Managing risk in global property (10)

Managing risk (3)

Focussed stock selection (2)

Westfield is a good example.

Westfield owns high quality assets in primary markets and has very secure cash flows.

In addition, the company has raised substantial new capital so is well poised to take advantage of any opportunities that should arise.

We've increased our holding and it is one of our top quality picks.

Another one of our high quality stocks is SL Green Realty, a US REIT with exposure to the country's strongest office market, Manhattan, New York.

We hold the management team in high regard and have taken the opportunity to increase our exposure while the stock is at significant discounts to valuation

Source: AMP Capital Investors, Australia

Managing risk in global property (9)

Managing risk (2)


Focussed stock selection (1)

Right now, stock selection is even more critical.

We will continue investing into defensive sectors such as premium retail and healthcare but remain careful with how much we invest in the office sector.


a) Good quality management,

b) cost of capital, balance sheet quality and

c) debt exposure are key elements of our analysis.


Source: AMP Capital Investors, Australia

Managing risk in global property (8)

Managing risk (1)

Taking into account the volatile environment, AMP Capital has implemented investment strategies designed to best manage risk across our global property portfolios.


Controlling risk through investment decisions

In general terms, we have improved the overall quality of our portfolio through increased holdings of higher quality stocks with more secure cash flows, and higher weightings to the more mature and higher yielding regions.


Regional allocations:

We have increased our allocations to higher quality mature markets such as Australia and the US and reduced our overweight position to the less developed European markets.

We've also maintained a cautious overweight position to younger, faster-growing property markets in Asia.


Source: AMP Capital Investors, Australia

Managing risk in global property (7)

How will this affect property? (4)

The combined impact of these issues has clearly had a significant effect on market sentiment.

However, there are also some direct implications for property markets


‧ Finally, in the event that we do see

i) an economic slowdown in the US, this will

ii) impact employment growth and

iii) demand for office and industrial space particularly in the major centres,

iv) leading to weakness in these markets.


Although this scenario is not a major part of our forecast, we are monitoring the situation carefully.


Source: AMP Capital Investors, Australia

Managing risk in global property (6)

How will this affect property?(3)

The combined impact of these issues has clearly had a significant effect on market sentiment.

However, there are also some direct implications for property markets


‧ The weak US housing market (the owner occupied market) may also affect the multi family (for rent) sector which represents about 15% of the US REIT market.

Somewhat perversely a weak owner occupied market can have a positive outcome on the multi family sector as families who cannot afford a mortgage move into rental accommodation.

However, given the extent of the US housing market weakness we think that it is inevitable that the multi family market in some regions will be adversely affected and we are positioning our portfolio accordingly


Source: AMP Capital Investors, Australia

Managing risk in global property (5)

How will this affect property?(2)


The combined impact of these issues has clearly had a significant effect on market sentiment.

However, there are also some direct implications for property markets


Negative impact on direct property markets

‧ Increased borrowing costs and reduced availability of finance are likely to have a negative impact on direct property markets.


This could potentially lead to

i) higher cap rates and consequently,

ii) lower property values.


Source: AMP Capital Investors, Australia

Managing risk in global property (4)

How will this affect property?(1)


The combined impact of these issues has clearly had a significant effect on market sentiment.

However, there are also some direct implications for property markets:


REITs


‧ REITs are typically relatively conservatively geared at around 40% to 50%.

Most of their borrowings are for fixed terms (around five and a half years for US REITs) so, in the short term, they are reasonably immune to global credit markets.

However, in the medium term, the rising cost of debt will almost certainly impact their bottom lines.


Source: AMP Capital Investors, Australia

Managing risk in global property (3)

What's happened in global investment markets?(2)


By February this year, investors began to question how long this would continue, especially if benign interest rate conditions turned sour.

The strong Chinese growth numbers in February threatened to do just that.


At the same time, investors were still questioning the impact of a slowdown in the US housing market which began back in 2006.

The final straw that came later in 2007 was the sub prime issue with its immediate impact on

i) property markets (both direct and listed) and

ii) related concerns over US economic growth, further reinforcing already negative market sentiment.


Source: AMP Capital Investors, Australia

Managing risk in global property (2)

What's happened in global investment markets? (1)


When the US sharemarket fell by around 10% in late February 2007, investors around the world were on the alert.

The immediate cause of the correction related to concerns that Chinese growth rates may need restraining via a coordinated global tightening in monetary policy.

The issue subsided shortly after and most markets swiftly recovered.

Listed property, however, continued to experience falls, underperforming the broader share market.

To understand why this has happened, it is first necessary to look back over the last few years.

One of the drivers of the outstanding performance of global listed property in the last five years has been the returns from the underlying properties themselves.

Property yields (cap rates) have fallen consistently in many markets to record lows.



Source: AMP Capital Investors, Australia

Managing risk in global property(1)

Listed equity markets have tumbled


Listed equity markets have tumbled over the last few months primarily on the back of concerns stemming from US economic issues – notably the sub-prime debt issue with its broader implications plus a rapidly deteriorating US housing market.

In many regions, listed property sectors have fallen even further than general equity markets and have struggled to recover.

This has occurred despite stable direct property markets and positive underlying fundamentals including rental growth, vacancy levels and investor demand.

We explain what has taken place and discuss our strategy for managing risk in these volatile conditions.


Source: AMP Capital Investors, Australia

The trend is your friend (5)

ADX


Lastly we can use ADX to assess the trend strength.

When the ADX reading is above 20, it indicates a strong trend – something that we should take advantage of.

There are 2 other lines +DI and –DI under the directional system that we should be aware of.


When +DI is above –DI, it suggests that the trend is up.

When +DI is below –DI, it suggests that the trend is down.

The trend is your friend (4)

Simple moving average


Use simple moving average, and, use

i) 20-week MA on weekly chart to determine the long-term trend,

ii) 20-day MA on daily chart to determine the intermediate-term and

iii) 10-day MA to determine the short term trend respectively.


The choice is personal.


Test the various type and length of MA, and, choose one that suits you.

The trend is your friend (3)

Moving average (MA) line.


To complement our trend analysis we can look at the slope of a moving average (MA) line.

This makes our analysis more objective.

When the slope of the MA is rising the trend is up, when it is declining the trend is down and when it is flat the trend is sideway.

The question is which type of moving average should you use and what is the length

The trend is your friend (2)

Trend pattern


A pattern of

i) higher highs and lows depicts an uptrend,

ii) lower highs and lows depicts a downtrend and

iii) comparable highs and lows depicts a sideway pattern.


The shortcoming with this method is we need at least 2 highs and 2 lows.


The trend would have been too far underway for us to take advantage of.


To overcome this we can anticipate the 2nd high or 2nd low by looking at technical clues, e.g. reversal candle patterns, take-out of previous high or low etc.

