Types of Options:

The two types of options are calls and puts:
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions.

The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date.

For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value.

The total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility because of the versatility of options, there are many types and variations of options. Non-standard options are called exotic options, which are either variation on the payoff profiles of the plain vanilla.

Working of stock options:

Suppose the premium for an August 100 call of Company X currently trading at $90 is $5. The expiry of this option will be the third Friday of August. So, at $5 we are buying the right and not the obligation to purchase 1 share of X at $100.
Cost of 1 option = $5.
Cost of 1 contract = $ 5×100 = $500.
The option will be exercised only when the share price goes above $100. We will breakeven at $100 + $5 (strike rate + premium) i.e. $105/option and $10500/contract. The share price and option price of the august 100 option of  X Co. after the end of June, July and on expiration is given below.

JUNE                           92 (Stock price)                      6 (premium)
JULY                           96 (Stock price)                      8  (premium)
EXPIRATION               95 (Stock price)                  worthless
We won’t be able to exercise the option as the stock price has not gone above $100 till expiry. So, our loss is the amount of premium paid I.e. $500. In case the share prise on expiration was $103 then the option would have been exercised at the strike price of $100 and our profit per share would have been $3 (103-100). So, profit on exercising the option would have been $300.

So, our net profit would have been profit on exercising options – option premium = $300-$500 = ($200).

Thus, a stock dividend does not involve cash. Rather, it involves the distribution of more shares of the Company’s stock. Perhaps, a Company does not want to part with its cash, but wants to give something to its stockholders. However, when dividends paid are in the form of cash, they are taxable. Thus, when a Company issues a stock dividend, rather than a cash dividend, usually there are no tax consequences until the shares are sold.

Companies pay dividends as a demonstration of financial health and as a way of increasing shareholder allegiance. However, not all companies pay dividends. Many firms keep their earnings and re-invest them in the business, reasoning that they can increase shareholder value more rapidly by fueling growth than by handing out cash. Firms opposed to dividends also argue that retaining earnings is a more tax-efficient strategy, since dividends are taxed as ordinary income, while any growth fueled by reinvesting earnings is generally taxed at more favorable long-term capital gains rates.

However, Companies may even decide to distribute stock to shareholders of record if the company’s availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. An example would be a company issuing a stock dividend of 0.05 shares for each single share held. ]]> http://newsworthystocks.com/201012293213/notablestocks/what-are-stock-dividends/feed/ 0 http://newsworthystocks.com/201012293211/notablestocks/what-are-penny-stocks/ http://newsworthystocks.com/201012293211/notablestocks/what-are-penny-stocks/#comments Thu, 30 Dec 2010 03:40:33 +0000 admin http://newsworthystocks.com/?p=3211 Penny stocks are shares that trade from a fraction of a penny to $5. They are usually (but not necessarily) trade for low valuations (P/E) and has great volatility and carry more risk. Penny stocks have the potential to give exceptional returns in a very short time for those daring, high-risk taking, knowledgeable and well-informed traders. Being lesser in prices than the regular stocks, it provides the investor with an opportunity to own them with ease. Penny stocks, unlike the other stocks, are traded in the over-the-counter market and not in a stock exchange.

Benefits if Trading Penny Stocks:

Trading penny stocks can be exciting, yet just as the volatility of a low priced stock can increase share value, it can also be responsible for the decrease in value. These swings in stock price can be profitable, or they could also be risky – causing investors to lose money. It is imperative to know what you are doing before becoming involved in trading. However, the benefits of trading penny stocks overshadow the risks like the volatility of the share & lack of corporate transparency involved in trading it.  The upside of penny stocks is the ability to turn a small investment into a fortune. With penny stocks, you get more bangs for the buck. You can turn a few hundred dollars into thousands, just by getting in on the right stock at the right time. Trading penny stocks is a great way to learn about the markets, without risking a lot or over-committing. At the same time, there is a lot more excitement and potential for rewards, because these fast paced investments often make great moves in short time frames.

Strategy:

The best strategy in case of buying penny stocks is to minimize the risk & to plan your exit having decided your expected profits. Do not just pump and dump the stock for reason that it costs you less than other stocks and will reach very high levels one day.

Conclusion:

Because investment is low and the risk high, penny stocks have been often labeled as nothing more than a beginner’s game. Done well, however, and in quantities large enough to make a difference, you can still earn and show a profit.

Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.

Mutual funds are popular because they offer a simple way to diversify an investment portfolio while letting a professional manager worry about buying and selling individual stocks.

A Brief of How Mutual Funds Work:

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares.
Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).

