for the S&P 500
over comparable periods, according to Schaeffer’s (see figure 2).
POST-SPLIT POST-SPLIT
AVERAGE
AVERAGE
RETURN,
RETURN,
6 MONTHS 12 MONTHS
Since 1990
Since 2009
12%
7.5%
21%
18%
S&P 500
AVERAGE
RETURN,
6 MONTHS
S&P 500
AVERAGE
RETURN,
12 MONTHS
4.3%
8.7%
8.9%
16%
FIGURE 2: SPLITTING HAIRS. Over the past quarter-century, post-split performances for many U.S. stocks (left columns) tended to outpace broader benchmarks like the S&P 500 Index. Figures reflect performance through May 2014.
Source: Schaeffer’s Investment Research. For illustrative purposes only. Past
performance does not guarantee future results or success.
“There definitely does seem to be some outperformance” for post-split
shares, Detrick said. Why? “Odds are, companies that split, more often
than not, are solid companies,” he said.
Indeed, a “2-for-1 Index” tracked by the New York Stock Exchange’s
parent company, has outpaced the S&P 500 in 13 of the past 17 years (see
figure 3). The index, comprised of about 30 companies, aims to quantify the
post-split outperformance that’s often seen over a two- to three-year period.
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10
THE
TICKER TAPE
MONTHLY
Stockpicking
DIVIDE AND CONQUER
FIGURE 3: DOUBLE YOUR
PLEASURE. The 2 for 1 index (ticker
$SPLITS), which measures postsplit performance of U.S. stocks, has
marched steadily higher in recent
years, in step with a wider bull market.
Source: TD Ameritrade, NYSE. For
illustrative purposes only.
All of which raises sort of a chicken-or-egg conundrum: Are certain
stocks rallying as a direct result of a split? Or does the post-split performance merely reflect fundamentals that were already in place, and likely
would have pushed the shares higher anyway?
Conversely, an escalating number of splits could be construed as a
warning of runaway bullishness, Detrick said. In the mid-’90s, the U.S.
market averaged about 80 splits annually, then jumped to more than 153
a year late in the decade and finally peaked at 175 in 2000. The following
year, after the tech bubble burst, there were a total of 57 splits.
NO MORE LOVE CONNECTION?
For investors, seizing on a split as the deciding factor in whether to buy a
stock is inadvisable. For traders, potential benefits of any split-related strategies have grown murkier. Years ago, it was common to buy shares after a split
because the stock tended to rise to the pre-split price within a year, Campbell
said. More recently, it’s unclear if that phenomenon still holds true.
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11
THE
TICKER TAPE
MONTHLY
Stockpicking
DIVIDE AND CONQUER
There was also the “Chuck Woolery strategy,” Campbell added. But,
much like the ’80s dating show and its amiable host, what was once
ubiquitous now seems of a distant era. Under this tack, you’d buy a stock
about two weeks prior to the announced date of a split, then sell it about
two days ahead of the actual split—the “Two and Two” trade, to echo
Woolery’s commercial break signoff phrase.
“The stock tended to rally into the split, then sell off after the split,”
Campbell said, noting that the effect was especially pronounced during the
dot-com bubble. But, like many short-term trades or arbitrage opportunities, patterns changed.
“Traders had created a self-fulfilling prophecy,” Campbell said. “Investors are savvier today than they were in the ’90s and early 2000s. They
realize the value of the trade isn’t changed through a split, so the excitement over splits isn’t there.”
The information contained in this article is not intended to be individual investment advice and is for educational and illustrative purposes only. Clients
must consider all relevant risk factors, including their own personal financial situations, before trading.
Past performance does not guarantee future results or success.
Market volatility, volume, and system availability may delay account access and trade executions.
Investools does not provide financial advice and is not in the business of transacting trades.
Investools, Inc. and TD Ameritrade, Inc. are separate but affiliate companies that are not responsible for each other’s services or policies or opinions.
