Trading Tips

While the overall market is great at consistently building wealth over long periods of time, individual sectors and stocks will have a far more volatile time. Capital moving from one area to another quickly can often lead to huge overvaluations that then result in drops that are just as large.

In Wall-Street speak, this move far outside the norm is a bubble. While buying into one seems like the right idea at the time, usually under the guise that “everyone else is making money!,” investors can often get better prices waiting for the bubble to burst.

Tech stocks slid an average of 80 percent after the tech bubble in 2000. Buying surviving companies like Microsoft, Apple, and Amazon then would have led to tremendous wealth creation.

Housing prices, in terms of price to income, had a bubble of their own, and in many markets housing prices fell by at least 50 percent. Buying a second home as a rental a decade ago would have created a lot of wealth—and income—for someone without having to even touch the stock market.

Today, one of last year’s bubbles, in the cannabis space, seems to be getting close to a bottom. Many of the players, big and small, have fallen 70-80 percent from their highs or more. And even tobacco stocks have struggled here, on news that they don’t want to get into the space yet!

However, the fear right now, after the collapse, is a good sign that it’s time to buy. There may not be a rapid rise here again like there was during last year’s bubble, but today’s prices are so depressed that they represent a good long-term entry price in a rapidly-developing new market sector.

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When you buy shares of a company, you’re getting an ownership slice. If the company does well, your shares should rise. The company may even pay a dividend, providing you with cash you didn’t have to labor over for a living.

Sounds great! But, a company is more than just the sum of its shares. Companies have a capital structure, which includes a mix of stocks (called equity), and other types of financing, typically debt.

Nearly all companies have debt. Some debt, relative to the stock value, is fine. It’s a lot like the mortgage on your home—borrowed money that lets the company do things today it otherwise couldn’t afford to do.

But sometimes, companies get too much debt for their cash flows. Or they structure their debt differently than a mortgage. For instance, some debt may be convertible to stock at the right price. If it does convert, the company has less debt, but existing shareholders end up getting diluted.

That’s part of the problem going on right now with Tesla Motors (TSLA). Shareholders may have seen their shares beat the pants off the market the past few years, but the company also loaded up on debt to finance its famous electric cars. Some of that debt came due, and, because of where the share price was at, ended up getting converted.

The timing is pretty bad. Besides the heavy debt load and now dropping share price, the company has some big production problems and a larger-than-life CEO distracted with a myriad of other activities. When shareholders ignore a company’s debt—and when it comes due—they set themselves up for losses. It’s no wonder that Tesla shares are down by nearly half in less than a year—and why some analysts are already calling for a further 90-95 percent drop from here.

Not sure the best way to get started?  Follow these simple steps to hit the ground running...
 
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Big Book Of Chart Patterns:  https://www.tradingtips.com/book-of-chart-patterns/
The Ultimate Stock Trading Toolbox: https://www.tradingtips.com/ultimate-toolbox/ 
10 Great Stocks Under $10: https://www.tradingtips.com/10-great-stocks-to-buy-under-10/
7 Cheap & Good Stocks: https://reports.tradingtips.com/7-cheap-stocks 


Step #2 - Join Our Premium Advisories:
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