Safe Investment Options

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safe investmentAre there safe investment options when you cannot afford a loss?

Believe it or not, there are some investment options that are safer than others when you cannot afford encountering any financial loss. These provide opportunities for significant growth for those investors who are looking to realize a substantial yield over a shorter period of time, usually less than a 5-year time frame.

These are also viable avenues for investors who want to protect their investments against the loss of that capital as being the primary objective. If you are attempting to fund your children’s educations or secure more retirement earnings, some of these options are an excellent way to achieve your goals.

Risk profile with investing

All investments involve risk, whether it is something as safe as US savings bonds or highly volatile stocks. Typically, risk profiles are established once you set up an investment account whether offline or online, with a regular broker, one of the binary options brokers or others.

This profile enables the investment professional you are dealing with to ascertain the best investments possibilities relative the risk tolerance abilities of the investor concerned. Remember that risk is classified from high to low. The low end involves an investor who is incapable of tolerating risk versus the high end which is associated with aggressive investors.

3 of the most common safe investment options to consider

The following 3 different options should be considered if you need to minimize your risk as well as needing a safer avenue of investment:

Bonds – money market securities typically exhibit lower returns or yields on an investment compared to bonds. Depending on what entity is issuing the bonds, most risk factors are fairly modest where bonds are concerned. The lowest amount of risk you will encounter is with US Treasury bonds followed by municipal and then corporate bonds. The average rate of yield on these different bonds is typically 2.5% to 3%.

Cash and/or money market securities – this category of investment is currently viewed as the safest type of investment and includes financial instruments such as CD’s. The key to these investments is that they offer better liquidity as well as a safer way to protect the investment’s principal. Additionally, you need to be willing to exchange those returns for easier access to your funds.

Penny stocks – despite the volatility that exists in today’s stock market, certain stocks are less risky than others. Penny stocks are considerably less risky where losing money is concerned and could result in tremendous financial gains. So it follows suit that you should also consider this option, provided you have done sufficient research and know what you are doing when “playing the market.”

   

European Central Bank

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ECBThe ECB (European Central Bank) is the central bank of the European Union, established in 1998 Relay to replace the EMI (European Monetary Institute from the Maastricht Treaty).

With a capital of 4 billion euros, this independent statutory body has inherited the entire Eurozone mission previously devolved to the national central banks: issuing currency and defining a monetary policy that the national central banks are then responsible to implement in the various national financial markets.

These interventions of central banks take two forms: the refinancing of banks in the open market, and the provision of bank standing facilities. Refinancing operations, which are loans from the ECB via the central banks to banks, are by tender (for example, the ECB announced that it has 500 million at a minimum rate of  predefined submission ) at a weekly frequency.

Hence the liquidity of banks, and thus the money in circulation in the euro zone, is controlled by the European Central Bank. Its primary statutory mission – maintaining price stability in containing inflation in the Euro zone countries below 2% – is achieved by setting interest rates, the most important of them being precisely the rate of refinancing interest-bearing loans to banks on the open market (2% as of July 15, 2012).

Subject to recurrent political criticism the economic bet assigned to the independent  ECB is that the fight against inflation will also maximize economic growth of the member countries of the European Union and minimize unemployment rates. The European Central Bank also has an advisory function to the EU and national authorities in the areas of its competence, and is responsible for the collection of statistical information needed for its operation via the national central banks.

The European Central Bank is governed by a board of directors which includes its Governor (currently the Italian Mario Draghi), whose six members are appointed by common accord of the Heads of State or Government of the Euro zone countries. The Board of Governors (the national central banks of the euro zone) and the General Council (including the governors of the central banks of countries that have not yet adopted the euro) are the two other decision-making bodies of the ECB.

As inflation has remained weak in Europe in recent years, the ECB did not have to worry on this front, but the persistent recession and the debt problems of countries such as Greece, Spain and Italy have been the focus of its actions, adding liquidity to the financial system to limit the effect of the criss.