TD Ameritrade, Inc. and Schaeffer’s Investment Research are separate, unaffiliated companies that are not responsible for each other’s services or
policies.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and
The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
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12
THE
TICKER TAPE
MONTHLY
Investor Insight
Words By
Flipping Inflation the Bird
Inflation hawks have been voices in the wilderness for some time. But
guess what? If ever they’re 100% right, damage to economic growth, and
unprotected portfolios, may already be done. Here’s how you can prepare.
tdameritrade.com
PHOTOGRAPH BY FREDIK BRODÉN
Rachel Koning Beals
13
THE
TICKER TAPE
MONTHLY
Investor Insight
FLIPPING INFLATION THE BIRD
For several
years now,
traditional inflation benchmarks have barely registered on
the economic dashboard. As the U.S. pulls further away
from the Great Recession of 2008—09, investors seem to
have grown desensitized to what we might deem “The Boy
(or Girl) Who Cried Inflation.” But here’s the thing about
inflation: By the time it’s under your nose—meaning,
entrenched and getting worse—it may be too late to stop it.
EDITOR’S NOTE: This article is the
second in a three-part series on
inflation. Up next: Pricing-power
microscope—how investors might
profit if the price of toothpaste,
toilet paper and other everyday
items goes up.
The Federal Reserve is our top cop in this department, and any monetary policy misfires by Janet Yellen & Co. could mean big trouble, probably
necessitating significantly tighter interest rate policy while forcing investors
to rethink their strategies.
To be sure, inflation remains subdued—for now. But that doesn’t mean
you shouldn’t keep your eyes open for signs of percolating prices, and look
for ways to capitalize. Believe it or not, an economy that tips toward inflationary growth can be beneficial, up to a point (read more in our introductory article).
So, what to watch for?
HAWK TALK
One of the best ways to gauge the Fed’s comfort or discomfort level with
inflation trends is through speeches and Congressional testimony by central
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14
THE
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MONTHLY
Inflation Selfie
In April, the Consumer Price
Index rose 2% from the same
month in 2013, compared
with a 1.5% year-over-year
increase in March. Still, that
was well below the 3.9% average since the end of World
War II and less than half the
10-year moving average.
Inflation as measured by
the Personal Consumption
Expenditure (PCE) index
rose 1.6% overall, or by 1.4%
on a core basis that excludes
food and energy—well below
the Fed’s inflation target of
2% to 2.5%.
But what’s the trend? Both
are edging up.
Click here to learn more.
SEE VOCAB QUIZ
ON PAGE 17
Investor Insight
FLIPPING INFLATION THE BIRD
bank governors, or the statements from meetings of the Federal Open
Market Committee, the Fed’s policy-setting arm. The quick-and-dirty Fed
consensus on inflation? Nothing to see here.
Actually, inflation might be a little too low, the Fed seems to suggest. In
an April 30 announcement following the most recent meeting, the FOMC
said inflation continued to run below the committee’s longer-term objective, and noted that a rate persistently under 2% “could pose risks to economic performance.”
Still, the Fed has been sufficiently encouraged by recent economic signals to scale back its QE bond-buying program, which is expected to end
by December.
Whether inflation picks up in coming years remains to be seen, but to
some observers, red flags have already popped up. Old-school types point to
overall money supply, which is three times the size it was in the beginning
of 2008. Hawks argue that inflation isn’t widespread, yet, simply because
the additional money has not circulated so well through a sluggish economy.
As the economy improves, watch out. At that point, surging prices will be
a symptom of underlying inflation already festering in high-priced assets,
excessive money supply or a weaker dollar (more on this below).
DUELING INDICATORS
The most helpful economic gauges project future inflation, rather than
merely convey what’s already happened. Investors benefit from watching a
handful of trending inflation indicators rather than, say, just the Consumer
Price Index (CPI), because any one indicator can have peaks and valleys.
While CPI may be the government’s inflation benchmark, the Fed’s
preferred measure is found in the fine print of GDP reports: the Personal
Consumption Expenditures (PCE) deflator. The Fed likes the PCE because it accounts for goods and services “substitution,” includes a broader
basket of prices and its historical data is more easily revised.
As an investor, your punch list could include the five-year “breakeven
rate,” which reflects the difference in nominal interest rates on a traditional
U.S. Treasury note and “real” (inflation-adjusted) rates on Treasury Inflation-Protected Securities, according to J.P. Morgan Funds Global Markets
Specialist Michael Hood.
