In above example the investor has obtained at a cost of $520 the right to bur 100 Coca Cola Co. (KO) shares for $51.70 each. The party on the other side of the transaction has received $520 and has agreed to sell 100 Coca Cola Co. (KO) shares for $51.70 per share if the investor chooses to exercise the option.
If the price of Coca Cola Co. (KO) does not rise above $51.70 before December, the option is not exercised and the investor loses $520. Instead, if the Coca Cola Co. (KO) share price rises to $80 and the option is exercised, the investor buys 100 shares at $51.70 per share when they actually worth $80 per share, thus realizing a gain of $2,830 ($8,000 5,170).
By and large, ETFs are profitable if an investor has a long-term horizon because the more the ETF is held, the lower are the costs incurred for the investors since it is not traded on a constant basis. In general, when buying ETFs, investors should set a clear investment horizon and be aware of the cost involved.
Friday, September 25, 2009
Thursday, September 17, 2009
How to Choose and Maximize Your ETF Fund - Part 1
Exchange-traded funds (ETFs) are closed-end investments purchased on an Exchange. They are passively managed funds which mirror the performance of specific indices by tracking the performance of the individual stocks that comprise each index. The major advantages of ETFs are (1) low cost structure, (2) tax efficiency and (3) ability to be traded throughout the day. Yet, an even greater advantage is the ability to buy and sell options on many ETFs, which offers investors the flexibility to execute more sophisticated trading strategies that transcend simple ownership of the ETFs.
Investors, who expect a market rally in an underlying index, buy call options on a corresponding ETF, and acquire the right to buy shares of the ETF at a specific strike price. Call holders are not forced to exercise the options, but if they do, the call writers are obligated to sell shares at the strike price. If the option is not exercised due to the index moving in the opposite direction than the buyer's expectations, the call holder loses only the premium paid to enter the contract, while the call writer of the option contract gains the premium either way.
Example
We assume that today an investor instructs a broker to buy on December a call option contract on Coca Cola Co. (KO) with a strike price of $51.70. The broker relays these instructions to a trader at the Chicago Board Options Exchange (CBOE). This trader then finds another trader, who wants to sell on December a call contract on Coca Cola Co. (KO) with a strike price of $51.70, and the strike price for an option to buy one share is assumed to be agreed at $5.20. One stock option contract is a contract to buy or sell 100 shares, according to the law in the United States. Therefore, the investor must arrange for $520 to be remitted to the exchange through the broker. The exchange then arranges for this amount to be passed on to the party on the other side of the transaction.
Investors, who expect a market rally in an underlying index, buy call options on a corresponding ETF, and acquire the right to buy shares of the ETF at a specific strike price. Call holders are not forced to exercise the options, but if they do, the call writers are obligated to sell shares at the strike price. If the option is not exercised due to the index moving in the opposite direction than the buyer's expectations, the call holder loses only the premium paid to enter the contract, while the call writer of the option contract gains the premium either way.
Example
We assume that today an investor instructs a broker to buy on December a call option contract on Coca Cola Co. (KO) with a strike price of $51.70. The broker relays these instructions to a trader at the Chicago Board Options Exchange (CBOE). This trader then finds another trader, who wants to sell on December a call contract on Coca Cola Co. (KO) with a strike price of $51.70, and the strike price for an option to buy one share is assumed to be agreed at $5.20. One stock option contract is a contract to buy or sell 100 shares, according to the law in the United States. Therefore, the investor must arrange for $520 to be remitted to the exchange through the broker. The exchange then arranges for this amount to be passed on to the party on the other side of the transaction.
Wednesday, September 9, 2009
Basic stock market investing tips
There are many ways available to successfully invest your money and make it grow. One of these is to invest in the stock market. However, as with most types of investing, there is risk associated with investing in the stock market and it pays to do some research prior to starting. This way, you will have a basic idea of what is required and have an understanding of what you are doing and the risks involved.
For conservative investors with a low risk tolerance, one of the best ways to invest is through a mutual fund. These are funds of money which track a certain stock market index or group of companies.
