How do the call options work and how to get extra dividends in the stock market

A call option is the right, but not the obligation, to buy a stock at a certain price. To a stock owner, this means a guaranteed income! And to a buyer, it means the possibility of netting a tidy sum.

With a call option, the buyer pays for the right to buy a stock at a certain price, at a certain point in time. Let’s say that a person believes a stock will be €5 in three months’ time, they can buy the right to buy that stock at €4 instead. Of course, if the stock is only at €3.50 at that stage, this right is worth nothing – and they don’t have to buy the stock since they are in no obligation to do so. On the other hand, if the stockdoes actually hit €5, they are able to buy it for less than the market price!

How does a call option work?

A call is an agreement regarding two things:

– a strike price: the locked-in price of the stock,

– a strike date: the agreed-upon date at which the sale will happen, if the buyer decides to go ahead and buy the stock.

And this agreement has a price: to lock in the price of the stock, the buyer agrees to pay a premium, whether or not they buy the stock in the end.

So the buyer buys two things:

– the right to lock in a certain price

– and then the actual stock at that particular price, if they still want to buy it at the strike date.

So, in a nutshell, this is what a call option is: Person A buys the right to buy a stock at a certain price from Person B. The right to buy the stock at a previously agreed upon price is a call option. The price that the potential buyer pays to lock in the stock price is the premium.

Who would want to buy a call option?

Let’s say a stock is looking good, the company offering that stock is healthy and doing very well.

A buyer might be interested in that stock, but for whatever reason (they don’t have the money right now to buy the number of stocks they want, they want to wait and see, or they have some other strategy), they decide not to buy the stock right now.

At the same time they believe that there is a high probability that the stock will go up, and they have a mind to buying it in the future. Tomitigate the disadvantage of buying the stock later for more money than if they bought it today, they can resort to calls. On the other hand, if the stock doesn’t actually go up in price, they may not want the stock at all! As a result, they just want the right, but not the obligation, to buy the stock at a certain price.

Their problem is that they don’t know how much the stock will cost when they actually get around to buying it. What if it skyrockets? Wouldn’t you be irritated to have to shell out €17 for a stock that only three weeks ago was trading at €10?

But for whatever reason you couldn’t or wouldn’t buy the stock three weeks ago. And you have to pay an extra €7 for not buying the stock earlier – unless three weeks ago you had the good sense of buying a call!

So the potential buyer enters an agreement with a person who holds that stock. The stock is currently trading at €10. They decide to pay the stockholder €1 to be able to buy the stock at €14 in six months’ time.

And what’s in it for the stockholder?

The stockholder makes both an income: the price of the premium; and a profit: if and when the potential buyer buys the stock from them, the buyer will buy it at a price higher than the stock is currently trading.

If I hold a stock that is currently trading at €10, and I sell a call option to sell that stock at €14 at a later date, on the condition that the potential buyer pay me €1 today, I have made:

– €1 (price of the premium, for securing the stock price),

– and €4 (difference between the current price of the stock and the price at which I will later sell it), if the buyer decides to exercise the option.

I have earned €5.

If the buyer decides to not buy the stock, I don’t make a profit, but I still have the income from the premium – and I still own the stock.

When I explain this, the overwhelming reaction is one of “But this sounds too good to be true!”

And in a way it is!

Whatever happens, you cannot lose money

But you might lose out – on a bigger profit.

This happened to me in 2009. I owned stocks in the emerging market index and they were trading at €33 or  €34. I sold a covered call to sell them at €35.

And then the index went up way past that. The person who bought the stock off me was very happy, as, by spending the price of the premium, they were now able to buy the stock below market price.

And I lost out on the profit I could have made by selling the stock at the higher market price.

But I had still made some income, and a profit… Not too bad!

For the buyer, call options are a means to potentially get a stock at a lower price than what the market is demanding, and for the seller, they are a means to guarantee they will earn money.

Source: http://www.thepositiveeconomist.com/

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Make Your Investing Easier: Imagine that Stock Market is a Supermarket

An extremely common reaction to investing in the stock market, especially from women, is that it’s too risky, too dangerous, and akin to gambling.

People often think of the stock market as a place that swallows money and wreaks havoc with emotions. In their imagination, it’s an overwhelming place, with “hyper” people screaming “BUY BUY BUY!!”, their eyes riveted to a flurry of figures cascading on four screens simultaneously.

