Lita Epstein

Article / Updated 07-06-2023

To be a successful trader, you must have good judgment and a solid trading system. Follow the steps in the following list to develop a system that works for you and that reflects your priorities and tolerances. Select system development tools. Gather historical data to test your system. Develop and test your system design. Identify system optimization pitfalls. Test with blind simulation. Account for slippage. Keep a trading journal. Frequently evaluate your trades.

Cheat Sheet / Updated 04-17-2023

There are several steps to understanding bookkeeping and maintaining a good record of your business’s finances throughout the year. It’s advantageous to get your head around the trickier bits of keeping the books and to know the process in order to better check and control those incomings and outgoings.

Article / Updated 09-15-2022

Financial statement fraud, commonly referred to as "cooking the books," involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices. These red flags include the following: Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered Unusually high revenues and low expenses at period end that can't be attributed to seasonality Growth in inventory that doesn't match growth in sales Improper capitalization of expenses in excess of industry norms Reported earnings that are positive and growing but operating cash flow that's declining Growth in revenues that's far greater than growth in other companies in the same industry or peer group Gross margin or operating margins out of line with peer companies Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages Unusual increases in the book value of assets, such as inventory and receivables Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction Invoices that go unrecorded in the company's financial books Loans to executives or other related parties that are written off A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.

Cheat Sheet / Updated 03-25-2022

You can find hundreds of books on technical analysis and using stock charts to make trading and investing decisions, but if you don't know how to properly build those charts, the information in them may be garbage. Stock Charts For Dummies helps you develop your own charting style to match your own trading and investing style. Here, you get the basics on chart attributes, overlays, indicators, trading techniques, and journaling tips.

Cheat Sheet / Updated 02-16-2022

If you're looking at a business with an interest in investing in it, you need to read its financial reports. Of course, when it comes to the annual report, you don't need to read everything, just the key parts. Combining the annual report with some of the financial reports a corporation files with the Securities and Exchange Commission (SEC) can help you figure profitability and liquidity ratios and get a better sense of cash flow. Keep this handy Cheat Sheet nearby for a quick reference to reading financial reports, including SEC reports, profitability ratios, liquidity ratios, and cash flow formulas.

Cheat Sheet / Updated 02-15-2022

Bookkeepers manage all the financial data for small companies. Accurate and complete financial bookkeeping is crucial to any business owner, as all of a company's functions depend on the bookkeeper’s accurate recording of financial transactions. Bookkeepers are generally entrusted with keeping the Chart of Accounts, the General Ledger, and the company journals, which give details about all financial transactions.

Article / Updated 07-06-2021

If you decide you want to trade for others as well as for yourself, you need to become a registered representative. The most comprehensive test you can take is the FINRA’s Series 7 exam. To qualify for the test, you’ll need a sponsoring broker. When you sign up for the required coursework for this exam, either through self-study courses online or a nearby training school, the school can help you locate a sponsoring broker if you don’t have one. Why you need credentials The license you'll earn allows you to buy and sell all securities products, including corporate securities, municipal securities, municipal-fund securities, options, direct participation programs, investment-company products, and variable contracts. There are other exams for people who want to sell only a specific type of security rather than the broader options that a Series 7 certification enables you to market. Professional certifications are not required to sell securities. Most pros who seek these certifications do so to show their clients that they have attained a level of proficiency and met or exceeded the standards within their specialties. Many schools that train people for professional designations provide ways for you to take the coursework, even if you don’t plan to get the license or certification. You can study for many of these courses at home online. Schools for aspiring securities and financial advisors American Investment Training offers self-study training for all the FINRA licenses. The American College of Financial Services offers online coursework toward the ChFC, CLU, and CFP designations along with other financial services education. College for Financial Planning offers online coursework for the CFP and CMFC designations along with other financial services education. Empire Stockbroker Training Institute offers courses online for all the FINRA Series licenses. FINRA provides detailed outlines of the content that must be covered for all its examinations online. Selling securities is a highly regulated field that requires considerable training before you can sell even your first share of stock. Although some people trade for others without a license, they risk the possibility of an investigation by the FINRA or their state regulators. Be sure that the trading activities you do for others fit within the law, or you can end up in a legal mess facing significant fines.

Cheat Sheet / Updated 07-05-2021

Trading in the stock market can be challenging and lucrative. To be a successful trader, you need to know how to identify and invest in bear and bull markets, and you need to know how to use market analysis tools to help develop your own trading system. And, with the embarrassment of riches available on the internet, you need to know the websites that offer the most help.

