« »
Showing posts sorted by date for query financial instruments. Sort by relevance Show all posts
Showing posts sorted by date for query financial instruments. Sort by relevance Show all posts

Monday, July 1, 2013

5 advantages of insurance products in retirement planning

Life insurance products are not limited by rules affecting IRAs and 401(K)s
Life insurance affords retirement planners several important benefits
Insurance companies are specialists in retirement planning; if there were no advantages of owning insurance instruments, the chances of the industry prospering for as long as it has would be lower. When considering the purchase of insurance products, an objective assessment of the financial security, planning options and monetary advantages they offer helps with decision.

Several perks exist when owning one or more insurance related contracts such as long-term care insurance, life insurance and annuity contracts. Moreover, since some of these features are not necessarily available from other financial businesses, this makes the careful use of insurance instruments a significant part of financial planning. Some of the advantages of owning insurance products are as follows:

Tax benefits

When insurance premiums are payed for with after-tax dollars, the cash value that accrues in some financial instrument is still taxable following withdrawal per Americans For Fair Taxation, a not-for-profit organization that advocates fair taxation. However, insurance benefits, which are different from cash value, are not taxable provided that premiums are paid with after-tax dollars.

Creditor protection

An important aspect of insurance products is creditor protection. This means in the event of bankruptcy, garnishment or debt collection, funds within insurance products are safe from liquidation. This is a substantial benefit that offers insured persons financial security not available via other financial instruments such as some types of brokerage accounts, bonds and certificates of deposit.

Guaranteed income

Another useful benefit of insurance products such as annuities is guaranteed income. For instance, a deferred annuity with a fixed income guarantee is contractually obliged to pay the annuity owner a specific amount of income at a pre-determined time and on a periodic basis. This type of financial instrument is sometimes a good option for individuals seeking to supplement income from Social Security.

No required distribution age

Unlike financial instruments such as 401(k)s and Individual Retirement Accounts, some insurance products do not have required minimum distributions or RMDs upon reaching a specific age. For those persons seeking to grow the value of their annuity via continued premium payments, this is a significant advantage.

No maximum contribution

In addition to no required minimum distribution age, insurance instruments such as annuities do not necessarily have limits on how much can be deposited into them each year. For individuals with extra money looking to boost financial security, this can be an attractive financial planning option.

In today's world choosing from a multitude of financial products can be confusing when planning for retirement. Even with all the positive aspects of insurance products, caution is often warranted when making financial decisions. To illustrate, depending on licensure requirements and state laws, insurance agents may or may not have a fiduciary responsibility to pursue their clients' best interest. For this reason, being aware of what insurance products have to offer in relation to their actual cost and financial planning goals is an act of due diligence that prospective insurers would be wise to carryout independently.

  Image license: PD; Виталий Смолыгин

Monday, June 10, 2013

Advantages and disadvantages of investing in warrants

Investment diversification is possible with stock warrants
Warrants are purchased through brokers or borkerage firms
Warrants are investment instruments that enable investors to purchase company stock at a specific price. Ideally warrants are issued by financially stable companies with high-growth prospects, and that are seeking an alternative mechanism of capital asset management.

The decision to purchase using warrants is optional; if the warrant is not used, the initial cost of financial instrument is forgone. Warrants are exercised within a time frame determined by the conditions of the warrant. Several advantages and disadvantages exist with these types of investments.

Advantages of investing in warrants

• Longer time horizon

A key advantage of warrants is they offer a long-term time horizon according to Investopedia. This means investors can wait several years before buying underlying shares. With time, the probability of a company's share price surpassing the warrant's strike price is higher if the market conditions and business fundamentals permit it. 

• Alternative to standard options

Warrants also offer an alternative investment to standard stock options; this can improve investment diversity and allow investors to profit from more dynamic market circumstances. For example, purchasing shares directly as well as a warrant make dollar-cost-averaging possible in addition to hedging risk associated with purchase price.

• Improved capital management

A third benefit of investing in warrants is the opportunity to leverage an investment. This is because warrants, like stock options, are classified into groups of shares. Since the shares do not have to be purchased immediately, but the right to buy at a specific price is, investors can better manage capital by accumulating incrementally rather than right away via margin or credit.

Disadvantages of investing in warrants

Investing in warrants is not without its downsides. Moreover, warrants issued by company's seeking to create additional capital incentive to investors do not always do so for the right reasons i.e. when the company is insolvent or at risk of bankruptcy. It is for this and other reasons having to do with investment analysis that Incademy recommends warrants only be invested by experienced investors.

• Substantial risk

Like many financial investments not insured by the Federal Deposit Insurance Corporation there is substantial risk. Several types of investment risk  apply to corporate investments per the Financial Regulatory Authority (FINRA). Among those that influence warrants are credit risk, managerial risk, liquidity risk  and possibly inflation risk.

• Opportunity cost

Opportunity cost is the difference between return on investment among two or more investments. For instance, if a warrant costs $1,000 up front, but yields a 10 percent ROI in five years, and a Californian Municipal Bond  also costs $1,000 and yields a 12 percent ROI for the same period, a two percent opportunity cost is incurred by investing in the warrant.

• Infrequently issued

Another disadvantage of warrants is they are not as common as regular stock options within the U.S. securities market. This is because they are less utilized as a financial instrument by many companies and because warrants do not trade in the same markets as regular stocks. The result of this limited availability and restricted trading capacity reduces the choices of warrants and the ease of investing in them.

