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Why You Shouldn’t Buy Spotify Stock (Right Away)

April 3, 2018 By Jackie Cohen Leave a Comment

Why you shouldn't buy Spotify stock -- or at least not right away

Don’t let hype motivate you to make an investment that isn’t perfectly sound — that’s the gist of why you shouldn’t buy Spotify stock on the opening day, which is today (depending on what timezone you’re in when reading this).

The music streaming company Spotify’s stock debut is getting a lot of attention due to it being the largest outfit to go this route instead of doing a traditional initial public offer.

Interestingly, Spotify’s founder and Chief Executive Officer, Daniel Ek, explained in a blog post that Spotify isn’t trying to raise capital through its IPO.

How Spotify’s Direct Sale Compares to an IPO

Even before the debut on the New York Stock Exchange, shares in the company were technically already tradeable by private investors and employees of the company. The company is simply listing its existing shares on the New York Stock Exchange starting tomorrow.

Instead of an opening price, there’s a reference price of $132 — significantly higher than where stocks tend to start out at.

That said, Spotify’s debut on the New York Stock Exchange has things in common with an IPO — athough here a company hires at least one investment bank to begin promoting the shares to the public.

Who Gets First Dibs on the Shares

But what really happens is the investment bank sells first sells to other bankers, institutional investors and high-net worth individuals before the rest of the investing public gets a crack at the stock.

Although the trading doesn’t technically begin until the opening bell rings on the New York Stock Exchange — or the equivalent beginning of session on other exchanges — the investment bankers handling the sale take advance orders for the shares beforehand.

The IPO model limits participation in the first round to the elite — usually the favorite customers of the investment banks — who get to enjoy what often has some of the strongest upside potential of any type of stock transaction.

Spotify, by contrast, is bypassing this convention in order to make the shares immediately available to the broader public. Although a financial institution still does the underwriting — in this case, Citadel Securities is doing it for Spotify — the first buyers of the stock can be anyone with a brokerage account.

Pros and Cons of Direct Sales

The resulting investment opportunity has both pros and cons; rushing into buying the stock right away can have consequences for those who lack the kind of investing experience that typify those who normally participate in IPOs.

Investment banks’ theoretically try to sell initial public offers to sophisticated investors who show an interest in holding on to the stock in order to stabilize it. But in practice the effect looks like it rewards favorites that do the most business with the brokerage

All of this makes Spotify’s direct offering a welcome contrast to those who crave access to the kind of money-making possibilities normally associated with an IPO. The music streaming company’s shares begin trading under the ticker symbol SPOT — and you can get in on the opening via any brokerage where you have an account.

Lots of Risks

Before you rush off to do that, stop and think about the risks. Stock offered directly to the public tends to have more volatility than shares that open through an investment bank. And since the markets are already pretty volatile due to a host of factors, that means Spotify stock could be in for a very bumpy ride indeed.

Speaking of which, Spotify’s choice of an investment bank happens to be an outfit that is known for algorithmic trading, which may be a contributor to market volatilty in addition to being well equipped to navigate those conditions.

The Day(s) After

Related to this — and the reason why investment banks try to take steps to stabilize new stocks: IPOs that have high flying debuts can have a special kind of hangover on the days immediately following. This has happened to stocks of all sizes, including some of the biggest IPOs of all times. It happens so often that Wall Streeters actually have a recurring joke about it.

In fact, the phenomenon may have been part of what Spotify’s CEO was thinking of when he said in his blog post that it’s “the day after, and the following day that matters — and all those days to come. Because that’s when we will continue the hard and important work of our mission.”

In all fairness, many stocks do recover sometime afterward. But that interim period of time can be tough if you’re at all squeamish or have a difficult time tolerating losses. This kind of risk aversion tends to develop among people after they experience a big drawdown in the markets like the 40% average loss during the credit crunch of 2007 to 2009.

Beware Overconcentration

Another risk to beware of: It’s easy to end up overconcentrated or imbalanced if you buy shares direct. A majority of people’s investments today consist of mutual funds or exchange traded funds rather than individual stocks; adding a single stock to such a portfolio may leave you without the correct counterbalances to spread out the risk that you would otherwise incur

Ask a financial planner or broker to help you make sure the rest of your portfolio includes enough diversification to keep you balanced.

Don’t Trade on Emotions

General investing wisdom calls for not basing financial decisions on emotions or impulse — and any motivation to buy Spotify stock that doesn’t consider the fundamentals of the investment might actually have some sentimentality at the root of it.

If you’re fan of Spotify’s services, that doesn’t translate into the shares being a sound addition to your portfolio. Do your research before buying any shares or other type of investment.