Article / Updated 06-29-2021

Traders can open brokerage accounts in a couple of different ways: as a cash account or a margin account. However, if you open a margin account, you also must open a cash account. You also may open separate accounts for retirement savings. Because retirement accounts have more restrictions, your trading alternatives are more limited in those accounts. Cash accounts The traditional brokerage account is a cash account, which also is known as a Type 1 account. With a cash account, you must deposit the full cost of any purchases by the settlement date of the transaction. At many brokerage houses prior to 2002, you were permitted to place an order to buy stock even if the cash was not yet in your account. Today, however, few brokers give you that kind of flexibility. Most brokers require funds to buy stocks to be in your cash account before you can place an order. The amount of cash you need to have on deposit varies by broker. Margin accounts You don’t have to have as much cash on hand to buy stock when you open a margin account. This type of account enables you to borrow certain amounts of money using cash or securities already in the account as collateral. Each respective brokerage firm has its own screening procedure to determine whether you can buy on margin. The Federal Reserve requires a $2,000 minimum deposit to open a margin account, and it currently limits the amount you can borrow on margin to 50 percent of the initial purchase price. Not all stocks can be bought on margin. When buying stocks on margin, you pay an interest rate on the margin loans, but most brokerage firms charge relatively low rates to encourage the transaction business. When opening a margin account, the firm also requires you to sign what’s called a hypothecation agreement, which stipulates regulations for the account and permits the broker to have a lien on your account whenever the balance in your account falls below the minimum maintenance margin. The agreement also enables your broker to loan your shares to short sellers. That’s where shorted stock comes from. You’re taking a risk by purchasing shares of stock with borrowed money and using shares you own as collateral. If your stock holdings fall in value below the minimum maintenance margin requirement, your broker can force you to sell stock you don’t want to sell and use other assets you may not want to use to cover the outstanding loan. Options If you want to trade options, your broker will require you to sign a special options agreement acknowledging that you understand the risks associated with trading options or derivative instruments. This practice became common after brokers were sued by some clients because they suffered huge losses when trading options and claimed they were unaware of the risks. This protects the broker from a lawsuit. IRAs and other retirement accounts IRAs and other accounts in which you’re saving for retirement sometimes allow you to trade options, but margin trading is not allowed at all. These limitations are for your protection to avoid risking major losses in your long-term investments that never should be put at such high levels of risk. The amount you can contribute each year to all retirement accounts is limited by the Internal Revenue Code. Although you may be able to find a brokerage firm that allows you to trade using options — puts and calls, which are a type of option — you nevertheless risk penalties for certain trading activities that occur in your retirement account whenever the IRS determines the account is being used for trading purposes rather than long-term investing. Officially, the Internal Revenue Code prohibits the “IRA or Keogh Plan account holder from loaning money to the account. Likewise, the holder cannot guarantee borrowing by the account or cover its losses.” That’s why margin accounts, which entail a type of borrowing, are not allowed. Because these accounts are either tax-free or tax-deferred, you can’t write off any losses in them against any gains from investments held outside of them in other taxable accounts. You don’t have the same tax-planning choices with IRAs or retirement accounts to offset gains and losses. All money taken out of an IRA at retirement is taxed at your current income tax rate. For these stocks, you can use stock losses to minimize the tax you might have to pay on stock gains. If you hold the stock for longer than a year, you are taxed based on the lower capital gains rate of 15 percent for most taxpayers rather than your higher current income tax rate, which can be as high as 35 percent for some taxpayers. Here are some additional trading limitations of retirement accounts: Margin is not allowed: Using funds within a retirement account as collateral for trading on margin isn’t permitted. It’s against the law. You won’t find a broker that will permit you to place retirement funds in margin accounts. Short positions are prohibited: Speculative trading using short positions requires a margin account. When someone shorts a stock, he or she borrows the stock and sells it in the hope of buying it back later for less. Selling short requires the use of margin and is therefore not permitted in a retirement account. Trading policies are more stringent: All brokers have more stringent trading policies for retirement accounts. Before you open a retirement account, check with your broker about their trading limitations to be sure they match your intentions for the account. Options trading may not be permitted: If you’re an experienced trader, you can find some brokerage firms that allow options trading in your retirement account. Not all types of options, however, can be traded in a retirement account. The ones that you most likely can trade are covered calls, long call and put positions, or cash-secured puts.

