By Lorna Tan
For the past months, many stock investors have been caught in a roller-coaster ride, no thanks to the current financial turmoil.
It is common to hear investors lamenting about how much they have sunk into the stock market, only to see the value of their stocks plummet.
If you have a stock portfolio and are bearish on where the market is heading, there are two things you can do: sell your stocks now, which may mean a loss, or just hope for the best.
Rather than do nothing, you may also want to check out the recently relaunched Straits Times Index (STI) Futures, which provide retail investors an opportunity to profit even from a falling market.
For those unfamiliar with the topic, the benchmark STI represents the performance of the top 30 stocks of the Singapore market, based on market capitalisation. They include Singapore Press Holdings, Singapore Exchange (SGX), SingTel and the local banks.
STI Futures are contracts or agreements between buyers and sellers to buy or sell the STI portfolio of 30 stocks at an agreed price (futures price) to be settled at a specific future date.
STI Futures were launched in 2000 but not many retail investors were aware of this tool. With the relaunch last Thursday, there will be firms that provide ready buy and sell prices for STI Futures. This will lead to greater liquidity of the product.
It is a useful tool for investors who wish to take a position on where the local market is heading - that is, whether they believe that the STI will trend up or down - by buying or selling STI Futures contracts.
This means trading based on broad market movements instead of single stock movements. This reduces the need for individual stock selection; your risk is also diversified over 30 stocks instead of being pegged to a single stock.
At the same time, it can help to protect you against, or help you profit from, fluctuations in the stock market.
Here are some things you need to know about STI Futures:
What is the value of one STI Futures contract?
The value of each STI Futures contract is equal to $10 multiplied by the current index trading level.
For instance, if the index is trading at 2,300, holding a futures contract will be equivalent to investing $23,000 in the stock portfolio of the 30 listed companies.
This means that when a STI Futures contract is traded, the seller has, in essence, agreed to sell $23,000 and the buyer has agreed to buy $23,000 worth of stocks, as measured by the STI.
How are STI Futures transacted?
You are not required to cough up the full payment equivalent to the contract value. But the buyer or seller must each put up an initial margin deposit with the broker in order to secure the contract.
This margin, which is decided by SGX, is typically about 5 to 15 per cent of the contract value. The prevailing initial margin is $1,625 for one contract.
The margin essentially means that the STI Futures allow the investor to trade a portfolio of 30 stocks at a mere fraction - about 5 to 15 per cent - of its value.
At the end of each trading day and all following days that your position remains open, the contract value is "marked-to-market".
Your account is credited or debited based on that day's trading session. If your margin deposit falls below a certain maintenance level - currently set at $1,300 - your broker will request additional funds to replenish your trading account. If your position generates a profit, you may withdraw any excess funds from your account.
Margin levels prescribed by SGX are based on the movement of the underlying stock market as represented by the STI. The margin levels, therefore, will fluctuate depending on the historical and prevailing movement of the STI.
Do I need to own any of the stocks included in the STI in order to trade the futures contract?
You do not need to own any stock in order to trade the STI Futures. In stock index futures trading, you do not actually deliver or receive any stocks.
How can I profit from trading the STI Futures?
Like trading stocks, the point is to buy low, sell high.
The STI Futures offer the flexibility of buying and selling in whatever order you want.
That is, you can "buy first, sell later" or you can "sell first, buy later". If you think prices are going up, you may establish a "long" (buy) position, and if you think prices are going down, you may initiate a "short" (sell) position.
In addition, with the STI comprising a portfolio of 30 stocks, you can effectively participate in the broad market movements without the hassle of stock-picking. Each index point movement has a value of $10.
In other words, you gain $10 per index point rise if you have a long position or per index point fall for a short position.
Below are two trading scenarios:
Scenario A
Day 1: You are bullish about the Singapore stock market and decide to buy a September STI Futures contract at 2,400.
Contract value = 2,400 x $10 x 1 contract = $24,000
Initial margin required (at $1,625 per lot) = $1,625
The STI rises that day.
End-of-Day 1 settlement price = 2,425
Daily marked-to-market profit = (2,425 - 2,400) x $10 x 1 = $250
You now have a paper profit of $250.
Margin account balance = $1,625 + $250 = $1,875
As you have not liquidated your contract, you have one lot of open position.
Day 2: Market rallies further to 2,438. You feel the price is good and decide to take profit, selling your September STI Futures contract at 2,438.
Daily marked-to-market profit = (2,438 - 2,425) x $10 = $130
Margin account balance = $1,875 + $130 = $2,005
Total net profit = $130 + $250 = $380
In this scenario, your bullish outlook holds and you ultimately make a net profit of $380 when you liquidate your position.