Next draw a trend line connecting the lows when the lows are getting higher or highs when the highs are getting lower.

When the trend line is up the trend is up and when it is pointing down the trend is down.

The trend is your friend.(1)

The truth in trading

Pardon the cliché’ but it is one of the truth in trading.

The question is how can you tell that the trend is there and which direction is likely to go?

This is what I hope to share with you from my observations and experiences trading the stock market.

The easiest way to determine the trend is by looking at price patterns on the price chart

Global Rising Rates Repercussions (8)

Oil prices can stay high

Oil prices can stay high while rates rise and equity prices rise because real demand generally comes from real productivity demand.

Even if you pay a higher price for a commodity, it still works because the product used generates sufficient improvement in productivity in countries like China and India.

Consuming nations like the US and Japan will have to bear the burden as that will eat into margins without sufficient improvements in productivity.

For Japan, the case is slightly different because it is finally emerging from its deep recession of over 13 years.

Hence the economy can withstand much more rate increases from a very low base.

The smaller Asian nations would be able to better cope with inflation via their appreciating currency.

Global Rising Rates Repercussions (7)

US dollar could afford to stave off the devaluation?

7) As for smaller emerging and developing markets such as Singapore, Malaysia, Thailand, Indonesia, HK - they will be forced to follow suit on any US/China rate increases.

However, their stockmarkets would have a better chance of rising further after having recovered from 97/98 financial implosion.

A substantial correction in US dollar would spell a temporary end to their bull runs as investors would then be able to lock up gains and cash out.

Is there any way the US dollar could afford to stave off the devaluation?

Not this time as every single asset class seems to be ganging up to push the dollar lower.

How many more rate increases can the Fed make to support the dollar without derailing the US domestic economy?

Global Rising Rates Repercussions (6)

Resilience of the US dollar

5) While the resilience of the US dollar, it appears that the moon and stars have converged to force the issue.

If the Fed tries to delay the substantial correction in US dollar, they will have no choice but to put in further increases in rates.

The next rate increase may still not be sufficient to derail the status quo.

Roughly 3 times of 50 basis points increase.


6) What China is doing in raising rates is more to protect its domestic overheated economy.

China will allow for the yuan to appreciate gradually.

Both will put a stifling effect on Chinese stocks .

Global Rising Rates Repercussions (5)

Investors pouring funds into stocks

3) Investors are still pouring funds into stocks of almost all markets, chasing equity and currency gains at the expenses of US dollar.

They will continue to do that until the US dollar drops substantially, thus improving actual returns of investors (hedge funds included).


4) Rates cannot continue to rise without something happening to asset prices.

Surprisingly, equity prices in America have surged.

The inevitable will happen, there will be more rate hikes in the US and the bottom will fall out.

Global Rising Rates Repercussions (4)

US is printing loads of money


Long term observers of gold would note that gold rallies tend to coincide with long periods where returns from other asset class are diminished.

Again, that does not seem to apply for now.

Growth in equity markets will be pared down by higher rates but investors are attracted to potential gains in the respective country's currencies also.

So what gives?

These are the important conclusions:

1) US is printing a whole bucket loads of money.

In order to finance the consumption patterns in America, US dollars in circulation has to rise. As long as there are willing holders of US Treasuries, nothing really bad will happen.

Global Rising Rates Repercussions (3)

Stockmarkets, interest rates and currency are on an uptrend.


One can understand why China needed to raise rates, however that is in an environment where its currency is also appreciating.

The rates squeezing movement in the US and EU have also forced second tiered players such as the smaller Asian economies to follow suit.

Now we have a situation where most country's stockmarkets, interest rates and currency are on an uptrend.

The exception being US where their currency would come under more pressure.

Usually higher rates would stifle equity markets but that equation seems to be ineffective for the time being.

All that is more surprising in that oil prices are also stubbornly high.

Not to mention other commodities, including gold.

Global Rising Rates Repercussions (2)

China's boom in lending and investment

New loans soared at least 61% ,causing investment in factories and other fixed assets to climb 29.8%.

China's boom in lending and investment, which has contributed to the country's rapidly rising exports, pushed growth in China's economy to 10.2% .

That was high even by China's extraordinary standards, and so strong that President Hu himself warned that the country needed efficient, high-quality development and not "excessively rapid economic growth."

Prime Minister Wen Jiabao warned that China would move to tighten controls on real estate and lending.

Global Rising Rates Repercussions (1)

China's central bank raised lending rates.

This was obviously to rein in the world's fastest-growing economy.

The action may not be so important if the US did not also do the same.

The Chinese action aims to slow a spectacular surge in investment and it may potentially brake China's voracious appetite on world markets for oil and other commodities.

With interest rates already climbing in the United States and the EU, and with monetary officials starting to tighten policy in Japan, China seems to be joining the world's central bankers in trying to gain control of speculation that has driven up prices of assets like gold and real estate.

From steel mills and auto factories to luxury apartment buildings and plush office complexes, China has been engaged in a nationwide building boom fueled by easy loans from banks and other financial institutions.

Markets Are Always Looking For Reasons(5)

Discounting instrument

Markets are necessarily a discounting instrument.

It tries to discount all the realistic projections, net present values, etc... as best it could.

The stock market would move up to try and discount that properly.

In general, the stock market cannot look too far ahead, 12-18 months is about as far as it will go as studies have shown that markets seem to regard anything longer than that as too wishy-washy to take into account properly

(i.e. too many variables and things can happen to change the equation).

Markets Are Always Looking For Reasons(4)

Discerning between what is "really bad market moving news" -

usually they are new news.

(not the ones that are heard once a week like

i) GDP growth forecasts; or

ii) another economist's bearish prediction; or

iii) research houses sell recommendations; etc.).


They may involve a

i) corporate scandal

ii) manipulation

iii)CBT.


The thing which cropped up last week was a good example of largely unanticipated news.

I do not think the market's over-reacting here because Asian countries have seen examples of the effect it can have on the real economy should portions of the economy shut down.

Markets Are Always Looking For Reasons(3)

Build up the anticipation of a correction

When markets run up like it did for the past month - fair and not overly excessive -

All participants are looking for reasons to correct.

Usually a run will last 1-2 weeks tops, and then correct slightly before moving forward again.

Prolonging the bull run will only build up the anticipation of a correction even more, thus making the correction quantum more severe than it needed to be, when it finally arrives.

Markets Are Always Looking For Reasons(2)

Market rallies

Market rallies such as the one seen on for the past month needs to be understood further.

The leaders of the market for the past one month were second and third liners, that should be easy to spot.

That also meant that the beta of these stocks (volatility) are very high.

Barring any "bad news", the rally should continue for some time.

Markets are always looking for reasons, either to go up, or down.