Wednesday, April 3, 2013

Silver and gold: Arizona looks to approve both as legal tender

Gold ceased to be formal currency in 1971 under the Nixon Administration
Gold and silver currency would complicate business transactions
 By Steven Ellis

With the recent passage of Senate Bill 1439, Arizona could become the second state in the nation to make gold and silver coinage legal currency. Currently Utah is the only one. What could be causing such a call for action? The federal government, of course, has not recognize bullion as legal tender for over forty years.

According to many in the state legislature, this legislation needs to be passed in order to shelter the state from impending financial ruin. Republican lawmakers have warned of a future of rampant inflation, when the dollar would become worth less than the paper it's written on. According to one Republican state representative, the concept has broad public support.

However, Democrats in the state legislature have objected to the bill. They point out the legalization of gold and silver as an acceptable form of currency would be a nightmare to business because many do not have or could not afford the instruments necessary to properly measure the value of the precious medals. Instead, Democrats have offered an alternative for gold supporters: take their message to the Federal Reserve because they argue it has the appropriate jurisdiction.

If passed, Arizona would distinguish itself from many other states that have debated the issue without any result; this list includes Minnesota, North Carolina, Idaho, South Carolina, and Colorado, among many others. The phenomena, which has occurred in only the past few years, is likely the indirect result of the financial crisis.

As the value of the dollar sank during the recession, more people began investing in gold and silver, as it often happens during such economic downturns. Gold and silver is recognized across the world as the only currency with an "absolute" value that transcends all others put out by individual countries. As of this month, gold futures sold on the market for over $1,600 a Troy ounce. That figure has only topped $1,000 an ounce since the start of the recession over five years ago.

For the majority of American history, gold (and sometimes silver) was recognized as an acceptable form of currency by the U.S. government. However, by the 1940's, burdened with the responsibility of having to pay for World War II, the government began printing more paper dollars. Formally, the backing of dollars by gold was abandoned in 1971 through executive order by President Nixon. Since then, the idea of gold-backed currency has remained widely unpopular, at least in government circles.

About the author: Steven Ellis is a freelance writer covering a wide range of topics from education to finance. Follow Steven on Twitter @stvnlls

Image license: PD

Tuesday, April 2, 2013

What are binary options?

Skilled binary options traders use market indicators and trend analysis
Investing in binary options is a risk endeavor that should be taken seriously

Whatare binary options? Binary options are a new financial product that has met a lot of success with people interested in trading financial markets. But one thing is clear, there are more losers than winners in trading, including binary options traders.

Some advertisements may claim you can earn thousands of dollars per month by trading these instruments. We all know that before getting there, it will take perseverance, effort and some good morale because the road to success is paved with failures. But failures can be beneficial if it you know to learn and improve from them.

Investing in binary options implies that you have the means to do so. In other words, do not invest money you cannot afford to lose. If you have difficulties making ends meet, trading binary options is perhaps not the best choice. In this case it is better to consider less risky investments such as traditional CDs or bonds. Binary options trading is further illustrated in the presentation below.

Before jumping in to binary options trading, it is also necessary to endorse some golden rules of online trading that apply not just to binary options but also to other types of investment. If there is one rule that you must master, it is the one that says that the objective of trading is not to win, but to avoid losing. This rule epitomizes what online trading is: an inherently risky investment, which seeks the maximum profit by minimizing losses.

Often before winning, we must learn to lose. Losing will highlight your mistakes, your shortcomings and if you take a step back, you will be able to improve yourself by correctly identifying your weaknesses. Usually, they are three types of errors:you are not familiar enough with technical analysis which prevents you from trading binary options effectively, you do not have a trading plan or you do not follow it and you are unable to control your emotions.

In many cases, it is not so much the lack of mastery of technical indicators such as breakout channels, moving averages or RSI which explains losses with binary options, but the lack of a trading plan. Novice traders in binary options make the mistake of not taking the time to make their trading plan, to improve it gradually as they go and especially to follow it without deviation when they are in the market. In fact, losses can accumulate and new traders will often end up joining the ranks of the binary options losers and they may abandon trading digital options too early.

Take the time to make a trading plan including all the necessary aspects (software tools to find support and resistance, integration of economic news, acceptable losses, expected gains, etc.). It is the key to success in this activity.

Then if you manage to control your emotions well which is not the easiest as a trader, you will be able to not deviate from your plan as long as your positions are not closed. Changing your plan along the way is a big mistake because it is often under the influence of emotion. In order to improve your trading plan, take a step back, be out of the market and carefully analyze your mistakes. By doing so, you can be one of the winners in the binary options market.

 Image credit: Cocochico; CC BY-SA 3.0

Thursday, November 1, 2012

How the risk-free interest rate is determined

Investments with little or no risk have a risk-free interest rate
The risk-free rate of interest is often equated with U.S. Treasury security yields

On the surface a risk-free interest rate is perceived to be the rate of return on an a financial allocation that has no financial risk associated with it. However, 'risk' itself is a word that has more depth to its meaning when coupled with financial instruments. This is because risk also includes the influence of variables such as devaluation from inflation, opportunity cost, and issuer default.

Characteristics of risk-free assets

According to Aswath Damodaran of the New York University Stern School of Business, risk-free assets have no variance from the expected rate of return. In other words, what you see is what you get without question; an example of such being guaranteed fixed interest rates. In this sense, risk-free rates do not have to be universal or the same across financial instruments such as savings accounts and government bonds, but do have to possess a strongly assured yield. 