Scenario B
Day 1: You are bearish about the short-term prospects of the Singapore market and decide to sell a September STI Futures contract at 2,400.
Contract value = 2,400 x $10 x 1 contract = $24,000
Initial margin required (at $1,625 per lot) = $1,625
Contrary to your initial bearish view, the market turns bullish; the STI closes higher.
End-of-Day 1 settlement price = 2,435
Daily marked-to-market loss = (2,435 - 2,400) x $10 x 1 = $350
You now have a paper loss of $350.
Margin account balance = $1,625 - $350 = $1,275
Maintenance margin required (at $1,300 per lot) = $1,300
You have a margin call and must deposit additional funds now because your margin account balance of $1,275 is below the maintenance margin of $1,300.
You need to top up $350 to bring it back to the initial margin level of $1,625.
Day 2: The market shows a decline.
You want to cash in on this move by liquidating your position by buying a September STI Futures contract at 2,388.
Daily marked-to-market profit = (2,435 - 2,388) x $10 = $470
Total net profit = - $350 + $470 = $120
In this example, you ultimately make a net profit of $120 on Day 2 when you liquidate your position.
How long should I hold on to a position?
As stock markets can be volatile, you take advantage of price movements by getting in and out quickly. Depending on your personal preference and perspective, you may wish to adopt a short-term trading approach (taking a position for one day, one hour, or even just a few minutes); or medium-term approach (several days to several weeks); or long-term (months at a time).
What are the risks?
The initial margin deposit is relatively small compared to the contract's value. The transaction may lead to quick and substantial profits, but the reverse is true for losses too when prices do not move in the expected direction. Investors should also be mindful of margin calls if the margin account falls below the maintenance margin.
It is possible that you may lose more than the amount you have in your margin account under circumstances of extreme market movements. Investors are strongly advised by financial experts to use only excess funds that they can afford to invest.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
Tuesday, October 7, 2008
Saturday, October 4, 2008
Quote of the day
We have to have the courage to reject the health and wealth gospel absolutely. It's a false gospel.
John Stott
John Stott
Friday, October 3, 2008
God Is In Control During the Financial Crisis
October 2, 2008
The following article is located at: http://www.christianitytoday.com/ct/2008/octoberweb-only/140-42.0.html
Home > 2008 > October (Web-only) Christianity Today, October (Web-only), 2008
Speaking Out
God Is In Control During the Financial Crisis
God often uses adversity for his greatest blessings and the markets are his.
Charles Colson | posted 10/02/2008 02:33PM
Most of us have been badly shaken by the tumultuous events on Wall Street in recent weeks. If you have an IRA or some kind of retirement plan, no doubt you are licking your wounds. You may even be fearful. I understand. I have experienced those apprehensions myself.
But we need to remember that fear is always the enemy of faith. The financial markets are his. The world is his.
Here is something else to remember: God often uses adversity for his greatest blessings — in several ways in this case. Christians are called to do the best things in the worst of times.
Above all, remember this: God is on his throne. Maybe the "eat, drink, and be merry" attitude of Americans needed a little adjustment — as does the spiritually casual attitude of the church.
Accounting for disaster
The near collapse and buyout of Fannie Mae and Freddie Mac are prime examples of Washington corruption. For at least a decade, a few brave politicians have sought to reform these quasi-governmental behemoths, only to be beaten back by political powerbrokers. Why? Because, as they say, money talks.
So while the politicians were busy padding their cozy little nests, the chickens have come home to roost.
The first step in the cleanup is the massive $700 billion plan proposed by Treasury Secretary Henry Paulson and passed by the Senate Wednesday night. Of course the people who are steering this plan through Congress are the very characters who brought us this crisis. And they are already looking for political and financial goodies they can hang on to the plan.
I have got a better idea. Those who steered Fannie and Freddie into the ground should return to the taxpayers their ridiculous compensation. And if there was criminality involved—either with corrupt executives or elected leaders—then let's have some indictments.
Cost and opportunity
Meanwhile, across America folks are outraged by the government's rescue plan for the nation's financial system. I understand — $700 billion is a lot of money.
Call it sticker shock. But let's get some perspective. Some estimate that the United States will spend more than $400 billion this year alone on foreign oil. So $700 billion is less than what we will be spending on foreign oil this year and next, putting money in the pockets of the likes of Saudi Arabia (which is an exporter of extremist Wahhabi Islam) and Venezuela (whose volatile leader, Hugo Chavez, makes no bones about hating the U.S.).
