What are credit default swaps?

There is a lot of mention currently in the media regarding credit default swaps. Here is our explanation on the credit default swaps, and why are they such a problem in the current market.

What are credit default Swaps?

The credit default swaps are unregulated contract that is approximately $62 trillion market. Currently, these contracts are blamed for the market volatility, as well as, downward spiral of American Insurance Group(NYSE:AIG) and Lehman Brothers(NYSE:LEH). Along with that, there is a lot of political, government and economical posturing going on to save the troubled financial institutions. So the question that comes to mind:

What are credit default swaps ?

Credit Default Swaps involve a large investor who buys a bond, but is worried that the company will not be able to pay off the bond. It investor who wants to participate in that particular bond market, but wants to manage the default risk. To manage that risk, the investor goes to, for example, AIG, and buys protection or insurance. This protection or insurance is called a credit default swap. The insurer, like in our example AIG, gets a fee for provide that protection to the investor. The investor in return gets the protection he/she wants.

There are some unique characteristic of these credit default swaps that are important to know, in particular, the unregulated nature of them. Below are some of them:

• The transactions is what is called an “over the counter” transaction. What this means that the transactions is NOT regulated by any public exchange.
• These contracts are not considered, in legal terms, an insurance. So the companies, like AIG, that guarantee the bonds are not required to keep adequate capital to pay them off in the event of a default. So basically the companies that are providing the insurance are not required to have the money to effectively provide that insurance.
• Because the insurance does not have the money in their “banks” to provide the guarantee, the investor who has bought the protection gets a false sense of security. The investor thinks that he is managing the risk of default but, in actuality, he is not because his insurer does not have the ability to pay.

So now we know the characteristic of these credit default swap, how did it cause the current turmoil ?

When the house prices where rising, the mortgage market were good places to invest money for pension funds and other institutions. The investors, like hedge funds and pension funds, invested in the mortgage market. To manage the risk of these investments, bought the insurance provided by the credit default swaps issuers. The investors did not realize that these companies do not have the ability to pay in case of the massive mortgage defaults. In fact, the management of insurance provider did not do good due diligence to account properly for the risk associated with such a melt down.

The investors kept on making more and more investments in the mortgage market because of attractive returns and this false sense of security provided by bond insurers like AIG.

So how did the house of cards fall ?

When the house prices declined, and the mortgage default rate begin to rise, the investors went to insurers to call on the protections that they had bought. The investors who went to insurers, suddenly faced the probability that the insurance providers may not be able to pay. So, the investors, who cannot recoup their losses, where left hanging. The insurance providers or insurers faced bankruptcy because they could not fulfill their obligation.

Thus, the house of cards.

We added askStockGuru UK

For those who want to research stock, analysis stock, perform technical analysis and know support and resistance for stocks traded in London Stock Exchange(LSE) in UK, we have added askStockGuru.co.uk. Hope you find it as helpful as askstockguru.com, which analysis US stock traded on NYSE and Nasdaq.

Changes to the top menu

Changed the top menu to provide following functions:

• Ability to logout
• Ability to change password
• Moved the Feedback under the affiliate

How to add/remove a stock to watchlist ?

How to Add stocks to the watchlist ?

1. Login to the website using your email and password.

on the top menu,

Login/Free Registration --> Login

then, type your email and password, and then click login

2. Look up a symbol, For example, type "IBM" in Symbol box, and click "GO"

On the Right hand side of the Summary Bar in gray, you should see "Add to Watchlist".
Click "Add to Watchlist" to add IBM to the watch list

Repeat the processs until all the symbols you want are added.

3. To view your watchlist, go to "My Watchlist"

You will now see all the stocks in your watchlist
( If you wish to remove a symbol, you can click remove on this screen. )

Regards,

askStockGuru.com Team

How do we determine which stocks we follow ?

