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What Are Futures in the Stock Market? A Comprehensive Overview and Practical Guide
Dive into the world of futures in the stock market. Explore the significance of futures contracts, their types, and the balance between risk and reward. Learn the history and the role of traders in shaping the futures landscape. Continue reading...
What should I know about IPOs?
IPOs are initial public offerings of a private company ready to turn public and trade on an exchange, with the scrutiny of shareholders. IPOs are priced by the investment bank selling them, instead of the supply and demand of the market. Many have heard the term "IPO" (Initial Public Offering), which is the issuance of the first publicly-available shares of a company. It actually represents the only capital a company will ever raise with its stocks, unless they issue more at another time or if they have issued convertible bonds or warrants. After the IPO, any money made on those shares of stock will be by the buyers and sellers in the market, which is known as the Secondary Market-- the Primary Market is where stocks are issued and purchased directly from the company. Continue reading...
When should I sell my IPO shares?
If you see that there is a high premium that others are willing to pay for your IPO shares, you may want to sell them as soon as possible, or you may feel that you got a reasonable price and are more willing to hold the shares for a long time because you believe in the long-term growth potential of the company. If there is a lot of hype surrounding the IPO, and share prices are driven upward in the following weeks, it may be a good strategy to immediately sell them while the frenzy is on. After the Lock-up Period of 90 -120 days, the insiders and investment bankers who were required to hold onto their shares may start to sell theirs off, and in some cases, this can cause a significant price drop as they flood the market. Continue reading...
How do I get IPO shares?
Participating in an IPO is generally limited to institutional investors. However, if you are a high net worth client at a brokerage firm that has access to the IPO, you may be able to purchase some shares. First, you need to know that investing in IPOs is considered speculative and only suitable for experienced investors will substantial assets. If you meet the criteria that your brokerage has for allowing IPO trading, which may include a minimum account balance of $250,000 or so, you may be allowed to submit an Indication of Interest (IOI), which is a document used to request shares in the IPO. Continue reading...
Should I buy IPOs for my portfolio?
You may find it difficult to find IPO shares to buy if you are not already a very active and wealthy investor, but if that is the case then you may be a good candidate for IPO shares. For investors who are less affluent and less experienced, you can still pick up a mutual fund or ETF that gives you IPO exposure, if it fits in with your portfolio. In the 1990s, there was a mad rush to buy IPOs: an IPO could be traded at $10 at the beginning of the day and at $100 at the end – you could be instantly rich if you were able to get your hands on an IPO for some of the many tech firms that sprouted up before the turn of the millennium. Continue reading...
What has been the historical performance of IPOs?
Many studies have investigated the benefits of purchasing IPOs, and the results might surprise you. Despite the fact that new issues tend to be priced at a discount from the price that underwriters have decided is a fair valuation, their performance after the initial frenzy tends to be lackluster. While most investors think that IPOs are good investments, this is not exactly true. There are IPOs that have doubled or tripled in price during the first day, and there are IPOs that opened trading below the original IPO price (and anything in between). For short term trading, it can go either way, but if the IPO is a “hot issue,” meaning that there are more indications of interest than there are shares to fill the orders, the average investor will not be able to procure IPO shares anyway. Continue reading...
Should I buy physical gold instead of gold ETFs?
There are probably more important things you can do with your time than find a place to store your suitcase full of gold and hover over it like a mother hen. But it may be worth it to you, since owning shares of a gold ETF is not the same as owning actual gold. Gold ETFs work by holding some amount of gold in trust and then selling shares of the fund that owns it. There is a significant discrepancy between the dollar value of the gold which is held and the total value of the shares which are sold, however, and if there were ever a “run” on the fund, no one would be able to actually get gold bricks out of fund managers. Continue reading...
Should I buy gold coins?
Gold bullion are an asset that will hold value due to their gold content; gold coins which are more numismatic, that is, collector’s items, may not retain the same value. The value of gold coins is twofold: the price of the gold in the coin and the numismatic value of the coin. There is an important distinction to be made, because some gold coins will have a lot of one, and not the other, and, if you want to make sure your investment is an investment in precious metal and not just a collector’s item, you should make sure you’re getting a coin that qualifies as bullion. Continue reading...
Should I invest in gold?