The skill is in spotting what is "reason enough".

Bull markets tend to brush away a lot of negative news.

Bear markets tend to brush away a lot of good news.

Deciding on what will turn the tide - well, like they say, you have pay the tuition fees, gentleman!

Markets Are Always Looking For Reasons(1)

Correction


How do you characterise the correction, particularly over the last few weeks?

It is a normal occurance, especially in a bullish market?

I do not trade the market anymore for short term gains (i.e. less than 10 days turnaround).

Whenever you say that you like a stock, there will always be some who will question your integrity the moment it dips.

Let's be fair here, an opinion on a stock is just that, an opinion, not a fail-proof trading idea.

Certainly not one that will provide for the immaculate in-and-out.

Hence when you buy a stock, do not be flustered if the price drops soon after -

always ask if the

i) basis,

ii) justification and

iii) grounds of your purchase are still intact.

If they are, everything should even out in the end.

Asian Equity Markets (6)

Asian bourses


Asia accounted for only 11% of the total global equity market capitalisation.

Currently, Asia accounts for slightly more than 20% of total global GDP.

Asia could very well rise to the 25% figure (of global GDP) within the next 10 years.

Bearing in mind also that Asian bourses have a much higher percentage of its GDP that is listed compared to the rest of the world, so the 11% figure is more skewed.

All said, more and more professionals recognise these important trends in Asia.

Even if Asian equity markets were to gain just 10% a year from here on, it would take at least 10 years before Asian equity markets reaches anywhere near parity with its share of GDP production and consumption patterns.

Asian Equity Markets (5)

Supporting by Asian governments

Asian governments are supporting these trends by

i) investing in education and infrastructure,

ii) offering favorable tax and regulatory treatment, and

iii)reducing tariffs and other barriers.

These measures, as well as Asia's underlying attractiveness, are helping to facilitate record numbers of cross-border transactions as well as rising trade and investment flows into the region.

After the 97 implosion, Asian countries are

i) a lot friendlier to one another, and

ii) there is renewed need for more cross-border trade,

iii) cooperation and inter-dependency among Asian countries.

Asian Equity Markets (4)

Asia a crucial market place

Asia is still a place where we can produce manufactured goods for export cheaply, but is quickly moving up the value-added ladder.

More importantly, Asia is now a crucial market place for

i) commodities,

ii) consumer goods and

iii) to a lesser extent services.


Less appreciated is the fact that Asia is quickly becoming a hub for

a) advanced R&D (research and development), as well as

b) design,

c) production, and

d) test-marketing of higher-end products such as


i) automobiles,

ii) consumer electronics and

iii) a range of technological applications and services

Asian Equity Markets (3)

Asia grew

More importantly, significant steps have been made to finally drag Japan out of the financial doldrums with mportant changes particularly with respect to abolishing cross-holdings, restructuring postal savings scheme, opening up of Japanese companies to foreign interest, and a renewed penchant for corporate restructuring.

All that is happening with the consumer base of two of the largest populated markets in the world (India and China).

Hence to view Asian equities as cyclical would be dangerously foolish and uninformed.

Asia grew at an impressive 7.3% in 2004, according to the Asian Development Bank.

In fact, 2004 marked the region's "best growth performance since the Asian financial crisis of 1997-98".

First-quarter 2005 data supports the view the region remains on an upward trend. India grew at a 7% rate while Japan registered 5.3% during the first three months of 2005.

That trend has basically continued going into 2006.

Asian Equity Markets (2)

Change after the 97 financial implosion

The situation, especially after the 97 financial implosion, have seen major developments in many important fronts in Asia.

The rise of out-sourcing to China, the rise of middle class consumerism in China.

The same pattern being replicated in India albeit 5-8 years behind China.

The excesses of the 90s being wrung out of the financial systems of most Asian economies.

South Korea and Taiwan moving up the technology and design curve appreciably.

Singapore edging ahead in the war with HK for financial center supremacy.

The (minor but significant) steps taken in the eradication of corruption in Asian economies.

Asian Equity Markets (1)

Asian Markets Are In

Asian markets are in for a for the next few years.

Back in 80s or even 90s, investing in Asian stocks was deemed so exotic that its like taking an occassional safari trip for European/American fund managers.

Despite the boom years for Asian equities in 93-96, many professionals still regarded Asian markets and even Asian economic growth as cyclical and temporary.

That view had some truth in it as in decades past, much of Asia was producing primary goods, non-value-added products, churning out low-end cheap products - all of which are susceptible to cyclical effects and not much long term sustainability.

Share Buybacks (7)

Ask themselves more questions

Any worthy share buyback has to be canceled for it to be effective.

Companies not doing that, need to ask themselves more questions as to why their share price is not at a level where it should be –

i) are investors not happy with the management’s vision;

ii) is the company not communicating its plans effectively;

iii) has the company not been able to chart a credible track record;

iv) have the financial results for the company been haphazard or inconsistent;

v) is the company too unfocused or too diverse that nobody even wants to follow/research the company;

vi) how is the management track record been in treating minority shareholders;

vii) have transactions or deals been really fair to all shareholders or been forced down investors’ throat –

chances are the stock will be rated properly if the above concerns have been addressed.

Hence most share buybacks will not be entirely successful as it is fighting against the “enemy” when the “enemy” is really internal and not external.

Share Buybacks (6)

Make their intention known

It is safe to say that companies should make their intention known to the public when doing sharebuybacks –

is it for future placements to institutions;

to be canceled, if so please state a time frame;

not to be canceled, but to be sold back into the market when price is higher;

or to be disbursed as bonus.

To me, that is vital information and I believe investors will rate the stock accordingly with the new information.

Bottom line, if it is not going to be canceled, share buybacks are not really that big a positive in rating the company.

Most times, companies who do share buybacks will not see significant improvements in their share price –

investors do not rate a company higher because of that as investors are not buying the stock in the first place for various other reasons, and the freefloat is not really a major reason.

Share Buybacks (5)

The danger of share buybacks

The danger is that share buybacks can be taken advantage as “insider trading” by management as it involves market timing –

hence the authorities must be more vigilant when it comes to the timing of share buybacks.

If a company buyback the shares and do not cancel them, are they waiting to unload when price is higher?

That is tantamount to trading in their own shares or having an investment portfolio. Is that part of the company’snormal course of business?

Can this activity account for a substantial amount of profit for the company?

How should analysts regard this profit – probably not enthusiastically as it is considered as a “one-off.”

Share Buybacks (4)

Free float

If a company has to resort to improving their share price by reducing free float, it is usually not successful –

a simple glance at the past 2 years' price performance of most of these companies will tell you that.

By reducing free float, it is a futile exercise as the company will have to accumulate a significant amount to prop up the share price –

that seems artificial no matter how you look at it as the only group really keen to own the shares is the company themselves.