This is not exactly the stock market – this can sometimes be the atmosphere at the actual, physical building known as a stock exchange. But the abstraction that is the stock market can be compared to something much tamer: a supermarket with a difference.

You get in with a list, buy what you need, and leave

Think of doing your weekly shopping: you might come in with a list of things you need, wander the aisle and fill your trolley, while availing of one or two promotions. Then you go to checkout and pay.

With a few differences, the stock market functions on the same principle: you go to the stock market to buy, not bread and milk, but “bits” of companies. The “stocks” are those bits. Instead of having to go to the farm to buy your milk, then to the manufacturer to buy kitchen rolls, you prefer to go to the supermarket, where you can find milk conveniently packaged and stock up on kitchen roll at the same time. Similarly, instead of having to go to each company separately, you go to the stock market and buy those stocks you are interested in.

The shopkeeper acts as a broker between the different providers and the customers: the shopkeeper/broker deals with the providers and companies wanting to sell their product; they might repackage that product to make it more relevant to customers’ needs, and they help customers process the sale.

You can pay attention to what happens in the supermarket, but you don’t have to, at least not all of the time

Investing in the stock market means you use the stock market like a supermarket: you go to the supermarket to buy something, but you are not interested in the supermarket itself. The supermarket is just the place you go to procure certain things. Would you pay attention to the drama of people quibbling over different brands of kitchen rolls in one aisle? This might strike you as ludicrous, but when it comes to the stock market, this is what the media and most people very often focus on. But it is only one aspect of the stock market.

Now people quibbling over kitchen rolls might actually be important and alert you to deeper underlying trends: the fluctuating price of wood pulp, for example, or the rise of the 100% recycled kitchen roll. This is why keeping an eye on stock market fluctuations is important, if you have the perspective to make sense of those fluctuations. But you don’t have to focus solely on those things to successfully buy stocks in the stock market.

Not everybody has the same shopping habits

In the stock market, just like in the supermarket, different shoppers will have different strategies: some will shop for value, some will shop for price only, others will want to impress by buying popular products, others still will buy whatever is on discount, hoping to bag a bargain. In this respect the supermarket and the stock market are almost identical.

It might also be that some people don’t like the marketing tactics and products of supermarkets and believe they get better value for money elsewhere, for example the corner shop down the road. As a result they never see the door of the bigger supermarket. Similarly, some people prefer to save their money in a credit union or post office, instead of investing it in the markets.

When shopping, do you buy depending on what others are buying?

But imagine you went to the supermarket and started to watch other people’s behaviour. Instead of buying what you came in to buy with your shopping list, imagine you noticed that a lot of people were buying a certain product. You look behind you and you see a stampede coming, as more and more people are buying that certain thing. Before the big herd comes, you decide to grab one of those popular things before they run out.

Or it could be that you notice people are not buying a certain item because their attention is on the first, more popular item. But you have a feeling that the unpopular item is underpriced, so you fill your trolley with as many as you can buy, just because nobody is buying it yet.

These behaviours reflect one of two different stock market strategies: either you use the stock market to buy what you came in to buy according to your list, and that’s investing, or you buy depending on what others are doing, and hoping to get in there faster than them, and that’s speculating.

Now the comparison wouldn’t hold if we didn’t add this: depending how many people buy or don’t buy an item, the supermarket changes its pricing, although it has fixed “opening” and “closing” prices. A popular item will rise in price as it becomes more popular, rewarding those who bought it early, and an unpopular item will become cheaper as less and less people want to buy it.

What if the supermarket allowed you to resell what you just bought?

And for the comparison to be really complete, we would have to add that, as soon as you have bought something in the supermarket, you can set up your own stall in the supermarket itself and sell what you have bought.

If a stock market customer is an investor, they will typically hold the stocks they have bought for longer; they will buy based on the actual use they want to make of the product (because it serves their objectives), as opposed to buying it because they see other people buying it too; and they won’t make decisions based on short-term price fluctutations. Just like in a supermarket, you might buy a specific brand of a product because it is of higher quality, and disregard another product although it is on special offer: same thing in the stock market.

The analogy can be brought even further: some people will have a personal shopper coming along with them to advise them. In the stock market, this is known as an advisory account. Or they might send in somebody else to do their shopping for them: this would be a discretionary account. But of course you can always do your own shopping, you just need somebody to process the sale: this is known as execution only.