Gold can provide diversification in a simple way, since it has a history of being generally non-correlated with most other asset classes. It is not necessarily a hedge against anything specific, as some claim, since its price movement is too random. Conventional wisdom says that investing in gold might be a good hedge against inflation or market cataclysms. Some of these beliefs are unfounded. The price of gold appears to go up only when it is in high demand (such as when the price has gone up some already), rather than in tandem to any specific market force such as inflation or interest rates. If investors have some idea of when other investors are going to pile in, such as during times of uncertainty, they will likely be able to ride an uptrend in gold prices for a while. Continue reading...
What is “contango?”
Contango is when the price of a futures contract is higher than the current spot price of a commodity, and the expected future spot price. Some contango falls within the normal range, but too much is generally unfavorable. Contango means that the price of a futures contract has become inflated beyond the expected price range of a commodity. Backwardation is the word for the opposite of contango, in which futures contracts are being sold for less than the current spot price and below the probable future spot price. Some backwardation and contango is part of life and considered normal, but contango markets can have a particularly negative impact on some ETFs. Continue reading...
What's important to know about real estate investments?
Real estate can be purchased in a form you can see, touch, and pay maintenance costs on, or it can be purchased indirectly through the use of REITs and other securities tied to the real estate industry. Real estate investments fall into a wide spectrum of subsets. You can invest in residential property, commercial property, development projects, raw land, etc. Within the residential sphere are multi-family residential complexes, rental houses, foreclosure flips, and vacation rentals with property management. Continue reading...
Should I have real estate investments?
Real estate has long been used as an alternative investment, to give investors a non-correlated asset that can give a portfolio increased diversification. In the last 15 years or so, with the prevalence and popularity of REITs and real estate industry funds, real estate investments are considered by some to be a core holding instead of an alternative investment. Real Estate investments are so accessible now that they should be considered an indispensable part of any portfolio. Continue reading...
What are REITs?
REITs are pooled investments similar to mutual funds, but, like mutual funds, they can take many shapes. They invest in different kinds of real estate and real estate-oriented assets, depending on the REIT, and sell ownership shares to investors. REIT is an acronym for Real Estate Investment Trust. REITs are similar to mutual funds, except that they only invest in real estate properties and related companies and assets such as mortgages. REITs will define the scope of their investments and strategies in their prospectus, which may read something like “We invest only in commercial Real Estate” or “Only in residential houses in Las Vegas” while other REITs are very general. Continue reading...
What is a hedge fund?
Hedge funds are private investment groups that attract high net worth individuals (and in some cases institutions), and use investment strategies that may be riskier than would be suitable for the average investor. While the name "hedge" implies that the fund serves a defensive purpose, today’s hedge funds use wide array strategies, and more often than not the goal is total return. The strategies used are often speculative, contrarian, or alternative compared to most investment options in say mutual funds or traditional long-only asset managers. Continue reading...
What can I find out about hedge funds?
Hedge funds have historically been very secretive. They still mainly fall under Regulation D and private-placement laws, but their reporting requirements have been slightly expanded after the Dodd-Frank Act in 2010. Now, they are a little more transparent, but not fully. Up until the Dodd-Frank Act, it was basically impossible to know what hedge funds were investing in and who was involved. Hedge fund managers and their investment banks were under no obligation to report the holdings, and they generally avoided leaking any information about their market positions for fear of damaging their advantages. Continue reading...
How can I invest in hedge funds?
Fund managers are allowed to accept up to 35 non-accredited investors, but for the most part you will either need to satisfy the “accredited investor” requirement of the SEC to invest directly in a hedge fund. Otherwise, there are now hedge fund indexes and ETFs that track and mimic hedge fund strategies that are accessible to everyone. You should know now that the minimum initial investment requirement to participate in a hedge fund can be quite large, such as upwards of $1 million. Continue reading...
Where can I find information about hedge funds and their performance?
Not all hedge funds are obligated to disclose their holdings, trades, or performance. About half of them are, however, and their performance can be found online through Morningstar and other sources. This information may not be as detailed as you would like, and you may try other means. Since the Dodd-Frank Act in 2010, more information about hedge funds is available to the public. This does not mean that all the information you seek will be readily available, however, and there are many hedge funds that do not make their information public. Continue reading...