Of course, share buybacks can successfully engineer higher share prices by massively reducing free float but they will have to meet regulations for minimum free float in the market place.

Share Buybacks (3)

The funds should be returned to shareholders.

Companies raise cash for investing in growth, if they find no good investing opportunities after a prolonged period and cash flow is healthy, the funds should be returned to shareholders.

Companies doing share buybacks are basically saying that that is the best way to spend their excess cash.

To arrive at that decision, they must be convinced that their share is undervalued compared to their company's prospects.

A company’s share price may not reflect its true potential –

who knows the company’s fundamentals better than the people running them.

Then we have to look at why management is doing this –

is it to improve share price via reducing the free float;

and/or improve the earnings per share (but that only happens when they cancel the shares).

Share Buybacks (2)

Reasons to keep profits

Successful companies may keep accumulating profits to prepare itself for two general reasons:

i) market down cycles, or

ii) in order to take advantage of opportunities when there is a market/industry correction/sell-down.

Companies should only indulge in share buybacks when accumulated funds are in excess for the above two reasons.

This is because share buybacks will deplete reserves and may not be easily convertible to cash when there is a down cycle or market correction – the time when funds may be needed for those two purposes.

Companies doing share buybacks must and should consider this aspect before embarking on the said exercise.

Even then, the company can still decide on other options to do with the excess cash –

give back to shareholders in the form of dividends or bonus – especially in a matured industry.

Share Buybacks (1)

Share Buybacks & Why They Usually Fail


Every few months, the papers would highlight the amount of share buybacks by listed companies, deliberating their merits, pros and cons...


Why there is a stockmarket


We need to understand first why there is a stockmarket in the first place?

First, it is there to allow companies to raise cheap funds to fund their growth strategies.

Second, it is to allow for individuals and other entities to participate in the growth of these companies.

Other reasons are secondary in nature.

A company raises funds to facilitate corporate strategies, hopefully they will make money, preferably higher than the prevailing interest rate (if not, all funds should put money in the bank and close shop).

Bonds (20) Trust deed

The common terms used in association with bonds

The following terms are associated with bonds and we need to understand what they mean in order to understand bonds


Trust deed


A trust deed is the legal agreement detailing the issuer's obligations related to the bond issue.


It contains

i) the terms of the bond issue and

ii) any restrictive provisions placed on the company, such as a

iii) requirement for the company to set up a sinking fund, or

iv) the inclusion of a call provision.


An independent trustee administers the trust deed.

Bonds(19) Term-to-maturity

The common terms used in association with bonds

The following terms are associated with bonds and we need to understand what they mean in order to understand bonds.


Term-to-maturity


This is the number of years over which the issuer of the bond has promised to meet the conditions and obligations of the bond issue.

During this time, the bondholder is paid the promised coupon payments and it also indicates the time period remaining before the bondholder is paid back the principal.

The term-to-maturity also affects the bond yield and the bond price.

Bonds (18) Coupon rate

The common terms used in association with bonds

The following terms are associated with bonds and we need to understand what they mean in order to understand bonds.

Coupon rate


The coupon rate is the amount of interest the bondholder will receive periodically.

For example if the nominal value of the bond is $100,000 and the coupon rate is 7%, then

the bondholder will receive an annual interest of $7,000.

If the agreed periodic payment is every six months, then the bondholder will receive $3,500 every six months.

Bonds (17) Nominal value

The common terms used in association with bonds(1)

The following terms are associated with bonds and we need to understand what they mean in order to understand bonds.


Nominal value

The nominal value of a bond is the par or face value also

referred to as the principal value of the bond.

This is the amount the issuer of the bond has agreed to pay the bondholder at the maturity date.

In view of this, the principal is also called the redemption or maturity value

Bonds (16)

How are bonds rated?

How do you know if an issuer is likely or not likely to default in paying back your principal or in delivering the agreed periodic coupon payments?

There are rating agencies, independent of the corporations issuing the bonds, that analyse the credit risk of bonds and provide a rating scale for the benefit of investors.

Credit rating is an objective and impartial third-party opinion on the ability and willingness of an issuer of a bond to make full and timely payments of principal and interest over the life of the bond.

The rating is given in the form of standard rating symbols, and is designed to rank, within a consistent framework, the degree of the default risk of a particular bond relative to others in the market.

The rating ranges from the highest grade (an AAA according to the RAM rating) given to the best credit risk, down to C which is the lowest grade before actual default

Bonds (15)

How do I invest in bonds?

The best way for you to invest in bonds is through bond funds or fixed income funds.

The funds are managed by professional managers and the income earned from the investments is then distributed to unit holders in proportion to their ownership.

The general bond funds usually invest in the medium- to long-term bonds while the money market funds and short-term bond funds invest in short-term bonds.

A short-term bond has a maturity period of less than a year and is technically referred to as a money market instrument.

Bonds (14)

How are bonds traded? (2)

The trading of bonds in the secondary market creates a market pricing of the bonds that depends on the supply and demand of the bonds, and the prevailing interest rates, among other factors.

When the market price of the bond is less than its par value, the bond is being sold at a discount.

When the market price of the bond is more than its par value, the bond is sold at a premium.

The secondary market plays an important role because:

i) Investors purchasing bonds at the primary market know there is an avenue to sell off their bonds.

ii) The secondary markets provide a gauge for issuers to price their primary issues.

Bonds (13)

How are bonds traded? (1)

When the issuer first offers new issues, that first trading is done in the primary market, where the money raised from the sale of the bonds goes directly to the issuer for its use.

Subsequently, the bonds can be bought and sold among other investors, and this is referred to as the secondary market.

The secondary market provides liquidity to buyers of the bonds who are now able to sell the bonds before the maturity date, should they wish to do so.

Bonds (12)

How do bonds rate with shares?

Investing in bonds has the following advantages and disadvantages when compared to investing in shares:

Disadvantages Investing in bonds

a) Investor does not get paid more

As the income (coupons) derived from bonds is stipulated, the investor does not get paid more even if business is booming as in the case of ordinary shareholders who may be given higher dividends.


b) No voting rights and not owners of the company

Bondholders have no voting rights and are not owners of the company while shareholders have a right to vote at general meetings as owners of the company in accordance to the number of shares they hold.

Bonds (11)

How do bonds rate with shares?

Investing in bonds has the following advantages and disadvantages when compared to investing in shares:


Advantages Investing in bonds

a) Receives Periodic Interest Income

Investor receives periodic fixed (or variable) interest income, irrespective of whether the company issuing the bonds is doing well or not.


b) Prior Right

Bondholders have a prior right over ordinary shareholders on the distribution of earnings and on claims in the event of bankruptcy.