Advantages:

It may not be obvious at first why you would want to purchase shares in different securities through a mutual fund “middleman” instead of simply purchasing the securities on your own. There are, however, some very good reasons why millions of Americans opt to invest in mutual funds instead of, or in addition to, buying securities directly. Mutual funds can offer you the following benefits:
•    Diversification
•    Choice
•    Liquidity
•    Convenience
•    Low Transaction Costs
•    Additional Services
•    Professional Management

Hedge Funds:

A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allow them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

Advantages:

Hedge funds impact the economy by affecting the stock market. Since some hedge funds are so huge their impact can be global, causing changes in oil prices, commodities, retail goods and magnified effects on stocks and mutual funds. If they then leave the stock market, and invest in bonds or commodities, individual investors could be adversely affected.
Hedge funds also help stock markets by acting as a source of liquidity, making major investments in publicly traded companies. Sometimes when a company requires new cash / investment, a hedge fund or foreign investment will come through when other sources of financing dry up. Hedge funds help the economy by giving companies other options for capital, especially when companies are concerned about taking on large foreign investments.

How they work?

Hedge fund’s charge investment fees that typically includes a management fee, which is calculated as a fixed percentage of assets under management, and an incentive fee, which is calculated as a percentage of the fund’s returns. Other “administrative” fees may also be charged. A fund might charge a 2% management fee and a 0.4% administrative fee in addition to a 20% incentive fee. If this fund managed USD 100MM and earned USD 18MM in income and capital gains over a year, the combined fee for the year would be:
(0.024) (USD 100MM) + .20 (USD 18MM) = USD 6.0MM

Strategies:

Hedge funds pursue a variety of investment or trading strategies. These go by various names, and there is some overlap between strategies. Generally, they fall into three categories:
•    Directional strategies involve taking positions that will benefit from broad market rises or declines.
•    Market neutral strategies involve taking offsetting long and short positions within a specific market. The goal is to avoid net exposure to the overall market while benefiting from changes in the relative value of individual instruments within that market.
•    Event driven strategies seek to exploit temporary mispricing associated with some corporate event, such as a merger or divestiture.

A security that tracks an index a commodity or a basket of assets like an index fund, but trades like a stock on an exchange is known as Exchange Traded Funds. ETFs experience price changes throughout the day as they are bought and sold.

Exchange-traded funds (ETFs) can be a valuable component for any investor’s portfolio, from the most sophisticated institutional money managers to a novice investor who is just getting started. Some investors use ETFs as the sole focus of their portfolios, and are able to build a well-diversified portfolio with just a few ETFs. Others use ETFs to complement their existing portfolios, and rely on ETFs to implement sophisticated investment strategies. But, as with any other investment vehicle, in order to truly benefit from ETFs, investors have to understand and use them appropriately.

An ETF, like any other type of Investment Company, will have a prospectus. All investors that purchase Creation Units receive a prospectus. Some ETFs may furnish an investor with a summary prospectus containing key information about the ETF instead of a long-form prospectus. If an investor receives a summary prospectus, the ETF’s long-form prospectus will be available on an Internet Web site, and an investor can obtain a paper copy upon request and without charge. Some broker-dealers also deliver a prospectus to secondary market purchasers. ETFs that do not deliver a prospectus are required to give investors a document known as a Product Description, which summarizes key information about the ETF and explains how to obtain a prospectus. All ETFs will deliver a prospectus upon request. Before purchasing ETF shares, you should carefully read all of an ETF’s available information, including its prospectus.

How ETFs are traded?

Understanding most ETFs is very straightforward. An ETF trades like a stock on a stock exchange and looks like a mutual fund. Its performance tracks an underlying index, which the ETF is designed to replicate. The difference in structure between ETFs and mutual funds explains part of different investing characteristics. The other differences are explained by the type of management style. Because ETFs are designed to track an index, they are considered passively managed; most mutual funds are considered actively managed. (For more insight, read Mutual Fund Or ETF: Which Is Right For You? and Active Vs. Passive Investing In ETFs.)

Why Exchange Traded Funds?

Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most practical vehicle. They help the investor focus on what is most important, choice of asset classes.

The vast majority of ETFs are designed to track an index, so their performance is close to that of an index mutual fund, but they are not exact duplicates. A tracking error, or the difference between the returns of a fund and the returns of the index, can arise due to differences in composition, management fees, expenses, and handling of dividends. Some of these factors are listed below:

•    Buying and Selling ETFs Can Be Good for the Small Investor
•    Treatment of Dividends
•    Tax Efficiency
•    Transparency
•    Fees and Commissions
•    Options

Motorola, Inc. provides technologies, products and services for mobile phones. Its portfolio includes wireless handsets, wireless accessories, digital entertainment devices, set-top boxes and video distribution systems, analog and digital two-way radios, wireless and wireline broadband network products, and end-to-end enterprise mobility products.

