Share Market

All those who have an interest in the share market must have heard the term quadruple times. Mutual funds are considered to be one of the best means of investing money. Retirement plans or brokerage account plans, all of them could be in the form of mutual funds. In the US, Investment Company Institute came up with a statistic which said that more than 92 million individuals in the US, like about 45% households owned mutual funds in the year 2008.

Having heard so much about mutual funds, these are an investment that allows a group of investors to pool their money and hire a portfolio manager. The respective manager then invests this money which is fund’s assets in the form of stock, bonds or investment securities. Mutual funds could also be a combination of three. The fund manager thereon continues to buy and sell stocks and securities according to the style that has been dictated by the fund’s prospectus.

Mutual funds have a compulsion in charging fees. This is needed to operate and manage the fund that has been collected and made. Management fees pay the fund companies or the managers to manage the funds. Some funds also charge investors an up-front sales charge/load when you make your first purchase in the form of shares in the fund. This happens while other funds charge a back-end load that is solely occurring upon sale of the fund shares so collected. There are funds of a nature that have no sales charge attached to them and are called no-load funds.

Mutual funds are open-end funds that are included in one of the four basic type of an investment company. The three other types of the company are exchange-traded funds and unit investment trusts.

Mutual funds need regular regulation when compared to other pooled investment options. They must comply with a strict set of rules that are monitored by the Securities and Exchange Commission. The SEC monitors the fund’s compliance with the Investment Company Act of 1940 and looks into the fact that it well adheres to other federal rules and regulations.

Mutual funds are good as an investment option as it can be invested with a few thousand dollars in one fund with which we could obtain instant access to a diversified portfolio. Added risk and instability gets diffused as it’s easy to diversify the portfolio without having to build individual securities. They also adhere to a basic principal of investing, that is, not to put all eggs in one basket. One can make many different types of investments in one portfolio and decrease the risk of loss from any one of those investments.

Derivatives are related with future performance and speculation of a certain market. Examples of derivatives would be futures, contracts, swaps, forwards and more. Derivative is a mere contract between two or more parties. The value of this derivative is determined by the market fluctuations in respect to underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Derivatives are used as an instrument to hedge risk, but can also be used for speculative purposes. To hedge this risk, the investor usually would purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into the currency he had. They are contracts that one needs to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined at real time. The contract may be binding on either the parties or just one party with the other party reserving the option to exercise or not.

In usual case, the underlying asset either has to be traded or some kind of cash settlement has to exist. Derivatives are traded either in organized exchanges or over the counter. They are important in the world of finance because they allow for hedging and managing risk. They are one of the fastest growing segments in the financial market.

Since derivatives have no value themselves and are dependent on the value of another asset, there is a larger risk associated with them. They do lead to quick profits but they just cannot be trusted. Derivatives can best be taken up by those who understand thoroughly the relationships between product volume, price trends and consumer interest.

There is a very interesting example to understand the significance of derivatives. If we take up the case of Japanese rice farmers and the rice warehouse merchants then we’d know exactly how it all works. A rice farmer could sign a contract with a merchant in the spring that would allow the merchant to pay the farmer a certain set amount of cash. In exchange for the immediate cash, the rice farmer would deliver a certain amount of rice after the harvest. In this case, the rice farmer has lowered the business risk because he has received a certain price for the rice, while the merchant has locked in the price for a certain amount. Shortage or overabundance of rice would decide the wisdom in the exchange.

An exchange-traded fund or ETF is an investment fund that is traded on stock exchanges. They hold a similar funda to stocks. An ETF holds assets like stocks, commodities, bonds and trades which are close to its net asset value over the course of the trading day. ETFs can be as attractive as investments because of their characteristics like low costs, tax efficiency, and stock-like features. They are the most popular type of exchange-traded product

ETFs generally provide very easy diversification, low expense ratios, and tax efficiency of index funds. All this, while maintaining all the features of ordinary stock, such as limit orders, short selling and options. Some investors invest only in ETF shares for a long term basis as they can be economically acquired, held and disposed of. This is done by investors for asset allocation purposes. There are also times when investors trade ETF shares frequently to implement market timing investment strategies.

