Use the limit order to get a good deal

The concept of a limit order is that the investor only desires to buy an asset for no more than a specified price or sell for no less than a specified price.  The limit order is an option that is offered by stock trading brokers.  In this case the principle is the same.  A buy limit order limits the price of what you are willing to buy the stock for and a sell limit order limits what you are willing to sell the stock for.

The opposite option of a limit order is a market order.  In this option your buy trade is immediately executed against whatever is the best available selling price.  The problem here is that price may be higher than the current reflected per share price.  The orders go through a computer system, where buyers and sellers are matched and the market “clears”.  Your buy transaction may be the unlucky one that clears a percent or two above market price.

Avoid this by maintaining your cool and willingness to wait to get into or out of a stock.  The market is efficient, but people are not.  By taking this into account, setting a limit a little lower than market price for a buy, and perhaps using the 30 day or good till canceled option; you can buy the stock that you are looking at for a modest discount.  Or as a seller, your patience can be rewarded by gaining a premium for your investment sale.

February 2013 S&P 500 Forecast Results

Financial Place Online provided a market forecast back in December.  The forecast was for the S&P 500 index to be above 1400 by 1 February 2013.  The good news is that this forecast came to be true.  The great news is that the S&P 500 is currently at 1513!   The primary concern though, is that the upward run has come too fast.  Very little of the underlying U.S. economy has changed in the last year.  The job market has modestly improved, but this is more than offset by fiscal uncertainty that may result in disaster coupled with a monetary policy that maintains the suppression of interest rates.

The 52 Week low for the S&P 500 was 1266.  Also, the index is up 100 points in the last month.  The price to earnings ratio (P/E) is a little above 17.  It is worth noting that the P/E ratio correlation to the stock market is weak as earnings growth is another factor which weighs heavily on the price of the index.  Forecasts for 2013 earnings growth are estimated to be anywhere from flat to 3%, hardly anything worth writing home about.

What may really be the cause of the run to over 1500, is the present 2.07% dividend yield.  Those who were invested in bonds found the S&P 500 dividend rate to be attractive since bond yields are low and interest rate risk is increasing.

Market Makers Make the Market

There is a relatively unknown force that keeps many markets moving, stocks included.  The “market maker” is a pivotal position within most all investment avenues.  A market maker stands ready to buy and sell, possibly at the same time, whatever assets they deal with.  In the case of any specific stock, the market maker will buy at a specified price and sell at a price a little higher.  this spread is where the market maker earns their income.  The benefit to the market is that liquidity is provided.  There may be a small interval in time when there are buyers but no sellers for a stock.  The market maker acts as a buffer here by absorbing that desire to buy by being obliged to sell their own holdings.

Market makers for stocks are typically large banks and investment institutions and are specifically registered as market makers.  They are required to be both a buyer and seller.  This risk is what justifies their reward.  The concept of the market maker goes outside of stocks.  Most commodities are sold through market makers.  Gold and Silver are the two common cases that you may have encountered in your daily life.  If you have ever been to a coin or pawn shop to buy gold or silver, the dealer will generally buy at spot price (market pice) and sell at a small premium above spot.  This is a market making function.  While not as formal as the stock market example, a local market maker will quickly lose business if they are selective about when they buy and sell or if their spread is too high.  Their worth is directly proportional to the amount of liquidity that they provide to their market.

One last note.  With all other factors the same, an increase in liquidity of an asset will increase the value of that asset.  Liquidity is a component of many comprehensive pricing methods.  Think about the difference between a house in an easy to sell area vs a house that may stay listed for a year or more.

The performance of the Financial Place Online balanced portfolio

The Financial Place Online balanced 401k portfolio example was developed based on a grouping of common Vanguard funds available to various 401k plans.  The asset allocation is as follows:

As compiled from Vanguard’s website, the performance record for each of these assets is impressive.

VanguardThe first thing to note here is the omission of the Developed Markets fund.  That fund has been recently established.  In its place, the MSCI EAFE index has been used, which is a more than reasonable assumption.  Each of the four funds have experienced strong performance in the past.  It is important to remember that past performance is just that; past performance.  What is important is what each of these funds represent.  As a combination, this portfolio covers ownership of the U.S. S&P 500 index, a stong mix of Real Estate Investment Trusts, the U.S. aggregate bond market (high credit rated bonds) and developed markets in Europe and Asia.  There will be profitability in the future.  You can be sure of that.  Businesses are all about increasing shareholder value, though some are better at it that others.  This portfolio is geared towards capturing as much of the total market profits as you can in as cost effective of a method as possible.

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