What are Specialty Funds?
Specialty funds may be completely unique and offer investors a strategy that they cannot find elsewhere, or they may just represent a strategy with an extremely narrow focus. There are many Specialty Funds, and their investment strategy is bounded only by the imaginations of the companies who create them. They tend to focus on markets that an investor may not have any exposure to otherwise, such as the Ultrashort Japan Fund. Continue reading...
What is a vertical spread?
A Vertical Spread involves the strategy of buying and selling an equal number of options on the same underlying security with the same expiration date, but different strike prices. Vertical Spreads can be both bullish and bearish, depending on your view of the underlying security. If you use calls, you are constructing a Vertical Bull Spread, and if you’re using puts, you’re constructing a Vertical Bear Spread. Continue reading...
What is a Basis Point?
When percentages being used to describe a security are very small, basis points are often used to describe the numbers. A Basis Point (bp) is 1/100th of a percent, so 1% = 100 bps. This metric is used when discussing financial instruments for which very small changes in percentages can make a difference. For example, rates on single premium immediate annuities change weekly, and generally only by a few basis points. These small changes can make a difference competitively week-to-week, because a few basis points can translate to thousands of dollars of income over time. Other places where basis points are used include: advisory and management fees, moves in indexes and securities, bonds, and so on. Continue reading...
What is the Bond Market?
You might not know it, but the Bond Market is about twice the size of the Stock Market. It’s true; in the US and internationally, the bond market, which includes municipal bonds, corporate bonds, government bonds, v, etc, has almost twice the amount invested in it than the Stock Market. Within these categories, there are many subsets. Bonds are widely used by individual investors as well as corporations and governments. 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...
B-/B3 — credit rating
B- — S&P / Fitch B3 — Moody’s In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will venture to explore. Bonds are rated by independent ratings institutions known as the Big Three: Moody’s, Fitch, and S&P. Two companies, S&P and Fitch, use the same symbols, and the B- in this example belongs to them. Moody’s has its own system, and the B3 in this example is theirs. Continue reading...
What is a commodities futures contract?
Commodities Futures are one of the most highly traded securities in the world, and it is partially because nothing has to be delivered by the participants as in a spot-trading market. Futures can be purchased on margin, opening up large positions, long or short, and if a trader finds a place to exit before the settlement date of the contract, the trader will buy/sell to close his or her position, and the exchange will regard the trader’s position as flat, and nonexistent for all intents and purposes. Continue reading...
What is asset allocation?
Asset allocation is theoretically the best way to control the return you experience, through diversification and rebalancing. Asset allocation theories provide you with mechanisms to diversify your money among various asset classes, such as stocks, bonds, real estate, commodities, precious metals, etc. The benefit of asset allocation is twofold: first, nobody knows which asset class will perform better at any given time, and second, various asset classes are not entirely correlated or have a negative correlation, which provides a hedge. If one asset class appreciates significantly, the other might not, but, if the allocation is done correctly, this may be exactly what the investor was looking for. Continue reading...
What is market saturation?
Market Saturation is the point at which there are few consumers that are still interested in buying a product because those who were ever likely to already have done so. Saturation can be said to exist for all similar products in a market. This may call for different strategies which could keep a company going. One is that products can be made to wear out after a certain amount of time and need replacement. Another is that the business can shift its focus to subscription or service-based income. Continue reading...
What is a naked call?
A naked call is a type of option contract where the seller of a call does not own the underlying security, thereby exposing them to unlimited risk. Investors have the ability to “write” or sell options contracts as well as to buy them. The seller of a call option has opened a position in which the buyer is given the right to buy 100 shares of a stock at the strike price named in the contract. The seller – along with all other sellers of calls for that security – are the ones who must cover and close the open positions if the call owners exercise their options. Continue reading...