ETFs come along with many advantages like low costs, buying and selling flexibility, tax efficiency, market exposure and diversification, transparency and more. Lower costs: ETFs generally have lower costs than other investment products because they are mostly not actively managed and are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. These funds typically have lower marketing, distribution and accounting expenses.

Buying and selling flexibility: ETFs can be bought and sold at current market prices at any time during the trading day. It is not like other investment options like mutual funds and unit investment trusts, which can only be traded at the end of the trading day. The shares of these funds can be purchased on margin and can be sold short being a publicly traded security. This enables the use of hedging strategies and using stop orders and limit orders for trading. This further allows investors to specify the price points at which they are willing to trade.

Tax efficiency: ETFs generate relatively low capital gains because they have low turnover of their portfolio securities. They share this advantage with other index funds. It counts as an advantage because tax efficiency gets enhanced by not having to sell securities to meet investor redemptions.

Market exposure and diversification: ETFs provide an economical way to rebalance portfolio allocations and to equalize cash by investing it quickly. It provides Transparency in the sense that whether an index fund or an actively managed fund, it has transparent portfolios that are priced at frequent intervals throughout the trading day. These advantages stem from the fact that these funds are index funds.

Leverage is what is mostly used in real estate transactions for the purpose of purchasing a home through mortgages. Defined in dictionaries it means the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. It also means the amount of debt that is used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Leverage can be created through options, futures, margin and other financial instruments. For example, if we have a $100 to invest in any manner and we invest them in 10 shares of Microsoft stock. To increase the leverage of the stock we could invest them in just five contracts and end up controlling 500 shares instead of just 10.

There are companies that use debts to finance their operations. In this manner, these companies increase their leverage as it can invest in more business operations by using this debt and not increasing their equity. For example, if a company is formed with an investment of $10 million from investors, the equity in the company is $10 million which is the money with which the company operates. If the company uses debt financing by borrowing $20 million, then the company has $30 million to invest in business operations.

Leverage helps both the investor and the firm to invest and operate. But it involves a high amount of risk. Leverage magnifies both gains and losses. If an investor uses leverage to make an investment and the investment goes against the investor then it results in a greater loss than what he would have incurred in case of a leveraged stock. In the business world, a company can use leverage to try to create a huge shareholder wealth and if it fails to do so, then the interest expense and credit risk of default destroys the shareholder value.

Leverage also refers to borrowing. If a business is leveraged, it means that the business has borrowed money to finance the purchase of assets as the only other way of purchasing assets is through use of owner funds or equity. Leverage can be determined by calculating the debt-to-equity ratio showing how much of the assets of the business have been financed by debt and how much by equity. Leverage is not a bad thing, it’s good for company growth.

Short selling is the selling of stock that the seller does not own. Yes, that is true. When we purchase stocks, you get to have a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or directly from the company. Brokers are used as they serve as an intermediary between the investor and the seller and often charge a fee for their services.

While using a broker we set up an account. The account is either set up as a cash account or a margin account. A cash account requires that we pay for our stock while making the purchase, but with a margin account the broker lends us a portion of the funds at the time of purchase and the security acts as collateral.

When an investor goes long on an investment, it means that he or she has bought a stock believing that its price would rise in the coming future. Conversely, when an investor goes short, he/she is anticipating a definite decrease in share price. In this context, a short sale is the sale of a security that is not owned by the seller, but which is promised to be delivered.

When you short sell a stock, the broker lends it to you. The stock there comes from the brokerage’s own inventory, from one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. You will have to close the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference and if the price of the stock rises then you have to buy it back at the higher price, whilst lose money.

