How Are Options Traded

Options are a contract agreement between the option contract supplier and than buyer of the options. Options are purchased in time periods of about a month and can be commonly purchased as far in advance as four months. The purpose of buying options is to make a profit by exercising the contract at a favorable price. Favorable prices are determined by assessing the contract price, underlying securities price, and expected exercise price of the contract Since options contracts are derived from underlying securities such as stocks, they are termed 'derivative securities'.

How to buy options:

To buy options one must have good credit and enough money to support adverse results in the course of trading. The contracts are offered through brokerage firms and/or investment banks and each option represents 100 units or shares if the options are for stocks. The contracts are usually sold with expirations of 30 days beginning every month. 

There are two types of options contracts called 'calls' and 'puts'; calls are options that allow the contract holder to buy underlying stocks at the fixed 'strike' price whereas puts allow the trader to sell at a 'strike' price. While stock options are well known and actively trader, there are also several other types of options in several different securities markets that include the following:

• Stock Options
• Futures Options
• Foreign Currency Options
• Interest Rate Options
• Index Options

In the Money Vs Out of the Money Options Vs At the Money

Choosing options that are in the money or out of the money depend on what one believes a security will do in the time period of an option and the risk adversity of the options buyer. In the money options are considered less risky than out of the money contracts.

When options contracts are bought 'in the money', the securities purchased through the options contract are priced lower than the time of purchase if the option is a call. This worth is reflected in a higher cost of the options contract. An out of the money contract is the opposite, the underlying securities are priced higher than the actual market price of that security and this makes the call options contract cheaper. The inverse is true for put options and securities purchased through options at the money contracts are equal to or near equal to the price of the underlying security.

When to exercise options

Stock options traded on U.S. stock exchanges can be exercised at any time during the term of the contract whereas European options can only be exercised at the expiration date. The best time to exercise i.e. buy underlying stocks if it is a call option or sell underlying stocks if it is a put is when the perceived value to the trader is highest. Since prices fluctuate frequently, there is no sure way to know exactly when the best time to exercise is. For this reason it is good to have a pre-determined expectation and trading strategy in mind as it can make the options experience more palatable.

Trading strategy

Developing a trading strategy for options may take some time. Since these contracts are leveraged through credit it can be considered betting using borrowed money. For this reason a new trader of options might be advised to follow a few precautionary steps as follows:

• Only borrow within your financial means.
• Familiarize thoroughly with the trading process and financial instrument.
• Use a reliable broker that is trustworthy and has a good reputation.
• Consult family or friends if the money to be used is shared.
• Develop a trading strategy or method.

Options trading is a sophisticated form of exchanging property through derivative calculations and means. While the potential to make money using options is higher than with non-derivative securities the risk can also be higher. Options contracts are bought from brokerage firms with expirations within 30 day increments and are bought with prices calculated in terms of the underlying security. The resulting contract prices therefore become either in the money, out of the money or at the money. Exercising options is not an exact science and is often done using trading strategies.

Sources:

1. Zvi Bodie, Alex Kane and Alan J. Marcus. 'Investments' New York. 2002 McGraw-Hill Irwin. p.662-670.
2. http://www.888options.com/basics/options_pricing.jsp
3. http://www.investopedia.com/ask/answers/05/buyingoptions.asp
4. http://en.wikipedia.org/wiki/Exercise_(options)

Mutual Fund Reviews: Templeton Foreign Fund A

Templeton Foreign Fund Class A (TEMFX) is a mutual fund managed by Franklin Templeton Investments, operated out of Fort Lauderdale, Florida, and incepted in the 1982 as an international equity fund. The fund has over $5 billion dollars in assets and mostly invests, i.e. over 95%, in the stock of large European and Asian information technology, telecommunications, financial services, energy, pharmaceutical and other firms.

Fund, performance and risk

This mutual fund has never been ranked higher than 3 stars by the Morningstar rating system. Nevertheless, a 3 star rating from Morningstar qualifies as above average according to the company. Approximately 350 competing mutual funds exist for the Templeton foreign class A fund (finance.yahoo.com) and the fund has returned an average return of 9.88% after sales charges since its beginning (franklintempleton.com) The fund has an annual dividend of .315 cents per share in addition to any accumulated capital appreciation as of the creation of this review. This dividend is the second highest of all 5 classes of the Templeton Foreign Fund series.

For the most part, the Templeton Foreign Fund Class A has outperformed funds in the same category for a number of years according to yahoo finance. Almost two thirds of the years in which the fund has existed have been gainful for the fund with the remainder of the years incurring annual capital depreciation. (finance.yahoo.com) The fund has experienced both double digit return losses and gains in various years of its performance and has tended to follow/correlate overall market performance.