Lawsuit Pending

Here comes the kind of risk that shows up in many companies’ investment prospectuses: Spotify has a pending lawsuit against it for $1.6 billion.

Although the suit has not stopped the company from going public, the case continues to incur legal costs that would eat into profits. This would become even more pronounced if the company loses the suit.

Why You Shouldn’t Buy Spotify Stock

Although risk in and of itself isn’t a bad thing — that’s where you find opportunities for gain — the aggregate risks associated with the stock should make you at leat think twice before making an impulse purchase of Spotify stock.

You could always wait to see how it performs and pick up the stock in the following days or weeks. Another approach would be to buy just a little, see how it does, and let the outcome determine whether you want to buy more, keep watching of even sell.

Readers, what’s your opinion about the direct sale to the public? Do you agree that you shouldn’t buy Spotify’s stock — at least not right away? Why or why not? What’s your investment strategy?

What’s the Relationship Between Federal Debt and the Stock Market?

October 13, 2017 By Jackie Cohen Leave a Comment

Wouldn’t it be wonderful if gains in the stock market could actually reduce U.S. government indebtedness? If that were true, money might as well grow on trees. But there is a relationship between federal debt and the stock market.

Fact check Trump on debt and stock market — Source: Politifact

About That Federal Debt

The U.S. government’s indebtedness impacts the bond market along with the value of the dollar (as it trades in foreign exchange markets) along with commodities, while having an indirect impact on stocks.

Generally speaking, when investors perceive the government’s indebtedness to be too high, that can reduce demand for government bonds and with that their prices can decline.

The same logic causes the value of the dollar to decline in foreign exchange markets. That, in turn, can make alternatives to the dollar, like gold, look more appealing, and demand might drive up prices.

Stock Market Impact

The relationship between federal indebtedness and the stock market gets a little more complicated because it’s a bit indirect.

To go back to the example about the dollar, if it declines because foreign exchange investors consider U.S. federal government debt to be excessive, then everything denominated in dollars would lose value.

To recapture that lost value, prices go up — yes, this includes inflation, and even stock prices going up is a type of inflation. And that also sends up the prices of just about all the other types of commodities besides gold.

Going Up

Sure, you can think of stock price appreciation as the silver lining on the cloud of inflation, but that won’t make increases in other types of prices feel any better if your income isn’t going up.

Speaking of going up up, if you’ve held onto any stocks from the date of the election until now, congratulations on those double-digit percentage gains — unless you held onto retail stocks or any other laggards, perhaps so you could capture capital losses come tax time.

Hopefully you can agree that it’s completely nonpartisan to point out that the stock market’s growth since the election is definitely above average, if not reminiscent of, say, 1999. However, it’s unrealistic to ascribe a single unified cause to the upward trend of the entire U.S. stock market.

Recovery From Credit Crunch

Indeed, the market has generally been rising ever since the credit crunch of 2007 to 2009 (the actual bottom occured at different times on the New York Stock Exchange, Nasdaq and in over-the-counter trading, so it’s simpler to cite a general range). federal debt

Some might make the case that the ascent was actually helped by government borrowing: $9.2 trillion of the $20.4 trillion federal debt was incurred during Barack Obama’s two terms of office.

To be fair, many investment analysts attributed policy-setting by the U.S. Federal Reserve for rise of the stock market from the credit crisis until around the time of the first interest rate increase in early fall of 2015.

The market took a bit of a breather and then resumed the upward movement, but for myriad reasons rather than any single cause.

It’s not unlike the factors that influence your income aren’t just your own performance but how your industry is faring and many other drivers.

Readers, how have your finances fared since November — and are you able to attribute the causes?

The Two Kinds of Insider Trading You Should Know About

September 26, 2017 By Jackie Cohen Leave a Comment

Did you know that most insider trading is actually legal — and something that can indicate good opportunities for investing?

This form of insider trading doesn’t capture the kind of headlines that the illegal variety does, which could explain why the misconception is so common.

Adding to the confusion, investigations of suspected illegal insider trading can take a long time to unveil the truth.

The latest high-profile example led to the dismissal of Equifax’s top three executives following revelations that they sold about $1.8 million in shares of the company between learning about a data breach and announcing it to the public.

What Qualifies as Insider Trading

Both illegal and legal insider trades involve at least one of the following: access to valuable non-public information about a company and ownership of more than 10% of a company’s stock.

A publicly held company’s directors and high-level executives are insiders. An insider is legally allowed to buy and sell shares in the company and any of its subsidiaries, but these transactions require advance filings with the Securities and Exchange Commission.

Usually these trades are prohibited in the days leading up to official announcements of earnings, mergers, spinoffs, reorganizations, and other events the SEC considers to have an effect on stock prices.

