There are so many counters listed on an Exchange and it is so difficult for a beginner to pick what to invest in. It all depends on one’s risk adversity. As a norm, the higher the return will be a higher risk of losses. The ranking from lowest risk to the highest should be in this order:-
Ø Mutual funds > ETF > stock > warrant > option > future
Mutual Funds
These are professionally managed funds which you can purchase in units. The choice of funds will depend on the fund types. Most mutual funds invest in the stock market but there are also funds that invest in indices, commodities, bonds and so on. Although the risk is lower, there is no guarantee that each and every fund makes money. Mutual funds are traded for a longer period of return – maybe 2 to 3 years or more.
So, it is important that you read the prospectus and check out the historical price chart to ensure you buy at the lower price range and not during market peak bull. You may lose money in mutual funds if you bought during the peak period just before a recession (e.g 2007?)
Chart of China Fund
Notice the price range during end 2007 and early 2009. Though it is mutual fund, we still want to buy low and sell high.
Exchange Traded Funds (ETF)
ETF are popular in US stock exchange. In HK, there are a few ETF but most of their the volumes are not exciting. The table below lists selected ETF that are popular and optionable in USA. Of course it is not exhaustive but these ETF usually have good Open Interest in their options.
Commodities
| |
GLD
|
SPDR Gold
|
IAU
|
iShares Gold
|
OIH
|
Merrill Lynch Oil Service HOLDRS
|
SLV
|
iShares Silver
|
USO
|
United States Oil Fund LP
|
Index
| |
DIA
|
SPDR Dow Jones Industrial Average
|
EWZ
|
iShares MSCI Brazil (Free) Index
|
IWM
|
iShares Russell 2000 Index
|
IYR
|
iShares Dow Jones U.S. Real Estate Index
|
QLD
|
ProShares Ultra QQQ
|
QQQ
|
PowerShares QQQ Trust Series 1 (NASDAQ)
|
SPY
|
SPDR S&P 500
|
Sector
| |
GDX
|
Market Vectors Trust Market Vectors Gold Miners
|
SMH
|
Semiconductor HOLDRS
|
XLB
|
Select Sector SPDR Materials
|
XLE
|
Select Sector SPDR Energy
|
XLF
|
Select Sector SPDR Financial
|
XLI
|
Select Sector SPDR Industrial
|
XLK
|
Select Sector SPDR Technology
|
XLU
|
Select Sector SPDR Utilities
|
XLV
|
Select Sector SPDR Health Care
|
XLY
|
Select Sector SPDR Consumer Discretionary
|
XRT
|
SPDR S&P Retail
|
At times when the broader market is a bit volatile (meaning, one two days up and next day down), it is better to pick ETF. In earnings season (i.e. January, April, July, October) some stocks can become highly volatile and may gap down a lot. If the stock you are holding announces poor results or failure to meet estimate target profits, it may gap down and stay low for quite a while. Hence, you may consider buying ETF or its option. You can choose to buy index linked ETF or sector ETF or whichever you prefer.
Garmin Chart
About end of October 2009, Garmin’s earnings was reportedly not favourable according to the fund managers. Subsequently, the stock price plunged and took quite some time to recover.
Two of the most popular ETF in HK exchange that have reasonably good daily trading volumes:
HK ETF
| |
2823
|
BGI iShares FTSE A50 China Index ETF (安碩A50中國)
|
2800
|
SSGA Tracker Fund of Hong Kong (盈富基金)
|
Warrants
Basically 2 main types of warrants that are popular with general retail traders:-
· Company issued warrants
· Institution issued warrants
Warrants are derivatives of mother stock and quite popular instruments in Asian markets like Hong Kong and Malaysia.
1. A warrant is a transferable option certificate issued by a company which entitles the holder to buy a specific number of shares in that company at a specific price (or exercise price) at a specific time in the future. It is normally issued by the listed company.
2. A call warrant (like a call option) also gives investors a right to buy stocks in a company within a fixed period of time. However, call warrants are issued by investment banks.
3. There are many risks in buying into call warrants. Call warrants have shorter maturity period as compared to warrants. Normally, warrants have maturity period of five years or more whereas call warrants have very short maturity period of less than a year.
4. Call warrants will be automatically exercised upon the maturity date if the settlement price is higher than the exercise price.
5. A lot of call warrants are not actively traded in the market. In fact, a majority of them do not have trading volume on a daily basis.
6. The prices of call warrants are influenced by their intrinsic value and time value.
7. If the call warrants are getting nearer to their maturity date, the time value will be closer to zero. In addition, if the mother price of the listed companies is being traded at a lower price than the exercise price plus the premium that the investors have paid for the call warrant, the market price of these call warrants will fall below their original issue price. Trading volumes may be very low for some of these call warrants getting nearer to maturity date. Unfortunately, in many instances, investors get nothing upon maturity of these call warrants if their mother price fall below the exercise price.
8. Majority of the call warrants are European-styled, which means investors cannot exercise them before the maturity date.
Genting call warrant chart
This call warrant CU of Genting (casino & resort group) that will expire on 27 September 2011 with exercise price of $10.00 against the underlying share price of $10.06 (at time of capture on 12 August 2011). Notice that the warrant price now has only a small intrinsic value and very little time value left. Also, the trading volume is so insignificant.
Warrants are derivatives of stocks so DO NOT BUY & HOLD. Trade them for short term gains only.
Futures
Futures trading is very risky and can result in substantial losses if you are not familiar with it. For instance, we can buy futures contract for an index and pay only a fraction of the value. We get paid a fixed amount for every point rise in the index (if we buy long) but if we are wrong, not only our initial investment is wiped out, we have to top up to stay in. It is somewhat similar to a margin call.
So folks, choose wisely the type of investment that suit your objectives and never trade with money you cannot afford to lose and respect Mr Market (follow the charts).
|
Post
comments or ask questions and let’s learn together.
Sign up
to follow my blog.
Thanks
for visit.
|
|
Click the “comment”
word
If you have difficulties under “profile”, you may use name/URL
|
Thanks KK
ReplyDelete