As this financial crisis spreads uncertainty throughout the markets and across Main Street, there's another opportunity on the table: the opportunity we Christians have to witness to our neighbors.
How you react to this crisis — in conversations with friends, in helping a family in trouble, in how you live within your means — will speak volumes about the confidence you have in Christ and in the sovereignty of God.
What's in it for me?
On Monday, the House of Representatives surprised its leaders, the administration, and, most of all, the financial community by rejecting the agreed-upon financial rescue plan.
Two-thirds of all Republicans and two-fifths of all Democrats voted against the plan, with predictable results. The markets tanked around the world.
Now to be sure, some opposed the rescue measure on principle. But many who voted against the bill merely reflected the will of their constituencies, who wondered why their money should be used to take other people off the hook.
I can't help but think this illustrates how far we have gone down the path of viewing all politics and all of life as "what's in it for me."
No great civilization has ever been built, or maintained, on that basis. That idea cannot demand, much less inspire, the necessary sacrifices to keep a civilization great, or even healthy. There's nothing to aspire to apart from fleeting self-satisfaction.
I respect the principled opposition to the rescue plan by some members. But the fate of the economy is hanging in the balance. If the American people can't look beyond the "me" and see the "we" with this much at stake, then much more than our retirement funds and our bank accounts are at risk.
Consumption and crisis
The financial crisis was precipitated by the meltdown of the sub-prime mortgage market. Millions of Americans took out mortgages they could not afford to buy houses that in some cases they really didn't need.
But it's not just the sub-prime mess. The personal debt of Americans is at record levels, and everything from the war in Iraq to Katrina recovery is funded by borrowing. Both political parties are quick to promise specific "goodies," such as new entitlements or tax cuts or new roads, but they never say how they are going to pay for them.
The answer, of course, is that they haven't a clue, other than to borrow from foreigners and then stick our children and grandchildren with the bill for some future day.
So first, we put our own houses in order. Next, we demand that our political leaders stop behaving like Santa Claus, or shopaholics in an outlet mall. In fact, I am tempted to say that we ought to be voting for the candidates who promise us the least goodies and tell us the hard truth: that we have to start acting responsibly.
Playing it SAFE
Once we get past this crisis, as we will, we are still a long way from getting our economic house in order. The problem is that we — politicians and those of us who demand they deliver the goods — have lost the political will to make the choices necessary to live within our means.
Congressman Frank Wolf of Virginia has proposed the creation of a bipartisan blue-ribbon commission called SAFE: Securing America's Future Economy. The SAFE Commission would identify the things we can afford and the things we can't afford. It would examine entitlements in a way that politicians seeking re-election dare not.
As it is, the nation's economy is in for a rough ride. But we may also be in the midst of what is called a "teachable moment." We ought to take advantage of it and show the world that we have the civic courage to do what is right.
Charles Colson is a Christianity Today columnist and founder of Prison Fellowship Ministries. This article is adapted from a series of radio commentaries for PFM'sBreakPoint. Excerpted with permission of PFM.
Copyright © 2008 Christianity Today. Click for reprint information.
Related Elsewhere:
Al Mohler also wrote "A Christian View of the Economic Crisis."
Christianity Today has special sections on the economic crisis and money & business.
The following article is located at: http://www.christianitytoday.com/ct/2008/octoberweb-only/140-42.0.html
Home > 2008 > October (Web-only) Christianity Today, October (Web-only), 2008
Speaking Out
God Is In Control During the Financial Crisis
God often uses adversity for his greatest blessings and the markets are his.
Charles Colson | posted 10/02/2008 02:33PM
Most of us have been badly shaken by the tumultuous events on Wall Street in recent weeks. If you have an IRA or some kind of retirement plan, no doubt you are licking your wounds. You may even be fearful. I understand. I have experienced those apprehensions myself.
But we need to remember that fear is always the enemy of faith. The financial markets are his. The world is his.
Here is something else to remember: God often uses adversity for his greatest blessings — in several ways in this case. Christians are called to do the best things in the worst of times.
Above all, remember this: God is on his throne. Maybe the "eat, drink, and be merry" attitude of Americans needed a little adjustment — as does the spiritually casual attitude of the church.
Accounting for disaster
The near collapse and buyout of Fannie Mae and Freddie Mac are prime examples of Washington corruption. For at least a decade, a few brave politicians have sought to reform these quasi-governmental behemoths, only to be beaten back by political powerbrokers. Why? Because, as they say, money talks.
So while the politicians were busy padding their cozy little nests, the chickens have come home to roost.
