Stock options are important investments to consider when you are building wealth in the stock market. The most basic definition for a stock option is a contract that allows an investor to purchase or sell a specified stock at a specified price, within a specified amount of time. Employers commonly give stock options as asset based compensation, and investors buy and sell options on the stock market to gain capital. Every stock option is characterized by the name of the stock, the strike price, the option contract expiration date and the price that was paid for the contract.
Basic Terms:
Call Options- these give the owner the right to buy a stock at a specified price, within a specified amount of time. Investors who buy call options are hoping that the stock value increases before the option expiration date.
Put Options- these give the owner the right to sell a stock at a specified price, within a specified amount of time. Investors who buy put options are hoping that the stock value decreases before the option expiration date.
Strike Price- the price that the option can be bought or sold at.
Options Investor Types: Buyers of Call Options, Sellers of Call Options, Buyers of Put Options, Sellers of Put Options
There is an important difference between the investors who buy and investors who sell options. Investors who buy puts and calls have the choice to exercise their option contracts. Investors who sell puts or calls have the obligation to exercise their options contracts.
The price of a stock option must go above the strike price for investors to exercise and make a profit on call options and the price must go below the strike price for investors to make a profit on put options. When options fall into these ranges, they are called "in the money".
Options can be used for a wide range of trading scenarios, such as:
-Reducing your risk from stock ownership
-Generating an income from stock you already hold
-Speculative trading in an up or down market
-Multi leg option strategies to take advantage of specific market action
-Volatility based strategies to take advantage of market volatility even if you do not know which way the market will go.
While is it true that options take some time to understand and to master, most people agree that once they have spent the time to properly educate themselves about options, that they are much better off for doing so.
Many stock traders I know, once learning about options have never traded a single stock again. They can make more money, and take less risk by using a properly structured option strategy.
So if anyone is still on the fence, it's definitely worth taking the time to learn about options.
Active Fund Investment Management – Do You REALLY Know the Costs?
This article looks at a very important topic:
Investing for your future
The reason I say very important is that in our experience some investors have either limited knowledge on the subject or a lack of access to enough information to help with their decision making.
When dealing with clients' money, we are very clear about the way in which we recommend they invest. This is based on a concept known as Modern Portfolio Theory, which uses passive not active funds.
NOTE: Passive funds do not employ the services of a fund manager, whereas active funds do.
Our clients are then rewarded by accepting the market return based on the risk they wish to take at a lower cost than many actively managed funds.
When meeting new clients they are often not aware of the historical failure (in terms of consistent performance) of many actively managed funds and the associated high costs.
As costs are the one thing we can control, we would normally illustrate these costs and how they eat into the real return they could expect.
Let's look a little further at these costs.
Ignoring trading costs for now (which is a cost based on how many shares the fund manager buys and sells in a year), below is an example of fixed costs of both passive and active funds.
James has existing investments made up of existing PEPs/ISAs/Unit Trusts totalling £100,000.
The advertise costs would typically be:
• Existing active annual management charge – 1.5%
• Equivalent passive annual management charge – 0.9%
What we can deduct from this is that the active manager has to grow his fund by 0.6% per annum to equal the passive fund.
However, what is missing here and what fund management companies have to show (introduced recently), are the costs to trade the shares that are incurred in any one year.
Example
The average actively managed fund trades 75% of its holdings every year, and the average passive fund trades 15%.
Taking into account the annual fixed charges above, the effect of this takes the typical charges to:
• Existing active annual total charges – 2.85%
• Equivalent passive total charges – 1.17%
This is a massive 1.68% difference!
Other Considerations
We need also to bear in mind that a lot of funds trade more than this. For example, it is not uncommon for some funds to trade 100-300% rather than the 75% average.
This takes the costs to something like 3.3% - 6.9% per annum! (some 2.1% to 5.7% above the costs of a passive fund).
Exceptions
There are exceptions to the debate though.
There are a number of actively managed funds that have delivered consistent returns over the long term. Examples are Fidelity Special Situations run by Anthony Bolton and Neil Woodford who runs the Invesco Perpetual Income and High Income funds.