   

Rochester Municipal Bond Funds

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munisMunicipal bond funds are defined as any mutual funds that are invested in municipal bonds, also referred to as “munis” and are debt securities which are issued by counties, municipalities, special purpose districts, and states.  In this manner, capital expenditures can be financed and are federal income tax exempt financial instruments.  Additionally, they may sometimes be state tax exempt as well for the residents of those states which have issued them.

Due to their favorable tax characteristics and the fact that they are a fixed-income type of investment, this is a popular financial instrument to purchase.  They typically provide tax relief for those individuals who fall into higher income brackets.  Like other types of bonds, munis are subject to the credit, duration, quality, and yield considerations of the investor.

A WORD ABOUT OPPENHEIMER ROCHESTER MUNICIPAL BOND FUNDS

According to Lawrence Jones, senior mutual fund analyst of Morningstar Inc., an investment research firm, the Oppenheimer Rochester Municipal Bond funds have always been characterized as high flying and high risk funds.  So if you are a novice investor, you need to be aware of this.  Remember the cardinal rule of investing when you are first starting out.  Never invest more than you can safely afford to lose.

Oppenheimer Rochester Municipal Bonds are available as 8 different state bond funds with 3 variations of each.  There is also a National Muni available in three varieties as well.  The following is a list of these:

  • Arizona Municipal A, B, and C
  • Massachusetts Municipal A, B, and C
  • Maryland Municipal A, B, and C
  • Michigan Municipal A, B, and C
  • Minnesota Municipal A, B, and C
  • North Carolina Municipal A, B, and C
  • Ohio Municipal A, B, and C
  • Virginia Municipal A, B, and C

SIGNIFICANTLY HIGHER DIVIDENDS

The key characteristic of most municipal bond funds, as well as Oppenheimer Rochester Municipal Bond funds, is that the dividends they pay are considerably higher than with other financial instruments such as CD’s and Money Market accounts.  Additionally, there are four major categories of municipal bonds with the Government or US Treasury bonds being the lowest risk investment of the group.

On the other hand, municipal bond funds are issued by local entities and governments are come with considerably higher risk.  The bottom line is that if you are a novice investor, you want to make sure that you plenty of research about the particular funds you are considering investing in.

 

   

The currency market

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Most people never directly encounter the currency market. Unless they are traveling to a foreign country, all of their monetary transactions take place in their domestic currency. However, the currency market indirectly affects people’s lives every day. Here is a basic summary of how it works.

What is the Currency Market?

Often called the foreign exchange market or forex market, the currency market is simply the market for buying and selling currencies between countries. The main participants in this market are large banks, investment firms, and commercial companies. It is the largest financial market in the world that handles trillions of dollars’ worth of transactions every single day.

How Does it Operate?

Essentially, the currency market is a system for buying and selling money. Every exchange includes the selling of one country’s currency (which is referred to as the counter currency) for that of another (referred to as the base currency). Investors speculate over which currencies will increase in value and try to buy the ones that will increase in value while selling the ones that will decrease in value. The value of a particular country’s currency is determined in relationship to the currency of another country. For example, it takes $1.35 in American money to purchase one euro, so the euro is worth more than the dollar in the currency market.

The currency market is a decentralized market. This means that there is not one central location where all the transactions take place. Instead, international dealers conduct currency transactions “over-the-counter” from all over the world. This network allows investors to do business through several different channels which gives them a choice of where to conduct these transactions.

How Does it Affect the Economy?

The stronger a nation’s currency, the the cheaper foreign imports will be. Foreign travel is also cheaper if your nation’s currency is stronger than that of the country you are visiting. However, a strong currency does not equal a strong economy.

The stronger a nation’s currency, the more expensive their products are compared to other countries. And since imports will be cheap, that nation will import more than it exports. National industries will not be able to compete with foreign companies, and thousands of jobs will disappear. Therefore, a strong currency can often drag the economy down.

What Factors Influence Currency Strength?

The exchange rate between two currencies is affected by several different factors. They include the supply and demand between the two currencies, political stability, inflation differentials, and interest rate differentials. Minor fluctuations between currencies are normal, but sometimes a particular currency will suddenly skyrocket or plummet. For example, war or political unrest can cause a nation’s currency to quickly drop in value in relation to other countries.