The SEC makes insider transaciton disclosures public via the EDGAR database — while you can access it directly via the link in this paragraph, it can be a bit rough on the eyes or at least challenging to navigate.

Easier Reading

Fortunately, numerous third-party publishers make the information easier to access. You can find it through simple Google searches for relevant keywords, and by going to just about any financial news outlet online and looking for insider trade data.

Of course, such a search might turn up news about the illegal variety of insider trading, but it’s fairly easy to tell which kind of information you’re looking at.

A headline referring to investigations or criminal proceedings probably concerns illegal insider trading, whereas in the legal kiund, executives buy, sell, or hold large amounts of shares in the company that employs them.

Insiders generally have more expertise in the company than the average investor does, so that’s what makes their transactions in the stock a strong indicator about the future expectations for the shares’ value.

Research has shown that a stock’s price tends to rise following purchases by insiders, partly due to the fact that other investors tend to follow the trades made by insiders.

However, since not many individuals technically qualify as insiders — in the sense of having large holdings — it can be misleading to only look at insider trading activity within individual stocks as the sole rationale for trading in a stock.

Sometimes insiders might trade for entirely personal motives that outsiders would have no way of knowing.

Instead, consider insider trading one of several factors involved in a stock’s price movement rather than as a single indicator.

The more you learn about the full range of influences upon a stock’s price, the better you can continue to develop your investing chops so you might discover additional investment opportunities in the future.

Look at All Inside Trades Instead

That said, an aggregate look at insider trading 00 across as many stocks as possible — can provide a signal about a possible change in the overall market direction.

And speaking of signals, the ones that the SEC looks for to catch illegal insider trading is a surge in the volume of trades in a particular stock taking place either before a public announcement or when there is no announcement to the public (meaning a secret or rumor is circulating).

These surges became easier to spot once trading began moving away from paper toward electronic format starting in 1971.

Readers, has learning about insider trading made you curious to include it in your own investment research?

Macy’s Announces Store Closures, Expect to See More

January 12, 2016 By Amanda Blankenship 1 Comment

You have probably heard about retail giant Macy’s most recent announcement about closing stores and laying off employees, and potentially leaving malls in the dust as well. Many shoppers have changed what they are looking for in retail, making it hard for many stores to remain open. Many people are searching for good deals or purchasing comfortable athletic gear. Stores, such as Macy’s and Nordstrom, have struggled to keep up with the trends. Now, many of them of having trouble keeping doors open through 2016.

Macy’s

Last week, Macy’s announced 36 store closures and a significant amount of layoffs. The company also announced that holiday sales fell an astounding 4.7 percent, blaming the unseasonably warm weather for the lack of sales in winter gear. In addition to the holiday sales fail, the company has also seen nearly a 50 percent decline in stock during the last 12 months. The retail giant, which relies on the sales of purses and clothing, has not seen a lot of newness in apparel. Now, it is facing competition from newer retailers like H&M and TJ Maxx. However, the company has formed a restructuring plan and is likely to weather the storm.

Nordstrom

As far as department stores go, Nordstrom is one of the strongest, but the company is still facing the same problems as Macy’s. This includes the competition from the newer companies as well as falling sales. Since last year, Nordstrom stock has fallen 42 percent. Nordstrom has possibly had a harder time with sales because, unlike Macy’s, it does not offer any big sales. This makes it difficult to compete against many other companies. Its discount retail store, Nordstrom Rack, has not seen much traffic either because of its lack of merchandise. It only sells clothing, which is a weak item on the market currently.

Aeropostale

Aeropostale shares have fallen to under $1 per share, which is troubling for the company. They have struggled with the falling clothing market as well as other hip retail stores popping up all over the place. It seems not many teens, or anyone else, are concerned with having the Aeropostale name on their clothing. During the third quarter, the company suffered a 20 percent decline in sales.

Sears

Sears has been squeezed by many other companies. Places like Lowe’s and Home Depot are now selling appliances, which Sears used to lead the market in. In addition, its apparel sales have been snuffed out by places like Target. Overall, Sears’ stores are just outdated. Many people don’t want to shop in Sears because they’ve not put any work into their displays or the look of the stores. In the new year, Sears is focusing on restoring profitability to the company through its stores. However, it is not yet foreseeable whether the company will achieve that goal or not.

HH Gregg

HH Gregg is a regional retail store, not all states have one. However, the company has seen a significant fall in sales due to a number of factors. Rural areas in particular have seen a significant decrease in sales. The company has also been hurt in electronic sales by Amazon and Best Buy. Sales for various products have fallen between 11 and 35 percent, and since last year, sales have fallen 64 percent.

The retail world is changing, and it seems some of the biggest and most well-known companies are being hit hard. Some will close stores, others will enact aggressive plans to push through. It is likely that we may see these stores slowly fade out over time.