Risk-free interest rates do not include a 'risk premium' or an added amount of interest yield that accounts for the risk associated with investing or depositing money into a financial instrument. For example, a 5 year corporate bond from Company A offers 4.5%, whereas a 5 year bond from Company B offers 5.6% These yields differ with perceived risk as measured in part by credit ratings. These ratings are determined by credit rating agency methodologies such as those used by Moody's

To illustrate 'risk premium' and 'risk-free rate' further, bond issuers with lower credit ratings have more credit risk associated with them, and are not therefore 'risk free'. The risk premium is determined by market forces such as the rate of return  investors are willing to accept for financial instruments  priced at certain levels with specific levels of risk as defined by credit rating and investor valuation(s). The risk free rate is often bench-marked using a shorter-term financial instrument such as 3-month Treasury Bills according to Rutgers University

Risk-free financial instruments and credit rating

Even if an issuer has a very high credit rating and is considered 'risk free', that can change. A recent example of this, and as reported by Reuters, was when the Standard and Poor's Credit Rating Agency lowered of the U.S. Government's credit rating from AAA to AA. These changes are somewhat predictable via rating agency 'outlooks', but for longer-term time horizons, are not always so clear. It is for this reason that a risk-free short-term financial instrument is not actually risk free when longer loan terms exist for the same issuer and instrument. 

What constitutes a risk free rate is not constant, and multiple financial vehicles can be considered to have risk-free rates.  For example, a financial statistics class at The Wharton School of Business considers a 1-month Treasury Bill as being risk free instead of a 3-month. This difference in opinion is further highlighted in a report by the financial consulting firm Value Advisor Associates. Moreover, in the report, both 5 year and 10 year financial instruments are considered acceptable proxies for the risk-free rate due  to factors such as upward sloping 'term-structure' i.e. higher rates of return for longer duration bonds.

Image license:  US-PDGov

Friday, October 19, 2012

5 reasons why securities transactions assist with financial goals

Securities transactions have the potential to yield a lot of money
Spread betting wagers on the outcome of future events
Securities transactions include a wide range of financial products. Carefully investing in a number of these is beneficial to financial goals in a number of ways. If this was not the case, many pensions and retirement accounts would not have the values they do. Moreover, securities transactions are essential to effective financial planning whether the transactions are made independently or not. After knowing which financial instruments to utilize, securities transactions are able to facilitate several financial objectives.

1. Profit

The first, and most important reason to participate in securities transactions is profit. Without it, investing would not be a worthwhile venture. In order to make profits, one must correctly allocate funds at risk levels proportional to one's tolerance for risk and loss. For example, the higher a particular securities transaction's risk becomes, the less amount of money is used to accommodate that risk. This helps ensure money within a portfolio is earned and not lost.

2. Hedging

Another good reason to engage in securities transactions is risk management. Hedging not only helps minimise risk exposure, but improves optimisation of one's capital allocations for potentially higher gains. To illustrate, an investor places 10 percent of his or her retirement account capital into small-cap stocks in an industry that is forecast to grow rapidly in the next five years. That same investor hedges this amount by allocating 60 percent of his retirement account's liquid assets into a bond fund consisting of of AAA rated international bonds.

3. Diversification

Diversification is used for hedging, but is different because the principle behind the diversification has less to do with how the transaction is made, and more to do with what the transaction buys. More specifically, diversification works by partaking in capital allocations across a number of industries via financial vehicles such as foreign exchange spread betting, whereas hedging is only performed via individual transaction construction such as a stop-loss order in forex, or bear put spread in stock options trading.

4. Security

Financial security is built through well implemented transactions. Over time the right money management decisions become the catalysts for financial security. However, to avoid investments leading to financial havoc, carefully planning transactions with financial professionals to meet individual or household financial planning objectives is often a good idea. With a well planned portfolio, financial security should grow to meet investment benchmarks, or provide an income via income investing strategies.

5. Retirement

Last but not least, securities transactions facilitate a good retirement. As investors move through life stages, they often make changes to their prior financial decision making, or restructure their investment plan to better meet retirement objectives. For instance, higher 401(k) contributions allow a more rapid saving, and reallocation of funds account for changes in economic conditions. Furthermore, a greater knowledge of new or specific financial products allows for a wider choice of financial transactions.

Image license: US-PDGov

Friday, October 12, 2012

Questions to ask before opening a new brokerage account

Brokerage accounts offer trading platforms and financial analysis tools
Overseas brokerage accounts are subject to different regulations

Opening a brokerage account is an important banking decision that affects individual finances and any financial commitment made to the account. Understanding how the account works and where one's individual responsibilities lie in regard to managing the account is necessary. Being properly informed of what brokerage accounts entail is instrumental in the choice to open one. Below are some questions worth considering before opening a new brokerage account.

What types of services are offered?

The types of services offered by brokerage accounts often surpass those of traditional banking. For example, some financial institutions offer spread betting, and full-service brokerage firms typically offer financial planning services as well. In other cases, premium services are only reserved for account holders with higher net worths. An alternative to this is to obtain the advice of a licensed securities professional on a per transaction basis via commission on services rendered.

Are the financial instruments worthwhile?

The range of financial instruments offered by various brokerage houses is staggering. Choosing the right financial institution is therefore, of paramount importance to the future of one's finances. This is because the financial products invested in influence potential yields, capital gains taxes, and opportunity cost. Carefully researching what an individual brokerage firm has to offer in addition to the advantages and disadvantages of a brokerage firm is key to making the right banking decision.