However, we cannot be sure that these funds will continue to prosper in the way they have, but we can be sure they will carry the extra expenses highlighted above.
The Financial Tips Bottom Line
Actively managed funds can be expensive, especially when you take ALL costs into account. As we can see, if a fund has a high 'trading percentage' the overall costs increase significantly.
If you use active funds make sure you request this information from your fund manager(s) and review your portfolio.
Recommended Reading
There is an excellent (readable) book that has recently been released on how to invest your money. "Smarter Investing" by Tim Hale, paperback, is available at amazon for £10.99.
Investing for your future
The reason I say very important is that in our experience some investors have either limited knowledge on the subject or a lack of access to enough information to help with their decision making.
When dealing with clients' money, we are very clear about the way in which we recommend they invest. This is based on a concept known as Modern Portfolio Theory, which uses passive not active funds.
NOTE: Passive funds do not employ the services of a fund manager, whereas active funds do.
Our clients are then rewarded by accepting the market return based on the risk they wish to take at a lower cost than many actively managed funds.
When meeting new clients they are often not aware of the historical failure (in terms of consistent performance) of many actively managed funds and the associated high costs.
As costs are the one thing we can control, we would normally illustrate these costs and how they eat into the real return they could expect.
Let's look a little further at these costs.
Ignoring trading costs for now (which is a cost based on how many shares the fund manager buys and sells in a year), below is an example of fixed costs of both passive and active funds.
James has existing investments made up of existing PEPs/ISAs/Unit Trusts totalling £100,000.
The advertise costs would typically be:
• Existing active annual management charge – 1.5%
• Equivalent passive annual management charge – 0.9%
What we can deduct from this is that the active manager has to grow his fund by 0.6% per annum to equal the passive fund.
However, what is missing here and what fund management companies have to show (introduced recently), are the costs to trade the shares that are incurred in any one year.
Example
The average actively managed fund trades 75% of its holdings every year, and the average passive fund trades 15%.
Taking into account the annual fixed charges above, the effect of this takes the typical charges to:
• Existing active annual total charges – 2.85%
• Equivalent passive total charges – 1.17%
This is a massive 1.68% difference!
Other Considerations
We need also to bear in mind that a lot of funds trade more than this. For example, it is not uncommon for some funds to trade 100-300% rather than the 75% average.
This takes the costs to something like 3.3% - 6.9% per annum! (some 2.1% to 5.7% above the costs of a passive fund).
Exceptions
There are exceptions to the debate though.
There are a number of actively managed funds that have delivered consistent returns over the long term. Examples are Fidelity Special Situations run by Anthony Bolton and Neil Woodford who runs the Invesco Perpetual Income and High Income funds.
However, we cannot be sure that these funds will continue to prosper in the way they have, but we can be sure they will carry the extra expenses highlighted above.
The Financial Tips Bottom Line
Actively managed funds can be expensive, especially when you take ALL costs into account. As we can see, if a fund has a high 'trading percentage' the overall costs increase significantly.
If you use active funds make sure you request this information from your fund manager(s) and review your portfolio.
Recommended Reading
There is an excellent (readable) book that has recently been released on how to invest your money. "Smarter Investing" by Tim Hale, paperback, is available at amazon for £10.99.
Investing in Stock Options - What You Need to Know About Options
Stock options are important investments to consider when you are building wealth in the stock market. The most basic definition for a stock option is a contract that allows an investor to purchase or sell a specified stock at a specified price, within a specified amount of time. Employers commonly give stock options as asset based compensation, and investors buy and sell options on the stock market to gain capital. Every stock option is characterized by the name of the stock, the strike price, the option contract expiration date and the price that was paid for the contract.
Basic Terms:
Call Options- these give the owner the right to buy a stock at a specified price, within a specified amount of time. Investors who buy call options are hoping that the stock value increases before the option expiration date.
Put Options- these give the owner the right to sell a stock at a specified price, within a specified amount of time. Investors who buy put options are hoping that the stock value decreases before the option expiration date.
Strike Price- the price that the option can be bought or sold at.