CONTINUED >
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THE
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Investor Insight
FLIPPING INFLATION THE BIRD
WAGE PUSH AND PULL
SEE VOCAB QUIZ
ON PAGE 17
FIGURE 1: TAKE THIS JOB. One
measure of U.S. wage growth, median
usual weekly earnings (blue line),
jumped nearly 3% in the first quarter, above the three-year average
(green). Source: Bureau of Labor
Statistics. For illustrative purposes
only.
Wage trends are what really matters in the inflation pipeline, many economists agree. After all, the bigger your paycheck, the more you’re likely to
spend (and vice versa).
One number to watch is the quarterly Employment Cost Index (ECI)
released by the Labor Department. Recent readings indicate businesses are
holding the line on wages, with the ECI rising a seasonally adjusted 0.3%
in the first quarter compared with the fourth quarter of 2013.
Compared to the first quarter of 2013, the ECI rose 1.8%. The ECI
would likely need to rise to 3.5% to 4.25% to stir inflation concerns, according to Hood. Still, other Labor Department numbers suggest wage
growth is perking up (see figure 1).
Rising Wages
Year-over-year change
Median usual weekly earnings
Average 2001- 2014
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
.5%
2001
2003
2005
2007
2009
2011
2013
“Labor market slack remains, but as the labor market tightens, wages
are likely to continue to move upward,” TD Bank Senior Economist James
Marple said. “Historically, the Federal Reserve has reacted to upward
movements in wage inflation by raising interest rates. If the Fed is slower
than usual to do so now, they run the risk of inflation pushing above their
2% target.”
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16
THE
TICKER TAPE
MONTHLY
Investor Insight
FLIPPING INFLATION THE BIRD
FOLLOW THE MONEY
Balancing Act
An Amerivest Managed
Risk Portfolio can help
you invest confidently while
potentially buffering your
portfolio against ever-present
market volatility. How, you
ask? Here are a few ways:
• A diversified and downsideaware strategy typically
reserved for high-net-worth
and institutional investors.
• Adaptability to different market environments
through investments using a
variety of strategies.
• Flexibility and freedom to
pursue the most promising
opportunities.
• Access to liquid, alternative strategy mutual funds
selected by Morningstar
Associates® LLC.
Click here to learn more, or
call 888-310-7921 to talk to
an Amerivest Specialist.
Foreign exchange patterns can also presage inflation. As a country’s currency depreciates, it becomes more expensive to purchase imported goods,
which puts upward pressure on prices overall.
Over the long term, currencies of countries with high inflation rates tend
to depreciate. Because inflation erodes asset values over time, investors often park money in markets with low inflation. That’s a big reason the dollar,
by and large, remains almighty—the world knows its money is reasonably
safe here.
COMMODITIES CORNER
Prices for copper, sugar, wheat and other raw materials are perhaps the
most visible inflationary signals. Rising oil prices, in particular, can bleed
through to the broader economy pretty quickly. While oil prices remain historically high, commodities generally aren’t ringing alarm bells at the moment. Farmers, miners and the like have the ability to ramp up production
quickly, which tends to make commodity price spikes relatively short-lived.
PARTING SHOT
Much of the worst-case inflation scenario is just that—it assumes the Fed’s
plan goes awry and the central bank won’t act quickly enough to stanch
surging prices. Remember, there’s no on-off policy switch for controlling
inflation. It’s a moving target.
For investors, here’s a possible takeaway on inflation—don’t fear it,
revere it. That’s right, some inflation (as opposed to none, or worse, deflation) is actually OK. It means the economy is expanding and demand for
goods and services is growing. Some industries and asset classes benefit
from inflationary forces. Being mindful of inflation risks simply means that
you and your portfolio are agile, too.
Before investing in an Amerivest portfolio, be sure to carefully consider the
underlying funds’ objectives, risks, charges, and expenses. For a prospectus
containing this and other important information about each fund, contact an
Amerivest Specialist at 888-310-7921. Please read the prospectus carefully
before investing.