How well are the account assets protected?

Asset protection is something all investors should take seriously because of the potential consequences of not being fully aware of specific investment risks. For instance, assets held within a brokerage account are not necessarily insured, and not all account types are protected from creditors. Different assets and accounts have varying levels of security that investors would do well to understand prior to opening an account, and before engaging in transactions through that account.

Do available accounts suit specific financial goals?

Differing accounts are offered by various brokerage businesses. To illustrate, some brokerage firms offer individual retirement accounts and individual business accounts, but do not necessarily offer exotic financial instruments, whereas other firms make more unique financial products available including simulations such as a currency spread betting trial account, but do not necessarily provide those products through a wide range of accounts.

Which jurisdiction is the best choice?

Jurisdiction is a major factor when opening a new brokerage account. Since each jurisdiction is subject to the laws and regulations governing it, the impact on individual banking is noteworthy. For example, Panamanian corporate brokerage accounts are not taxed in the same way as an individual brokerage account located in the United States. Before opening a brokerage account with a large balance, investigating brokerage account jurisdiction options and advantages is potentially a time worthy pursuit.

Image license: US-PDGov

Monday, October 8, 2012

4 billionaires currently investing in gold

As the economy improves and monetary policy tightens, gold price is effected
The price of gold rose to near $1,400/Oz after 2008, but declined in 2012

By Jonathon Thompson

Sure, you’ve heard that investing in gold is a great way to make your money grow, and you’re probably familiar with all the touted benefits. But what proof is there that this precious metal can really offer returns that are superior to other investment instruments? Well the proof is in the pudding, and it’s also in the bank accounts of some very successful billionaires. The following four mega moguls know exactly how powerful gold investing can be:

John Paulson

 John Paulson recently purchased more than 4.5 million gold shares from SPDR Gold Trust. In addition, he sold a lot of other stocks, ultimately resulting in almost 50% of his U.S.-traded equities being tied to gold bullion. This is a person that made $3.7 billion in a single year by speculating on a housing crash, so he is pretty good at gambling on future events. He is the founder and president of one of the most successful hedge funds in the world; do you think his opinion matters?

George Soros

If there is one businessman you should take financial advice from, it’s George Soros. This man is one of the world’s most renowned investors and philanthropists, with an estimated net worth of more than $20 billion. Recently he spent a lot of money on gold, and he didn’t just a buy a little bit either, he more than doubled his gold stakes. So why did George choose to buy more gold this year? Simple, the value of the dollar is plummeting and recent research suggests that extreme economic upheaval is nearly imminent.

Ray Dalio

Ray Dalio was listed by Time magazine as one of the ‘Top 100 Most Influential People in the World’ in 2012, and he’s also on the Forbes ‘Top 100 Wealthiest Billionaires’ list. He has a net worth of $10 billion as of September of 2012, and he began investing at the young age of 12. If someone who became a successful investor before he hit puberty starts buying a bunch of gold, do you think it would be a wise idea to do the same? So why has he recently started investing in more gold? Because the price of gold has seen a 10% increase during the past five weeks that’s why.

Eike Batista

Eike Batista, the richest man in Brazil, has been investing in gold since his early 20’s, so he didn’t just jump on the bandwagon. With a net worth of $30 billion he has certainly established a reputation for using his money wisely. His mining company was the first to used mechanical equipment in the Amazon Jungle back in the 80’s. He invests in gold by going straight to the source and pulling it out of the earth by the ton. One of his mineral deposits has an estimated gold content of more than 3.5 million ounces!

About the author: Jonathon Thompson is an experienced investor and professional blogger who currently conducts research and blogs on behalf of Gold-401k.org.

Monday, August 20, 2012

Guide to dividend payments

Diagram: How corporations allocate dividends
Stock prices are offset by dividend issues
Special dividends are unique dividends uncharacteristic of typical issues

Shareholder dividends are a form of monetary distribution most commonly paid to owners of business stock and mutual funds. The dividends for company stock are made from corporate earnings and income earned from mutual funds. In the case of mutual funds, how the dividend is treated depends on the type of investments made by the fund. For example, bond funds are sometimes exempt to state tax because they invest in tax free bonds. In the case of corporations, the issuance or increase of a dividend sometimes leads to an increase in stock trading activity.

Corporate dividends are issued by boards of directors, and increases or decreases to dividend amounts are typically announced via quarterly reports. To qualify for a dividend payment the shareholder has to own the shares by a specific date. This date is called the record date. In addition to owning the shares by the record date, the shareholder must hold the shares until the ex-dividend date, the day of dividend distribution.

When dividend payments are made, they are either deposited directly into a Federal Deposit Insurance Corporation (FDIC) insured account such as a money market account or a FDIC defined non-insured investment sweep account. As an alternative to having funds deposited into a sweep account, dividends can be reinvested into the issuing corporation via a Dividend Reinvestment Plan or DRIP. Dividends may also be paid into retirement accounts and life insurance polices that hold shares in either stocks or mutual funds.

Qualified dividends

Qualified dividends are paid to investors at a lower tax rate and generally dividends issued by U.S. Corporations. Moreover, qualified dividends are taxed at a maximum rate of 15 percent per the Internal Revenue Service (IRS). Income earners in the lowest tax bracket pay less than 15 percent according to the brokerage firm Fidelity Investments. Qualified dividends earnings are are reported on a Form 1099-Div that is typically sent to taxpayers in January of each year and use for tax filing purposes on IRS Schedule-D. The following presentation further explains what qualified dividends are.