Bonds (10)

How risky are bonds? (3)

Iinterest Rate Risk

A bondholder is also exposed to interest rate risk if he sells his (or buys another's) bond before maturity.

Interest rates have an inverse effect on bond prices.

When

i) interest rates rise, outstanding bond prices fall and when

ii) interest rates fall, the bond prices rise.

Hence, short-term bonds will mature faster and be less affected by the movements in interest rates, but they pay lower returns.

Longer-term bonds will be subject to greater interest rate risk but pay higher returns.

Bonds (9)

How risky are bonds? (2)

Bonds issued by the government (or any stable government of economically strong countries) are considered the least risky.

It is in a nation's interest that bonds issued by its government


a) pay their coupons and

b) the principal sum

so that

i) the credibility of the government remains strong and

ii) it can continue to raise capital through the future issuance of bonds.

Bonds (8)

How risky are bonds? (1)

As is the case with all investments, there is some degree of risk in investing in bonds.

Two important risks are

a) credit risk and

b) interest rate risk.


Credit risk

is the risk that the issuer will default - that is,

i) it cannot pay the coupons or part of them, or

ii) it is unable to pay the principal on maturity.


This is why bonds are rated .

Bonds (7)

Why invest in bonds?

Investors invest in bonds because

a) there is stability of income from the coupons,

b) the principal sum of the loan is preserved and

c) there are also opportunities for capital gains (due to the tradable nature of bonds).

Some investors view shares as generating higher returns but most acknowledge that bonds are less risky than shares.

Bonds also yield greater returns than savings and fixed deposits.

In other words, bonds present a good balance for those too cautious to invest heavily in the share market but wishing more returns than just keeping their money in the bank.

Bonds (6)

Who buys bonds?

Mainly institutional investors such as the

financial institutions,

discount houses,

large corporations and

asset management companies (like the pension, insurance or unit trust funds).

The individual/retail investors do not normally participate in the bond market because bonds are normally sold over-the-counter (OTC), in large amounts - an average investment being about million.

However the individual investor could invest in bonds indirectly by investing in bond funds.

Bonds (5)

Who sells or issues bonds?

Governments,

government agencies and

corporations which need funds, for the bond market is another avenue for raising capital.

When a bond is issued, it means the government or corporation is borrowing a specified amount of money from the investor for a specified period of time.

The bond market comprises government bonds and private or corporate bonds.

The government bonds were initially issued to meet the investment needs and to fund the budget deficits of the government.

Later bonds were issued to raise funds for financing public sector developmental expenditure.

Corporate bonds, also known as private debt securities (PDS), are issued by corporations.

Such bonds are privately placed with investment institutions and traded on the secondary market by finance companies and discount houses.

Bonds (4)

Basic characteristics of a bond

The basic characteristics of a bond are:

A maturity date - date the amount borrowed must be repaid;

A stipulated rate of interest payment or coupon rate

- the coupon rate is normally a fixed rate though interest can be paid on a floating rate basis according to a pre-agreed formula;

the face or par value (principal sum) redeemable upon maturity.

Bonds are often referred to as 'fixed income' securities because the investor knows how much he will get back on maturity.

Bonds (3)

What is a bond?

A bond is basically an IOU, a debt instrument for a loan which is issued by a borrower to an investor who is the buyer of the bond and lender of the monies.

In return for the monies, the issuer agrees to pay regular interest to the bondholder for the term of the loan and the principal sum borrowed upon maturity.

However the buyer does not have to hold the bond until maturity;

he can sell it anytime before maturity if he wishes.

Thus bonds are tradable assets i.e. can be bought and sold among investors.

Bonds (2)

Learning the Basics (2)

Bonds are ideal for raising capital to fund long-term development projects.

Over recent years, great efforts have been spearheaded to accelerate the development of the bond market and

to encourage the usage of bonds as an asset option for investors,

as well as a financing choice for borrowers of capital.

Over the past 10 years, the bond market has grown substantially in terms of trading activities in the secondary market and in terms of market liquidity.

But what exactly are bonds?

I introduce bonds by presenting below some of the most frequently asked questions about bonds.

Bonds (1)

Learning the Basics (1)


Bonds are your lesser-known investment product, much overshadowed by the well-known stocks and shares and the rising star, the unit trust.

However bonds have a crucial role to play in financing the country's development.

They provide an alternative avenue for corporations to raise capital.

A mature bond market plays an important role in stabilising the overall financial system of a country.

In many developed countries, the market capitalisation of the bond markets is larger than the stock markets

The Worth of a Warrant (5)

Warrant (5)

Why do companies issue warrants?

Warrants are often issued to investors together with debt securities (particularly bonds) in a package.

The warrants are detached from the bonds and traded separately.

Companies embarking on projects with long gestation periods normally opt to issue such packages.

Doing so enables them to raise capital initially from the sale of debt (bonds), and subsequently from the sale of the warrants near the expiry date.

The latter is timed to coincide with the time when the potential earnings of the project start materialising so that additional shares issued for the warrants would be supported by higher earnings

The Worth of a Warrant (4)

Warrant (4)


Should the situation be reversed, whereby the price of the underlying instrument or share as in the example above,

falls below $2, you might decide not to exercise your rights to subscribe to the share at $2.

It is no longer attractive as you can buy it from the market at a lower price.

(Please note that the above is just an example to illustrate the point and should not be taken as investment advice to buy or sell warrants).

Remember that the warrant becomes worthless after the exercise period has expired.

The Worth of a Warrant (3)

Warrant (3)


For example,

when you buy a warrant for a share of a company, you pay the price of the warrant (say, $0.50 per unit), which is usually much lower than the price of the share.

The warrant gives you

the right,

during the exercise period,

to subscribe to the share at a fixed price of, say, $2 each share.

If the prevailing price of the share rises to more than $2, you might decide to exercise your right and buy the share at the agreed price of $2.

The Worth of a Warrant (2)

Warrant(2)

When you buy a warrant, you pay the price of the warrant which is usually lower than that of the stock or

commodity it covers and so requires less capital than buying the instrument directly.

The warrant then gives you

the right to purchase the underlying instrument

at an agreed price

during the exercise period.

The Worth of a Warrant (1)

Warrant(1)

Transferable subscription rights (TSRs) or

warrants (as they are now more commonly called) give the holders

the right but

not the obligation,

to subscribe for new ordinary shares at a pre-determined exercise price within a stipulated validity time frame (exercise period).

The warrants become worthless after the expiry of the exercise period.

Warrants are thus a form of call options.

Futures and Options (14)

Put Options (3)

As long as the YYY share price drops to below $10, you would make a profit because your put option is in-the-money.

Remember your strike price is $10.

But if the share price rises,

your put option would be out-of-money and

your option will expire worthless with you losing the premium you paid for buying the put option.