CONTINUED >
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17
THE
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Investor Insight
FLIPPING INFLATION THE BIRD
Vocab Quiz
The CONSUMER PRICE INDEX (CPI), which
is tracked by the U.S. Labor Department,
reflects average price changes over
time for a basket of goods and services,
including food, gasoline, rent, apparel, and
medical care.
The EMPLOYMENT COST INDEX, released
quarterly by the U.S. Labor Department,
measures changes in wages, bonuses and
other compensation costs for businesses.
The FEDERAL OPEN MARKET COMMITTEE
is the branch of the U.S. Federal Reserve
that determines the direction of monetary
policy, primarily through adjustments to
benchmark short-term interest rates. It’s
composed of a seven-member board of
governors and five reserve bank presidents,
and it meets eight times a year.
MONEY SUPPLY broadly refers to the total
amount of currency and other liquid instruments in a country’s economy at a particular
time; this can include cash and checking and
savings account balances.
THE PCE DEFLATOR, similar to the CPI, tracks
price changes for several common goods
and services; the PCE is included in quarterly
Gross Domestic Product reports released by
the U.S. Commerce Department.
QE, or QUANTITATIVE EASING, is an uncon-
ventional monetary policy in which a central
bank purchases government bonds or
other securities to lower interest rates and
increase the money supply. The Fed’s QE
program involved buying about $85 billion
worth of securities each month, though
those purchases were being reduced in
2014.
TREASURY INFLATION-PROTECTED SECURITIES, OR TIPS, are backed by the U.S. govern-
ment and carry a par value that rises with
inflation, as measured by the CPI. TIPS pay
interest twice a year, at a fixed rate.
The information contained in this article is not intended to be individual investment advice and is for educational and illustrative purposes only. Be sure to
understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk
factors, including their own personal financial situations, before trading and please remember, past performance of an investment does not guarantee
future results or success.
Market volatility, volume, and system availability may delay account access and trade executions.
James Marple is an employee of TD Bank Group, which is affiliated with TD Ameritrade, Inc. as TD Bank Group has an ownership interest in
TD Ameritrade Holding Corporation; the parent company of TD Ameritrade, Inc. Mr. Marple’s opinions and commentary should not be construed as an
endorsement or recommendation by TD Ameritrade, Inc.
TD Ameritrade, Inc. and JP Morgan Funds are separate, unaffiliated companies that are not responsible for each other’s services or policies.
CONTINUED >
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Investor Insight
FLIPPING INFLATION THE BIRD
There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the
risk of experiencing investment losses.
Mutual funds are subject to market, exchange rate, political, credit, interest rate, and prepayment risks, which vary depending on the type of mutual fund.
The Amerivest Managed Risk Portfolio is designed to use an absolute return strategy to limit volatility and provide protection against declines in the equity
markets. The portfolio is generally invested in alternative strategy mutual funds. The mutual funds are subject to a variety of risks that include, but are not
limited to, long-short equity, convertible arbitrage, merger arbitrage, and opportunistic high yield. The portfolio is not designed to outperform stocks and
bonds in strong markets and there is no guarantee of positive returns or that the portfolio’s objectives will be achieved.
Amerivest Portfolios is an investment advisory service of Amerivest Investment Management, LLC (Amerivest), a registered investment advisor.
Brokerage services provided by TD Ameritrade, Inc. Amerivest Investment Management, LLC and TD Ameritrade, Inc. are both wholly owned subsidiaries
of TD Ameritrade Holding Corporation. Amerivest is a trademark of TD Ameritrade IP Company, Inc.
Amerivest provides nondiscretionary and discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its
underlying securities. For more information, please see the Amerivest Disclosure Brochure.