The first step in the cleanup is the massive $700 billion plan proposed by Treasury Secretary Henry Paulson and passed by the Senate Wednesday night. Of course the people who are steering this plan through Congress are the very characters who brought us this crisis. And they are already looking for political and financial goodies they can hang on to the plan.
I have got a better idea. Those who steered Fannie and Freddie into the ground should return to the taxpayers their ridiculous compensation. And if there was criminality involved—either with corrupt executives or elected leaders—then let's have some indictments.
Cost and opportunity
Meanwhile, across America folks are outraged by the government's rescue plan for the nation's financial system. I understand — $700 billion is a lot of money.
Call it sticker shock. But let's get some perspective. Some estimate that the United States will spend more than $400 billion this year alone on foreign oil. So $700 billion is less than what we will be spending on foreign oil this year and next, putting money in the pockets of the likes of Saudi Arabia (which is an exporter of extremist Wahhabi Islam) and Venezuela (whose volatile leader, Hugo Chavez, makes no bones about hating the U.S.).
As this financial crisis spreads uncertainty throughout the markets and across Main Street, there's another opportunity on the table: the opportunity we Christians have to witness to our neighbors.
How you react to this crisis — in conversations with friends, in helping a family in trouble, in how you live within your means — will speak volumes about the confidence you have in Christ and in the sovereignty of God.
What's in it for me?
On Monday, the House of Representatives surprised its leaders, the administration, and, most of all, the financial community by rejecting the agreed-upon financial rescue plan.
Two-thirds of all Republicans and two-fifths of all Democrats voted against the plan, with predictable results. The markets tanked around the world.
Now to be sure, some opposed the rescue measure on principle. But many who voted against the bill merely reflected the will of their constituencies, who wondered why their money should be used to take other people off the hook.
I can't help but think this illustrates how far we have gone down the path of viewing all politics and all of life as "what's in it for me."
No great civilization has ever been built, or maintained, on that basis. That idea cannot demand, much less inspire, the necessary sacrifices to keep a civilization great, or even healthy. There's nothing to aspire to apart from fleeting self-satisfaction.
I respect the principled opposition to the rescue plan by some members. But the fate of the economy is hanging in the balance. If the American people can't look beyond the "me" and see the "we" with this much at stake, then much more than our retirement funds and our bank accounts are at risk.
Consumption and crisis
The financial crisis was precipitated by the meltdown of the sub-prime mortgage market. Millions of Americans took out mortgages they could not afford to buy houses that in some cases they really didn't need.
But it's not just the sub-prime mess. The personal debt of Americans is at record levels, and everything from the war in Iraq to Katrina recovery is funded by borrowing. Both political parties are quick to promise specific "goodies," such as new entitlements or tax cuts or new roads, but they never say how they are going to pay for them.
The answer, of course, is that they haven't a clue, other than to borrow from foreigners and then stick our children and grandchildren with the bill for some future day.
So first, we put our own houses in order. Next, we demand that our political leaders stop behaving like Santa Claus, or shopaholics in an outlet mall. In fact, I am tempted to say that we ought to be voting for the candidates who promise us the least goodies and tell us the hard truth: that we have to start acting responsibly.
Playing it SAFE
Once we get past this crisis, as we will, we are still a long way from getting our economic house in order. The problem is that we — politicians and those of us who demand they deliver the goods — have lost the political will to make the choices necessary to live within our means.
Congressman Frank Wolf of Virginia has proposed the creation of a bipartisan blue-ribbon commission called SAFE: Securing America's Future Economy. The SAFE Commission would identify the things we can afford and the things we can't afford. It would examine entitlements in a way that politicians seeking re-election dare not.
As it is, the nation's economy is in for a rough ride. But we may also be in the midst of what is called a "teachable moment." We ought to take advantage of it and show the world that we have the civic courage to do what is right.
Charles Colson is a Christianity Today columnist and founder of Prison Fellowship Ministries. This article is adapted from a series of radio commentaries for PFM'sBreakPoint. Excerpted with permission of PFM.
Copyright © 2008 Christianity Today. Click for reprint information.
Related Elsewhere:
Al Mohler also wrote "A Christian View of the Economic Crisis."
Christianity Today has special sections on the economic crisis and money & business.
Thursday, October 2, 2008
The layman's finance crisis glossary
The current financial crisis has thrown terminology from the business pages onto the front page of newspapers, with jargon now abounding everywhere from the watercooler to the back of a taxi.
Here is a guide to many of the business terms currently cropping up regularly, as well as some of the more exotic words coined to describe some of the social effects of the credit crunch.
