Money and Investing

[youngdan]

I think I will start a thread on the issue of money and investing. With all the people that bitch and moan about greedy capitalists, they should realise that they can become greedy capitalists themselves by simple buying a few shares of whichever company they fancy from the 10s of thousands that are listed and traded worldwide. Then they will make or lose exactly the same percentage of their stake as Buffet. To give a bit of pep to the proceedings I will use real money rather than the numerous sites that offer a fantasy portfoliofor fun and training. I will be using TDAmeritrade which is a discount brokerage. I will be mostly using options. These I will explain presently. They are very very volutile and most lose their shirts in pretty quick time. I hope some people join with comments and advice

[Scolaire Bocht]

This is definitely interesting... So like people here say you should invest in x or y stock and you will in real life make a small nominal investment in it or?...

Well if there is some kind of option available to predict oil prices I will say they will double this year, so that would be my investment advice anyways.

I won a kind of PDA device in a fantasy share competition in the Irish Independent ages ago, but that was easy enough because since I knew there were thousands on it I just aimed to increase volatility, knowing that only a violent swing in the shares had any chance of winning anything.

Anyways hopefully people will throw in their tuppence worth and as regards real investment advice I would say the same thing, you should get those large diesel tanks and stock them up with gallons of dielsel and hence ride out the price hike.

[youngdan]

Well in practical terms if anyone was interested there then they themselves could invest a bit in the same things as I did, assuming of course that I was not losing my shirt. What I would be doing would not be conservative by any means. I would be selling options, a very high risk speculation. I am usually a buyer of options which is even more riskier. What you would need there is a discount broker which allows you to trade NY shares and options. A simple non margin account like I will be using myself. This means I can't be "naked". Maybe get a group of people together and form an investment club. If nothing else, it is relatively cheap entertainment.

I mentioned this to another person today and he thought it a great idea. I will be asking some lads if they are interested for 200 each. These are just regular people that might wish to learn about how the markets work. It might take me 2 weeks to get this organised and ready to go, taking into account funds are on hold for a few days. I will be back presently to explain options, they really are very simple. They are derivatives, this simple means that their value is derived from the value of something else. In this case the value of the stock option is derived from the value of the stock. There being a huge multiplying effect involved in the changing values of both

[Scolaire Bocht]

I am sorry I didn't know how you were going to do it but sounds good. Personally I think ye will all lose the 200 dollars in jig time in the current environment, but that will only add to the excitement! So what will you invest in can I ask or?

[youngdan]

I should hope to lose it slower than that

[youngdan]

Options on stocks are easy to understand. It is, as the name implies, just the option to either buy or sell the stock in the future at a certain price called the strike price and before a certain date called the expiration date. It is called the expiration date because your option dies that day so unless the stock moved in the direction that you hoped and enough to get to the strike price then you are out of luck and your option is worthless.
It is best to take an example. Today IBM closed at 107.61 dollars a share. If you believe it is going higher then you can guess for yourself how much higher and how long timewise before it gets there because if it gets there after the expiration date you still lose. However the more time you give yourself the more expensive the option is. Also the further away the price strike is, then the less expensive the option is because the less chance the stock has of rising that much in the time period chosen. These options that depend on the stock rising are called "Calls". So an optimist will buy the Call. Say he believes IBM will go to 220 in 5 months. He buys 1 Call Contract for 1.71 dollars. One contract covers 100 shares so his cost is 171 dollars. He has bought the option off someone else to buy 100 shares of IBM at 220 dollars a share at any time up to July. He starts making money once IBM gets above 220(less the 171 spent). If IBM gets to 225 then he can force whoever sold the contract to sell him 100 shares of IBM at 220 dollars even though they are worth 225 dollars so the option is worth 500 dollars. If it goes to 260 dollars a share, then the contract is worth 4000 dollars. If it went to 300 dollars a share the contract is worth 8000 dollars. What usually happens of course is that IBM does not get to 220 a share and the gambler loses his 171 dollars he paid for the option. If it only gets to 115 then the gambler is sorry he did not pick a strike price of 110 which would have cost 415 dollars today and he would have made 85 dollars net. If after his time has expired it gets to 220 it is also a sickener and he is kicking himself for not paying more and buying more time.

The person that sells the option takes the opposing view. He believes the stock will not get to 220 and sells the option which forces him to sell 100 shares to the other lad at a price of 220. As long as the price stays below that till the time runs out he is happy. His profit is limited to the 171 dollars he got for the contract. His loss though is not limited and could in a worst case scenario be huge. If Ibm shot up to 300 dollars he was in a prediciment as he is obliged to deliver 100 shares at 220. If he own 100 shares they are "called" away from him at 220 and sold to the other guy and he is down 8000 dollars. If he has the shares he is "covered" and the seller sold a "covered call". If the poor fool does not have the 100 shares he is said to have sold a "naked call". So he has to buy the share at for 30000 dollars and sell them to the other lad for 22000 dollars.

Those are calls because the shared can be called away. The optimist buys calls and the pessimist sells(or writes) call.

The opposite is a "PUT". a PUT is a contract forcing a person to buy 100 shares of IBM at an agreed price before an agreed time. Obviousely these are of value only if the price falls below the strike price. In this case the pessimist will buy a put and the optimist will sell or write the put. The pessimist might believe that IBM will fall below say 140 before July. One contract covering 100 shares will cost 2.12 for a total of 212 dollars. If it goes below 140 he can "put" 100 shares to the other lad and force him to buy at 140 dollars a share. If the price of IBM in July is 130 then his contract is worth 1000 dollars. If it is trading at 100 dollars a share then the contract is worth 4000 dollars. If IBM is trading at 150 dollars a share 150 the contract is worth nothing. Which again is usually what happens.

So there are 4 possible actions.
1. A lad can buy a call, hoping for the stock to rise. His cost is the price of the option(171 dollars) and his profit if any depends on how much it rises above 220 dollars a share in this case.

2. A lad can sell the call. His potential profit is limited(171 dollars) but his potential loss could be huge if IBM rocketed

3. A lad could buy a put. His cost is limited to the price of the contract(212 dollars) His potential profit is known. He hopes the share price goes to zero and he would PUT 100 shares to the other lad and he would have to pay 140 dollars a share for a profit of 14000 dollars.
4. A lad could sell the put. His potential profit is 212 dollars and his worst possible loss is 14000 dollars. If he is to have a covered position he must have 14000 dollars in his account, frozen, till the contract expires.

At any time between now and July, the buyer can sell his contract for whatever it is worth. Likewise if it is going against the seller he might decide to cut his losses and buy back the contract he sold and take the loss.

That is the simple explanation of options

[stange84]

Truly very useful information on investments. Couple of months ago, came to know about a personal financial advisor Las Vegas and hired a perfect one who explained all the pros and cons about this investment. It really helped me a lot.