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Chinese Stocks

How the New Delisting Bill Could Impact Chinese Stocks

The new delisting bill could be critical for many high profile and popular Chinese stocks.
Investors need to watch out for their moves.

The US Senate passed a crucial bill on Wednesday, May 20, that could have implications for the
relationship between the US and China. This bill will also have an impact on the stock market;
here’s how. Fox Business reports that the new bill, called the Holding Foreign Companies
Accountable Act (HFCAA), removes “rogue” Chinese companies from the US exchanges.

The Reason Behind the Legislation

The main reason behind the legislation is the concern that Chinese companies listed on the US stock exchanges are not subject to those standards of accounting and investor protection rules that US companies have to follow.

As a result, retail investors are faced with a greater risk of fraud. According to the bill, if the Public Accounting Oversight Board isn’t provided access to the books of any foreign issuer of stocks for 3 years, the Securities and Exchange Commission will prohibit the trading of those shares on the US exchanges. All that’s needed now is the approval by the House of Representatives after which the President will sign the bill.

Now what do investors need to keep in mind? Well, there are some stocks that would be directly affected by this. In fact, 165 Chinese companies (of which are quite popular with investors) have their stocks listed on the American stock exchanges, and all these could be adversely affected by this legislation.

High Profile Chinese Stocks that Could Be Affected

Among these are search engine giant Baidu ($BIDU), cloud computing giant Alibaba ($BABA), e-commerce platform provider JD.com ($JD), and social media and video game company Tencent ($TCEHY).

One Chinese company that already has its stock hit is Luckin Coffee ($LK). NASDAQ already sent the beverage chain a delisting notice after its COO was found to have fabricated sales worth $310 million in 2019. Debuting at $17 per share on NASDAQ in May 2019, the stock soared to $50.02 in January. The company was valued at $12.02 billion. On Wednesday, its value dropped to less than $700 million.

Delisting from NASDAQ

Baidu is already thinking of delisting from NASDAQ. It plans to list on some stock exchange located closer to China since it believes its stock isn’t given the deserved value in US markets.
Will other Chinese companies follow suit? That could happen, or a situation could arise when these companies could be blocked from trading in the US. Or only be allowed to trade on the OTC markets instead of the top exchanges. New Chinese companies could also be prevented from listing on the US stock markets.

If you are using an online stock broker or one of the commission-free trading brokers you need to be vigilant when dealing Chinese stocks and how the Holding Foreign Companies Accountable Act (HFCAA) will effect their listing in the US stock exchange.

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Stock Market Rally

Can You Count on the Stock Market Keeping Its Rally Going? 

Investors always look for the light at the end of the tunnel. It’s no different this time, with the lull the months of March and early April have witnessed as a result of Covid-19 coronavirus. While it is essential to look for the next big investing opportunity, even when there seems to be none around, you also need to be careful you don’t jump the gun. 

Since March, the Market Is on a Roll

After the coronavirus pandemic, the market did experience flashes of growth despite the overall bearish volatility. But since March 23, the S&P 500 has grown around 25%. There has been a continuous debate about how sustainable these gains can be, as a result of the Covid-19 fallout. Even the Nasdaq Composite is in the year-to-date (YTD) lead. Is this an indication that the bad times are past?

Not to Get Drawn Away by the Rebound 

According to prominent strategist Sophie Huynh, as quoted by MarketWatch, investors really shouldn’t be drawing too much from this since the rebound has been mainly surrounding the healthcare, staples and technology sectors. What’s characteristic about these sectors is that they benefit from an environment of low interest rates and kind monetary policies. The current work-from-home situation has also contributed to their growth. These influences aren’t exactly sustainable. 

The upside is limited now, Huynh reckons. She is waiting for a rebound concerning industrial, energy and discretionary stocks. These are stocks that really reflect economic growth recovery more than the other stocks. A total “risk off” is still some way off, she reckons. Currently she doesn’t see any sign of capitulation when compared to 2008 levels, but some of the risk-off has settled in.  

Unemployment Figures Keep Rising

As per reliable data, the total number of individuals who have filed for unemployment in the US is 25 million, when including the 4.4 million who have recently filed for unemployment. The Markit PMI services and manufacturing indexes have dropped, while sales of new homes have also sunk 15%.

Domino’s Pizza, Target and Eli Lilly 

As for the current situation, Domino’s Pizza ($DPZ) missed its same-store sales estimates. The company’s shares slumped 2% in premarket trading on last Thursday after the pizza chain reported first-quarter profit and revenue that rose above expectations but saw reduced U.S same-store sales. However, Target ($TGT) experienced an increase in online sales while pharmaceutical company Eli Lilly ($LLY) also reported earnings growth.  The shares of Eli Lilly rallied 1.5% during premarket trading Thursday – the drug maker had reported better-than-expected first-quarter profit and revenue and also provided an outlook for the full year, which was consistent with the forecasts. They witnessed revenue boost by an estimated $250 million due to increased customer buying patterns related to the COVID–19 pandemic.