Cost and fee structure

The Templeton Foreign Class A fund has a different fee structure than class B. The fund has a front-end load fee of 5.75% and an expense ratio of 1.14% of investment worth. (Morningstar.com) The combined 1st year fee would consequently be 6.89% of the investment with subsequent years being closer to the 1.14% management and operational fees. The minimum investment for this fund is $1000.00 with lower required amounts for Individual Retirement Accounts and 'Annual Incentive Plan Accounts' (Morningstar.com)

Managment

As of the date of this article, the Templeton Foreign Fund, Class A was managed by 3 professional chartered financial analysts named Tucker Scott, Lisa Myers and Cynthia L. Sweeting, all of who have been employed by Templeton Global Advisors Limited since 1996 or 1997. According to the 2008 annual report of the Templeton mutual fund, the fund seeks value in its investments in relation to their estimated/projected long-term performance. These managers were selected by the parent company of the fund for their capacity to operate and maintain foreign funds.

Summary

For investors seeking a diversified, moderate risk, mutual fund investment with long term returns of close to 10%, the Templeton Foreign Fund Class A may be worth considering. The company in which the fund is managed is a long-standing and reputable financial services firm with a track record consisting of multiple mutual funds for investors. 

Consultation with a financial advisor, planner, accountant or Franklin-Templeton representative may assist with the decision to purchase shares in the Templeton Foreign Fund Class A. Since financial plans, age, risk tolerance, investment goals and other factors vary between investors, deciding whether or not the Templeton Foreign Fund Class A is the right fund to invest may be both a personal and informed financial decision.

Sources:

1. https://www.franklintempleton.com/retail/jsp_app/products/fund_facts.jsp?fundNumber=104
2. https://www.franklintempleton.com/share/pdf/products/semi_ann/annual/104s.pdf
3. http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&Symbol=TEMFX
4. http://finance.yahoo.com/q?s=TEMFX

The Best High Risk Stocks to Buy

High-risk stocks to buy should ideally provide a high return on investment to compensate for the risk taken in the investment. High risk stocks to buy include stocks listed in pink sheets that are traded in the Over The Counter Bulletin Board (OTCBB), micro-cap, private stock, small cap and some mid-large cap stocks.

In fact, any stock has the potential to be high risk, but some have a greater chance at being bad risks than others. Deciding which high-risk stocks to buy involves first defining what high risk is, and then determining why the risk should be taken. In other words, understanding how to differentiate between good high-risk stocks and bad high-risk stocks may assist in selecting the best high-risk stocks to buy.

What a high risk stock is

High-risk stocks are the shares of high-risk companies. In some cases trading activity of a stock may influence its risk, however for the most part high-risk shares stem from the company itself. High risk generally means the stock price as well as the company shareholders own has a higher than average risk of failure, hence increasing the risk of share prices dropping.

This makes the term 'best high risk stocks' seem a little paradoxical because some people associate risk with bad, in which case there are no 'best high risk stocks' to buy. The following list comprises some of the characteristics that may indicate a high-risk stock.

• Volatile price movements
• Under capitalized
• New businesses
• Badly managed
• Weak performing industry
• Overbought shares
• Unregistered and/or less regulated



How to identify a good high risk stock

Believe it or not some high-risk stocks may be quite a good investment. Just as businesses and financial institutions use risk management, individual investors can manage their risk by distinguishing between reasonable and low-profit probability stocks within the same high risk category. The trick is knowing which stocks are merely high-risk by classification and not actuality. For example, investor models, analysts and trading tools may all indicate a particular stock is high risk due to the potential for failure.

This does not mean the company will fail however, just that the probability of it failing is higher. To find a good high-risk stock involves knowing what to look for. For example, a company with all the characteristics of a high-risk stock may also be a good high-risk stock for the following reasons.

• High growth industry
• Strong quarterly reports
• Innovative technology, product, service etc.
• In demand i.e. non-saturated market
• Competitive edge
• Good value

How to identify a bad high risk stock

Just as some stocks may be more likely to be the best high risk stocks to buy, some may also be the worst, or not as good. Distinguishing the best stocks from the worst is important in determining what aren't the best high risk stocks to buy actually are. For starters, inverse patterns to that of good stocks may indicate a bad stock in addition to characteristic variables that can correlate with the downward or declining value of a company's stock price. The items below may hamper and/or prevent a high-risk stock from risking in price over time.