Options Investor Types: Buyers of Call Options, Sellers of Call Options, Buyers of Put Options, Sellers of Put Options
There is an important difference between the investors who buy and investors who sell options. Investors who buy puts and calls have the choice to exercise their option contracts. Investors who sell puts or calls have the obligation to exercise their options contracts.
The price of a stock option must go above the strike price for investors to exercise and make a profit on call options and the price must go below the strike price for investors to make a profit on put options. When options fall into these ranges, they are called "in the money".
Options can be used for a wide range of trading scenarios, such as:
-Reducing your risk from stock ownership
-Generating an income from stock you already hold
-Speculative trading in an up or down market
-Multi leg option strategies to take advantage of specific market action
-Volatility based strategies to take advantage of market volatility even if you do not know which way the market will go.
While is it true that options take some time to understand and to master, most people agree that once they have spent the time to properly educate themselves about options, that they are much better off for doing so.
Many stock traders I know, once learning about options have never traded a single stock again. They can make more money, and take less risk by using a properly structured option strategy.
So if anyone is still on the fence, it's definitely worth taking the time to learn about options.
Basic Terms:
Call Options- these give the owner the right to buy a stock at a specified price, within a specified amount of time. Investors who buy call options are hoping that the stock value increases before the option expiration date.
Put Options- these give the owner the right to sell a stock at a specified price, within a specified amount of time. Investors who buy put options are hoping that the stock value decreases before the option expiration date.
Strike Price- the price that the option can be bought or sold at.
Options Investor Types: Buyers of Call Options, Sellers of Call Options, Buyers of Put Options, Sellers of Put Options
There is an important difference between the investors who buy and investors who sell options. Investors who buy puts and calls have the choice to exercise their option contracts. Investors who sell puts or calls have the obligation to exercise their options contracts.
The price of a stock option must go above the strike price for investors to exercise and make a profit on call options and the price must go below the strike price for investors to make a profit on put options. When options fall into these ranges, they are called "in the money".
Options can be used for a wide range of trading scenarios, such as:
-Reducing your risk from stock ownership
-Generating an income from stock you already hold
-Speculative trading in an up or down market
-Multi leg option strategies to take advantage of specific market action
-Volatility based strategies to take advantage of market volatility even if you do not know which way the market will go.
While is it true that options take some time to understand and to master, most people agree that once they have spent the time to properly educate themselves about options, that they are much better off for doing so.
Many stock traders I know, once learning about options have never traded a single stock again. They can make more money, and take less risk by using a properly structured option strategy.
So if anyone is still on the fence, it's definitely worth taking the time to learn about options.
Active Fund Investment Management – Do You REALLY Know the Costs?
This article looks at a very important topic:
Investing for your future
The reason I say very important is that in our experience some investors have either limited knowledge on the subject or a lack of access to enough information to help with their decision making.
When dealing with clients' money, we are very clear about the way in which we recommend they invest. This is based on a concept known as Modern Portfolio Theory, which uses passive not active funds.
NOTE: Passive funds do not employ the services of a fund manager, whereas active funds do.
Our clients are then rewarded by accepting the market return based on the risk they wish to take at a lower cost than many actively managed funds.
When meeting new clients they are often not aware of the historical failure (in terms of consistent performance) of many actively managed funds and the associated high costs.
As costs are the one thing we can control, we would normally illustrate these costs and how they eat into the real return they could expect.
Let's look a little further at these costs.
Ignoring trading costs for now (which is a cost based on how many shares the fund manager buys and sells in a year), below is an example of fixed costs of both passive and active funds.
James has existing investments made up of existing PEPs/ISAs/Unit Trusts totalling £100,000.
The advertise costs would typically be:
• Existing active annual management charge – 1.5%
• Equivalent passive annual management charge – 0.9%
What we can deduct from this is that the active manager has to grow his fund by 0.6% per annum to equal the passive fund.
However, what is missing here and what fund management companies have to show (introduced recently), are the costs to trade the shares that are incurred in any one year.
Example
The average actively managed fund trades 75% of its holdings every year, and the average passive fund trades 15%.