Ordinary dividends

The IRS describes ordinary dividends as payments made from the earnings of corporations that do not qualify for the net capital gains tax rate. One such qualification is the holding period of shares. For example, when shares are not held by investors for a certain amount of time they are paid as ordinary dividends. According to Fairmark, mutual funds that are owned for 60 days or less don't qualify for lower tax rates. Since ordinary dividends are not subject to a maximum of 15 percent tax, they are taxed at the regular income tax rate.

Special dividends

Special dividends are usually one time, larger than average dividends paid to shareholders when corporations have extra earnings. In the case of public companies, these dividends are reported to the Securities and Exchange Commission (SEC) using a Form 8-K. It is important to note that share prices can drop proportionate to the size of the dividend on the ex-dividend date. For example, if Company A has a share price of $100 and issues a $10 special dividend per share on January 26, then the share price opens for trading at $90 on that ex dividend date, it is most likely due to the special dividend according to the Motley Fool. The video below demonstrates an advanced trading method that utilizes dividend paying financial instruments and derivatives trading techniques.

Dividend investing or income investing is a way of investing that creates income with or without capital gains. This is helpful for retirees seeking to preserve cash-flow from higher risk investments while simultaneously limiting capital erosion. Depending on how dividend investing is utilized, the benefits and risks vary.

Image attribution: Urbanrenewal; CC BY-SA 3.0

Wednesday, August 15, 2012

How book building works

Financial statement numbers are impacted by book building activity
Securities underwriters "book build" when financial securities are issued

Book building is the valuation of  new financial securities carried out by securities underwriters known as book runners. When a company issues new bonds or shares, they have to be priced. This pricing is performed by the book builder(s) who market the new financial instruments for the issuing company. This price assessment is partially based on a measured demand for the security by both institutional, private and public investors. However, book value for securities is also determined using financial formulas such as the discounted value of future cash flows.

Book building and securities valuation

An initial public offering (IPOs) such as the Dunkin' Brands Group, Inc. IPO in July 2011 serves as an illustration of how  additional issuer based valuation influences book building. The IPO had shares offered at $19 per a July Wall Street Journal report. Arriving at this initial offering price is theoretically the role of book building, but is also be influenced by the issuers capitalization needs. In other words, if the IPO is designed to raise money, the amount of money to be raised can influence the IPO price per share regardless of book building valuations.

Business influences on book building

In light of the competing motives behind IPOs the process of book building involves capitalization requirements, buyer demand for financial securities, and actual valuation of corporate worth as represented by the financial security. Some financial observers also believe book building undervalues valuation. For example, in academic research published by New York University and authored by two professors named Boyan Jovanovic, and Balázs Szentes, it is suggested than an initial public offering be pre-valued below actual worth before soliciting bids from buyers in an effort to share 'super-normal' returns with preferred clients for business purposes. 

Securities valuation and regulatory protection

The actual value of shares to be offered via an IPO are only issued shortly before the offering takes place according to research in the Journal of Corporate Finance. Moreover, according to this research, yet another variable affects the valuation of book building. Specifically, regulatory environment as evident in the form of opt out rules. In other words, the author of the study demonstrates that since book-builders can withdraw their offering of securities if demand is not high enough, the undervaluation that can take place during IPOs is accepted due to the surety made possible via the opt out option.

The function of book building is fundamentally straightforward, however what actually happens when organizational entities seek to raise funds by issuing financial securities via book-building isn't quite so simple. This process and the valuation of securities is carried out by book-builders that are securities underwriters or book-runners. However, the actual price of the securities offered, IPOs in particular, are affected by several factors including book-builder financial motives, the issuer's financial security, and investor demand.

Image attribution: Freedigitalphotos.net; standard royalty free license

Friday, August 10, 2012

Pros and cons of online securities trading

Successful and experienced online securities traders acquire wealth
Financial strategies assist with online securities trading

The ability to utilize expertise and resources to acquire capital gains is essential to the success of individual traders of financial instruments. In this sense it is the responsibility of traders to discern between poor and prosperous techniques and strategy. Numerous drawbacks befall even the best and most talented of industry experts. However, once a trader becomes experienced, knowledgeable, and refined in his or her practices, avoiding the financial pitfalls associated with online securities transactions becomes more possible.


A key factor that draws millions of people to online securities trading is the substantial opportunity to increase personal wealth. Monetary gains on well implemented trades often yield returns far above more conservative forms of money management such as federal treasury bonds. The potential to earn hundreds, thousands and even millions is possible via online securities trading and via several financial instruments such as spread betting on currency pairs.


A key benefit of trading financial instruments online is the acquisition of tactical knowledge and ability to implement learned trading strategy. Using brokerage tools helps develop awareness of the affects of market forces such as volume and economic events on asset prices. Furthermore, the trading process and simulations help acclimate brokerage account holders with the best trading mechanisms to use at specific times. For instance, in intraday arbitrage, knowing when to buy or sell using limit orders vs market orders and all or nothing trades, is important, if not essential to a well implemented transaction.


Another important benefit of securities trading is the value provided by online brokers. For example, discount brokers that only charge transaction fees and exclude commissions via self-directed accounts often only cost pennies on the dollar. Moreover, the larger the transaction amount is, the smaller the proportional cost associated with that trade becomes. In addition, a wide range of complementary digital tools such as a spread betting demo account assist traders learn how to make the most of their money.