Morningstar Associates, LLC (“Morningstar Associates”) is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. Morningstar
Associates provides consulting services to Amerivest Investment Management, LLC (“Amerivest”) by providing recommendations to Amerivest
regarding asset allocation targets and selection of securities appropriate for the Amerivest Portfolios; however, Amerivest retains the discretion to
accept, modify, or reject Morningstar Associates’ recommendations. Morningstar Associates selects securities for the Amerivest portfolios from the
universe of investments made available through TD Ameritrade. In performing its services, Morningstar Associates may engage the services of its
affiliate, Morningstar Investment Services, Inc. (“MIS”), a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. Neither
Morningstar Associates nor MIS is acting in the capacity of advisor to Amerivest’s clients. Asset Allocation target allocations are subject to change
without notice. Morningstar Associates establishes the allocations using its proprietary asset classifications. If alternative classification methods are
used, the allocations may not meet the asset allocation targets. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar
Associates is not affiliated with Amerivest or TD Ameritrade.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and
The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
tdameritrade.com
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Gear Head
Words By
Jeff Haydon
COME PLAY
WITH THE
COOLEST
NEW TOYS
Keeping up with fast-moving markets is difficult enough these
days.Your investing and trading platform should make your life
easier, not harder.The recently enhanced tdameritrade.com offers
a number of tools to help you be more efficient and nimble.
As another quarterly earnings season looms, new features
recently added to tdameritrade.com can help you prepare
for the twists and turns ahead.The enhanced site, launched
late last year, is packed with several new “gotta have” features designed to help you get to just the right information at crucial moments. Let’s spotlight three of those new
features: the redesigned home page, enhanced Watch Lists
and new docking features.
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Gear Head
COME PLAY WITH THE
COOLEST NEW TOYS
1. YOUR REDESIGNED HOME PAGE—SAY “CHEESE”
Cut through all the noise and follow the money, providing a “snapshot” of
both your account and the market at a given moment—as well as the tools
to take immediate action.
The Overview section, seen when you first log in, gives a sense of what’s
moving the markets and an overview of daily portfolio performance. Who’s
committing the big news of the day? Any “story stocks” or major corporate
actions in the pipeline? It’s right there in front of you—videos, too. You can
sort through earnings announcements by market capitalization, which helps
identify the stocks most likely to have the greatest impact on the overall
market and broader benchmarks, like the Standard & Poor’s 500 Index.
Check the Calendar tab for past, present and future corporate news,
economic releases and any other real-world events that may have a direct
effect on your nest egg (see figure 1). Other handy tabs include Balances/
Positions and Last Transactions, to help track your recent moves and
how you stand.
FIGURE 1: LET’S MAKE IT A
DATE. Check out a given day’s slate
of earnings releases and other corporate events, easily available from the
redesigned tdameritrade.com home
page; from your account Overview
section, scroll down and find the
Calendar tab (red arrow). Source:
TD Ameritrade. For illustrative
purposes only.
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Gear Head
COME PLAY WITH THE
COOLEST NEW TOYS
2. REDESIGNED WATCH LISTS
(AND THROW IN A SCREENER)
Setting
Screens
To set up Screener for
stocks, log in to
tdameritrade.com.
From your Account
Overview,
click on the Research &
Ideas tab >
Click on Screeners >
Select Create a Stock
Screen and enter criteria.
We’re not saying you’re a stalker—but you do want to keep a lurking eye on
what you’ve sunk your hard-earned money into, and where some enticing
opportunities may lie.
Watch Lists function as a streaming storehouse of your best ideas. Track
top picks in a sector or industry, or the biggest movers over a certain time
period, or stocks scheduled to pay dividends. Once you create a watch list,
research on a specific company is but a few clicks away, and up-to-date
market data can help you hit the right entry or exit point for a trade.
With the Screener, you can further sharpen your focus. Screens are pretty
easy to set up. Say you want to zero in on highly rated stocks in the financial
sector that pay a dividend yield of over 3%. Or maybe you’re interested in
stocks that recently crossed below their 50-day moving average (see figure 2).
1. Just follow the click-path to Research & Ideas > Screeners.
2. Choose Stocks, Options, Mutual Funds, or ETFs from the left menu
3. Choose your criteria and parameters.
4. Select the green “View matches” button.
From the results page, you can save your list as a new watch list, or save
the screen itself to run again without the inconvenience of amnesia blocking you from remembering your perfect screen.
