Archive for personal finance
Index Options Trading (Part I)
Posted by: | CommentsThe options market has caught the fancy of many investors and this is not surprising. The beauty of options is embedded in its very name. You have the options but not the obligation to buy or sell stocks at a given price by a given time. Now for options buyers this option unlike futures limits their maximum liability to the option premium they had paid at the time of buying the options contract.
In’78, Chicago Board Options Exchange (CBOE) began options trading on popular stock indexes such as the S&P 500 Stock Index. The CBOE options trades in multiples of $100 per index point. This is much cheaper than the $250 multiple per index point for the S&P futures contract.
An index option allows the investor to buy the stock index at a set point within the given time period. Let’s take an example. Suppose the S&P 500 Index is at 1100 points. You have a bullish opinion of the market and are of the opinion that the S&P 500 Index will go further up.
There are options Greeks that you need to understand. Time and volatility are two very important factors for an options contract. In case of an index options, what this means is that if any time for the next three months you decide to exercise your call option, you will get $100 for each point the index is above 1150. So you decide to purchase a call option at 1150 for three months for 50 points. In other words you paid an option premium of $5000.
So when an options contract loses value, you only lose the premium that you had paid while buying that contract. In that case you will only lose the premium of $5000 that you had paid to buy the call index option. Now, 1150 is the strike price of the index option. In case the S&P 500 Index does not rise above 1150, you can simply decide to not exercise your call option.
So for you to make a profit with this call option, the S&P 500 Index will have to rise above 1200 point within the next three months otherwise you will lose your premium. Contrast this with S&P futures. Call options are considered to be bullish.
In case the S&P Index had fallen to 1100 point, you would have recouped your options premium. Put options are considered to be bearish. A Put Index Option works in exactly the same way as a Call Index Option except that you make profit when the stock index goes down. If you had bought the put index options instead of the call index option in our example above, every point below the strike price of 1150 would have given you a profit of $100.
Options are highly dependent on the volatility of the market as well as time to expiry. As the options contract nears expiry, its premium starts decreasing. The more the options contract is away from expiry, the higher the premium you will have to pay. But the most important factor is the expected volatility of the market. Now the option premium that you pay is determined by the market and it depends on many factors like interest rates and dividend yield.
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MLPs (Part I)
Posted by: | CommentsInvesting in commodities may be something that investors thought of boring and dull only a few decades back but not anymore now. If you are interested in investing in companies that are involved in the production, transformation and distribution of commodities, than one of the best ways to do so is through investing in the Master Limited Partnership (MLP).
So how do you go about investing in an MLP? The shares that an MLP issues are called Units and the investors who own them are known as Unit Holders. MLPs are public entities that trade on public exchanges. An MLP issues shares that trade on an exchange just like a company stocks that trades on an exchange. You can invest in an MLP by buying its shares on an exchange. You can instruct your broker to buy the units of an MLP that you are interested in investing.
When you invest in an MLP, you are essentially investing in public partnership. There are tax advantages to investing in MLP. Unlike regular corporations, an MLP is only taxed once. Now most of the MLPs trade on the New York Stock Exchange. A few MLPs also trade on the NASDAQ and the AMEX.
Congressional Legislation, any MLP that derives 90% or more of its income from the production, distribution and transformation of commodities qualifies for this tax exempt scheme.
Tax exemption means that MLP have to generate a lower rate of return as compared to other companies competing with it in the same sector. Since an MLP has got the tax exempt status it will only have to generate only $1.54 for each dollar that you invest in it. Suppose you invest $1 in the stocks of a regular corporation and you are in the 35% tax bracket. Corporate tax is 30% of its before tax income. This means that for each dollar that you invest you need to get at least $1/ (1-0.35) =$1.54 just in order to breakeven. So the corporation will have to generate $1.54/ (1-0.3) =$2.2 for each dollar that you invest in order to return you $1 after tax profit.
However, most GPs do a good job of running the MLP as it is in their financial interests. Now you must know as a limited partner in an MLP, you have limited voting rights. This means when you invest in an MLP, you are giving away the keys of ownership to the GP. This means you are out of the decision making in an MLP.
Investing in MLP units can give you quarterly cash flows as well as appreciation of the unit price. An MLP is obligated to distribute all available cash back to its unit holders on a quarterly basis, so you will be getting a quarterly income from your units. Secondly as the MLP expands and grows overtime, its units may give you capital gain as well.
Mr. Ahmad Hassam is a Harvard University Graduate. Trade Dow Futures . Learn Commodity Trading ! You are welcome to reprint this article – but get your own unique content version here.
An Overview Of ETF Trading For Beginners
Posted by: | CommentsThere will be a learning curve involved in becoming a successful ETF trader. A person will want to do the necessary research, take classes, and follow the websites, blogs, and forums of successful traders to learn the intricacies of ETF trading. When a person is learning to trade they will want to have a solid understanding of ETF and what to expect when they begin trading.
A person will find that there are many classes, courses, and books offered on the Internet regarding ETF and ETF trading. When selecting a course or book, it is important to research the company or individual carefully to make sure that they have experience with ETF and knowledge of the types of strategies that are needed to be a successful trader.
The ETF industry is gaining popularity at a very fast rate. As more people and companies have learned of the many benefits and advantages of ETF training the industry has grown to almost twice the size it was in 2008. The flexibility offered to traders and the lower fees are just two of the benefits to traders in this market.