• Stagnant or declining industry
• Non-growth orientated
• Inefficient operations
• Conflicted organizational structure
• Non-distinguished product and/or service
• Over valuation of shares

Stock and risk analysis

No one can predict which stocks are the best with 100% accuracy, but one can identify, distinguish and differentiate some probability of stock success within the high risk category. This probability can be ascertained both quantitatively and qualitatively with a review of specific areas of performance. However, obtaining the correct information is a challenge in and of itself, especially with private and non-SEC registered corporations.

In light of this, being weary of conflicting and competing information can at times, be difficult when determining a particular stock's chance of success, be it in regard to short-term, medium-term or long-term performance The list below illustrates some of the factors and tools that can be used in analyzing a company's stock.

• Statistical data sets
• Financial fundamentals
• Technical performance
• Economics
• Strategic plan
• Operational and organizational structure
• Managerial accounting

Consideration of a high-risk stock's performance may involve additional techniques of risk analysis. For example stocks within the high-risk category may vary in risk levels based on things like the cost conversion cycle, project management, consistency of revenue, affect of business cycle on the company's solvency, debt management etc. There are many ways to review and study a company's performance that makes accurately determining a company's risk more difficult than it might sound. Nevertheless, with enough knowledge about a business, its competitors, the industry etc. an investor may have a better chances at selecting the best high risk stocks to buy.

An overview of stock market indices

Stock market indicis are a financial tool used throughout the World to measure how a group of companies' stocks have been valued. Indicis also exist for commodities prices traded in exchanges such as the Chicago Mercantile Exchange. Stock market indicis can generally be thought of as financial indicators.

To better understand what stock market indicis are, it is helpful to consider the different types of indicis, why they are used and how they are measured. While some aspects of indicis such as their calculation can be conceptual and abstract they can be thought of as simple financial tools.

The World's many stock market indices

Many countries have their own indicis and many indicis exist within many countries. The type of index varies according to what is being measured. While it is usually the stock of a group of companies, it can also include a collection of commodities such as oil, grains and metals. A few of the various types of indicis are listed below.

• Local and Regional Indicis Ex-Bloomberg Chicago Index
• National Indicis Ex-Nasdaq-, DJI, S&P 500
• Commodities Indicis Ex- S&P GSCI
• Sector Indicis Ex- Nasdaq-100
• Specialized Indicis Ex-Sin fund Index (corporations specializing in alcohol and tobacco)

Why stock market indicis are used

Stock market indicis have several functions. One of the major functions of an index is to provide a navigational direction regarding financial stock valuation of a particular group of companies. Other uses of indicis include the following:

• In the sale of index futures
• To provide widespread performance data
• Recognition of corporate standards and achievement
• Analysis of business and economic trends.
• Research data for financial theorizing.
• Marketing and demonstration tool for financial services.

How Indicis are calculated

There are several ways to calculate in index value and how this is done is key to understanding what you are looking at when one sees an index number. For example, in a price weighted average index such as the Dow Jones industrial average, the prices of stocks are what influence the index value. However, in Nasdaq indicis the traditional calculation method is market value weighted which is a calculation based on the value of outstanding shares. This metric takes into account both share volume and price. Several ways to calculate an index value are the following.

• Market value weighted average
• Equal weighted
• Price weighted average
• Market share weighted average
• Float adjusted weighted average

While the final index value will be different using all these methods the general trend will sometimes be the same whichever method is used. That is to say, even if the individual companies within the index are measured differently in terms of proportion of influence on the index value, the overall trends of those companies may be correlated and therefore reflected in the index. Nevertheless, the more representative and proportional the index measurements are, the more accurate a reflection of the company pool the index value will be.

In summary, stock market indicis are financial measurement tools that reflect valuation of different groups of companies and/or commodities. Different indicis exist around the world to provide financial planners and others useful indicators of how particular segments of an economy are performing at any given time and under various economic climates.

The information from indicis can be used in a plethora of ways such as for statistical analysis of data in economic research, portfolio management and financial services. Many indicis are measured using weighted averages which provides for a more representational and proportional index value. However, there are several different ways to calculate a weighted average value using stock prices, outstanding shares, actively traded (float) shares and equal weighted.

Sources:

1. http://tinyurl.com/ygneawb
2. http://dynamic.nasdaq.com/services/indexes/default.aspx
3. http://www.djindexes.com/
4. http://www.bloomberg.com/markets/commodities/cfutures.html
5. http://www.cme.com/files/emini.pdf
6. http://www.investopedia.com/terms/f/float.asp