Futures and Options (13)

Put Options (2)

Let's say the price of YYY starts to slip to $12.

You buy a put option for 1,000 YYY stock with a strike price of $10.

If the YYY share price keeps falling before the expiry date of your option,

you could exercise your right to sell your YYY shares at $10 a share, no matter what the market price falls to.

Or you could hold your YYY shares and close your position by selling your put option.

Futures and Options (12)

Put Options (1)

Investors buy put options to protect their investment portfolios from downside risk, or

to profit from expectations that the market of the underlying security will tumble.

For example, let's say you had bought 1,000 shares of YYY Company at $10 a share some time ago.

The price is now riding at $15 but you anticipate that the share price will drop sharply over the next few months.

However you don't want to sell your stock because you think the drop will be short-term, but you need to protect your investment against the decline.

Well, you could resort to buying options

Futures and Options (11)

Options (5)

If the XXX share price does not rise above your strike price (of $30),

then your option will be considered out-of-money and

when the expiry date arrives, your option expires worthless and

you lose all your investment money, which is your premium of $3,000.

Futures and Options (10)

Options (4)

Two, you don't exercise your option but instead sell your right to buy 1,000 XXX shares.

You can sell your option for $10 a share and receive $10,000.

Your profit will equal $10,000 minus your premium $3,000 equals $7,000.

Either way, the end result is the same (a profit of $7,000), but selling your option is less cumbersome.

It is up to you which way to go, although most of the time, investors don't exercise their options to buy the security

Futures and Options (9)

Options (3)

There are two ways to realise your gain.

One, you can exercise your option, that is, you cash in your right to buy 1,000 XXX shares from the seller of your option and $30,000.

Then you sell the 1,000 shares at the market price of $40 and realise your profit

which is $40,000

minus $30,000

less your premium of $3,000

equals $7,000(profit).

Futures and Options (8)

Options (2)

First, call options.

Let's assume that you buy a call option for $3 premium a share with a strike price of $30 a share for 1,000 shares of XXX Company.

Your option therefore costs you $3,000 ($3 x 1,000 shares).

This means you have bought the right to buy 1,000 XXX shares for $30 a share until the expiry date.

Now, because you own a call option, you want the XXX share price to go higher than $30 so that you will make a profit.

Let's assume that it does go higher, to $40.

Your option price could then soar from $3 to $10.

When this happens, your option is in-the-money, because the share price of $40 is higher than your strike price of $30

Futures and Options (7)

Options (1)

Options give the buyer/holder of the option the right, but not the obligation, to buy or sell a specified asset at a specified price (strike price), at or before a specified date from the seller, for which the buyer pays a premium.

(This limits the buyer's potential loss in the options market to the amount of his premium.)

Options that give the buyer the right to buy are known as calls.

Options that give the buyer the right to sell are known as puts.

The seller of the option has a contingent liability or an obligation, which is activated if the buyer exercises his right.

To understand how options work, examples which are not to be construed as investment advice to trade in options, but are for illustration purposes only.

Futures and Options (6)

Futures Contract (3)

If a trader has bought a futures contract, he will sell it to close out when the price has gone up.

On the other hand, if a trader has sold a futures contract, he will buy it back to close out when the price goes down.

The futures market acts as a risk-shifting mechanism, enabling those exposed to these risks to shift them to someone else.

The allure of futures trading is that you don't need a lot of money to start.

You are obligated to put up a percentage of the contract value i.e. you trade on margin.

If the price swings in your favour, you stand to gain the amount of profit that is calculated from the entire contract value.

Of course, if the price swings the other way, your loss is also calculated from the whole contract value.

Thus, because futures allows you to control a larger amount of a product without paying a lot of money upfront, it is high stakes investing.

For a small sum, you could win - or lose - a fortune within minutes.

Futures and Options (5)

Futures Contract (2)

Hence when you buy a futures contract, it requires you to take delivery of the goods - or to make delivery if you sell the contract - unless your position is closed.

However most of the time, the delivery exchange doesn't take place and positions are closed out or resold before the expiry date.

This is because the main purpose of futures trading is not to buy or sell the physical goods or financial instruments but to manage the risk of price changes for hedgers; and for speculators, to profit from the changes.

As the market price of the futures goods fluctuates during the contract period, a difference arises between the contract price and the market price and so the futures contract shows a gain or loss in value.

Most traders, both the hedgers and speculators, will close out their contracts by taking an opposite position, when they feel the contract value has risen or fallen in their favour.

Futures and Options (4)

Futures Contract (1)

Futures contracts are like forward contracts in that they represent an agreement between a buyer and a seller to exchange a specified amount of cash for an asset at a future date.

But unlike forward contracts, futures contracts are traded on an exchange and the agreements are standardised with contract specifications stating exactly the amount and quality of goods to be bought or sold at a fixed price at a fixed future date.

The contracts are not privately arranged but made known publicly so that anyone can participate in the trading.

Each futures contract has an expiry date, which is the last day of trading in the particular contract month.

On that day, any futures position that is open (i.e. has not been closed out - meaning offset - by an opposite transaction) will be called upon for physical delivery or cash settlement.

After the expiry date, the futures contract ceases to exist.

Futures and Options (3)

Forward Contract

When an agreement to buy or sell an asset at an agreed price and specified date is privately made between two parties, it is termed as a forward contract.

For example, a crude palm oil refiner requires 1,000 tonnes of crude palm oil in six months time.

He finds a palm oil producer who agrees to sell him the 1,000 tonnes at a specified date and price, six months down the road.

Such an agreement between the two parties is a forward contract.

Forward contracts are therefore not standardised,meaning that as long as the price and date set is agreeable between the two parties, they can create their own forward contract on any commodity.

Such a form of privately arranged trading is done over-the-counter (OTC) as opposed to buying and selling futures contracts at the exchanges.

Futures and Options (2)

High Stakes Investing(2)

It is important to understand fully the risks and financial liabilities involved in trading futures and options before you even begin to consider venturing into these investments.

The complexity of these instruments cannot be fully explained here, so a simplified explanation of what they are is offered here.

Futures and options are basic derivative instruments whose values are dependent on the value of an underlying asset such as

common stocks,
bonds,
indices,
currencies or

commodities e.g.

crude palm oil,
rubber,
cocoa .....

They are often used for risk management or hedging by investors to safeguard their investments in anticipation of future market directions.

Speculators also trade in the market, trying to achieve a profit by buying futures at a low price and selling at a high price.

Speculators are important participants who give liquidity to the market and opportunities for continuous trading

Futures and Options (1)

High Stakes Investing(1)

Investors who trade in futures and options are dealing in a different world of investing, removed from stocks, bonds or unit trusts.

It is a specialised market where the pace is much faster and the risk, higher.