What are the pros and cons of hedge fund investing?
Hedge funds are sometimes the highest-earning investment vehicles, and sometimes they do that much worse than everything else. They have a high buy-in, low transparency, and limited liquidity. There are also other advantages and disadvantages worth mentioning. A good hedge fund can provide you with an excellent diversification of your investable assets and give you exposure to the best and brightest money managers in the world. Continue reading...
What is the minimum investment in a typical hedge fund?
Hedge funds can require initial investments that are quite large. This may be somewhere between $250,000 to $10,000,000. They will generally only accept Accredited Investors, meaning high net worth individuals that pass SEC standards which exempt the fund from some reporting and disclosure requirements. While the minimum investment varies, most Hedge Funds will accept only so-called accredited investors. Continue reading...
What kind of hedge funds exist?
Hedge funds can employ many strategies and focus on virtually any kind of investing style or market. They also have the flexibility to change their strategy as they see fit. Morningstar and other services will group hedge funds into categories and provide benchmarks based on their average performances. As of 2016, there are over 12,000 hedge funds, and over half of those are required to report to the SEC. Continue reading...
What can I learn about venture capital?
Many people know about venture capitalists that help provide the funding for startup companies in Silicon Valley and other areas. In reality, only a small portion of venture capital is directed at seed money for startups. The rest of it is directed at companies in various phases of growth that need capital to fuel a new expansion or to turn their business around. Venture capital comes from individual investors or venture capital firms who agree to infuse new money into a business in exchange for an equity stake in the business going forward. Continue reading...
What kind of venture capital funds exist?
Different venture capital firms focus on different types of funding. Some are more attuned to late-stage funding for proven companies who still have not gone public, while others prefer to help startups with bright futures. There are large venture capital firms, which might invest in any start-up company, as long as they think that the company has potential. There are also more narrow VC firms specializing only in one or a small number of industries, such as clean energy, or semiconductors. Continue reading...
What is the minimum investment in a typical venture capital fund?
Minimum investments in venture capital funds tend to be vast sums of money. They tend to be for $1 million or more but can be as low as $250,000. As with hedge funds, the minimum investment is very steep and suitable only for accredited investors and qualified buyers. A typical minimum investment in a VC fund varies between $1 to $5 million, but it can be over $25 million. Most of the investments in venture capital funds are made in terms of commitments: you commit a certain amount of money, and when a venture capital fund finds an appropriate investment, it makes a “call” on you to deposit the money with them, perhaps in increments over a period of several years. Continue reading...
Who are venture capitalists?
Venture capitalists may have been entrepreneurs themselves who are now helping newer companies achieve success in return for large equity positions in the business. They may also work for investment banks. They form firms which manage a portfolio of venture capital investments. Venture capitalists are firms whose business model is to infuse money into companies which do not have access to the capital markets, or do not want to turn to the open market, in return for equity in the business. Continue reading...
What should I know about private placements?
Private placements fall under Regulation D, usually, which stipulates the rules by which investors can be sought and placed into privately arranged contracts for equity investments. Private placements may be for non-public companies, or it may be a private offering of a publicly traded company. Regulation D stipulates the guidelines by which investors can engage in private investment without many reporting requirements. Continue reading...
Should I invest in private placements?
Different opportunities to invest in private placements may present themselves to wealthy individuals over time. Unless the opportunity comes from someone that you know and trust, and you have the ability to research the opportunity, it is probably something you should avoid. Private Placements are sometimes complex deals that cost people a lot of money. You should definitely have your guard up if one is pitched to you. In general, the company or partnership seeking the private placement will not have to register with the SEC or report their books accurately on a public record. Continue reading...
Where can I get information about private placements?
The short answer is, you can’t. Private placements have no reporting or registration requirements with the SEC or other entities. Sometimes this can be good for investors who enjoy the discretion. But it can also be a shield for unethical business people who prefer to avoid regulatory oversight. There is no source for detailed information about private placements unless you personally know a general partner who can describe to you his project, or who comes highly recommended with a lot of references. If an offering seeks to raise over $2 million in the capital in a year’s time, they are obligated under Regulation D to provide audited financial statements to the investors. Continue reading...
What are Collateralized Debt Obligations (CDOs)?