FIGURE 2: MAKING A LIST. Use
the Screener function, under the
Research & Ideas tab, to build a list
of stocks based on valuation metrics such as P/E ratios (red arrows)
and other fundamental and technical factors. Source: TD Ameritrade.
For illustrative purposes only.
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Gear Head
COME PLAY WITH THE
COOLEST NEW TOYS
3. GO FOR A RIDE
Think of this as your personal dashboard, although unlike what you’ll find
at your local auto dealership, you can tailor this version however you please.
Located on the right side of your screen, the dock allows you to keep just
what you want right in front of you at all times: quotes, headlines, account
balances and positions, shortcuts, you name it.
By default, the dock is very much a blank canvas—allowing you to customize it with an array of “modules.” Take a few minutes to customize your
dock by exploring the module library and dragging the ones that catch your
eye into the dock. It can be a powerful tool, helping keep you in tune with
real-time market events (see figure 3).
FIGURE 3: DOCKING IN. Customize My Dock with “modules” that
display streaming stock quotes,
headlines, account balances and
other information, and use the “gear”
to make tweaks (red arrow). Source:
TD Ameritrade. For illustrative purposes only.
Customization doesn’t end at selecting a mix of modules. Each module
can also be customized. Check what’s in each module’s “gear” menu for
possible tweaks to best serve your needs.
And don’t forget to check the module for premium content you have
subscriptions to, such as Barron’s or TheWall Street Journal. Heck, if your
interests go beyond investing (we shudder), no need to leave your trading
platform—just add the RSS Reader for things like ESPN, Autoblog,
Engadget, and Reddit.
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THE
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Gear Head
COME PLAY WITH THE
COOLEST NEW TOYS
We’ve really only scratched the surface on how the upgraded site can
help you pursue your investing and trading goals. Be sure to check back for
future Gear Head columns for more highlights on all the coolest new toys.
The information contained in this article is not intended to be individual investment advice and is for educational and illustrative purposes only. Be sure to
understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk
factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Access to real-time market data is conditioned on acceptance of exchange agreements. Professional access differs and subscription fees may apply.
See our commission and brokerage fees for details.
Third-party research and tools are obtained from companies not affiliated with TD Ameritrade, and are provided for informational purposes only. While the
information is deemed reliable, TD Ameritrade does not guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties
with respect to the results to be obtained from its use. Please consult other sources of information and consider your individual financial position and
goals before making an independent investment decision.
Past performance does not guarantee future results.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The TorontoDominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
tdameritrade.com
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THE
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Trader Archive
Words By
Adam Warner
NOW
YOU
SEE
IT,
NOW YOU DON’T
PHOTOGRAPH BY FREDIK BRODÉN
Trading on margin can be an effective
strategy to boost your performance.
It can also be a black hole of losses.
Keeping your eyes wide open is half
the battle.The other half is
understanding what you’re doing.
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Trader Archive
NOW YOU SEE IT,
NOW YOU DON’T
Here’s a tweet
you may spot on Twitter after a sharp market rally: “Anyone who bought XYZ on Monday earned 25% if he bought
on margin.” And here’s a tweet you’d likely never spot
two days or so later: “Broker closed me out on that XYZ
I bought on margin on Monday ahead of selloff.” That’s
the deal when you trade on margin. It can add fuel to your
returns when you get it right. But it can also wipe out your
account in an eyeblink when you get it wrong.
EDITOR’S NOTE: This article first
appeared in the Winter 2012 issue
of thinkMoney.
So, what exactly is margin? Here’s the long answer, straight from the
TD Ameritrade handbook:
“A margin account permits investors to borrow funds from their brokerage firm
to purchase marginable securities on credit and to borrow against marginable
securities already in the account. The terms of a margin loan require the qualifying
securities or cash that you have in your account be used as collateral to secure the
loan. Interest is charged on the borrowed funds.”
Now, here’s the short answer: It allows you to borrow money from your
broker to buy more marginable securities than you can afford.
Margin can increase your effective returns. It can also bankrupt you. And
frankly, we tend to obsess over the latter, and for good reason. There can be
benefits to trading on margin when used with care and discipline. It may allow you to take advantage of investment opportunities you would otherwise
have to avoid simply because you were “priced out.”