While with stocks, an investor can still afford to sit back and see which direction his shares are heading,

in futures he has to stay on top of price all the time for he can lose a fortune or make a fortune in minutes.

Futures and options are not for the amateur investor;

even those who are extremely knowledgeable and who trade all the time have been burnt.

Wise things to know about equities(2)

Unfortunately such spot on accuracy is usually impossible to achieve, so what you can do is try to catch a portion of each big swing.

You buy when the upswing has begun, and sell as the downswing starts.

But for this to work, you must be able to curb your greed as you don't know exactly when the top or bottom is reached.

The stock market can be said to be driven by two emotions:

greed and fear.

People get caught up in the boom fever and pay silly prices for unworthy shares - this is greed driving bull markets.

In bear markets, people get carried away with the ruling pessimism and are overeager to believe the worst rumours - this is fear dominating bear markets.

You must step away from the crowd and not let the mob mentality take over your rational reasoning and action.

Wise things to know about equities(1)

If you are patient and calm enough to endure market ups and downs, equity investments grant you good returns.

Centuries of world economic data and our own bourse history bear this out.

However, stocks and shares are also the most volatile asset class in terms of price movements and thus, the most risky.

Hence, do not invest directly in the stock market unless you can endure a fall in price without it having any impact on your day-to-day living standard.

Remember the truism in investing:

the greater the reward, the higher the risk.

The aim of investing in stocks and shares is to buy at a low and sell at a high, but knowing when, is the problem.

Many investors attempt to time the market:

they try to figure out when the market is going up and buy into it before it does, and then figure out when it is going to crash and sell everything just before it does.

Stocks and Shares (5)

Rights Issue

A rights issue gives the existing shareholders the right to subscribe for new ordinary shares at an issue price lower than the prevailing market price and at a ratio equivalent to their existing shareholding.

Companies carry out a rights issue when they want to raise additional funds to finance their capital requirements.

In offering a rights issue, the company sends out a provisional allotment letter (PAL) to all existing shareholders informing them of the rights issue entitlement.

Shareholders are required to follow all the instructions given in the PAL in subscribing their rights for the new shares.

If you choose not to exercise your right, remember that the PAL can be sold to the open market (if quoted) or the entitlement can be renounced to someone else.

Often, you will see a category of 'A' Shares listed in the newspapers and investment magazines.

The listing of 'A' shares refer to the issue of shares not qualified to entitlements, such as dividends, bonus and rights issues.

These shares will later merge with the existing shares after the entitlement date.

Stocks and Shares (4)

There are also two other types of share issues an investor will come across in trading shares, and they are bonus and rights issues.


Bonus Issue

A bonus issue is the issue of new ordinary shares at no cost to existing shareholders but out of the company's reserves and in direct proportion to their existing shareholding in the company.

Bonus issues are used to enlarge the capital base of the company and may also be used as a means of rewarding its existing shareholders.

To be entitled to the bonus share, take note of the Ex-Date as only shares bought before the Ex-Date will be entitled to the bonus share.

The period from the day of announcement of the entitlement of bonus or rights issue or dividend to the day before the Ex-Date is commonly referred to as the cum-period.

Normally, Cum is a prefix meaning "with." A share that is cum-dividend means the buyer is entitled to a dividend currently attached to it.

The same is true for cum-rights and cum-bonus.

Stocks and Shares (3)

For long-term investors, it is important to select shares based on fundamentals, which means investors need to be knowledgeable about the companies in which they plan to invest their savings.

It is therefore important that you read and understand:

the prospectuses,

financial reports and,

corporate announcements,

which listed companies are required to issue to the shareholders and the investing public.


In selecting shares, you should examine factors such as:


the background of the company and its management,

its financial strength,

price-earning ratio

dividend yield,

its earning growth prospect

and competitive edge.

A wise investor checks out these factors which may affect the price of a stock before putting in his money.

Stocks and Shares (2)

You should be aware that there are risks associated with buying shares.

When the company performs poorly, its shares may fall in value and you may not receive any dividend.

There are other factors such as the performance of the stock market as a whole and the country's economic situation that may affect the price of your shares.

It is also possible that you may lose your entire investment if the company goes out of business.

There are also shares that are difficult to sell if the demand for them is lacking.

It is therefore important that you select the right companies to invest in.

Financial advisers will generally recommend shares as part of an investment portfolio.

The aim in trading shares is of course to buy at a low and sell at a high price.

Stocks and Shares (1)

Stocks and Shares

When you buy stocks or ordinary shares, you own part of the company and have the right to vote at general meetings.

Each share is a small stake in a company and you can buy small or large number of lots depending on the amount of money you have.

As a shareholder, you can benefit from the profits earned by the companyin the form of dividends paid to you, and also from the growth in the value of the company.

But why do companies issue shares?

The company benefits by raising funds to operate and expand its business without having to borrow the money from other sources such as banks.

REIT (11)

Smart tips for REIT investors:


Before you invest in REITs, observe the following:


Read and understand the prospectus thoroughly;

Study the list of real estates included in the REIT investment portfolio, such as the location of the real estates, tenancy mix, lease length, rental payments in arrears and other related investment information (e.g. dividend policy, and fees and charges);

Analyse and understand the fund’s annual reports.

So, if you are thinking of investing in REITs, get as much information as possible on the product from the management company to help you make a well-informed decision.

If in doubt as to the action to be taken, consult your stockbroker or any other licensed professional adviser.

REIT (10)

Risks (2)

Loss of control over investment

Investors will not have direct control over the management company’s investment decisions like when to buy or sell certain real estates, or how they will be managed.


Market factors

Like other investment products, REITs are subject to the vagaries of market demand and supply.

As such, market fluctuations, confidence in the economy and changes in the interest rates may affect REITs price.

There are other risks associated with investments in REITs.

Please read and understand these risks that are extensively highlighted in the REIT’s prospectus.

REIT (9)

Risks(1)

Distribution is subject to cash availability

If the real estates of the REITs do not generate sufficient net operating profit and cash flow, the REITs ability to make distributions will be adversely affected.

Returns are not guaranteed

The dividend payments from investing in REITs are not guaranteed and the total return of REITs, amongst others , is subject to the performance of the property market.

Hence, the unit price of a REIT may go down if its underlying properties drop in value.

REIT (8)

Why should you invest in REITs? (2)


Liquidity

Unlike traditional private real estate ownership, REITs are liquid assets that can be sold fairly quickly to raise cash or take advantage of other investment opportunities.

One of the reasons for the liquid nature of REITs is that its units are primarily listed and traded on a stock exchange.


Affordability

Unlike direct property investments, where investors would require a large capital to invest, REITs provide average investors with the ability to invest and diversify their real estate investments without a large capital.


Convenience

Sale and purchase agreements, lawyers’ fees and stamp duties are among the many things real estate investors have to put up with.