Online securities trading is risky. The financial products are not typically insured and market volatility has a dramatic affect on the price of securities. When combined with leverage or margin, capital losses are multiplied and substantially lower asset worth if prices go the wrong direction. Reducing risk exposure entails locating financial instruments that have higher yield for the least amount of risk. Ideal risk management also involves allocating assets in such a way that overall portfolio yield rises despite any capital losses on riskier assets. To further illustrate the risks associated with online securities trading, the eHow video below discusses investment techniques that affect risk.


There is a significant learning curve associated with online securities trading. If trading platforms are simplified, they do not necessarily make up for a lack of market knowledge and experience. Moreover, most digital brokerage services provide glossaries, demonstration accounts and tutorials precisely because there is a level of complexity involved with the trading process. Not being fully aware of the pitfalls of online trading such as failing to use a stop-loss order, or using too much leverage on risky buy order makes it that much easier to make a small, but costly error.

Image license: US-PDGov

Thursday, August 9, 2012

Types of financial instruments held in offshore accounts

Each offshore jurisdiction has unique financial advantages and disadvantages
Offshore accounts are financial vehicles that defer immediate taxation

Offshore bank accounts provide individuals seeking an alternative investment opportunity or different avenue of financial management to improve their financial planning options. Financial instruments held within expat bank accounts often include products that's value is based on market forces, or pre-determined contracts that offer lower interest rates and  costs. The potential benefits of offshore banking outweigh those of more restrictive banking regulation and policy. This is achievable via a range of products.


Foreign currency of various countries and denominations is held within offshore bank accounts. Money held in offshore accounts for foreign exchange trading also have several benefits. For starters many offshore banking facilities offer enhanced privacy protection, and the ability to pay bills or expenses in foreign currency rather than a domestic one. Some offshore financial institutions even provide accounts able to hold more than one currency or multi-currency accounts. 


Contracts for difference such as currency pairs, equity swaps and similar financial instruments are in effect derivative financial securities. These products provide traders an opportunity to capitalize on price movements without actually having to hold the underlying asset. In some cases these CFDs are purchased using capital leveraging or margin. In other words, a credit account is used in addition to the primary fully funded offshore account.


Funds come in many shapes and sizes, and are either directly managed by offshore banks, or traded with their services. Bond funds, exchange traded funds, and mutual funds are just a few of the fund types that are held within expat bank accounts. Additional funds such as hedge funds, money market funds and fixed income funds are examples of others. These funds are either maintained independently through a trust established at an international bank, or managed with the assistance of financial service professional.


Over the counter securities trading services are available via select offshore financial institutions. These include pink sheets, another term for stocks not traded on larger exchanges. Collateralized debt obligations are another type of OTC exchanged through offshore accounts. Essentially, if it is not traded via a major formal exchange that is regulated by a particular organization, then financial instruments are considered OTCs.


Equities are an asset class within several offshore financial institutions and expat bank accounts. Moreover, stocks that are not over the counter can be traded via accounts at offshore banks. This is because when the offshore bank has a headquarters in the domicile of residence, the trading networks are interlinked enabling offshore securities trading. Stock options or stock derivatives, are also available via some offshore banks.


Certificate of deposits are able to yield as high as eight percent or more at select offshore financial institutions. Specific rates are determined based on deposit amount, location, term and applicable banking policy. These rates are above and beyond some of the best international CD rates available, and this makes these negotiable instruments an attractive investment opportunity. Additionally, offshore banks do not necessarily withhold interest income tax due to differences in regulatory requirements.


Due to the fact offshore accounts are located in foreign jurisdictions, they are not subject to the monetary decisions of other banks in larger jurisdictions. It is for this reason, interest rates on loans from offshore banks are able to be more competitive. For example, offshore bonds that cost less to underwrite are better able to offer higher yields to lenders or investors. Similarly, just as loans are made, debt instruments such as international treasuries, corporate debentures and convertible bonds are also held or purchased within offshore accounts.

The range of financial products made available through offshore accounts is as diverse as the jurisdiction's regulations and banking policies allow. Due to the more liberal banking practices made possible via these financial institutions, more money management opportunities are available to investors and traders seeking investment alternatives with higher yields and potentially higher capital gains. In any case it is important to understand how any offshore investment, deposit or account is protected and to carefully study and discuss the risk and safety of such decisions with a financial professional.

Image license: US-PDGov

Thursday, July 19, 2012

Features to look for in a digital brokerage platform

Stock market simulators and financial analysis tools are a benefit of online brokerages
Digital brokerage platforms allow individual's to invest

Brokerage platforms provide online investors and traders a wealth of money management opportunities. Choosing between brokers is a decision that affects financial objectives for as long as a brokerage account is used. In some cases, owning more than one brokerage account provides experienced traders with wider options. Paying close attention to account benefits, features and terms assists with evaluating the quality and potential of a digital brokerage service provider.


Service is a substantial factor weighing into the decision to open an account with a digital brokerage platform. A physical address, trained customer service support and regulatory licensing are just the beginning. Additional considerations include multiple account types, online bill paying, direct ACH money transfer and secure transmission of financial data over the internet. Additional service factors to take into account are transaction fees, minimum balances and margin interest rates.


Reliability in the carrying out of transactions and user interface speed are also important aspects of a digital brokerage platform. This is especially true for those using speed based strategies such as event driven intraday currency trading. Furthermore, fast and accurate access to the best available rate spreads help customers make competitive bid and ask decisions in addition to effectively placing orders designed to take advantage of changes within securities markets.