Taking into account the annual fixed charges above, the effect of this takes the typical charges to:
• Existing active annual total charges – 2.85%
• Equivalent passive total charges – 1.17%
This is a massive 1.68% difference!
Other Considerations
We need also to bear in mind that a lot of funds trade more than this. For example, it is not uncommon for some funds to trade 100-300% rather than the 75% average.
This takes the costs to something like 3.3% - 6.9% per annum! (some 2.1% to 5.7% above the costs of a passive fund).
Exceptions
There are exceptions to the debate though.
There are a number of actively managed funds that have delivered consistent returns over the long term. Examples are Fidelity Special Situations run by Anthony Bolton and Neil Woodford who runs the Invesco Perpetual Income and High Income funds.
However, we cannot be sure that these funds will continue to prosper in the way they have, but we can be sure they will carry the extra expenses highlighted above.
The Financial Tips Bottom Line
Actively managed funds can be expensive, especially when you take ALL costs into account. As we can see, if a fund has a high 'trading percentage' the overall costs increase significantly.
If you use active funds make sure you request this information from your fund manager(s) and review your portfolio.
Recommended Reading
There is an excellent (readable) book that has recently been released on how to invest your money. "Smarter Investing" by Tim Hale, paperback, is available at amazon for £10.99.
Investing for your future
The reason I say very important is that in our experience some investors have either limited knowledge on the subject or a lack of access to enough information to help with their decision making.
When dealing with clients' money, we are very clear about the way in which we recommend they invest. This is based on a concept known as Modern Portfolio Theory, which uses passive not active funds.
NOTE: Passive funds do not employ the services of a fund manager, whereas active funds do.
Our clients are then rewarded by accepting the market return based on the risk they wish to take at a lower cost than many actively managed funds.
When meeting new clients they are often not aware of the historical failure (in terms of consistent performance) of many actively managed funds and the associated high costs.
As costs are the one thing we can control, we would normally illustrate these costs and how they eat into the real return they could expect.
Let's look a little further at these costs.
Ignoring trading costs for now (which is a cost based on how many shares the fund manager buys and sells in a year), below is an example of fixed costs of both passive and active funds.
James has existing investments made up of existing PEPs/ISAs/Unit Trusts totalling £100,000.
The advertise costs would typically be:
• Existing active annual management charge – 1.5%
• Equivalent passive annual management charge – 0.9%
What we can deduct from this is that the active manager has to grow his fund by 0.6% per annum to equal the passive fund.
However, what is missing here and what fund management companies have to show (introduced recently), are the costs to trade the shares that are incurred in any one year.
Example
The average actively managed fund trades 75% of its holdings every year, and the average passive fund trades 15%.
Taking into account the annual fixed charges above, the effect of this takes the typical charges to:
• Existing active annual total charges – 2.85%
• Equivalent passive total charges – 1.17%
This is a massive 1.68% difference!
Other Considerations
We need also to bear in mind that a lot of funds trade more than this. For example, it is not uncommon for some funds to trade 100-300% rather than the 75% average.
This takes the costs to something like 3.3% - 6.9% per annum! (some 2.1% to 5.7% above the costs of a passive fund).
Exceptions
There are exceptions to the debate though.
There are a number of actively managed funds that have delivered consistent returns over the long term. Examples are Fidelity Special Situations run by Anthony Bolton and Neil Woodford who runs the Invesco Perpetual Income and High Income funds.
However, we cannot be sure that these funds will continue to prosper in the way they have, but we can be sure they will carry the extra expenses highlighted above.
The Financial Tips Bottom Line
Actively managed funds can be expensive, especially when you take ALL costs into account. As we can see, if a fund has a high 'trading percentage' the overall costs increase significantly.
If you use active funds make sure you request this information from your fund manager(s) and review your portfolio.
Recommended Reading
There is an excellent (readable) book that has recently been released on how to invest your money. "Smarter Investing" by Tim Hale, paperback, is available at amazon for £10.99.
Previewing High Holiday sermons; Joan Nathan on Persian Jewish holiday dishes; God and video games
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