Readers can send any terms they need explaining using the form at the bottom.
A-C
Administration
A rescue mechanism for UK companies in severe trouble. It allows them to continue as a going concern, under supervision, effectively to try to trade out of difficulty.
A firm in administration cannot be wound up without permission from a court.
Bear market
In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.
Bond
A debt security - or more simply an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. Banks and investors buy and trade bonds.
Bull market
A bull market is one in which prices are generally rising and investor confidence is high.
Chapter 11
The term for bankruptcy protection in the US. It postpones a company's obligations to its creditors, giving it time to reorganise its debts or sell parts of the business, for example.
Commodities
Commodities are products that, in their basic form, are all the same so it makes little difference from whom you buy them.
That means that they have a market price. You would be unlikely to pay more for iron ore from a particular mine, for example.
Credit crunch
The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had.
This in turn resulted in more expensive loans and mortgages for ordinary people.
Credit default swap
A swap designed to transfer credit risk. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default.
A bank which owns a lot of mortgage debt could swap it, but would have to make a pay-out if those mortgages were not repaid.
D-F
Derivatives
Derivatives are a way of investing in a particular product or security without having to own it. The value can depend on anything from the price of coffee to interest rates or what the weather is like.
Derivatives can be used as insurance to limit the risk of a particular investment.
Credit derivatives are based on the risk of borrowers defaulting on their loans, such as mortgages.
Equity
In a business, equity is how much all of the shares put together are worth.
In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.
Fakeaway
A home-made, belt-tightening version of a takeaway - think, a curry made with a jar of sauce, bag of rice and a packet of poppadoms from the supermarket.
Futures
A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity.
H-K
Hedge fund
A private investment fund with a large, unregulated pool of capital and very experienced investors.
Hedge funds use a range of sophisticated strategies to maximise returns - including hedging, leveraging and derivatives trading.
Hedging
Making an investment to reduce the risk of price fluctuations to the value of an asset.
For example, if you owned a stock and then sold a futures contract agreeing to sell your stock on a particular date at a set price. A fall in price would not harm you - but nor would you benefit from any rise.
Hypermiling
Techniques used by drivers to get more miles to the gallon, such as coasting in neutral and keeping tyre pressure high.
Investment bank
Investment banks provide financial services for governments, companies or extremely rich individuals. They differ from commercial banks where you have your savings or your mortgage.
L-P
Leveraging
Leveraging, or gearing, means using debt to supplement investment.
The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.
Deleveraging means reducing the amount you are borrowing.
Libor
London Inter Bank Offered Rate. The rate at which banks lend money to each other.
Liquidity
The liquidity of something is how easy it is to convert it into cash. Your current account, for example, is more liquid than your house.
If you needed to sell your house quickly to pay bills you would have drop the price substantially to get a sale.
Loans to deposit ratio
For financial institutions, the sum of their loans divided by the sum of their deposits.
Currently important because using other sources to fund lending is getting more expensive.
Mark-to-market
Recording the value of an asset on a daily basis according to current market prices.
So for a futures contract, what it would be worth if realised today rather than at the specified future date. Also marked-to-market.
Negative equity
Refers to a situation in which the value of your house is below the amount of the mortgage that still has to be paid off.
Profit warning
When a company issues a statement indicating that its profits will not be as high as it had expected. Also profits warning .
R-T
Rating
Bonds are rated according to their safety from an investment standpoint - based on the ability of the company or government that has issued it to repay.
Ratings range from AAA, the safest, down to D, a company that has already defaulted.
Recessionista
A person who manages to look fashionable on a tight budget.
Securitisation
Turning something into a security . For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded.
Banks who buy these securities receive income when the original home-buyers make their mortgage payments.
Security
Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example.
Short selling
A technique used by investors who think the price of an asset, such as shares, currencies or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market.
The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference. Also shorting .
Spiv
A term popularised in World War II for flashily-dressed chancers involved in black market dealings. A fictional spiv is ladies' man Private Joe Walker in Dad's Army.
Newspaper headline writers use "spiv" as shorthand for traders who play for high stakes.
Stagflation
The dreaded combination of inflation and stagnation - an economy that is not growing while prices continue to rise.
Staycation
Staying at home for your holiday in a bid to save money.
Sub-prime mortgages
These carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes.
Swap
An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate and one in another country has a lower floating interest rate, an interest rate swap could be mutually beneficial.
U-Z
Unwind
To unwind a deal is to reverse it - to sell something that you have previously bought, or vice versa.
When administrators are called in to a bank, they must do the unwinding before creditors can get any money back.