Make a list, shop with your tummy full, and know the dangers of retail therapy: same thing in the stock market

Now many people recommend that you make a list before you go to the supermarket, to make sure that you get what you need, and only what you need. Taking a list with you is a good way to prevent impulse spending in the supermarket. The same applies to the stock market: if you don’t have a list (aka an investing plan), it’s easy to get derailed by the latest shiny object and to buy things that don’t suit you.

And of course some people go to the supermarket just to browse through the aisles, for a bit of retail therapy – this is also a danger in the stock market. Some people like the emotional high they get from impulse spending, just like some people like the emotional rollercoaster that comes with stock market fluctuations.

Other motivations for spending money might be keeping up with the Joneses, or getting a kick from making a successful transaction (for example bagging a bargain): these same motivations can be seen in the stock market. But be careful as there is a very high cost to this if you take your eye off the ball.

Hopefully this analogy has taken away some of the “mystery” around stock market investing. Now what’s the next step? A good place to start would be to educate yourself about the different products available in the stock market (I work with Gillenmarkets), and what they can do for you, just like you would compare the merits of supermarket products.

And don’t forget to have a good think about what your own objectives are – in the same way that you will waste food if you buy things you don’t actually use, in the stock market you have to know what you want to achieve or you might end up wasting your money.

Source: http://www.thepositiveeconomist.com/

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Portfolio Trackers Online: Keep an Eye on Your Investments

No matter what type of investor you are, keeping an eye on your investments is always a priority. Thankfully, websites devoted to this task are continually offering more powerful portfolio management tools to help you do just that.

This Comparison article examines the top online portfolio tracking websites for individual investors. The focus here is on everyday investors and not on power traders or institutional investors, so top sites in this category should have a good balance of power and functionality, along with a reasonable price tag. In addition, expect these websites to be user-friendly. The three sites designated as the best in this year’s comparison are SmartMoney.com, Morningstar.com and Wikinvest.

Although online portfolio trackers are constantly adding new features and functionality, they still pale in comparison to software-based portfolio trackers. The majority of online portfolio trackers can only handle cash, stocks, mutual funds and exchange-traded funds ETFs; they are limited in their customization; and they offer fewer portfolio analysis features. Reports offered are generally less robust than those found in software programs, as well.

The main upside for online portfolio trackers is that they are typically less expensive and, for the most part, easier to learn and use. In addition, online services provide the added convenience of being able to monitor your portfolio using smartphones and tablets. There is no software package to install and update, and users do not usually need to worry about platform compatibility.

With the majority of individual investors using online brokerages, the merits of using a separate site to track investments may seem redundant. Many online discount brokers offer proprietary portfolio management capabilities that are very good. However, most investors now have holdings in several accounts at different financial institutions: For instance, you may have a 401(k) account in one place, an IRA account in another and also an account at a discount broker. A third-party online portfolio management service solves the problem of tracking separate accounts by allowing users to combine and analyze all assets in one location, making it easy to monitor all holdings as one complete portfolio.

Most of the top websites that offer portfolio monitoring capabilities are part of larger comprehensive investment websites. As such, the portfolio trackers often provide links to news items and are able to provide emails that alert you to price, volume and news triggers. Furthermore, if you are paying for a premium portfolio tracker, the membership often comes with all the premium products offered at the website, such as advanced screening tools and robust fundamental data.

Features to Look For

When you are deciding on a portfolio manager, there are certain crucial features to look for. The top portfolio trackers here are all similar in functionality. When creating our top list, the characteristics most heavily considered were:

·         Number of portfolios that can be tracked,

·         Number of securities that can be handled in each portfolio,

·         The types of securities handled,

·         Frequency of price updates,

·         Availability of analysis tools,

·         Simplicity of use,

·         Availability of email alerts, and

·         Links to additional news sources.

Although this list does not represent everything individual investors look for in a portfolio tracker, it covers the most important aspects to weigh when considering your options.

Number of Portfolios

The top websites each offer a different number of portfolios that can be stored. For most investors, the differences will not be an issue, since users can store 25 separate portfolios at a minimum. If you have more than 25 separate portfolios, you may want to consider consolidating.

Another area to take into account is the maximum number of holdings each portfolio can track. Once again, this should not be an issue for the most part. However, it is worth noting that there is a definite possibility that users might reach the maximum allowed by SmartMoney.com, which is 50 securities per portfolio. Investors run almost no risk of reaching the maximum number of holdings per portfolio when using Morningstar.com or Wikinvest.

