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...
What if the Matching Contribution for My 401(k) is in Company Stock?
Employer contributions in the form of company stock can pose some liquidity issues, but it can also be a nice benefit. If the matching contribution to your 401(k) is made in company stock, you have to weigh carefully your overall exposure to the financial well-being of your company. You are already receiving the current income (salary) from your employer. You may also have taken advantage of an Employee Stock Purchase Plan (ESPP) or Employee Stock Ownership Plan (ESOP) outside of the retirement plan. Therefore, you might already have a lot riding on the stability of your company. Continue reading...
What is “efficient market hypothesis”?
The Efficient Market Hypothesis (EMH) states that it is impossible to beat the market consistently over time, since all available information is priced efficiently into stock prices. But what the EMH misses is the impact that sentiment can have on price discrepancies in the short-term. Emotions can lead to gross mis-valuations (as we saw with the tech bubble in 2000), and market corrections can see stocks selling off dramatically for no fundamental reason. Continue reading...
What is a bear straddle?
A Bear Straddle is another name for a short straddle, in which the investor writes (goes short) on both a call and a put, for the same strike price and expiration, on the same underlying stock. A short straddle can be called a bearish position because the investor believes that the underlying will basically hibernate until expiration. As long as the price of the underlying remains close to the strike price, the investor can make a profit, with the maximum profit being the premium collected from the sale of the options which have expired worthless. Continue reading...
What is Accidental Death and Dismemberment Insurance?
Accidental Death and Dismemberment (AD&D) coverage is normally offered as a rider on health or regular life insurance policies, or as a part of voluntary deduction supplemental insurance offered to an employee group. AD&D policies provide separate coverage and terms for the instance of death by accident and the loss of limbs or specific functionality of body parts. The main attraction to this insurance is that it is very affordable, and many employees check to box to have it deducted from their pay because it is such a negligible amount. Continue reading...
What is a Long Position?
A long position - or to be “long a stock” - means that an investor has share ownership and will receive an economic benefit if the share price rises, and vice versa. Creating and maintaining a long position is simple: an investor just buys and owns the investment. A “long-only” strategy refers to an asset manager that only buys and sells securities in the portfolio as a management strategy - they will not use options or shorting strategies as a result. Continue reading...
What is a Dividend Reinvestment Plan?
A Dividend Reinvestment Plan, referred to as DRIP, is a plan offered by corporations that allows investors to reinvest their dividends in full or partial shares of additional stock, on the dividend payment date. Accessing a DRIP is typically a good long-term investment play - it allows for the investor to repurchase shares at a discount to the share price, and by accumulating additional shares over time increases equity ownership in the company. Continue reading...
What is an 'expiration date' in reference to option trading?
An ‘expiration date’ refers to the time when an option contract must either be acted upon by the owner (buying or selling the security in question) or left to expire. With derivatives such as options and futures, there will be an expiry, or expiration date in the contract, after which they expire worthlessly. Most options contracts will expire in 3, 6 or 9 months from when they are generated, and they all share the same expiration day of the month on their contracts in the United States, which is the 3rd Friday of the month at 4 PM. Continue reading...
How do I Invest in commodities?
Commodities can be acquired through brokerage services that can access the commodities markets, or you can buy the stocks of companies that bring commodities to market. Investors can also gain exposure to commodities through mutual funds and ETFs that focus on them. There are a few ways to invest in commodities. One simple way is to purchase the stock of companies that produce commodities. You can also invest through futures contracts, which are agreements to buy a certain amount of a commodity at a certain price at some point in the future; this is the primary way that commodities are traded. They can also trade at spot, which means at the current price, or through the use of other derivative instruments, such as options on futures contracts. Continue reading...
How are option prices computed?
Option prices are decided by the buyers and sellers in the marketplace, but are tied closely to the amount of risk inherent in the agreed upon expiration date and strike price. Option prices change as the market factors in the relevant information. The main factor is the strike price. The closer an option’s strike price is to the actual market price of a security, the higher it’s price will be. Once it’s in-the-money, it has inherent value that makes it essentially the same price as the market security that underlies it. The expiration date of the contract is also a factor because if the expiration date is closing in, and the strike price is not quite close enough to the market price of the underlying asset, there is little chance that the option will be useful. Continue reading...