Alcatel-Lucent (ADR) (NYSE:ALU) gained 1.68% to $3.02. The 52-week range of the stock is $2.25-$3.82.

Alcatel Lucent provide products, solutions, and transformation services offerings, which enables service providers, enterprises, governments and strategic industries (such as transportation or energy) globally to deliver voice, data and video communication services to the consumers.

Nokia Corporation (ADR) (NYSE:NOK) is down 3.37% to $9.75. The 52-week range of the stock is $8-$15.89. The stock is down more than 24% year-to-date.

Nokia Corporation (Nokia) is engaged in the manufacturing of mobile devices and in converging Internet and communications industries. It has three segments: Devices & Services, NAVTEQ, and Nokia Siemens Networks. Devices & Services is responsible for developing and managing its portfolio of mobile devices, as well as designing and developing services, including applications and content.

Capstone Turbine Corporation (Capstone) develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation applications, including cogeneration (combined heat and power (CHP), integrated combined heat and power (ICHP), and combined cooling, heat and power (CCHP)), resource recovery and secure power.

Foster Wheeler Ltd. (NASDAQ:FWLT) added 3.95% to $32.90. The 52-week range of the stock is $20.33-$35.01.

Foster Wheeler AG, formerly Foster Wheeler Limited, incorporated on November 18, 2008, operates through two business groups: Global Engineering and Construction Group (Global E&C Group)and Global Power Group. Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities.

Illinois Tool Works Inc. (NYSE:ITW) is down 0.61% to $50.25. The 52-week range of the stock is $40.33-$52.72. The stock is up more than 4% year-to-date.

Illinois Tool Works Inc. (ITW) is a multinational manufacturer of a diversified range of industrial products and equipment. The Company has approximately 840 operations in 57 countries, which are aggregated and organized into eight segments: Transportation, Industrial Packaging, Food Equipment, Power Systems and Electronics, Construction Products, Polymers and Fluids, Decorative Surfaces and All Other.

Republic Services, Inc. is engaged in the collection, transfer and disposal of non-hazardous solid waste. The Company provides non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 376 collection companies in 40 states and Puerto Rico.

Emerson Electric Co. (NYSE:EMR) added 0.73% to $56.74. The 52-week range of the stock is $40.52-$57.62.

Emerson Electric Co. is a diversified global technology company. It is engaged in designing and supplying product technology and delivering engineering services and solutions in a range of industrial, commercial and consumer markets around the world. The Company operates in five business segments.

The Boeing Company (NYSE:BA) slid 1.03% to $64.51. The 52-week range of the stock is $53.10-$76. The stock is up more than 19% year-to-date.

The Boeing Company (Boeing) is involved in the design, development, manufacture, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services.

Amylin Pharmaceuticals, Inc. (NASDAQ:AMLN) slid 0.12% to $12.68. The 52-week range of the stock is $9.51-$24.21.

Amylin Pharmaceuticals, Inc. (Amylin) is a biopharmaceutical company engaged in discovery, development and commercialization of medicines. The Company is marketing two first-in-class medicines to treat diabetes, BYETTA (exenatide) injection and SYMLIN (pramlintide acetate) injection.

PharmAthene, Inc. (AMEX:PIP) is up 2.82% to $3.65. The 52-week range of the stock is $1.13-$4.96. The stock is up more than 85% year-to-date.

PharmAthene, Inc. is a biodefense company engaged in the development and commercialization of medical countermeasures against biological and chemical weapons.

The stock has average daily volume of 8.37 million shares. At current market price, the market capitalization of the company stands at $40.10 billion.

Geron Corporation (NASDAQ:GERN) lost 1.44% to $4.79. Geron Corporation (Geron) is a biopharmaceutical company that is developing biopharmaceuticals for the treatment of cancer and chronic degenerative diseases, including spinal cord injury, heart failure and diabetes. The Company is advancing telomerase targeted therapies, including an anti-cancer drug and a cancer vaccine, through multiple clinical trials.

Amgen, Inc. (NASDAQ:AMGN) is up 0.33% to $53.46. The 52-week range of the stock is $50.26-$61.26. The stock is down more than 5% year-to-date.

Amgen Inc. (Amgen) is an independent biotechnology medicines company. The Company discovers, develops, manufactures and markets medicines for grievous illnesses. It focuses on human therapeutics and concentrates on medicines based on advances in cellular and molecular biology.