Uncertainty for Target?

But there is still uncertainty for Target as it experienced big sales swings. The shift in shopping trends during the pandemic is the primary reason. In fact, the shopping trend shift has been from physical and online stores to only online. That has affected Target’s earnings, making it less profitable. So, the uncertainty continues for the period past the first quarter. 

On April 23, Target released a business update containing valuable information for investors as well as those following the broader retail sector. 

  • Their quarter-to-date comparable sales are up 7% though comps have reduced slightly in stores and digital sales have more than doubled. 
  • For the first few weeks of April, digital sales surged 275% whereas social distancing measures resulted in in-store comparable sales to fall by the mid-teens. 

The company noted that it has increased market share across all of its core merchandise categories. Nevertheless, changes in supply chain to cope with the rise in digital sales and higher wages and bonuses for staff have added up to incremental costs. Investments and expenses and the shift to lower-margin products like food and beverage as well as inventory write-downs for unsold apparel and accessories may lead to the company’s operating margin for the first quarter to fall by more than 5% points from the previous year. This is a threat to its quarterly profit caused by an operating margin of less than 1.4% compared to 6.4% the previous year. However, the company’s CEO reassures that even though the present crisis will put near-term pressure on their profitability, that pressure is far outweighed by doing right by their team and their guests. He said they were confident the actions they were taking at present will drive growth and greater guest affinity over the long term.

The market may give weight to factors such as reduced in-store sales for Target, uncertainty regarding the return of customers in full numbers to their stores, and the shift to lower margin online shopping. This could keep Target’s stock value uncertain, at least for now.

As a stock trader, you can find growth opportunities in the current situation. But it’s still too early to make any investment plan under the notion that we’re out of the woods. We still need more time to find that out for sure. Keep your eyes on the industrial and energy sectors. But with advanced direct access trading platforms offered by online broker dealers, you can easily get started in stock trading.        

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How Are Stocks Categorized and What Kind of Stocks to Invest In?

While there is general excitement for stock trading, you need to figure out the kind of stocks out there and choose them based on your investment goals.

Looking to actively invest in the stock market? There is much greater excitement surrounding the stock market, but before you sign up with an experienced online stock trading brokerage, here’s a look at the kind of stocks out there and their categorization so you can figure out where you need to invest in. Motley Fool analyst Dan Caplinger gives his insight.

Kinds of Stock
1.Common Stock

Now when you hear people saying they “invest in stocks” or “trade stocks,” they usually refer to common stock. Common stock basically gives you part ownership — corresponding with the value of the share – in a company. When you buy stock in a company, you’re a shareholder in the company. Shareholders are provided with the right to get a share of the company, proportional to the value of the stock they hold, if the company goes through a dissolution process.

If the company in which you hold shares keeps performing profitably, the value of the stock you hold keeps rising, and if you sell the stock, you make a profit. With common stock, the potential for an upside is great, but it is also risky if the company fails to perform well. In that case the stock value reduces, and you could be in for a loss if you sell your stock. Worse, if the company totally fails without leaving any assets, you could be getting basically nothing.

2.Preferred Stock

To avoid that, people invest in a company’s preferred stock, if the company offers it. Preferred stock gives shareholders of the stock preference in providing a certain amount over the shareholders holding common stock – if the company goes through a dissolution process. If the company pays dividends, preferred shareholders have the right over the common shareholders to receive them. But companies won’t always offer preferred stock, and often they never will. Common share trading therefore has higher volumes.     

3.Dividend Paying and Non-dividend Stocks

We talked about dividends. Stocks are also classified on the basis of whether they pay dividends or not. Dividend stocks pay dividends to shareholders regularly. If you own a dividend stock you’ll be getting monthly payments, which gives you a great source of income. That’s why dividend stocks are quite sought after. Of course, the dividend amount per share can be greater or lesser depending on the company that’s offering it. And the number of shares you hold also determines if the dividend is substantial enough for you.

Companies offering non-dividend stocks don’t pay dividends, so you won’t get the regular income. However, if those stocks keep rising in value over time, they can also be pretty strong investments. It isn’t mandatory for companies to pay dividends for their shareholders, though that trend has been rising now.  

4.Classification Based on Market Capitalization

The other major classification of stocks is on the basis of their market capitalization, their total share worth. Large-cap stocks are those of companies having the greatest market capitalizations. These stocks generally have $10 billion or more in terms of market capitalization. Mid-cap stocks have lesser market capitalization, generally in the region from $2 billion to $10 billion, while small-cap stocks are even smaller, with market capitalization below $2 billion.

While small-cap and mid-cap stocks have tremendous potential for growth, they tend to be riskier. But if growth is what you’re looking for, and are prepared for some kind of risk, you’d go for them. Large-cap stocks are safer options. Since they’ve already reached the large market capitalization stage, their potential for growth is less, but they are safer investments.  

These are general characteristics, though not all stock in each of the categories need to perform in the exact same manner. With direct access trading platforms, you just need to set your investment goals and get started. 

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