Access to innovative financial instruments and products is advantageous to online brokerage account holders. This is because a diversity of financial products improves maneuverability in fluid securities markets. For example, being able to select from trading mechanisms such as spread betting, arbitrage and hedging benefits customers by providing them with the right products for each type of market environment and trading strategy.


Without specialised financial tools, traders of financial instruments would not be able to make informed decisions, perform technical analysis or carry out multiple trading techniques. Online tools such as stock screeners and historical charting allow enhanced assessment of financial securities with the click of a button, or the touch of a screen. Other useful tools including heat maps, trading simulators and programmable orders further empower the securities trading process.


Many firms that offer digital brokerage platforms also provide traders with educational tutorials and access to research studies or reports. Outside of an account these resources are not necessarily free, and are therefore a considerable advantage of brokerage accounts that provide them. Historical data such as fundamental statistics, intraday pricing patterns, relevant economic data and up to date news alerts are all informational assets when placing one's money into a brokerage account.

Sunday, June 10, 2012

How repurchase agreements work

Repurchase agreements
Reverse repurchase agreements involve the return of cash for securities

Repurchase agreements are short-term financial transactions between traders of government securities; often financial institutions and government agents, but also private parties. These transactions typically involve large amounts of money and require the seller of financial instruments to repurchase them in the future. The cost of 'repos' varies with the financial security, and the market conditions surrounding the transaction; it is referred to as either the general collateral rate or in the case of discounted repurchase agreements, special collateral rates.

The Government Finance Officers Association (GFOA) states repurchase agreements are primarily used to assist with the financing of organizational cash-flow needs. In a broader sense, and in the case of repurchase agreements involving the Federal Reserve Bank, the agreements are also intended to assist with the implementation of monetary policy according to the New York Federal Reserve Bank. An example of how repurchase agreements can help implement monetary policy is given by the Inter-American Development Bank that claims a strong 'repo market' is key in facilitating bond market and secondary market liquidity.

Securities traded in repurchase agreements

The types of government securities traded in repurchase agreements include Treasuries such as Treasury Bills, but also include other securities such as home loan bank bonds per the GFOA. The term of a repurchase agreements generally does not exceed two months in the case of Federal Reserve Bank "repos". The transactions may also involve three parties where the third party or bank acts as the financial intermediary between the two parties engaged in the repurchase agreement. In some cases a second sale of repurchased assets can also occur when multiple transactions by a dealer have been pre-arranged. 

Market influences

The repurchase agreement market can be influenced by demand for short-term financing via repurchase agreements and Treasury auctions according to an article by Bradford and Susan Jordan in the Journal of Finance. Specifically, in the case of Treasury auctions, when demand is high, the demand for repurchase agreements can also rise leading to a reduction of financing cost for sellers of securities in repurchase agreements. Moreover, if a significant amount of buyers at the auction fail to acquire enough treasuries that have already been pre-sold, resulting higher competition for repurchase agreements can lead to special rates for the sellers of Treasuries.

Repurchase agreement risks

The risk associated with repurchase agreements is more dependent on the credibility of the transaction than the quality of the financial instrument, especially in the case of high grade treasury securities. In other words, it is more likely an investor will be left holding a security beyond the extent of the repurchase agreement than it is the Treasury Bill or other government security will lose a great deal of value. However, the Inter-American Development Bank points out that repurchase agreements involving assets that do not sell easily do present a liquidity risk.

Image attribution: FreeDigitialPhotos.net; standard royalty free license

Thursday, May 10, 2012

How the U.S. national debt is different from federal deficit spending

National debt grows when there is a federal budget deficit
U.S. federal national debt is near 100% of Gross Domestic Product
The difference between government deficit and national debt is the deficit is thought of on an annual basis whereas national debt is long-term. Moreover, the deficit is the total expenditures and costs incurred by the federal government that exceed revenue from sources such as taxes in a given fiscal year, and according to the U.S. Bureau of Public Debt, national debt is the total debt which includes deficits and debt owed on financial instruments that has been accumulated by government over time.

To illustrate further, the annual federal budget deficit does not add the deficit or unpaid balances from previous years of deficit spending. The Congressional Budget Office (CBO) states the deficit is the net amount by which government 'outlays' exceed revenue for a given period. The forecasted budget deficit for 2011 is $1.645 trillion or 10.9 percent of GDP according to the 2012 U.S. Budget released by the U.S. Office of Management and Budget.

The national debt is the total amount owed on financial instruments such as Treasury bonds and deficit spending that has contributed to national debt. The CBO describes national debt as the total value of debt instruments issued by multiple federal agencies. Since the budget deficit is not financed by debt instruments, it is incorrect to conclude the national debt is the cumulative total of all unpaid deficits based on the CBOs definition of each.

Each year the government spends trillions of dollars
Health and human services is the largest national expense

The U.S. Bureau of Public Debt keeps an ongoing tally of total national debt which was  $14.287 trillion on April 29, 2011. This amount includes public debt and 'intragovernmental' debt which is debt held by government rather than the public. The national public debt was predicted to reach its legal limit on May 16, 2011 according to U.S. Treasury Secretary Timory Geithner and as reported by MarketWatch. Additional facts about the U.S. national debt are illustrated below:

The national debt became a money management controversy when it reached a percentage of Gross Domestic near 100 percent. President Obama addressed this issue by putting forward a proposal to cut this debt by $4 trillion within 12 years according to Bloomberg. However, opposition to this plan did not agree with the amount of tax increases that would be necessary to make the debt decline under Obama's plan.