Write-down
Reducing the book value of an asset to reflect a fall in its market value. For example, the write-down of a company's value after a big fall in share prices.
Send us the bits of jargon that you think need explaining using the form below.
Name
Your e-mail address
Town/city and country
Your comment
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/magazine/7642138.stm
Published: 2008/09/29 16:30:23 GMT
© BBC MMVIII
Here is a guide to many of the business terms currently cropping up regularly, as well as some of the more exotic words coined to describe some of the social effects of the credit crunch.
Readers can send any terms they need explaining using the form at the bottom.
A-C
Administration
A rescue mechanism for UK companies in severe trouble. It allows them to continue as a going concern, under supervision, effectively to try to trade out of difficulty.
A firm in administration cannot be wound up without permission from a court.
Bear market
In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.
Bond
A debt security - or more simply an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. Banks and investors buy and trade bonds.
Bull market
A bull market is one in which prices are generally rising and investor confidence is high.
Chapter 11
The term for bankruptcy protection in the US. It postpones a company's obligations to its creditors, giving it time to reorganise its debts or sell parts of the business, for example.
Commodities
Commodities are products that, in their basic form, are all the same so it makes little difference from whom you buy them.
That means that they have a market price. You would be unlikely to pay more for iron ore from a particular mine, for example.
Credit crunch
The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had.
This in turn resulted in more expensive loans and mortgages for ordinary people.
Credit default swap
A swap designed to transfer credit risk. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default.
A bank which owns a lot of mortgage debt could swap it, but would have to make a pay-out if those mortgages were not repaid.
D-F
Derivatives
Derivatives are a way of investing in a particular product or security without having to own it. The value can depend on anything from the price of coffee to interest rates or what the weather is like.
Derivatives can be used as insurance to limit the risk of a particular investment.
Credit derivatives are based on the risk of borrowers defaulting on their loans, such as mortgages.
Equity
In a business, equity is how much all of the shares put together are worth.
In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.
Fakeaway
A home-made, belt-tightening version of a takeaway - think, a curry made with a jar of sauce, bag of rice and a packet of poppadoms from the supermarket.
Futures
A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity.
H-K
Hedge fund
A private investment fund with a large, unregulated pool of capital and very experienced investors.
Hedge funds use a range of sophisticated strategies to maximise returns - including hedging, leveraging and derivatives trading.
Hedging
Making an investment to reduce the risk of price fluctuations to the value of an asset.
For example, if you owned a stock and then sold a futures contract agreeing to sell your stock on a particular date at a set price. A fall in price would not harm you - but nor would you benefit from any rise.
Hypermiling
Techniques used by drivers to get more miles to the gallon, such as coasting in neutral and keeping tyre pressure high.
Investment bank
Investment banks provide financial services for governments, companies or extremely rich individuals. They differ from commercial banks where you have your savings or your mortgage.
L-P
Leveraging
Leveraging, or gearing, means using debt to supplement investment.
The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.
Deleveraging means reducing the amount you are borrowing.
Libor
London Inter Bank Offered Rate. The rate at which banks lend money to each other.
Liquidity
The liquidity of something is how easy it is to convert it into cash. Your current account, for example, is more liquid than your house.
If you needed to sell your house quickly to pay bills you would have drop the price substantially to get a sale.
Loans to deposit ratio
For financial institutions, the sum of their loans divided by the sum of their deposits.
Currently important because using other sources to fund lending is getting more expensive.
Mark-to-market
Recording the value of an asset on a daily basis according to current market prices.
So for a futures contract, what it would be worth if realised today rather than at the specified future date. Also marked-to-market.
Negative equity
Refers to a situation in which the value of your house is below the amount of the mortgage that still has to be paid off.
Profit warning
When a company issues a statement indicating that its profits will not be as high as it had expected. Also profits warning .
R-T
Rating
Bonds are rated according to their safety from an investment standpoint - based on the ability of the company or government that has issued it to repay.
Ratings range from AAA, the safest, down to D, a company that has already defaulted.
Recessionista
A person who manages to look fashionable on a tight budget.
Securitisation
Turning something into a security . For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded.
Banks who buy these securities receive income when the original home-buyers make their mortgage payments.
Security
Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example.
Short selling
A technique used by investors who think the price of an asset, such as shares, currencies or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market.
The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference. Also shorting .
Spiv
A term popularised in World War II for flashily-dressed chancers involved in black market dealings. A fictional spiv is ladies' man Private Joe Walker in Dad's Army.
Newspaper headline writers use "spiv" as shorthand for traders who play for high stakes.
