What is Simple Moving Average ?

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A simple moving average (SMA) calculates the average of a selected range of prices, usually closing prices, by the number of periods in that range.

Definition

The Simple Moving Average (SMA) is a technical analysis tool used to smooth out price data by calculating the average price over a selected period, typically using closing prices. It helps identify price trends.

Origin

The concept of the Simple Moving Average originated in the early 20th century with the rise of technical analysis. It was initially used in stock markets to help investors identify price trends and make more informed investment decisions.

Categories and Features

SMA can be categorized based on different time periods, such as short-term, medium-term, and long-term. Short-term SMAs (e.g., 10-day) are more sensitive to price changes and are suitable for short-term traders; medium-term SMAs (e.g., 50-day) are used to identify medium-term trends; long-term SMAs (e.g., 200-day) are used to identify long-term trends. The advantage of SMA is its simplicity, but its disadvantage is its slow response to price changes.

Case Studies

During the 2008 financial crisis, many investors used the 200-day SMA to identify long-term market trends. When the S&P 500 index fell below its 200-day SMA, many investors saw it as a bearish signal and chose to reduce their stock holdings. Another example is Apple Inc., where in 2016, its stock price repeatedly tested the 50-day SMA as a support level, helping investors determine buying opportunities.

Common Issues

Investors often misunderstand the lagging nature of SMA, thinking it can predict future price movements. In reality, SMA is a lagging indicator that reflects past price trends. Additionally, choosing the wrong time period can lead to misleading signals.

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A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.A liquidity trap may develop when consumers and investors keep their cash in checking and savings accounts because they believe interest rates will soon rise. That would make bond prices fall, and make them a less attractive option.Since Keynes' day, the term has been used more broadly to describe a condition of slow economic growth caused by widespread cash hoarding due to concern about a negative event that may be coming.

Liquidity Trap

A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.A liquidity trap may develop when consumers and investors keep their cash in checking and savings accounts because they believe interest rates will soon rise. That would make bond prices fall, and make them a less attractive option.Since Keynes' day, the term has been used more broadly to describe a condition of slow economic growth caused by widespread cash hoarding due to concern about a negative event that may be coming.

Liquidity Crisis

A liquidity crisis is a financial situation characterized by a lack of cash or easily-convertible-to-cash assets on hand across many businesses or financial institutions simultaneously.In a liquidity crisis, liquidity problems at individual institutions lead to an acute increase in demand and decrease in supply of liquidity, and the resulting lack of available liquidity can lead to widespread defaults and even bankruptcies.

Liquidity Crisis

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Liquidity Event

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Liquidity Event

A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares.A liquidity event is considered an exit strategy for an illiquid investment or equity with little or no market to trade on. Founders of a firm push toward a liquidity event, and investors like venture capital (VC) firms, angel investors, or private equity firms expect one within a reasonable amount of time after initially investing capital.

Liquid Alternatives

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Liquid Alternatives

Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. These products' selling point is that they are liquid, meaning that they can be bought and sold daily, unlike traditional alternatives which offer monthly or quarterly liquidity. They come with lower minimum investments than the typical hedge fund, and investors don't have to pass net-worth or income requirements to invest. Critics argue that the liquidity of so-called liquid alts will not hold up in more trying market conditions; most of the capital invested in liquid alts has entered the market during the post-financial crisis bull market. Critics also contend that the fees for liquid alternatives are too high. For proponents, though, liquid alts are a valuable innovation because they make the strategies employed by hedge funds accessible to retail investors.

Zero-Coupon Convertible

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Zero-Coupon Convertible

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Zero-Investment Portfolio

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Zero-Investment Portfolio

A zero-investment portfolio is a collection of investments that has a net value of zero when the portfolio is assembled, and therefore requires an investor to take no equity stake in the portfolio. For instance, an investor may short sell $1,000 worth of stocks in one set of companies, and use the proceeds to purchase $1,000 in stock in another set of companies.