Economic security is put at risk from excessive federal spending
The value of the dollar is negatively impacted by excessive national debt
In summary, government financing comes in the form of debt instruments such as bonds in addition to revenue from taxes where budgets are thought of in terms of government revenue and expenses where debt is a function of money owed on debt obligations. In light of this, three key variables including the type of financing, the time period for which fiscal policy takes place, and whether or not the negative balances are cumulative defines whether money owed is from an annual deficit or national debt.

Image attributions: Unforgettable fan; CC BY-SA 3.0,  Gene Simmons NDAC, CBO; US-PDGov, CC BY-SA 3.0, US-PDGov

Thursday, March 8, 2012

Investment risk-management techniques

Investment risk levels are affected by economic cycles
Risk management is commonly carried out via asset diversification

Investment risk is minimized a substantial amount by properly following three key principles. These include the use of risk avoidance techniques, understanding the situations in which investments are exposed to risk and knowing which financial tools have the best probability of capitalizing on reduced risk.

Understanding investment risk

Economic analysis

A method of understanding investment risk is economic analysis. By understanding what impact specific economic conditions have, an investor can more effectively manage his or her risk. Economic analysis involves more than just major economic trends, but also being able to forecast those trends, and what asset classes and investment instruments would be most likely affected by that economic event. To illustrate economic analysis, the Conference Board, a business research association, measures global business cycles to assist in evaluating the economic impact of those business cycles.

Market performance

Markets are sub-components of an economy. Broad based economic indicators may span across individual markets and therefore do not help in understanding all aspects of investment risk. Knowing each market, what affects it financially and what its performance depends on are ways to understand investment risk in those markets.

Risk management is an important aspect of individual portfolio planning and business strategy. The instructional video below further explains the process of risk management with an emphasis on business applications.

Risk avoidance techniques

Asset class

Asset class investing is a technique to manage financial risk and follows the principle of the risk pyramid. In the risk pyramid, investments are divided by asset classes or categories by risk level; the apex includes asset classes with the highest risk, and the base consists of more stable investments. Asset class risk levels can help an investor better assess what level of risk a particular type of asset is. Even less risky investments within asset classes cannot protect against all types of risk however. For example, U.S. Treasury bonds, in the bond asset class,  have relatively low socio-political risk, but are not all immune from interest rate risk.

Investment methods

A number of investment methods exist that protect against investment risk. Diversification and dollar cost averaging are widely known and practiced techniques of protecting against risk,  but these investment techniques are not the only ways available. For example, income investing, through investment in dividend paying stock protects against capital depreciation. Additionally, dividend reinvestment plans (DRIPS)  reinvest stock dividends that add to the affect of income investing. In the case of an initial public offering (IPO), price risk can be protected against by purchasing shares before they become publicly traded.

Investment risk management tools

Financial instruments

A financial instrument is a particular account, contract or financial arrangement that allows for and facilitate particular financial advantages, objectives and disadvantages irrespective of the asset class invested in. For example, a Roth IRA is a tax savings financial instrument designed to lower savings costs and prepare for retirement. Additionally, an Exchange Traded Fund or ETF, some might offer tax protection in the form of investment in tax free municipal bonds whereas others may invest in commodities. In both cases, the Roth IRA and the ETF are financial instruments that have the capacity to invest in multiple asset classes and thereby manage risk.


Insurance is a risk management tool because it specifically serves as a hedge against risk realization that investments themselves can't protect against. To illustrate, insurance protects investments against liability claims from debtors or the need to use investments in adverse circumstances such as bankruptcy. In other words, investments made within an insurance product or financial instrument are afforded a certain amount of legal protection that can help reduce exposure to debtors. In the case of unemployment or disability insurance, a state provided protection indirectly helps reduce investment risk arising out of personal circumstances.

Image attribution: Janoon028, standard royalty free license

Monday, March 5, 2012

The 4 percent rule assumes positive ROI

The four percent rule is a retirement cash-flow principal that begins withdrawing from pensions at a rate of four percent, then adjusts upward each following year to account for inflation. In principal this method is designed to preserve income for the duration of retirement up to 30 years per U.S. News. The four percent rule is further explained in the video below:

However, for retirees seeking to preserve capital, a rate above four percent is necessary after the first year of using  the four percent rule according to the Prosperity Concierge. Moreover, when managing annuities or retirement income from pensions, they must achieve a return on investment of above four percent in order to maintain principal value. That is excluding inflation which would make the actual required return to be more like 7 percent or higher. 

According to the  Statesman Journal maintaining retirement cash-flow is more challenging due to uncertainty in financial markets, inflation and longer life-spans.  That means, early retirees or those who retire at 65 and live more than 30 yrs will experience a dramatic drop in retirement income after the 30 years accounted for by the four percent rule expiration.

Assumption can be a dangerous word in finance and should be a red flag for anyone forecasting future income based on a financial plan. The four percent rule assumes no negative valuation such as equity devaluation during a bear market.  Strong asset allocation is an understatement when assessing the effectiveness of the four percent rule as it is not only desirable, but necessary for the method to work. To obtain optimal benefit, retirement capital should preserved, or at least extended for maximum duration via financial instruments that preserve capital value.

International term-deposits that are laddered for consistent 6 percent or greater yields are one place to start looking. Highly rated utility firms that's equity values keep up with inflation and yield high dividends are another.  Exchange traded funds that invest in solid corporate and government bonds that allocate risk proportionally using a sound investment strategy is another.