Collateralized Debt Obligations (CDOs) are bond-like investments backed by debts such as mortgages. The mortgages or debt obligations are pooled together and divided into tranches based on the maturity date and coupon payments and sold as securities (CDOs). If interest rates change and the borrowers in the underlying pools can refinance their debts, the CDOs will experience some volatility as the obligations are paid off early, but how much volatility depends on which tranche the investment is in. Continue reading...
What is a credit default swap?
A Credit Default Swap is a contract that provides a hedge against credit default risk. To guarantee against the non-payment of a loan, a Credit Default Swap can be purchased for a premium. The seller of the swap bears the risk of payment if a bond issuer defaults, or if there is a similarly threatening “credit event” which is agreed upon in the terms of the swap contract. Generally, the buyer of a credit default swap will pay quarterly premiums for the protection, and the annualized premium is called the "spread," which may be a set percentage of the notional amount. Continue reading...
What are credit derivatives?
Stemming from the hedging strategy of Credit Default Swaps, an entire speculative derivatives market continues to grow, in which tranches of credit risk and indices are traded. With the ballooning of consumer credit in recent years, it is only natural that a credit derivatives market would follow it. In essence, the risk associated with a loan or bond is separated from the actual asset and is passed on to a counter-party for a premium, and then other market participants become involved, perhaps in the form of futures contracts or other derivatives. Continue reading...
What is a derivative?
A derivative is a security which monetizes the risk or volatility associated with a reference asset. Derivatives derive their value from speculation surrounding an underlying or reference asset. The reference asset could be another security, an interest rate, or an index, for example, but there are also derivatives based on future weather patterns. Derivatives come in many forms; examples include options, swaps, and futures. Some derivatives trade on exchanges and some are Over-the-Counter (OTC). Derivatives might be used for speculation or hedging. Continue reading...
What are futures markets?
Futures markets are the formal exchanges on which futures contracts are bought and sold for commodities, financial products, and interest rates. Futures markets constitute a large part of the financial system and are an attempt by participants to hedge against some of the volatility and risks to which they might be exposed as time passes, especially where contracts await resolution or payment. Futures contracts might be created for financial instruments, commodities, and other derivative interests. The Chicago Mercantile Exchange, the Intercontinental Exchange (ICE) and the Eurex Exchange are large parts of the international network of futures markets and clearing houses. Continue reading...
What are futures contracts?
Futures contracts constitute a binding agreement to trade a commodity, share, or instrument at a future date at an agreed-upon price. They are auctioned on regulated futures exchanges. Futures contracts are used primarily to deal with agricultural assets and natural resources but have come into use for anything that can be commoditized, including financial instruments and technological resources. Continue reading...
What are index futures?
Index futures are futures contracts written on an index in which a large position can be held with a relatively small margin requirement. Index futures can be used for hedging or speculation. A "good faith" initial margin deposit (also called a performance bond) of a fraction of the contract size is all that is required to hold a substantial position, with a notional value worth significantly more than the amount invested. Continue reading...
What are forward contracts?
Forward contracts are agreements to exchange specific assets on a specific date, at a price determined at the outset. Forward contracts are similar to futures contracts, but they are over-the-counter private contracts drafted for specific purposes, quantities, and dates that satisfy the specific needs of the counter-parties. These contracts are mostly entered into by institutional investors seeking a hedge against risks such as interest rates and exchange rates. Continue reading...
What is naked shorting?
In a regular short sale transaction, the seller would locate and borrow the security being sold before the sale. Naked shorting means that the seller has not located or secured the security being short sold, and is in many cases illegal. Naked shorting is illegal because it accompanies an extreme likelihood that the security sold short will be FTD (Fail to Deliver) within the settlement period. Naked shorting is selling something that you do not have, without confirming that you can get the security to deliver, or even that the security exists. Naked short selling has a long history. Continue reading...
What are 'non-marginable' securities?
Some securities, such as penny stocks and IPOs, are prohibited from being purchased on margin or for serving as margin for other purchases. Stocks and other securities that are too volatile to serve as margin collateral - or to be purchased on margin - are called Non-marginable Securities. The Federal Reserve Board has defined certain criteria for determining which securities are non-marginable, and brokers often have their own house rules for traders. Continue reading...