Article / Updated 11-21-2019

External financial statements, including the income statement (also called the profit report) comply with well-established rules and conventions. By contrast, the format and content of internal accounting reports to managers are wide open. If you could sneak a peek at the internal financial reports of several businesses, you’d be probably surprised by the diversity among the businesses. All businesses include sales revenue and expenses in their internal profit-and-loss (P&L) reports. Beyond this broad comment, it’s difficult to generalize about the specific format and level of detail that bookkeepers need to include in P&L reports, particularly regarding how operating expenses are reported. Designing internal profit (P&L) reports Profit performance reports prepared for a business’s managers typically are called P&L reports. These reports should be prepared as frequently as managers need them, usually monthly or quarterly — or perhaps weekly or daily in some businesses. A P&L report is prepared for the manager who’s in charge of each profit center; these confidential profit reports don’t circulate outside the business. (The P&L contains sensitive information that competitors would love to get hold of.) Accountants aren’t in the habit of preparing brief, summary-level profit reports. Accountants tend to err on the side of providing too much detailed data and information. Their mantra is to give managers more information, even if the information isn’t asked for. Managers are busy people, and they don’t have spare time to waste, whether for reading long, rambling emails or multiple-page profit reports with too much detail. Profit reports should be compact for a quick read. If a manager wants more backup detail, she can request it as time permits. Ideally, the accountant should prepare a profit main page that fits on one computer screen, although this report may be a smidgen too small as a practical matter. In any case, keep it brief. Businesses that sell products deduct the cost of goods sold expense from sales revenue and then report gross margin (alternatively called gross profit) both in their externally reported income statements and in their internal P&L reports to managers. Internal P&L reports, however, provide a lot more detail about sources of sales and the components of the cost-of-goods-sold expense. Businesses that sell products manufactured by other businesses generally fall into one of two types: retailers that sell products to final consumers and wholesalers (distributors) that sell to retailers. The following discussion applies to both types. There’s a need for short, to-the-point or quick-and-dirty profit models that managers can use for decision-making analysis and profit-strategy plotting. Short means one page or less (such as one computer screen) with which the manager can interact and test the critical factors that drive profit. If the sales price were decreased 5 percent to gain 10 percent more sales volume, for example, what would happen to profit? Managers of profit centers need a tool that lets them answer such questions quickly. Reporting operating expenses Below the gross margin line in an internal P&L statement, reporting practices vary from company to company. No standard pattern exists. One question looms large: How should the operating expenses of a profit center be presented in its P&L report? There’s no authoritative answer to this question. Different businesses report their operating expenses differently in their internal P&L statements. One basic choice for reporting operating expenses is between the object-of-expenditure basis and the cost-behavior basis. Reporting operating expenses on the object-of-expenditure basis By far the most common way to present operating expenses in a profit center’s P&L report is to list them according to the object-of-expenditure basis. This basis classifies expenses according to what is purchased (the object of the expenditure), such as salaries and wages, commissions paid to salespeople, rent, depreciation, shipping costs, real estate taxes, advertising, insurance, utilities, office supplies, and telephone costs. To use this basis, a business has to record its operating expenses in such a way that these costs can be traced to each of its various profit centers. The salaries of people who work in a particular profit center, for example, are recorded as belonging to that profit center. The object-of-expenditure basis for reporting operating costs to managers of profit centers is practical. This information is useful for management control because, generally speaking, controlling costs focuses on the particular items being bought by the business. A profit center manager analyzes wages and salary expense to decide whether additional or fewer personnel are needed relative to current and forecast sales levels. A manager can examine the fire insurance expense relative to the types of assets being insured and their risks of fire losses. For cost control purposes, the object-of-expenditure basis works well, but there’s a downside. This method of reporting operating costs to profit center managers obscures the all-important factor in making a profit: margin. Managers absolutely need to know margin. Separating operating expenses further on a cost-behavior basis The first and usually largest variable expense of making sales is the cost-of-goods-sold expense (for companies that sell products). In addition to cost of goods sold (an obvious variable expense), businesses have other expenses that depend on the volume of sales (quantities sold) or the dollar amount of sales (sales revenue). Virtually all businesses have fixed expenses that aren’t sensitive to sales activity, at least in the short run. Therefore, it makes sense to take operating expenses classified according to the object-of-expenditure basis and further classify each expense as variable or fixed. Each expense would have a variable or fixed tag. The principal advantage of separating operating expenses into variable and fixed classifications is that margin can be reported. Margin is the residual amount after all variable expenses of making sales are deducted from sales revenue. In other words, margin equals profit after all variable costs are deducted from sales revenue but before fixed costs are deducted from sales revenue. Margin is compared with total fixed costs for the period. This head-to-head comparison of margin and fixed costs is critical. Although it’s hard to know for sure, because the internal profit reporting practices of businesses aren’t publicized or generally available, probably the large majority of companies don’t attempt to classify operating expenses as variable or fixed. Yet for making profit decisions, managers need to know the variable versus fixed nature of their operating expenses.