Stagflation
The dreaded combination of inflation and stagnation - an economy that is not growing while prices continue to rise.
Staycation
Staying at home for your holiday in a bid to save money.
Sub-prime mortgages
These carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes.
Swap
An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate and one in another country has a lower floating interest rate, an interest rate swap could be mutually beneficial.
U-Z
Unwind
To unwind a deal is to reverse it - to sell something that you have previously bought, or vice versa.
When administrators are called in to a bank, they must do the unwinding before creditors can get any money back.
Write-down
Reducing the book value of an asset to reflect a fall in its market value. For example, the write-down of a company's value after a big fall in share prices.
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Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/magazine/7642138.stm
Published: 2008/09/29 16:30:23 GMT
© BBC MMVIII
Wednesday, September 10, 2008
5 Reasons a Recession Can Be a Good Thing
Steve Scalici, CFP
Treasure Coast Financial
If there’s one thing we can’t avoid these days, it’s bad news about the economy. As a financial planner, it’s all anyone wants to talk to me about. Of course, when everything is going well, everyone wants to talk about how well they’re doing. I guess it’s part of my job. No matter how hard I try, I can’t seem to get away from the negative news. Headlines scream “high gas prices,” ”high unemployment,” ”a weak dollar” or the R-word: “recession.” No one wants any of that, of course. As I write this, we are not officially in a “recession,” but it sure feels like one. Recessions aren’t all bad news. In fact, here are five ways a recession can actually be a good thing, according to MSN:
You’ll have more time to spend with your family. Research shows that recessions foster more family mealtimes – as the budget for other activities dries up. Meals eaten as a family tend to promote a healthier diet, fewer eating disorders, better communication, and a lower risk of teenage substance abuse. A simple way to connect with your kids is eating together as a family. This is easy to do when they're little, but as kids get older, sports and other activities compete with the family mealtime.
Our family is committed to sharing dinner together. We play a game called “high-low.” Each of us tells a highlight and a lowlight from the day. Usually someone's highlight or lowlight is a springboard for other discussion. We also play the “story game” where someone starts the story with one word and we go around the table and each person shares one word to make the story come to life. We may go around five or six times to get a good short story. We find this helps with our kids’ vocabulary and their wittiness. Our goal is to make the stories funny and they often end up that way.
The improved relationship with your family that may result is definitely worth any financial cost. Ask anyone who is estranged from their adult children and they will tell you they’d give anything to get back into their kids’ lives.
Start that business you’ve always wanted to. Think about it: Right now, wages are low, rents are cheap, and supplies are easy to find at a discount. Plus, many recently fired executives are more likely to invest their money in new businesses. Consider this: More than half of the companies on the Dow Jones stock exchange – including Microsoft, Hewlett-Packard and Disney – all got started during recessions. Not to be flippant about it, but if you have recently lost your job or have had to take a pay cut, it may be the final straw that forces your hand and finally gives you a good enough reason to start that business you have always wanted to start. Trying to find a job in this market may prove futile so why not create your own?
Fewer credit card offers. A recent study found that direct mail offers for new credit cards have dropped 19%. The temptation for you to use credit is drastically reduced which will have a positive long term impact on your finances. In Ron Blue’s book, Master Your Money, he says that the average consumer spends 34% more when using credit cards over cash. And get this: according to Sound Money Tips.com, McDonald's found that the average customer transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. That’s a lot of pressure on our wallets (especially from the extra weight we’ll be carrying as we eat more McDonald’s).
Prepare to see more coupons. One survey found that 67% of North Americans are more likely to clip coupons during a recession. Grocery stores are already leading the charge – offering more discounts through newspaper circulars, and through online coupon sites. People who take advantage of all those coupons can save an average of 25% on their grocery bill. Also, a lot of restaurants are known to offer more “buy-one, get-one-free” deals in tough times. Use this time to catapult you into the next economic boom time. When the economy turns positive, continue to clip coupons and be thrifty. As I mentioned in last month’s article, the same basic principles that work in tough economic times work in good economic times as well. Clipping coupons and deal hunting are guaranteed ways to help you spend less money.
It’s a great time to reassess your life! It’s amazing how easy it is to refocus on your true passions when money gets tight. Like: Do you really need that fancy new cell phone with all the gizmos? Do you really need a plasma TV (or one in every room)? Or are you better off channeling your savings into fulfilling a dream? This is gut check time. Decide now what kind of person you want to be. Do you want to be someone whose happiness depends on the size of his bank account? Or would you rather be someone whose happiness comes from more important things such as faith and family?
