stocks – Miro Zecevic

What Are Financial Derivatives?

March 22, 2022 mirozecevicmmg

What is a derivative?

A financial instrument based on another asset is known as a derivative. Stock options and commodities futures are two of the most common examples of derivatives, and you’ve definitely heard of them but aren’t sure how they operate.
Derivatives allow consumers the option — but not the duty — to acquire or sell an underlying asset at a later date. The underlying asset and the period until the contract expires determine the derivative’s value.

How Financial Derivatives Work

Financial derivatives are financial products whose value is determined by one or more underlying financial assets, such as stocks, bonds, commodities, currencies, or interest rates.

Investors engage in contracts with stated terms, such as the period of the contract and the consequent values and definitions of the underlying assets, to purchase and sell derivatives.

Futures, options, swaps, and forwards are examples of financial derivatives. Futures and options are often traded on the CME, which is one of the world’s major derivatives marketplaces. Swaps and forwards are traded on an over-the-counter (OTC).

Derivative Regulations

The SEC and the CFTC regulate financial derivatives in the United States. FINRA regulates the parties engaged in financial derivative contracts.

Ways Derivatives Are Used

Derivatives are rarely used as part of a long-term buy-and-hold strategy due to their complexity.

Derivatives are used for:

Hedging: To limit losses, an investor can use derivatives. For example, if an investor is concerned about a rapid drop in the price of security they own, they can buy put options, which can benefit if the price of the security drops, thereby offsetting the loss of the other asset.

Leverage: Financial leverage may be achieved by using derivatives to boost the returns of an underlying asset or index.

Speculation: If an investor feels the price of an asset will move dramatically in one way, they can utilize a derivative to profit from the projected price movement.

Access to complex assets: Financial derivatives can give an investor indirect access to assets or markets that would be difficult to access otherwise.

4 Derivative Investment Types

The four main types of derivatives are futures, options, forwards, and swaps. Common types of underlying assets within these derivative types include stocks, bonds, commodities, bonds, interest rates, currencies, and cryptocurrency.

The four main types of derivatives are:

Futures
Futures are financial derivatives that include a contract between two parties to exchange an asset at a certain price and date in the future. Regardless of the prevailing market price at the time the contract expires, the buyer of the futures contract must purchase (and the seller must sell) the specified asset at the price indicated in the contract
Options
Options are financial derivatives that involve a contract that provides the buyer the right to purchase or sell the underlying asset but not the obligation to do so.
The call option and the put option are the two types of options available.
– A call option allows an investor to purchase a stock at a specific price by a specific date.
– A put option allows an investor to sell a stock at a specific price by a specific date.
Forwards
Forwards, also known as forward contracts are financial derivatives that involve two parties entering into a tailored contract to purchase or sell an asset at a specific price on a specific future date.
Swaps
Swaps are financial derivatives that include a contract that permits two parties to exchange cash flows for a certain period of time. An interest rate, currency exchange rates, or the price of a stock or commodity may all influence cash flows.

Advantages

Hedging: Derivatives can be used by investors to hedge an existing asset position. The derivative contract’s earnings may be used to cover losses in the underlying asset.
Financial leverage: It’s possible to utilize it to boost the returns of an underlying asset like a commodity or an index.
Access to unavailable markets: Derivatives can provide investors access to assets or markets that would otherwise be difficult to reach.

Disadvantages

Complexity: Derivatives and associated methods can be difficult to grasp for many investors since they frequently need extensive investment expertise and understanding.
Risk: Derivatives can expose investors to losses that are greater than those incurred by the underlying asset.

The SEC’s new plan might be a significant gain for day traders

February 16, 2022 mirozecevicmmg

Have you ever traded penny stocks with a small account only to be frustrated when it came time to make another trade? Many people who invest in small-cap stocks are concerned by the Pattern Day Trade regulation.

To purchase and sell penny stocks or higher-priced stocks within a single day and more than three times during a rolling 5-day period, traders must have at least $25,000 in their trading account. In many circumstances (depending on your broker), you may avoid this by using a cash account.You can make as many day trades (buying and selling in the same trading session) as you like.However, you can only use the amount of settled funds in your account.

You must be mindful of settlement time-frames if you trade penny stocks.Your money will usually be settled two business days following the trade date (T+2).That implies you’ll have to wait a few days after selling out of your transaction before you may trade with those funds again. The “benefit” is that you are “forced” to refrain from over-trading.

On the other hand, you won’t be able to profit from market volatility as rapidly as you’d want.
If you’ve ever day traded with a smaller account, you’re all too familiar with this problem. However,
the US Securities and Exchange Commission (SEC) may be attempting to assist ordinary traders.

The Securities and Exchange Commission (SEC) submitted a document explaining a
potential adjustment to this settlement regulation earlier this month.