Securities Handled

One of the key differences between online portfolio trackers and the more robust software-based portfolio programs is the types of securities handled. Online services mainly track cash, stocks, mutual funds and exchange-traded funds. Data on these types of investment holdings are readily available on most investment websites.

Morningstar.com allows you to manually enter bond holdings and SmartMoney.com offers tracking of options. However, investors with significant holdings in bonds, options, futures or real estate may need to look elsewhere. If you are interested in more powerful, software-based portfolio managers, be sure to see our comparison in the Fourth Quarter 2011 issue of Computerized Investing (available at www.computerizedinvesting.com).

All of the top online portfolio trackers can handle stocks, mutual funds and exchange-traded funds.

Frequency of Updates

Online portfolio trackers originally required users to manually refresh the page to update pricing and market values for holdings. This is not the case anymore, as the top online portfolio managers reviewed here all update dynamic information, such as pricing, automatically when new data is available. In addition, the pricing data are all provided in or near real-time.

However, data updates are not frequent enough for investors who are performing trading functions.

Additional Analysis Tools

The availability of additional portfolio analysis tools is usually one of the top priorities of investors looking for a portfolio manager. The ability to generate quick breakdowns of your portfolio in terms of sectors, asset classes and industry is crucial when attempting to maintain a diverse portfolio. Being able to compare your portfolio’s asset class, sector and industry weightings against that of an index is an added bonus.

In addition, each of the three top online portfolio trackers offers company analysis and fundamental data. Morningstar.com and SmartMoney.com were both highlighted in AAII’s comparison of top comprehensive websites (August 2012 CI Online Exclusive; available in the Comparison archives online), so both offer a bevy of other features, such as stock and fund screening. Morningstar.com provides propriety company analysis for premium members. SmartMoney.com offers a variety of java-based tools. Wikinvest provides company pages that can be edited by registered users and allows members to post articles on perceived investment trends.

Simplicity of Use

Another key consideration for investors is the relative ease-of-use of an online portfolio tracker. Users with basic computer knowledge should have no problem using any of the three top online portfolio trackers.

Wikinvest’s extra option of automatically “syncing” with your brokerage accounts makes it the easiest to use, especially when initially setting up your portfolio. Morningstar.com offers videos to help you get started, along with an extensive frequently-asked-questions FAQs page.

Email Alerts and News

The beauty (and potential annoyance) of living in the information age is that you can be constantly connected to the Internet, which enables you to receive continual updates. Each of the three top online portfolio managers offers email alerts that can be sent based on a variety of triggers.

With so much news available at your fingertips, news items have become a big driver of short-term stock price movement. As two of the top comprehensive investment websites, Morningstar.com and SmartMoney.com provide outstanding news from outside sources. These news stories can be shown directly on the website portfolio pages. In addition, they are prominently linked in company summaries.

The Top Trackers

This comparison focuses on our top picks among the online portfolio management websites. This year, the top online portfolio trackers remain the same as our last Comparison in 2010—Morningstar.com, SmartMoney.com and Wikinvest. Depending on your investment websites of choice, the best portfolio tracker for you may simply be the one on the website you already typically frequent.

As part of our due diligence, I took a close look at the portfolio trackers at Google Finance and MarketWatch.com. After familiarizing myself with the new features available at each site, I decided not to add either to our top list. Google Finance offers very limited additional analysis tools and does not provide the features that we have come to expect from the best online portfolio trackers. MarketWatch.com, on the other hand, does offer good analysis tools, but creating portfolios on the site was not intuitive. In addition, MarketWatch.com does not offer a comprehensive help section.

Source: http://www.aaii.com/

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7 Tips For Choosing An Online Broker

Do your research before you sign up

You may think choosing a binary options broker to trade with is easy – how hard can it be to just search online and choose the first one you come across? But this is not the best way to do it. Selecting the right online broker for you can mean the difference between your trades making money or losing money.

Financial Assets

All brokers offer a different set of tradable assets. Whether they be commodities (gold, cotton, wheat), currency pairs (EUR/USD, USD/GBP, USD/JPY), indices (FTSE-100, DOW Jones) or stocks (Apple Inc, Google Inc, BP). Making sure that the broker you choose has the assets you want to trade in is an important factor.  All brokers will have an ‘Asset Index’ on their site where you can find this information and if you can’t find them there be sure to check our binary options broker reviews as we have listed them so you can quickly and easily compare between them.

