Sunday, October 6, 2013
This possibility is heavily used by hedge funds because ETFs can speculate down on an entire index, avoiding the hassle of selling each individual underlying security. The speculator must borrow the security sold short during the holding period of the short position. On the stock market, the stock of available titles is limited, hence a strong demand in the bond market makes way more expensive to borrow, which discourages speculators. It is not the same on the ETF market and they can be created on demand, which allows borrowing amount and so building significant short positions.
This leads to a rather unlikely situation first, where some of the ETF amount of short positions is several times the number of shares actually outstanding! Many holders of ETF therefore hold shares actually "ghosts”, which were sold to them by a short seller, the latter saying that the shares can be created anyway when the time comes. If sellers orders flock to the ETF arbitrage trading seen above, which we have seen, are fully automated trigger.
Specialized intermediaries massive demand the return of the underlying securities of the issuer. But the issuer may either not hold at all, or have lent. He will not be able to deliver immediately, or not being able to deliver at all. However, there are provisions limiting the daily volume of refunds on the money, especially if short positions identified above a certain threshold.
In addition, an “Authorized Participant" must prove , when requesting a refund on the one hand , that it is "real" and not the result of a securities loan at any level of the chain. If such clauses may allow the fund to survive individually in a debacle, they are unlikely to calm the markets. Indeed, if investors are denied the ability to obtain repayment of the shares that they were sold as completely safe and liquid , it is more likely that the panic spreads to all ETF , then why not the underlying assets.
Tuesday, October 1, 2013
There are ETFs on all sectors of the market, and if a little unlikely sector is not yet covered today and in tomorrow it will emerge as new ETF. This is happening almost daily. We will soon invest in the segment of companies specializing in the balloon or tie pins, or companies based in anywhere. If there is no index representing the performance of the sector concerned, no problem, it creates the index and the ETF in stride. The phenomenon went beyond the stock market and extends to all asset classes, bonds (ETN Exchange Traded Notes), commodities (ETC Exchange Traded Commodities), futures, currencies (ETV Exchange Traded Vehicle) etc. The set is grouped under the term FTE, Exchange Traded Products. In short it is a beautiful alphabet soup simmering and is reminiscent of a previous recipe, the securitization (remember the ABS, MBS, RMBS, CMBS, CDO, etc), which had overflowed with some damage collateral for the past 5 years from now.
On the road there is nothing simpler than ETF investor buys an index, and as follows, upward or downward, the performance of the index being tracked. But precisely how this replication is obtained? There are two main methods: physical replication and synthetic replication. With physical replication, the issuer of the ETF actually holds the portfolio securities of the index being tracked. It calculates and communicates information two times: first, the net asset value equal to the valuation at market prices of assets held , divided by the number of shares issued and secondly the market price of the share , which comes from the comparison of buying and selling interests in exchange just like a stock. Both figures; net asset value and share price must be the same to a small margin near.
What will happen in case of divergence? These are specialized intermediaries (“authorized participants "), mandated by the fund issuer, which come into action. If the market value of the share exceeds the net asset value then the ETF is moving faster than the rise in the index, they will buy a basket of stocks in the index. This then delivers their new units; they can sell on the market, realizing a capital gain. Conversely, if the market price is below the net asset value of the fund, they will buy ETFs on the market and present it to again, which reimburses them by delivering the underlying assets. They can then sell these securities on the market and making a profit. These so-called arbitrage transactions are fully automated and have the effect of “realign " asset prices that were uncorrelated. It is the development of algorithmic trading has led to the development of ETFs.
In case of synthetic replication, the issuer does not directly hold securities of the index, but other assets. It will then go to a specialized intermediary , typically a bank, to negotiate with him a "total return swap " the bank pays the issuer of the ETF 's performance index, while it reverse the performance of assets held in the portfolio. Physical replication is mainly practiced in the United States, where regulation severely limits the use of derivatives by collective investment funds. In Europe, ETFs are equally divided between the two modes of replication. We are mainly interested here in the physical replication, in which today we have a little more perspective. All this cooking takes place behind the scenes between specialized players (asset managers, hedge funds, brokers and banks financing and investment), thus preserving the image of simplicity and transparency between the final investor.
This should not, however, be fooled: many intermediaries are involved in constantly, and we must be aware that they do not by pure philanthropy, but because they have an interest. There was a second there the resemblance securitization market: the first beneficiaries of financial innovation are not the ultimate investors, but those who create and distribute these innovative instruments. That said, proponents point out that these ETF products are primarily funds, and so most of them are within the regulatory framework for the funds. These regulations, both in Europe in the United States, are very demanding especially in terms of transparency to investors . It is up to them to read the prospectus in which he will find, in principle, all the necessary information.
Monday, April 15, 2013
Thursday, February 11, 2010
I have been a trader in stock Market for the past 10 years. Whenever I introduce myself as a stock market trader to any new people, they just blink at me and look at me somewhat skeptical at me. The reason is simple. If you are a trader in a speculative market, people look at you as gambler.
Gambling is different from speculation. Playing cards and betting on horses is a gamble. In this two, you are betting on a thing whose performance is not in your command. You are betting on a performance, not on any asset.
But in trading, you are putting money on an asset i.e. stock. The money you have invested in market is backed by the fundamentals of the company. More over you would have invested in that stock after analyzing the performance of the stock fundamentally and technically.
So, here the outcome is predictable. But in gambling the outcome is not predictable. So if the outcome is predictable, then how can we say it is gambling if we trade in stocks.