The SEC agreed to recommend rule changes to lessen risks in clearing and settling securities.
Shortening the normal settlement cycle for “most broker-dealer transitions” in securities is one technique to do this.The shorter settlement involves switching from a T+2 (two business day) to a T+1 (one business day) settlement time. The changes, according to the Commission, are intended to reduce “credit, market, and liquidity” risks in transactions.

This might be a huge gain for day traders, particularly those with smaller accounts who don’t qualify as “day traders.” Trading options is one of the few strategies to accomplish a T+1 settlement.
However, options have a higher volatility and numerous other elements, such as time decay, that work against them. With a planned T+1 settlement for securities deals, investors wishing to get into the market might do so considerably more quickly.

The SEC’s document explains what this means for “self-directed” or retail traders. Recent events, in particular, motivated these decisions, according to the white paper:

“Accelerating Time to Settlement” and “Settlement Optimization.”59 Among other things, the DTCC-owned clearing agencies have been exploring steps to modify their settlement process to be more efficient, such as by introducing new algorithms to position more transactions for settlement during the “night cycle” process (which currently begins in the evening of T+1) to reduce the need for activity on the day of settlement. Portions of these two initiatives have been submitted to the Commission and approved as proposed rule changes.”

In addition, the SEC’s document discussed: “More recently, periods of the increased market volatility—first in March 2020 following the outbreak of the COVID-19 pandemic, and again in January 2021 following heightened interest in certain “meme” stocks—highlighted the significance of the settlement cycle to the calculation of financial exposures and exposed potential risks to the stability of the U.S. securities market.”

The DTCC’s February 2021 document discussed how speeding up settlement beyond T+2 may “provide considerable benefits” to market players, which sparked this debate.
The DTCC predicted that a T+1 settlement strategy would be implemented in the second half of 2023, and that this form of settlement cycle would reduce the volatility of individual margin needs by “up to” 41%.

When it comes to penny stock investing, everyday patterns change swiftly. As a result, a shorter time to clear might provide market players with opportunities to be more systematic in their approach. The DTCC, the Securities Industry and Financial Markets Association, and an Industry Steering Committee released a T+1 Report late last year describing the proposed transition to a T+1 standard by 2024’s second quarter. Furthermore, an Industry Working Group looked at the possibility of a T+0 settlement. While this may be at the bottom of the priority list, it is still being discussed. Is it possible that traders will have a 0 settlement timescale for deals in the future?

Summary

The Securities and Exchange Commission (SEC) is considering rules that would reduce the usual settlement cycle for most broker-dealer transactions from two to one business day following the trade date (T+1).
In order to protect investors, minimize risk, and improve operational efficiency, the SEC proposes additional standards for broker-dealers, investment advisors, and certain clearing agencies to execute institutional trades.
Compliance with a T+1 standard settlement cycle would be needed by March 31, 2024 if the bill is passed. The SEC is also considering whether a same-day standard settlement cycle (i.e., settlement no later than the end of the trading date, or T+0) should be required.

12 Financial Terms You Should Know

October 26, 2021 mirozecevicmmg

1. Broker
Someone who’s mastered all the math and financial jargon so you don’t have to. Work with them to create a portfolio that matches your goals.

2. Capital
What you’re worth. Right now, that might just be $500 in your bank account, but it also includes other wealth (like investments, stocks, bonds…)

3. Capital Appreciation:
When you sell stocks at a profit, you’re money-literally. Appreciate the appreciation.

4. Certificate of Deposit (CD):
A fancy alternative to your savings account that pays interest-except you can’t take the money out until a set maturity date.

5. Dividends:
As companies grow, some share their profits with stockholders in the form of money or more stock.
Dividends aren’t always included though (so read the fine print).

6. Investment Risk:
Every product, whether it’s stocks in Apple or a carefully invested IRA, could lose you money. It’s about weighing how risky you want to be an accepting the consequences.

7. IRA:
AKA the “Individual Retirement Account”. You invest in a portfolio during your working years, then live large and travel off of the account in your retirement.

8. Maturity Date:
Investment jargon for “this is the day you get your investment back with interest”.

9. Mutual Fund:
Like splitting the tab at dinner with your BBFs, except instead, you’re splitting up an investment (recommended and managed by a savvy broker of course).

10. Portfolio:
The grand sum of all your investments from CDs to stocks a diverse portfolio is key so mix it up.

11. Treasury Bills (T-Bills):
Like stock investments in a company, except that company is your country. How patriotic.

12. Stocks AKA Shares:
Think of a company like a giant apple pie at your local diner. You can buy a slice (or two, or twenty) depending on your dessert goals. The better the pie, the better the slice. The better the company the better the payoff.