The foreign exchange market is the largest, most liquid financial market in the world. It is an essential element of the money world and affects both global and individual prosperity. Even if a person never directly encounters the currency market, he is still affected by it. The prices at the grocery store, interest rates on mortgages, and job outlooks are all tied to the foreign exchange market.

   

Pension obligation bonds

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Pension obligation bonds are referred to as POB’s in the finance and investment industry. They are basically an instrument of debt which is issued by a government entity in order to finance a portion of or all of UAAL’s (Unfunded Actuarially Accrued Liabilities) for pension purposes and/or other PEB’s (Post Employment Benefits).

In so many words, and from an accounting standpoint, are capable of converting the liability of a short balance sheet to the liability of a hard balance sheet.

The benefits of investing in POB’S

There are three key advantages or benefits to investing in pension obligation bonds that you should be aware of if you are considering investing in these financial instruments:
• the disciplining of budgeting the annual payments of debt services in order to cover the newer obligations of the bonds
• the difference between the interest paid on these bonds and the actuarial assumed returns results in annual funding cost reductions of from 15% to as much as 30%
• cash is provided to the various retirement systems so that they can invest these in order to lower any unfunded liabilities as well as meet benefit payments in the future

The history of pension obligation bonds

In 1985, Orrick created financing for the City of Oakland by developing and issuing “pension bonds” as well as serving as the bond’s counsel. This resulted in a “snowballing” effect of financing and other copy-cats which rapidly followed and were tax-exempt financial instruments.

However, they were driven by the possibility of legal arbitrage occurring in the process. A number of these transactions were patterned after either annuity instalment sales or as lease financing.

Tax legislation relative to the Tax Reform Act that was passed in 1986 put an end to these tax-exempt bonds. Interestingly enough, financial institutions have continued to work on other tax-exempt pension obligation bonds due primarily to special non-arbitrary or rules of transition situations that may exist.

In 1994, a newer, taxable version of POB’s occurred in the state of California, the origination point being situated in Sonoma County.

These were driven by the rate of declining, taxable rates of interest compared to the actual rate of interest that was imputed by certain pension funds on the UAAL (see above). Additionally, needing budget relief and the legal arbitrage risk became opportunities in a much broader array of investments made by most pension funds compared to what the city or county governments had permission to make.

   

Bond valuation

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bond traders

What is bond valuation and how does this work?

The process of calculating a bond’s fair price is referred to as ‘bond valuation’. However, the theoretical fair price is based on the current value of the cash flow that the bond is expected to generate.

It follows suit then, that the actual valuation of a bond is calculated by discounting the anticipated cash flow to the current time by using the rate of discount that currently applies. Determining the rate, or the ‘pricing’ of the bond, is done with considerable reference to other financial instruments. This information is important to people whose goal is to make money via bond trading.

Once the bond’s price or value has been determined, the price sensitivity can be estimated. The different yields which relate to the bond’s value to the bond’s coupons can be determined as well during the valuation process. This valuation becomes more specialized if ‘embedded options’ exist (options which provide a structure to the bond) and are included in the bond. This more specialized valuation combines the cash flow based approach above with option pricing.

The 2 bond valuation formulas

As was mentioned above, the fair value of straight bonds, or those types of bonds which contain no embedded options, is calculated by using the current discount rate and applying it to the estimated cash flow of those bonds. The applicable formula is calculated in the following manner:

Cash Flows – C = periodic coupon payments,
n = the number of times that coupon payments occur,
F = the face or par value,
and T = the value of the bond which is paid out when it matures.
Discount Rate – r = the required rate of return or yield which is compounded annually and is the current market rate of interest for those bonds with similar risk rankings and terms,
m = the coupons which remain to be paid over the remaining bond’s lifetime (in other words like n above) multiplied by T (see above), and u = (1 + r) 1 / n) which is the accumulation of interest during each coupon period.

Taking the above into consideration, the formula is that the bond price is a combination of the above. Since the value of the bond is the present value of applicable cash flows, an inverse relationship exists between the discount rate and the actual price of the bond. The higher the rate of the discount, the lower the bond price or value that will be attained.