Every business is risky. The same risk is associated with trading in stocks also. Then why some body say it as gambling. So, stock trading is also a business as some other business.
Thursday, January 7, 2010
We have seen that whenever a market is viewed by all participants as bullish, a trend reversal takes place and turns bearish. Likewise, whenever a market is expected to be bearish by all, it turns bullish against their view.
When Crude oil was trading around 145 USD in 2009, everybody is thinking it will go to 200 USD levels. The Media is bullishly covering Crude oil. Everybody is expecting the demand for the Crude to go up because of growing world Economy. Every Analyst has turned bullish on Crude, but it has turned otherwise. Crude fell from 145 USD to 30 USD within 6 months.
Why is this happening, when everybody is in one view but the Market turns otherwise? Let me explain the internal dynamics in it.
Market movement is influenced by demand and supply. There is always a demand or supply potential for a market. Demand is inversely proportional to Supply. If the participants in a market feel bullish about a particular market, they will start to accumulate the asset. Like this slowly, every participant acquires the asset. In initial stages, the demand potential will be high, but as the time progress and as more number of participants acquires the asset, the demand potential slowly recedes.
But the sentiment in the market will slowly turn bullish, as more number of peoples have already bought the asset. As this process continues, almost all of the Investors would have bought the asset and the sentiment would be highly bullish by this time.
Now the buying potential is already receded because the potential Investors have already bought the asset. Now a selling potential is created, as those who have bought it will sell it for a profit. As the buying potential recedes, a selling potential increases.
At some point of time, the demand potential and supply potential will be same. And after some time, demand potential will be overwhelmed by supply potential. But at this time, the bullish sentiment would grip the Investors.
At one point of time, everybody would have bought the asset and nobody is left, so everybody is highly bullish, but the selling potential would be at its highest and buying potential would be at its lowest in this point time.
This is the time, trend changes from bullish to bearish because of the change of balance of buying and selling potential in the market. That is why, even though the sentiment is bullish, the trend changes from bullish to bearish and vice versa.
Understanding the internal dynamics of the Market is essential for successful Investing.
Friday, January 1, 2010
Monday, December 28, 2009
Friday, December 18, 2009
Thursday, December 17, 2009
According to me it is ‘Yes’. Stock Markets and Economic growth are interrelated because the rise of Stock Markets would attract small investors into the Market which will propel the stock Markets further, which in turn fuel the start of new companies and projects, which in turn help grow Economy.
A rising Stock Market would invite retail Investors and Foreign Investors to invest in the Stock Markets through secondary Markets and also through Initial Public offerrings. This process will infuse huge amount of idle money into the system
The money that came for circulation would be used by the companies to expand, backwared integrate and forward integrate. Thus the production capacities of all companies increases, so they produce more end products.
These end products has to be sold and this will be done by exploring new Markets locally or internationly. Thus the earnings of the companies will increase, which in turn means increased tax for Governments.
Thus a rising stock Market will surely propel a Economic growth.
Monday, December 14, 2009
During the 20th century, investments in the real estate showed steady returns. Sometimes the price rise is fast and sometimes it is slow. But the rate of return is some what better than the Fixed deposits and also above Gold. But is somewhat riskier than fixed deposits.
Likewise, Investments in the Gold also showed good returns and at times it is stagnant. It sometimes performed better than fixed deposits and at times it is under performed when compared to fixed deposits. But is riskier than fixed deposits.
Investments in the Stocks is the riskiest of these investments. But the returns were phenomenal during the Bull Market and it showed negative growth in bear markets. But on Average, it performed better than other investment avenues. But the risk factor is much more in Stocks.
My investment plan would be to invest 30% in Stocks, 30% in Real estate, 20% in deposits and 20% in Gold. Any investment plan should take into consideration atleast 5 years time frame. And the best way to invest is to invest at bear markets.
But here, the Interest rates we are talking about is the rate at which a central bank or federal bank of any country lends the money to other banks. In USA, the central bank is Federal Reserve and in India, it is Reserve Bank of India.
Central Banks world over lends money to other Banks of their country. The Interest rate at which it is being given to the Banks really matters. If there is inflation, in order reduce the price rise, Central banks increase their lending rates in order to reduce the flow of money in to the system. This in turn reduce the price rise.
And in times of deflation ( prices decline steadily ), Central banks reduce the lending rates to inject money in to the system.
If interest rates are hiked, then the Banks will increase their lending rates and the Industry which is financed by Banks will get affected by the rising interest cost. Thus it affects the bottomline of the Company.
Since companies bottomlines are affected by rising Interest cost, their earnings will be affected which in turn affect the sentiments of the stock Market, which in turn affect the stock prices of the companies.
Friday, December 11, 2009
People ranging from ordinary men to investors in the stock market panicked and the period saw many layoffs in all sectors of the Economy. Unemployment rose in US and world over. The severely affected country was USA.
Many Banks and Financial Institutions in USA went bankrupt mainly because of sub prime crisis which is due to the burst of real estate bubble and Stock Market decline. The tremors are felt heavily in European countries and it is felt mildly in Asian Economies. It was said at that time, that World was going to face the worst bear market.
Ever since that, Governments offered stimulus packages to boost their respective countries economies. The stock Market were recovered from the lows very quickly. Now, everybody saying that the bear market is over. The stimulus packages given by their governments boosted the economy and everything is normal today.
But My opinion is, even though Stock Markets have rallied for the past 9 months, the present rally seems to be temprory.
No bear market completes its term in just 9 months. So, the real and the worst bear market is yet to come. It may take another five or six years to complete. Hisotry will always repeat itself.
Be prepared for it.