Expiry Times

Most binary options brokers offer the regular 15min, 30min, 1hr, 24hr and weekly option expiry times. Some have chosen to get on board with 60 seconds trading. Depending on your experience it is probably best to stick to around 30 min to 1hr trading and leave the 60 seconds trading to the more advanced trader. Knowledge of the assets and financial markets you are trading in is always beneficial.

Profits and Returns

Binary options trading can be a very profitable form of investment and it can be even more profitable if you find a broker that offers higher returns and payouts. Returns usually range from 60% to around 80%. Choosing a broker with a higher return may not always be the right option. There are many factors that make a good binary options broker, so make sure you choose the right one for your needs.

Financial Tools

Choosing a broker who can provide you with a wide variety of in-depth tools to help you analyse the financial markets and economic climate is a wise choice. Following your gut can almost always lead to mistakes and losses. Technical analysis of the markets to find patterns and scenarios is a much better way to minimise your risk. Top brokers provide tools that include: live stocks, commodities, indices and currency data as well as economic calendars which can help you with your trading strategies and scheduling your trades to maximise your returns.

Support

No matter what you do online if its buying products, using services or trading binary options you will want to know that there are competent, knowledgeable staff accessible when you need them. The top brokers know that customer support should be second to none and will offer a variety of ways to contact them including Live Chat, Phone, Skype, Call Back and Email. Having a choice of your contact options means that you can feel comfortable talking to someone however you want. The level of support does differ between brokers so be sure to make this one on your checklist when deciding on your preferred binary options broker.

Secure Deposits and Withdrawals

Security, privacy and ease of use should be a priority when it comes to choosing a broker. You want to be able to deposit quickly so that you can get trading straight away and not worry about whether your details are safe. You can secure your financial details further by signing up to an E-Wallet likeSkrill(MoneyBookers) or PayPal and use that for most broker accounts. (Be sure to check that your preferred brokers accept them first).

Being able to withdraw money from your account is always a priority, so be sure to check any specific details that the brokers define like processing and payment time frames as these can differ per payment method and broker.

Source: http://www.binaryoptioninsights.com/

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The Nature of Trading Fees

Trading fees are the fees you pay when selling or buying a stock. There are diverse brokers who charge different levels of trading fees depending on the service they are giving. You can buy and sell stocks in one of three ways; either through your bank, or through a traditional stock broker, or through an on-line broker. The level of trading fees is an important area to consider when deciding how you are going to trade stocks or stock indexes.  Whatever the size of your investment, there will be fees and commissions involved, items such as trading fees, interest charges and broker’s commissions which can accumulate and become a sizable amount. If you are investing $1,000 and the trading fees are steep, you will need to have enough return on your investment so as to at least break even on the trade, before even making some money.

The size of the fees depends very much on how much the broker does for you. For example you might feel comfortable in doing your own research, technical analysis and fundamental analysis, therefore you would be placing a buy or sell order with the broker and that would be the maximum involvement for the broker. For such a service the bank and the stock broker would charge a similar level of fees, while the on-line broker would be less expensive. However, if you felt that you couldn’t do the research on the stocks you wanted to invest in, you could ask the bank or your stockbroker for discretionary services which means that they have your authority to buy and sell shares on your behalf without consulting you beforehand. Of course, such a service comes with very expensive fees and commissions because the stockbroker or the bank is actively managing your portfolio.

The cheapest fees are when trading through an on-line broker. This is akin to asking your traditionalstockbroker to buy and sell shares whenever you want to trade, except that you are using an on-line broker’s trading platform and completing the trade on your own over the internet.

The advantage with trading directly over the internet is that although it is an ‘execution only’ relationship with the broker, trading platforms have a wealth of information available to the investor or trader. Every trading platform comes with technical analysis tools, fundamental analysis tools in the form of economic calendars and live ticker tape news feeds and candlestick charts where the investor can track what the price action on his selected stock is. So fees charged by on-line brokers are very cheap because of the wealth of add-ons the trader/investor gets with the trading platform.  

Finally, the fees charged by brokers for index funds are cheaper than other stock broker fees simply because index funds are passively managed and therefore the broker does not need to charge as much as with actively managed assets. Except, perhaps if you hold CFD’s overnight where you will pay a finance charge, depending on the prevailing interest rates.

Source: http://www.ufxmarkets.com/

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