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NOW YOU SEE IT,
NOW YOU DON’T
Before you get started, make sure to understand how it all works, lest you
get “that call” and have to sell securities, deposit more money, or worse, be
forcibly sold out by your brokerage firm before you’re able to put up more
money. Also, make sure you know where to go on the TD Ameritrade website
to check your margin balances (see figure 1).
Margin Basics
You can trade with
30% margin on many
stocks through
TD Ameritrade. But
not all stocks qualify.
There are two ways to
check:
1. THE ORDER TICKET—Just
prior to purchasing any security, the margin requirements for any order will
be displayed on the order
ticket.
2. ON THE WEB—
Log in to your account at
tdameritrade.com and
enter “special margin
requirements” in the search
field.
Select the link “special
maintenance requirements.” That will provide
a comprehensive list of
equities and their related
margin requirements.
FIGURE 1: BEING ACCOUNTABLE. Go to Balances & Positions under the
My Account tab on tdameritrade.com for updated figures on margin equity,
maintenance requirements (red arrows) and other related numbers.
Source: TD Ameritrade. For illustrative purposes only.
Here are a few ways margin works, depending on what you’re doing:
REGULATION T
Also known as “Reg T,” this type of margin typically allows you to buy a
marginable stock with 50% of the money the security would cost in full.
Suppose you’re loving yourself some XYZ stock trading at $20. You would
like to buy 1,000 shares, or $20,000 worth. You only have $10,000 you can
spare to invest, however. No problem. You can buy the stock on margin. You
use the $10,000 you have and borrow the other $10,000—a loan on which
you pay interest.
If XYZ declines, you could be in trouble. Let’s say it falls to $19—the value
of your holding is now $19,000 (1,000 shares of a $19 stock).You’ve lost
$1,000, so your equity in the position is only $9,000.
TD Ameritrade has various maintenance requirements for stocks, the
most common being 30%. So while you needed $10,000 to initiate the
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Trader Archive
NOW YOU SEE IT,
NOW YOU DON’T
purchase, you “only” need to maintain $6,000 in equity (30% of $20,000)
to avoid a margin call. Great, you have some breathing room. This can play
out a couple of different ways:
ON THE GOOD SIDE—Suppose XYZ rises to $25. You now own $25,000
worth. You borrowed $10,000, so your equity stake is $15,000. Since you
only actually put up $10,000, the $5,000 you earned represents a 50%
return. Since you’ve purchased shares on margin, when the stock rose 25%,
you made 50%. Sweet.
ON THE BAD SIDE—XYZ drops to $15, meaning you lost $5,000. You started
with $10,000 in the account, so now you have $5,000 left, and you still owe
$10,000 to your broker. You dropped 50% on a 25% drop in XYZ. What’s
more, you now have some maintenance issues. Your XYZ holding has a
value of $15,000. In order to maintain that position, you need 30% equity,
or $4,500. You only have $5,000 equity left in the account, so that leaves a
mere $500 of leeway. Not so sweet.
If XYZ goes any lower, you will get a margin call. At this point, you can:
1. Put up more money and maintain the position (i.e., deposit funds or margin-
able securities into your account).
2. Sell other securities in your account to raise cash.
3. Close out of the position.
Depending on the situation, you may never get the choice, and the position
can be closed out by your brokerage firm without your consent. And none of
these options factor in ancillary expenses.You owe interest on the money you
borrowed, the same as if you borrowed it anywhere. There are also trading
commissions and regulatory fees, so keep on top of it all.
Those are the basics. But wait—there’s more. Other types of trading activities and other stocks have different margin rules that are not always the cutand-dried 30%. Also, maintenance requirements can be raised at any time.
PATTERN DAY TRADER
If you make four or more round-trip day trades within any rolling fivebusiness-day period, and that represents at least 6% of your total trading
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Vocab Quiz
An IRON CONDOR is an option
spread composed of calls and puts,
with long options and short options
at four different strikes. The options
are all on the same stock and of the
same expiration, with the quantity
of long options and the quantity of
short options netting to zero. Generally, the strikes are equidistant
from each other.