Although interest is charged on margin accounts, you can hold a short for as long as you want. With this you can keep a short sale open for a long time as it will cost more. However, one can be forced to cover if the lender wants the stock you borrowed back. Brokerages can’t sell what they don’t have. So in this case you will have to come up with new shares to borrow, or you will have to cover. This is known as being Called away. It happens rare, but is possible if many investors are short selling a particular security.

A potential buyer for a stock quotes a certain highest price and the seller quotes his lowest price he is ready to offer. This defines a normal bid-ask spread. However the stock quote is entirely different from this. It refers to the prices themselves rather than being the difference itself.

Reading a stock quote is more like reading the magic codes because even when one has extremely good knowledge about numbers associated with trading a stock, it is tough. Making use of them is even tougher. The seasoned traders also have to stop and think before they have analyzed the quotes. In fact de-coding the stock’s future direction is very hard to find.

The Stock quotes follow a similar format whether you use the new age Yahoo Finance or the old school procedure. Right at the top of the quote is the name of the company being traded as well as the stock’s ticker symbol. There are quite a few stock exchanges that a stock could be traded on. For example, major cities like Tokyo and London have their own exchanges like other countries, that is, Australia and Switzerland. Internet has a base of a list of the major stock exchanges, along with in-depth information about each one. The numbers that make up a stock quote are divided into two columns where the left-hand column focuses more on the basic facts while the right hand side reflects a little more analysis on the stock in talk.

Discussing further on the bid-ask section, when you see both the bid and ask sections of a stock quote, they are either blank or are listed as N/A. Now, a bid is the highest price that a principle brokerage firm has announced it’s willing to pay for a share of a specific stock at a specific time.

There is also a Day’s range which can be seen at the starting, on the right-hand side of the stock quote. Rather than relying on a single share to give an idea of what a stock is doing at that time, it in fact gives you the range on which a stock’s price has varied by over the course of the day.

Derivatives are related with future performance and speculation of a certain market. Examples of derivatives would be futures, contracts, swaps, forwards and more. Derivative is a mere contract between two or more parties. The value of this derivative is determined by the market fluctuations in respect to underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Derivatives are used as an instrument to hedge risk, but can also be used for speculative purposes. To hedge this risk, the investor usually would purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into the currency he had. They are contracts that one needs to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined at real time. The contract may be binding on either the parties or just one party with the other party reserving the option to exercise or not.

In usual case, the underlying asset either has to be traded or some kind of cash settlement has to exist. Derivatives are traded either in organized exchanges or over the counter. They are important in the world of finance because they allow for hedging and managing risk. They are one of the fastest growing segments in the financial market.

Since derivatives have no value themselves and are dependent on the value of another asset, there is a larger risk associated with them. They do lead to quick profits but they just cannot be trusted. Derivatives can best be taken up by those who understand thoroughly the relationships between product volume, price trends and consumer interest.

There is a very interesting example to understand the significance of derivatives. If we take up the case of Japanese rice farmers and the rice warehouse merchants then we’d know exactly how it all works. A rice farmer could sign a contract with a merchant in the spring that would allow the merchant to pay the farmer a certain set amount of cash. In exchange for the immediate cash, the rice farmer would deliver a certain amount of rice after the harvest. In this case, the rice farmer has lowered the business risk because he has received a certain price for the rice, while the merchant has locked in the price for a certain amount. Shortage or overabundance of rice would decide the wisdom in the exchange.

Forex Trading is trading currencies from different countries against each other. It’s an acronym of Foreign Exchange. For a better understanding, for example the currency in US is US Dollar and in UK it is Euro. Thus, an example of Forex trading would be buying Euro while simultaneously selling US Dollar. This would be called a going long on the EUR/ESD.

Forex trading is done through a broker or market maker. As a forex trader you are free to choose a currency pair according to your liking and your expected change in value and place. These kinds of trades can be placed through a broker or market maker. Orders can be placed with just a few mouse clicks and the broker would then pass the order to a partner in the Interbank Market to fill your position. Also when you close your trade, the broker closes the position on the Interbank Market and credits your account with loss or gain accordingly. All this takes a matter of seconds.