ETFs can be traded throughout the trading day. Unlike with mutual funds which can only be traded at the end of the day, this gives ETF traders a tremendous advantage and opportunity. Changes happen in fifteen second increments on the stock index. This means that a great deal of activity can happen during the day. This activity can provide a trader with opportunities to increase the gains and sell when it is most advantageous for them to do so.
Tracking an index like the S&P500 or MSCI EAFE makes ETFs very easy to work with. A unique symbol is given to each basket in ETF so that they can be easily identified. ETF values are based on the weighted average or price of the combined stocks and bond of the companies within a basket or sector. This can confuse some people who expect larger gains because they have not included the calculation for all stocks and bonds in their figures.
ETF traders are able to use all of the same orders as with other stocks. A trader can use a limit order, bracketed buy order, stop-loss order, etc. A great benefit of ETFs is the ability to short sell at any time. Stocks may not be sold short is the price of the stock is below it’s last price. ETF traders can take advantage of a drop with a short sell when the trade is warranted without worrying about the last price of the stock.
ETFs are rapidly growing as part of a mixed portfolio for retirement planners. Large companies are finding that the steady growth and low risk offered by long term ETF trading makes it very attractive to many types of portfolio. Many of these companies are buying creation units in order to diversity their trading options.
Before you begin ETF trading it will be important to learn as much as possible about ETF, its structure, and the intricacies of working with it. By talking to a professional who has knowledge in ETF and all of the types of trading opportunities available a person can successfully begin trading.
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What Goes Into ETF Trading
Posted by: | CommentsUnderstanding what goes into ETF trading (and ETF is what is known as an exchange traded fund) will be necessary before deciding to participate in an ETF. As an investment vehicle, these funds can deliver good returns on investment with a little bit of effort. ETFs are index funds set up to track one of the large market indexes such as the S&P 500, for example.
They sometimes are also what are called “trusts.” Either way, they usually are constituted much like mutual funds in that they contain a basket of various securities. Also, they are listed on a stock exchange and can be traded all day long, which the industry refers to as “intraday.” This means that trading activities in the fund are looked at on a trading day basis.
Currently, there are over 100 different ETFs on the American Stock Exchange. Most ETFs have a wide range market sectors and indexes that they represent. They are involved in many industries, most stock market indexes, many sectors in individual markets and also represent many international regions. They also may represent a wide range of corporate bond or Treasury indexes.
Investors who wish to participate in ETF trading sell or buy shares in the collective performance of one or several of an entire portfolio of bonds or stocks as a single security. As an arrangement, there are many benefits to doing so. This includes combining liquidity of stock investing with all the benefits of investing using traditional fund indexing.
There are a great many advantages to the investor, whether large institutional kinds or the small investor who will be getting into an ETF through a trading system. Generally speaking, an exchange traded fund has much lower annual expenses — referred to as costs — than many other investment vehicles. Because they are not index-based, their management fees are usually very reasonable.
What this means is that the fund itself is not actively managed on a minute by minute or hour by hour basis. Many traders in an ETF who adhere to a fundamental strategy very really see those particular portfolios moved much at all in the day or even the trading week. Additionally, studies show that actively managed funds don’t outperform these funds, which are benchmark index operated.
ETFs can operate in this way (meaning non-active management) because they tie their net asset value on each trading day to the assets that underlie the fund. This can make an ETF extremely transparent because it tends to replicate the holdings that are contained in the index that the ETF is tied to and which it tracks on a daily and intraday basis.
Many small investors of the non-institutional variety go one of two ways when trading in an ETF; they usually trade all day or they make their moves to single trades carried out at at the end of the day. There is really no restriction placed upon trading activities by the ETF when it comes to this, though. ETF trading, then, usually turns out to be very easy.
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Helpful Hints Regarding Etf Trading
Posted by: | CommentsTrading stocks is something that people have been doing for many years. One of the newest ways that this is seen is through etf trading. They are the economical way that people have found to get involved with the stock market. Being economical is one of the major reasons for it becoming so popular.
When you want to start etf trading you will need to find a good stockbroker to help you. There are a lot of people that are in the stockbroker position these days, but this does not mean that they are good. Investigate the options to make sure that you find someone that satisfies all of the questions that you have, as well as have your best interests at heart.
When you open up an account in order to start trading, you will need to make an investment of some sort. This can vary from place to place and it is a good idea to look at various options before making a decision on a company to deal with. There are costs that you will need to pay but they will depend on what all you are allowed to do when it comes to etf trading.
You also need to look at the amount that the company charges you for trading. This also can vary between companies. The least expensive is not always the best way to go as there could be some things that you may want that are not included in the services that they provide their clients. Taking a close look at the companies that people that you know deal with can help you when it comes time to decide on a company that you want to deal with.
The most popular thing with etf trading that people like is that it costs far less than other forms of trading that are available. Many people have made a good profit from a fairly small investment, which explains the rise in popularity that it has seen. This is something that more and more people are looking at with the economy being in such a poor state at the present time.
Reading about etf trading can be one of the best things for a person to do if they are thinking of becoming involved in it. There are a lot of websites around that offer a lot of information that can help a person learn some valuable tips and tricks.
Another option is to look at message boards and forums that are on the internet about etf trading. These are where you will find out what people have had in the way of personal experiences with etf trading. A lot can be learned from people that have already been there.
You need to remember that this is something that you need to look at seriously. If you cannot afford to lose money than the best thing to do is not become involved in it. There are many people that have gotten in over their heads because they did not look at it in a serious manner.
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