Matthew recorded Jesus’ words in Matthew 6:34: "So don't worry about tomorrow, for tomorrow will bring its own worries. Today's trouble is enough for today.” When you have your priorities in place, it is amazing how easy it is to not worry about tomorrow.
Steve Scalici is a Certified Financial PlannerTM with Treasure Coast Financial. He is co-host of God’s Money, which can be heard on the internet at www.oneplace.com . You can contact Steve at steve@tcfin.com .
Treasure Coast Financial
If there’s one thing we can’t avoid these days, it’s bad news about the economy. As a financial planner, it’s all anyone wants to talk to me about. Of course, when everything is going well, everyone wants to talk about how well they’re doing. I guess it’s part of my job. No matter how hard I try, I can’t seem to get away from the negative news. Headlines scream “high gas prices,” ”high unemployment,” ”a weak dollar” or the R-word: “recession.” No one wants any of that, of course. As I write this, we are not officially in a “recession,” but it sure feels like one. Recessions aren’t all bad news. In fact, here are five ways a recession can actually be a good thing, according to MSN:
You’ll have more time to spend with your family. Research shows that recessions foster more family mealtimes – as the budget for other activities dries up. Meals eaten as a family tend to promote a healthier diet, fewer eating disorders, better communication, and a lower risk of teenage substance abuse. A simple way to connect with your kids is eating together as a family. This is easy to do when they're little, but as kids get older, sports and other activities compete with the family mealtime.
Our family is committed to sharing dinner together. We play a game called “high-low.” Each of us tells a highlight and a lowlight from the day. Usually someone's highlight or lowlight is a springboard for other discussion. We also play the “story game” where someone starts the story with one word and we go around the table and each person shares one word to make the story come to life. We may go around five or six times to get a good short story. We find this helps with our kids’ vocabulary and their wittiness. Our goal is to make the stories funny and they often end up that way.
The improved relationship with your family that may result is definitely worth any financial cost. Ask anyone who is estranged from their adult children and they will tell you they’d give anything to get back into their kids’ lives.
Start that business you’ve always wanted to. Think about it: Right now, wages are low, rents are cheap, and supplies are easy to find at a discount. Plus, many recently fired executives are more likely to invest their money in new businesses. Consider this: More than half of the companies on the Dow Jones stock exchange – including Microsoft, Hewlett-Packard and Disney – all got started during recessions. Not to be flippant about it, but if you have recently lost your job or have had to take a pay cut, it may be the final straw that forces your hand and finally gives you a good enough reason to start that business you have always wanted to start. Trying to find a job in this market may prove futile so why not create your own?
Fewer credit card offers. A recent study found that direct mail offers for new credit cards have dropped 19%. The temptation for you to use credit is drastically reduced which will have a positive long term impact on your finances. In Ron Blue’s book, Master Your Money, he says that the average consumer spends 34% more when using credit cards over cash. And get this: according to Sound Money Tips.com, McDonald's found that the average customer transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. That’s a lot of pressure on our wallets (especially from the extra weight we’ll be carrying as we eat more McDonald’s).
Prepare to see more coupons. One survey found that 67% of North Americans are more likely to clip coupons during a recession. Grocery stores are already leading the charge – offering more discounts through newspaper circulars, and through online coupon sites. People who take advantage of all those coupons can save an average of 25% on their grocery bill. Also, a lot of restaurants are known to offer more “buy-one, get-one-free” deals in tough times. Use this time to catapult you into the next economic boom time. When the economy turns positive, continue to clip coupons and be thrifty. As I mentioned in last month’s article, the same basic principles that work in tough economic times work in good economic times as well. Clipping coupons and deal hunting are guaranteed ways to help you spend less money.
It’s a great time to reassess your life! It’s amazing how easy it is to refocus on your true passions when money gets tight. Like: Do you really need that fancy new cell phone with all the gizmos? Do you really need a plasma TV (or one in every room)? Or are you better off channeling your savings into fulfilling a dream? This is gut check time. Decide now what kind of person you want to be. Do you want to be someone whose happiness depends on the size of his bank account? Or would you rather be someone whose happiness comes from more important things such as faith and family?
Matthew recorded Jesus’ words in Matthew 6:34: "So don't worry about tomorrow, for tomorrow will bring its own worries. Today's trouble is enough for today.” When you have your priorities in place, it is amazing how easy it is to not worry about tomorrow.
Steve Scalici is a Certified Financial PlannerTM with Treasure Coast Financial. He is co-host of God’s Money, which can be heard on the internet at www.oneplace.com . You can contact Steve at steve@tcfin.com .
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