Costco Wholesale Shares Rose During 2015, Unlike Many Other Retailers

January 11, 2016 By Amanda Blankenship 2 Comments

Costco Shares Rise — Photo: Flickr: Mike Mozart

Costco Wholesale Warehouse (NASDAQ: COST) ended a great year in sales and stock. 2015 was a not-so-great year for many retailers, however, Costco seemed to shine throughout the past year.

Shares of Costco Wholesale Warehouse Club saw a significant rise in 2015. In fact, stock rose 14 percent and hit an all-time high of $169.73 during the year. It ended 2015 at $161.50 a share.

There is one clear reason that Costco has done so well, according to experts, and that is consistency. Costco outperformed other retailers during 2015 because they have remained consistent.

A huge reason why many retailers saw decreases in stock in 2015 was because of the rising wage bills throughout the United States. Many states are petitioning to raise wages for workers, however, it is hurting some companies. For instance, in 2015, Wal-Mart will likely share a 10 percent decline in the current fiscal year, and has already prepped its shareholders for another decline in the coming year.

By comparison, Costco has always paid its employees well, so the pay increases will not likely effect the company much at all. In fact, the company has showed nothing but stability in the face of a strong dollar and declining gas prices. In the 2015 fiscal year, revenue rose for Costco by 3.2 percent and rewarded shareholders with a special dividend last year.

In the first few moments of the 2016 fiscal year, Costco saw a slight slump in sales, however, it has not hurt the company much. Some one-time items being sold affected the company’s sales during the first quarter. Its underlying performance, however, is still strong.

People interested in investing in Costco will likely be willing to pay a larger premium because of Costco’s reliability. It has reliably produced strong results for its shareholders and plans to continue to do so, so shareholders can sleep well knowing their money is in Costco’s hands, so to speak. This is different from other retailer, such as Wal-Mart, that seem to simply go from one crisis to the next.

Another factor that will likely affect Costco’s business this fiscal year is the switch from American Express to Visa. Costco’s credit cards, for years, have been American Express, however, the company decided to move forward in 2016 with Visa. Visa will offer the company lower fees. Visa is also more user-friendly. The customers who have credit cards through Costco will be able to use their card more places. American Express, on the other hand, is not accepted as many places.

Moving forward, Costco won’t likely see any decline in stock or shares any time soon. Shareholders are looking forward to a long-term upward trajectory with the wholesale company, and Costco is happy to provide.

Stability and smart business decisions is what drives Costco forward, and the company’s executives plan to continue driving the revenue, shares and overall Costco experience upward.

For more info on Costco check out these articles.

Is the Costco Membership Fee Worth it?

Is a Costco Executive Membership Worth the Price?
Costco Gas Calculator: Will I Save Money Buying a Membership if All I Buy is Fuel?

Costco Return Policy

Costco Holiday Schedule

Costco Tires

You can check out our articles for Target as well.

Target Christmas Store Hours

Target Holiday Schedule and Store Hours

McDonalds Shows Increase At End Of Third Quarter

November 2, 2015 By Guest Writer 1 Comment

Last Thursday, McDonald’s third-quarter earnings results topped the analysts’ forecasts. The long-awaited McDonald’s turnaround might finally be here. The troubled fast food giant announced that their global same-store sales grew by 4 percent in the third quarter of 2015, with the increase driven by growth in several international markets.

Same-store sales at locations that have been open for at least a year rose 0.9 percent in the United States while analysts expected a decline. Overall, McDonald’s profit grew to $1.3 billion for the quarter, from $1.07 billion for the same quarter a year earlier.

McDonald’s ended seven straight quarters of same-store-sales declines in the U.S. McDonald’s ended the losing streak by implementing a turnaround strategy that included customizable burgers and all-day breakfast. The company claims that the new crispy buttermilk chicken sandwich and breakfast increased their sales in the America.

The move appears to have boosted traffic, however, domestic franchisees are complaining that all-day breakfast and customizing sandwiches is making operations difficult and slowing service. McDonald’s Chief Executive Steve Easterbrook said restaurant operators have embraced all-day breakfast, and that an early read suggests it is “an incremental profitable business,” wooing new and existing customers.

McDonald’s said that its decision to raise wages and improve benefits for 90,000 workers in U.S. company-operated restaurants took a chunk out of operating income. Chief Financial Officer Kevin Ozan said the strong U.S. dollar would increase fourth-quarter earnings per share by 8 to 10 cents. McDonald’s gets about one-third of revenue and more than half of its operating income from outside the United States.

The third quarter earnings of the company joined an international increase in world shares worldwide. The world economy as well as private shares are seeing increases for the first time in years and McDonald’s, it appears, is no different.