   

What are CFDs

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price chartWhat are CFDs? A CFD is a Contract for Difference, which is a way of making money from the movement of share prices in the stock market without the requirement of owning the share itself. Instead of buying the share, you own a contract instead. It is this contract that you buy at one price and then sell at another, either making money, or potentially losing money.

What are CFDs compared to conventional share dealings?

If you deal in shares, you need to own the full value of the shares you are buying or selling. With CFDs, you only need to own a percentage of the share value up front. This is called the Margin Requirement. With equities it starts at 5% of the full value. So if you invest in a 10,000 position, your initial margin would be 500. When you trade on margins, you are able to earn or pay interest on your position. Another great advantage of trading in CFDs is that there is no minimum on the size of the trades you are allowed to place.

What are CFDs main advantages and disadvantages?

Trading in CFDs sounds almost too good to be true, but naturally there are some disadvantages to be aware of and although there is a huge potential for big returns in trading CFDs, you can potentially lose more money that you initially invested.

There are two types of CFDs and these are known as Long CFDs and Short CFDs.Long CFDs are when you believe that the share price or index will rise. You buy CFDs to make a profit when it goes up, or a loss if it should fall instead. In CFD trading, this is known as a Long Position.

Short CFDs refer to making money on CFDs even when you think that the price of a share or index might be in danger of falling. You sell your CFDs at a high price with the intention of buying them back again when the price falls. This is known as taking a Short position.

With long CFDs, the maximum amount of money you could lose would be the notional value of the CFDs you bought. However, the stock market would need to fall to zero before that could happen. With short CFDs, there is potentially no limit to the amount of money you could lose. If the price of your position continued to rise, you would keep losing money until you closed the position.

One main disadvantage is that you might need to make further deposits at very short notice if your positions move in the wrong direction, so you need to have the funds available at your disposal.

Trading in CFDs is not for everyone and before you consider getting involved you should give a great deal of thought to how much you are willing to lose should things go awry. However, CFDs are open ended, so as long as you can continue to keep financing your position, you can keep the contract open for an unlimited period if you are hopeful the position will recover sufficiently.

   

How to hedge an investment portfolio

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hedgingWHAT IS HEDGING?

In the financial and investment industry, hedging is the practice or lowering the risks that are inherent with a particular investment by using a variety of methods. 

You establish a position in one market to offset the price fluctuations occurring in an opposite market in order to minimize your exposure to risk.  There are certain financial vehicles that you can employ to accomplish this such as forward contracts, insurance policies, and options to name just a few.

PORTFOLIO HEDGING STRATEGIES

It’s unfortunate but hedge funds have been put in a bad light and have been associated with continually taking undue risks when investing.  In so many words, many individuals view this as blatant greed.  The practice of hedging is appropriate for reducing the downside in your portfolio while at the same time preserving any growth prospects.  Here are a few suggestions for how to hedge an investment portfolio.

Purchasing put options – this is a way to sell your options or stocks for an agreed upon price at a later date.  Should the market fall, you are able to sell them at a profit and offset your losses.  For downside protection, you can use a put option against:

  • your individual stocks
  • an index that your portfolio has been modelled after
  • a major index such as the S&P 500

Real assets – commodities, real estate, and REIT’s offer diversification as well as effective hedging.  Where commodities are concerned, you can invest in ETF’s (exchange-traded funds) or trade commodity futures.  You need to be careful when playing the commodities market as futures typically correlate with the broader economy.

Shorting stocks – this is the opposite of purchasing stocks.  The concept involves borrowing a stock and selling your right to acquire it at a later date for the current price.  You are gambling that the price of the stock is going to fall in the future.  This enables you to purchase the stock at a cheaper price in the future and then pay back your obligation while pocketing your profits from the short sale of it.  Despite the fact that there is limited profit potential, the potential for loss is unlimited.

Finally, other hedge options that you should consider are cash, bonds, and/or gold.  Gold has been bought, sold, and traded for centuries, but it is still one of the most effective ways to hedge your investment portfolio.