Currently, we follow about 3500 to 4000 stocks that are traded either on NASDAQ, NYSE or AMEX exchanges. Furthermore, we filter out stocks that do not meet our criteria. The criteria is based on history of the stock and other indicators that we follow. Sometimes, we may exclude a stock because of limited trading history, inadequate daily trading volume, exceptional events, and based on other indicators we follow. We filter these stocks to ensure that we give our users good analysis that we feel comfortable with.

Site Down

Today the site went down for about 2 hours. We apologize for any inconvenience that it may have caused our users.

Why Market Phases Are Important For Stock Investors?

Are you into stocks? Do you trade the stock market? Are you an investor or a trader? In either case, you will find this article very helpful. You will also find the market phases to be a good indicator for stock, and perhaps you will be able to profit from it.

It is important for an investor or a trader to understand the life cycle of a stock. If you trade stocks, you know that stocks go through peaks and valleys. It is the nature of the stock market. We believe that most stocks go through these cycles. Through an algorithm developed by askStockGuru.com, we have classified the life cycle of a stock into 6 distinct phases. These market phases are as follows:

• Recovery phase
• Accumulation phase
• Bullish phase
• Warning phase
• Distribution phase
• Bearish phase

The above market phases describe the stage of the stock within the cycle. For instance, as the stock initially rises in the price, it goes through recovery phase. These are buyers that are first to recognize the value. Similar to early adopter to technology, these investors recognize the value of the stock early on.

Accumulation Phase generally follows the recovery phase. More buyers are entering the market. The bullish phase, which follows the accumulation phase, the buyers have the control of the market, and are anxious to push the prices up.

Eventually, the Bullish phase ends. In most cases, the market will give you a warning before it goes into distribution phase. The warning phase is the early signs that sellers are beginning to enter the market. A fight is taking place between the buyers and sellers.

During the Distribution Phase more sellers are entering the market, and are trying to drive the prices down. The Bearish phase is when the sellers have the control of the market, and the prices are going down.

In most instances, the phases are not as orderly as one might prefer. For example, a stock may go from accumulation phase back to Recovery Phase few times, before going forward to the Bullish Phase. Nevertheless, it is important to comprehend the phases and trade accordingly.

The phases are important because it gives traders and investors common language to understand and describe the price behavior of a particular stock. Understanding this behavior is critical to trader's road towards profiting from price movement in any market.

For more information about market phases visit the website,
askstockguru.com It provides analysis and recommendations for over 4000 stocks for FREE. Askstockguru.com has developed this and other indicators for trading stocks. Manish Shah has a B.S. in Engineer from Illinois Institute of Technology and a Masters in Business Administration from Washington University. He has been trading markets for over 10 years.

Happy New Year

We wish all traders and investors a very happy new and prosperous new year.

Breakouts and Breakdowns

One of the questions that was recently asked was:

>What does upside and downside breakout mean?

Breakout is price movement of a stock through an identified level of support or resistance. The upside or downside breakouts are traded with the presumption that the move will continue. Traders who keep an eye on the upside or downside breakout, generally, look for increase in the volume( number of shares traded ) for the breakout bar. Higher this volume, bigger and stronger the breakout. The traders will buy the stock when the price breaks above a level of resistance and sell when it breaks below support. The traders may also buy the stock when the price bounces from a support level with higher volume. Similarly, The traders may also sell the stock if the price declines from a resistance level with noticeable increase in volume.

A downside breakout is also referred to as breakdown. This is usually a bearish sign.

askStockGuru tries to identify both breakouts and breakdowns. It also checks for increasing volume. Although we track degree of breakout, we have not made the indicator available to our users. We do plan to do publish that indicator in the future.

How often do we update our analysis ?

Recently, we were asked the following question:

> How often do you update your analysis ?

We want to give our clients timely and actionable analysis. To achieve this purpose, askStockGuru.com updates its stock analysis at least 2 times a day. The first update occurs during the market hours, and the second update occurs after the market close. When the market is open, we may update our analysis multiple times.