Preferred Stock

Although it takes the name of a kind of stock, a preferred stock is widely regarded to be a form of fixed income holding.

What it is:
Preferred stock, like a common stock, pays you dividends and gives you ownership of the company. However, the dividends are usually fixed (hence a form of fixed income) and in the event of bankruptcy, preferred stockholders' claim to the company's assets have higher priority than those of common stockholders (hence 'preferred').

Who is it for:
Like a common stock, as long as you have the capital, you can invest in preferred stocks however there are exceptions. Recently, DBS Bank issued preferred stocks solely to institutional investors. You can still get around this by checking out which investment companies bought the stocks and buy into their respective Fixed Income Fund (where preferred stocks are normally found).

How can I use this knowledge:
Look at the financial pages and beam with pride when you see news of preferred stocks because now you know.

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Animal Talk

The 2 most popularly used words in the financial world are undoubtedly bull and bear. They also happen to be 2 of the most misleading terms for a layman.

When I flipped to the finance or business columns while I was a teenager, I could never figure out what is meant by a bull market or a bear run. It makes no sense to see animals in the stock markets. Take those terms literally and you could have some pretty interesting visuals.

For starters, almost everyone knows that a bull market signals good times and rising stock prices while a bear market reflects bad times and downward spiraling stock prices. However, I guess not many of you know why those animals were chosen.

My innocent mind once thought that perhaps bulls signified good luck because they mated with the cows and the cows will have more milk; while bears were bad luck because they eat people. Well, it turns out that there is a whole lot more philosophy than that.

The explanation is actually pretty intuitive.

Bulls attack by thrusting their horns up (stocks go up).

Bears attack by swiping their paws down (stocks go down).

Bet you didn't know that.

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Gettin hot around the collar!

Dear readers,

As promised, here is more information and a picture of how a collar actually looks like, hope you find it informative and allows you to better understand the previous post, and not make you all hot around the collar wondering what's going on!

Basically, a collar is an exotic derivative based on 2 different types of options, to hedge against the risk of unlimited loss but at the same time, place a cap on the maximum gains possible, creating a ceiling and floor for possible payouts, which reduces risk...

Alright! Take good care! I'll be headed out station for the next 5 days! =D

note: As with all my other posts, my aim is to provide a very VERY basic background information about various finance theories in a light hearted and palatable way so as to provide you with substance for "coffee table discussions" should the topic turn to finance. Never is any of the posts in Sense & Cents meant as investment advice, nor will it ever be!

Collar

From: optiontradingtips.com

Components

Long underlying stock/future
Short OTM call option
Long OTM put option

Risk / Reward

Maximum Loss: Limited to the difference between the two strikes less the net premium paid or received less the loss on the stock leg.

Maximum Gain: Limited to the difference between the two strikes plus the net premium paid or received plus the gain on the stock leg.

If the net premium is a credit, i.e. you received money for the option legs, then your maximum gain is the difference between the strikes plus this amount (and then plus the profit from the stock leg). If the net premium was a payment then it is subtracted from the strike differential.

Characteristics

As you can see from the above payoff chart, a collar behaves just like a long call spread.

It is suited to investors who already own the stock and are looking to:

• increase their return by writing call options
• minimize their downside risk by writing put options

Covered calls are becoming very popular strategy for investors who already own stock. They sell out-of-the-money call options at a price that they are happy to sell the stock at in return for receiving some premium upfront. If the stock doesn't trade above this level, the investor keeps the premium.

The problem with covered calls is that they have unlimited downside risk.

The solution to this is to protect the downside by buying an out-of-the-money put.

This increases the cost as you will have to outlay more to purchase the put and hence lowers your overall return.

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Bear sale!

Mr Jack commented to me that Bear Stearns might have had a chance had they changed their name to Bull Stearns~ (Bear Bull? huh? read here)
This is an article from the Star business section dated 19 March 2008, regarding the fire sale of Bear Stearns to JP morgan (Lol! I know you can read, I'm just rehashing..)

Well for me this is a big SHOCK! Why? because from my humble point of view, this is like a major nail in the coffin that is US' economy.

The US market, from my observation:

• is bearish(i.e. there is a general sentiment that the markets will be on the decline.),
  
• has a rising inflation rate(prices of essentials increase more than income),
  
• US dollar weakening(which would lead to a whole myriad of effects, which I need a whole other post to discuss!
• Campaigning for new president ongoing, not knowing how the transition of leadership would be...
  

The run on effect from the collapse of such a major institution would have an adverse impact on other banks which would lead to a credit crunch as can be seen by "interbank lending halted".

This would affect the market as credit would not be created and spending will ground to a stand still which would lead to a stagnation of the economy and which will go round and round in a vicious cycle.

In terms of socio-economic-political stability, the US is not looking too good on its feet at the moment.... For years Mr Warren Buffet has been predicting that the US bubble would burst and come crumbling down as it was way too much in debt, and while the problem was not really caused by debt, but instead of bad leveraging of bad underlying securities and giving out bad credit, this has had a run on effect on everything else.

So... What's my point?! Hmm... with the current weak USD, I'd say... Go on a holiday to new york! LA! Hollywood! Disneyland! And grab a few pairs of Levi's and Fossil watches for arbitrage profit! =D Read more ...

To Ride a Bus

The Bus (yes the one you pay a fare to get a ride, that one) is my passport to adventure. Once I plonk my ass down on the seat and play my music, I'm transported from a participant to an spectator. It detaches me from life and I seem to be watching other life stories roll past as I look out the bus window (assuming I get the window seat). It gives me a chance to reflect on the simple things in life, admiring the fluffy clouds or the hot babe that just sashayed past me (mostly admiring the babe) and it was on one such trip that I realized I've ignored the simple things of Sense n Cents.

In my previous post I blabbered on and on, thinking that I was on a roll, without caring to explain any of the financial jargons I've used. So this time, let us strip (woohoo!) to the basics. Sticking to the essence of this blog, I will neither attempt to go into details, nor will I be politically correct.

In the crazy financial markets, there are often many terms that refer to the same thing, its almost like they (crazy people working in financial markets) want to prevent anyone from understanding anything they say. To me, a bus is a bus is a bus.

Unit Trusts / Mutual Funds. There is actually a slight difference between these 2 but when most financial professionals use them interchangeably, the difference is probably not that different. Well, here's how they work. They get many money from many people in many countries. Then they buy many stocks in many companies in many countries thereby forming a fund. Finally, they put someone in charge of monitoring the fund and call him the Fund Manager.
So it achieves 2 goals for the investor (that's you). Firstly, risk is diversified (by buying so much in so many). Secondly, costs are kept low (compared to you buying that many stocks in that many countries individually). Incidentally, it also achieves 2 goals for the Fund Manager. Firstly, he gets a job. Secondly, he gets paid. Very well. Hence, mutual funds are mutually beneficial.

Stocks/ Equities/ Shares. Once again, a bus is a bus is a bus. My guess is everyone knows what stocks are, so everyone knows what equities are and so everyone knows what shares are. For the lesser-informed, buying a share of a company is buying a share of it and you get to share its profits!

There it is, stripped to its core and allow me to explain the key term of this post: The Bus. A form of transport for some, an enjoyable ride for others but when stripped to its core,

“A bus is a vehicle that runs twice as fast when you are after it as when you are in it”

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