The trading can happen on the site and it has a few good pointers which makes you trade easily. One can open an account with as little as $2000 or equivalent. It allows you to leverage your own collateral up to 200 times that is, margin trading with margin requirements is completely allowed. They also don’t have any problems with a minimum ticket fees on small trades. They help you in something called deep forex trading. The best part of forex trading via this site is that it gives you a free practice account with no risk and obligation to serve under, for a 21 days period.

There are forex trading sites that offer features like: A leveraged trading of up to 30 most liquid currency pairs, some 12 index CFDs and 13 commodities CFD including oil, silver and gold. They provide a margin requirement starting at 1% for foreign exchange, 4% for indices and 5% for commodities. They believe in a minimum initial funding of $2000 or equivalent by bank transfer. They also have credit or debit card refunding. Call-centre and chat services and support is available in English language. They also provide a choice of downloadable client station or browser-based Web Trader trading platforms.

As an investor it’s important for you to know what alpha and beta of stocks are. In a perfect scenario, the stocks would go up because of strong fundamentals and go down when earnings deteriorate. In reality however, this is not true. No doubt that fundamentals of the company play a huge and important role in its stock price, but psychology plays a big role in prices as well due to the inherit nature of any supply and demand marketplace.

There are times when the companies with strong and growing earnings are sometimes unjustifiably punished just because the whole market is going down. Beta was created to measure this only. Beta is nothing but a mathematical term that measures how a stock moves relative to an index.

The higher the beta, the more volatile it is against the index. For example, when a stock goes up by 20% while the index goes up 10% will have a beta of 2, while a stock with beta 1.2 means that the stock will go up 20% more than the index. When beta is seen as less than 0 then it means that the stock goes down every time the market goes up. If the stock moves exactly as the market does, the beta of it will be 0.

Therefore, stocks with low beta are the ones that are less volatile and therefore carry less risk. A very aggressive stock could have a very high beta.

In this term, if beta is the measure of how prices relate to the overall market then alpha measures everything else that affects the price of the security. High alpha stocks tend to rise even when the whole market falls. Thus it’s a very desirable attribute for a stock. In definitive terms an alpha is a measure of the buying pressure of the stock that is independent of the overall market forces. It’s not important that it’s related to the company’s strong fundamentals.

Alpha and beta are measures that help traders and investors in building their portfolio. For example, by constructing a portfolio with a mixture of betas, one can further diversify risks in our portfolio. But it is of importance to know that Beta and Alpha are backward looking, in the sense that they are historical data. Hence one must not just look at the numbers and assume low beta and high alpha is always good. Using them as another measurement to help your analysis is a good point.

Margin trading is when you buy stocks without having full money for it. There exists certain method to buy stocks even if you don’t have the desired amount of capital for raising it which has been institutionalized through the futures market. The process is called margin trading.

Buying on margin is borrowing money from a broker to purchase stock. It is more like a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to in normal circumstances. To trade on margin, you need a margin account and it is very different from a regular cash account, which is used for trading using the money in the account.

Under law your broker cannot open a margin account unless you sign on it. The margin account may be a part of your standard account opening agreement or may be a completely separate agreement. To open a margin account you need an initial investment of at least $2,000. In certain cases, you need more. This deposit is known as the minimum margin.

Once the account is open and is operational, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. It’s essential to know that you don’t have to trade till 50% as you can borrow less like about 15% or 30%. It’s important to know that some brokerages require you to deposit more than 50% of the purchase price.

The margin trading can continue for as long as you want till the time some provisions are met. First, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid. Second, there is also a restriction called the maintenance margin, which is the minimum account balance that is a must to maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. This when happens is called a margin call.

Buying on margin is mainly used for short-term investments because the longer the period that you hold it for, the greater the return gets to make it even. If you hold an investment on margin for a long period of time then the profits that you will make on that stock starts flipping down.