What is an OTC Stock?
Over-the-Counter securities transactions are done outside of formal exchanges, and the term could refer to private investments and contracts or transactions in unlisted securities, such as penny stocks. The major exchanges have requirements for being listed, pertaining mainly to the size of the company offering equity shares and the nature of the securities. Resources such as the Over the Counter Bulletin Board and "pink sheets" help to facilitate trades that cannot be performed on the largest exchanges, but there are several caveats to bear in mind. Continue reading...
What is a penny stock?
A penny Stock is a term for equity shares valued below $5, many of which are not registered with the SEC and trade over-the-counter. They do trade on over-the-counter exchanges regulated by FINRA. Penny Stocks are equity in companies that may be small or have bad credit ratings, whose shares are priced below $5, per the SEC definition, but below $1 in the more widely accepted street definition. Because they do not have to observe all of the disclosure requirements of the SEC, there is not very much transparency about the companies or brokers issuing penny stocks. Continue reading...
What are pink sheets?
The Pink Sheets used to be printed on pink paper and contained the bid and ask prices of penny stocks which were not listed on major exchanges. Today the Pink Sheets are operated online by OTC Markets Inc but fulfill the same role. The Pink Sheets will list penny stocks which may or may not be found on other micro-cap exchanges. To be listed on the Pink Sheets, there are no listing requirements, such as cap-size; companies must only file one form and which provides some current financial information, but update information may not be required as time goes on, and hence companies listed only on the pink sheets are considered the most speculative and risky equity plays an investor can make. Continue reading...
What is secondary market?
The secondary markets are where most trading goes on today, where the trades are made investor-to-investor using shares that were issued sometime before, and profits are made by investors and not the underlying company who issued the shares originally. The secondary market is a term used to describe the market created by those who are selling and buying shares which were issued some time ago in what's called the primary market. Continue reading...
What is a short position?
A short position is a sale made by an investor for a security which he or she will deliver to the buyer in the near future, but which he or she is hoping will go down in price in the near future so that a profit can be retained from the price collected in the short sale. A short position is a bearish play on a security which an investor believes will decrease in price in the near future. The investor offers shares for sale, and collects the current market price for the shares from the buyer. Continue reading...
What is short interest?
Short interest is a term used to describe how many short positions are open for a given security or market at a given time. It is often expressed as a percentage of the total securities outstanding and is used for the short interest ratio. This serves as a gauge of bearish market sentiment, since short-sellers are expecting price action to trend downward. The short interest ratio (SIR) provides a context for the quantity of short interest outstanding by stating this amount in relation to the average daily trading volume. Continue reading...
What is a short sale?
A short sale is the sale of a security not owned by an investor, which the investor has borrowed from the broker in order to sell. An investor can use his broker to give him the ability to sell shares that he does not have in his inventory. The investor believes that the stock price will be lower in the near future, and will replace the borrowed shares by purchasing them at the (possibly) lower price in the future. Continue reading...
What is a short squeeze?
A short squeeze occurs when many short-sellers attempt to cover their positions at the same time, and it drives prices up rapidly. A short squeeze is a bottleneck situation where many investors who have sold a security short, suddenly become very interested in covering their positions - usually, because the stock starts on a strong uptrend. The squeeze will actually cause the price of the security to rapidly increase, more than it would otherwise, because so much demand has hit the security at once. Continue reading...
What is triple witching?
Triple witching hour is when three types of derivatives expire at once, which happens once every quarter in the US. It typically results in irregular or volatile movements in the markets. When stock market index futures, stock market index options and stock options all expire at the same time, the hour before close is called the Triple Witching Hour. This occurs on the third Friday of March, June, September, and December in the United States between 3:00 PM and 4:00 PM Eastern time. Continue reading...
What is an Accelerated Return Note (ARN)?
An accelerated return note (ARN) is an unsecured debt instrument that uses derivatives to offer leveraged returns and minimal loss exposure to retail investors. Accelerated Return Notes came onto the scene around 2010-2012. They are a form of structured note marketed primarily by Merrill Lynch and Bank of America. They were packaged as offering “accelerated” returns on familiar indexes and stocks. The way such returns are generated is by taking up 2x or 3x positions in calls and futures on the index or stock of choice. Continue reading...