The stock market can obviously go up and down and one of the best ways to invest is to take a long term view and invest some money each month. Your investment can then effectively be put on autopilot with money being invested on a regular basis. This is a less stressful way of investing because if the stock market goes down you will effectively be buying more for your money each month. To be effective it has to really be done over a number of years and the best time to cash out is when the stock market is high.
For those with a higher risk tolerance, you could consider investing in individual shares. This is obviously more risky than mutual funds, since the fortunes of companies can rise and fall and companies can go out of business. It is therefore essential to undertake some research prior to investing.
You should learn fundamental analysis, which is the assessment of a company's financial position over a number of years. In this way you can identify fundamentally sound companies which have the best prospects of being successful.
You don't need to do a full depth analysis, but at least set up a spreadsheet showing revenue, net profit/loss, net asset value and profit/loss per share for the previous five years. In this way you can gain an understanding of the company and how it is performing over time. It is not a guarantee of success but identifying fundamentally sound companies should improve your chances.
It is also important to have an idea of technical analysis which can be use in conjunction with fundamental analysis to greatly increase your chances of making money. There are many different forms of technical analysis available and the trick is to find one that you understand and are comfortable using. Typical examples include bar charts, candlestick charts and relative strength. One of the best is Point and Figure charting which tends to provide fairly clear buy and sell signals.
If you use fundamental and technical analysis together you will have a good chance of obtaining a return on your money by investing in the stock market. If you have some time, researching your investments is also an interesting and stimulating exercise.
For conservative investors with a low risk tolerance, one of the best ways to invest is through a mutual fund. These are funds of money which track a certain stock market index or group of companies.
The stock market can obviously go up and down and one of the best ways to invest is to take a long term view and invest some money each month. Your investment can then effectively be put on autopilot with money being invested on a regular basis. This is a less stressful way of investing because if the stock market goes down you will effectively be buying more for your money each month. To be effective it has to really be done over a number of years and the best time to cash out is when the stock market is high.
For those with a higher risk tolerance, you could consider investing in individual shares. This is obviously more risky than mutual funds, since the fortunes of companies can rise and fall and companies can go out of business. It is therefore essential to undertake some research prior to investing.
You should learn fundamental analysis, which is the assessment of a company's financial position over a number of years. In this way you can identify fundamentally sound companies which have the best prospects of being successful.
You don't need to do a full depth analysis, but at least set up a spreadsheet showing revenue, net profit/loss, net asset value and profit/loss per share for the previous five years. In this way you can gain an understanding of the company and how it is performing over time. It is not a guarantee of success but identifying fundamentally sound companies should improve your chances.
It is also important to have an idea of technical analysis which can be use in conjunction with fundamental analysis to greatly increase your chances of making money. There are many different forms of technical analysis available and the trick is to find one that you understand and are comfortable using. Typical examples include bar charts, candlestick charts and relative strength. One of the best is Point and Figure charting which tends to provide fairly clear buy and sell signals.
If you use fundamental and technical analysis together you will have a good chance of obtaining a return on your money by investing in the stock market. If you have some time, researching your investments is also an interesting and stimulating exercise.
Tuesday, September 1, 2009
Intermediate guide to the stock market - Part 1
So you've started investing in the stock market. You've opened an account, made some trades, and maybe even made a little money. Congratulations - you're on your way to taking advantage of the greatest money machine in existence!
But maybe you've realized that to pull money from the market consistently, you will need more than a little luck.
What you need is a Portfolio Management Strategy.
Many full time day traders lose money quite regularly, and you should be wary of this type of strategy, especially if you don't plan on spending several hours each day trading stocks. A much safer approach would be to build a core portfolio of strong, reliable stocks, and to risk only a small fraction of your account in riskier strategies.
For the long term, some of the best types of stocks for a core portfolio would include index funds, large cap stocks, and some carefully chosen smaller stocks.
But maybe you've realized that to pull money from the market consistently, you will need more than a little luck.
What you need is a Portfolio Management Strategy.
Many full time day traders lose money quite regularly, and you should be wary of this type of strategy, especially if you don't plan on spending several hours each day trading stocks. A much safer approach would be to build a core portfolio of strong, reliable stocks, and to risk only a small fraction of your account in riskier strategies.
For the long term, some of the best types of stocks for a core portfolio would include index funds, large cap stocks, and some carefully chosen smaller stocks.
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