A VERTICAL SPREAD STRATEGY
is an option position composed of
either all calls or all puts, with long
options and short options at two
different strikes. The options are all
on the same stock and of the same
expiration, with the quantity of long
options and the quantity of short
options netting to zero.
According to the Financial Industry
Regulatory Authority (FINRA), a
PATTERN DAY TRADER is defined
as anyone who executes four or
more “day trades” within five business days, provided that the number
of day trades represents more than
6% of the customer’s total trades in
the margin account for that same
five business-day period. Pattern
day traders must have at least
$25,000 in their accounts and can
only trade in margin accounts.
Trader Archive
NOW YOU SEE IT,
NOW YOU DON’T
activity during the same period, you are now considered a pattern day
trader. You can open a regular margin account with as little as $2,000, but
pattern day traders need a minimum equity balance of $25,000 in order to
day trade. What does that mean for you? Specifically, four times your excess
maintenance requirement. In other words, if you have $25,000 in your
account above and beyond any money needed to hold securities, you have
access to $100,000 of day-trading buying power. But keep in mind, if your
equity drops below $25,000 minimum for pattern day trading, you may be
subject to a minimum day-trading equity call.
OPTIONS TRADER
Margin requirements for defined-risk options strategies, such as long puts
and calls, verticals and iron condors are pretty straightforward. It works like
a cash account inside your “margin” account, meaning you simply need to
put the cash up for the cost of long trades, or in the case of short strategies,
such as short verticals or iron condors, you’ll need to put up the amount
at risk. Short verticals, for example, would require the difference between
the strikes less the premium received on the sell side of the vertical. Just
remember that if/when you exercise such strategies, you will need to follow
the margin rules on the stock or underlying.
Selling “naked,” though? According to TD Ameritrade, the writing of
uncovered puts and calls requires an initial deposit and maintenance of the
greatest of the following three formulas:
A. 20% of the underlying stock price minus the out-of-the-money amount,
plus the premium multiplied by 100, multiplied by the number of contracts.
B. For calls, 10% of the market value of the underlying stock plus the premium value. For puts, 10% of the exercise value of the underlying stock
plus the premium value.
C. $50 per contract plus 100% of the premium.
Got that? As an example, let’s say you want to sell 10 uncovered puts
on XYZ, which is trading at $42. The strike price is $40, and the puts are
trading at $3.
With formula A, you would need 20% of $42 ($8.40), minus the out-of-themoney amount ($2), plus the premium ($3), multiplied by 1,000 shares, or
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Trader Archive
NOW YOU SEE IT,
NOW YOU DON’T
$9,400. With formula B, you would need 10% of $40 (the exercise value) plus
$3,000 (the value of the puts), or $7,000. With formula C, you would need
$500 for the 10 contracts, plus the $3,000 of premium, or $3,500.
In this case, the big winner is formula A, and you would need to put up
$9,400.
Not over-leveraging is key. Margin is like a lot of things—if used as a tool
to supplement your trading strategy, it can potentially complement returns,
particularly in underperforming markets. But if you abuse it, that shiny new
car you rolled the dice on just became a Hot Wheel.
Options are not suitable for all investors as the special risks inherent to option trading may expose investors to potentially rapid and substantial losses.
Option trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in
options.
Market volatility, volume, and system availability may delay account access and trade executions.
The information contained in this article is not intended to be individual investment advice and is for illustrative purposes only. Past performance of a
security does not guarantee future results or success.
Multiple-leg option strategies such as vertical spreads and iron condors can entail substantial transaction costs, including multiple commissions, which
may impact any potential return. Ancillary costs such as commissions, carrying costs, and fees should be evaluated when considering any advanced
option strategy.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
Be aware that assignment on short option strategies discussed in this article could lead to unwanted long or short positions on the underlying security.
Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels.
Margin is not available in all account types. Margin trading privileges subject to TD Ameritrade review and approval. Carefully review the Margin
Handbook and Margin Disclosure Document for more details. Please see our website or contact TD Ameritrade at 800-669-3900 for copies.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and
The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
TDA 5003 06/14
tdameritrade.com