Through REITs, investors are relieved of such factors.


Comfort of regulations

REITs must comply with the requirements of the Securities Commission Act , the Guidelines on Real Estate Investment Trusts which has investor protection as its main objective.

REIT (7)

Why should you invest in REITs? (1)

Stable and recurrent income

REITs are driven entirely by recurrent rental income from real estates.

It distributes at least 90% of its income to unit holders, thus providing stable and consistent income to unitholders.


Diversification

REITs invest in a variety of real estates at different geographic locations.

This diversification strategy reduces the negative effects associated with holding assets in a single location.


Professional management

Professional managers manage REITs and they have the expertise beyond the knowledge of individual investors.

REIT (6)

What is the difference between REITs and property stock/company? (2)

Property stock/company


Property stocks are shares of companies (property companies) which deal in real estate or property-related business.

A property company is managed like any other company.

A property company owns real estates and is not restricted to carrying on a business in property investment and property development.

The board of directors, on behalf of the shareholders, will monitor a property company to ensure that its assets are protected and that the company is properly run.

An investor of a property stock is not subjected to management or trustee fees.

A property company is not subject to such requirements.

A property company is subject to corporate tax.

REIT (5)

What is the difference between REITs and property stock/company? (1)

REITs

REITs is a “fund” or “trust” that invests in real estate and property-related businesses, including property stocks.

An Securities Commission (SC) approved management company manages a REIT.



An appointed trustee safeguards the assets for unit holders.

A REIT has a well-defined investment policy and invests largely in a portfolio of income-generating real estates.


The trustee holds the real estates or properties in a REIT portfolio in trust for the REIT investors.

A REIT investor is subjected to management and trustee fees.


A REIT has to distribute 90% of its income as distributions.

REITs are exempt from income tax.


Unitholders pay tax at their respective level.

REIT (4)

How to invest in REITs?

There are listed and non-listed REITs.

For listed REITs, you can buy and sell them like listed stocks.

There are currently REITs listed on the Bursa Malaysia and investors need to go through a stockbroker to invest in them.

Like any listed products on the Exchange, investors should be aware that REITs may trade at a premium or discount to their respective net asset values.

For unlisted REITs, like any other unit trust products, you can buy from or sell to the management company or through other authorised agents.

REIT (3)

In essence, REITs work like anyother trust funds which involve the following parties:

REIT (2)

What is REIT?

Real estate investment trust or REIT is a collective investment vehicle (typically in the form of a trust fund) which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets (e.g. shares in public-listed property companies, listed or unlisted debt securities of property companies etc.).

It is a passive investment vehicle which acquires and holds income generating real estates.

REITs are driven entirely by recurrent rental income from real estates and with the present tax structure governing REITs, distribute at least 90% of its income to unit holders, thus providing stable and consistent income to unitholders.

The objective of REITs is to obtain reasonable investment returns.

Total returns are generated from the rental income plus any capital appreciation that comes from holding the real estate assets over the period.

Unit holders will receive their returns be in the form of dividends or distribution and capital gains for the holding period.

REIT is an asset class that sits between bonds and equities.

Its features are more similar to bonds than equity stocks.

With their regular and stable yields, REITs should appeal to risk averse investors.

REIT (1)

REIT Demystified

To most people, real estate investing is limited to residential ownership with little thought of owning shopping complexes, industrial warehouses or office buildings etc.

Now, real estate investors can literally stretch their investment horizon with REITs (pronounced “reets”) which combine the best features of real estate and trust funds.

They give an investor a practical and effective means to include professionally-managed real estate in a diversified investment portfolio.

It also allows small investors a means to invest in real estate assets through a vehicle that is highly liquid compared to buying a real estate itself and with a smaller investment capital.

Diversify

If there's one solution that keeps jumping out to you in how to manage away a lot of the risks in investing, it's diversification.

Diversification means 'to spread it around', that is, to spread your money over several, not one, investments.

Like not putting all your eggs in one basket, for if you drop the basket, chances are they will all break.

Likewise, if you sink all your money into one stock and if that stock plummets in value, you could lose all of your money.

Generally, a diversified investment portfolio has different baskets of investments so to speak.

Each basket could be likened to an asset group (like stocks or bonds or futures).

The next step is to further diversify within that asset group.

Hence buying stock means buying stocks of various sectors, or buying unit trust means buying more than one kind of unit trust fund (there are income funds, growth funds, bond funds etc.)

The strategy is to mix high-risk and low-risk investment vehicles and to allocate them wisely among your baskets and within each basket. Why?

So that you have a better chance of winning within an asset class and among the asset groups.

Imagine the unfortunate circumstance of having all your savings tied up in the stock market and needing immediate cash but the stock market remains stubbornly bearish.

This is not diversifying among asset groups.

Or putting all your money into property shares only to have real estate sink into the doldrums while other sectors are booming.

This is not diversifying within an asset class.

But with diversification, if one of your assets takes a nosedive, you have many alternate assets to fall back on.

If you diversify smartly, the losses in the non-performing investments will be easily absorbed in the gains of the better performing ones.

Your investment risks are minimised while your average rates of return are maximised.


However avoid over-diversification.

While you don't want to store all your eggs in one basket, you also don't want to scatter your eggs among so many baskets that you find it difficult to monitor your investments.

Furthermore when you are over-diversified, your investments start to counter-balance each other so that your rate of returns is actually diminishing.

Investment Tips (2)

Here are several indications of real investment:

# Reasonable monthly rate (less than 5%), more than that can be categorized as a high risk investments

# No compounding

# High minimum initial deposit (minimum principal is 50, 100, 1000 or sometimes 5000 usd)

# Short holding periods of your principal (usually takes 1 month to 6 months)

# No referral commissionNow the question is, if you successfully find an Online Investment Programs that fulfilled all criteria above, are you assured that your monies will be working for you as a clock work without any delay?

I would like to point out the difference between an ordinary investor.
Here some Investment Tips I would like to share with you in order not to become an ordinary investor but a smart investor.

Some good investment programs indicated by:

# They give you ID of traders + fund manager, office location and respective phone number.

# They give you proof of their trading.

# Due Diligence by third party will be an added value.

# Usually they become hot topics on many investment blogs and forums.Few things need to be highlighted once you willing to get in or already inside the investment program in regards to rules changing (terms and conditions) of each investment.

# Adding minimum deposit

# Going private

# Profit rate or principal withdrawal takes a longer time than it should be.If you aware, these might be a red flag or a true sign that the investment program you are referring to is experienced problems.

Get out quickly because you do not know on the next day they will gone with your monies. Several excuses will be provided by them such as:

# Trading loss

# Site and payment processor being hacked

# fraudulently deceived by a single individual who has full control of assetsAt my last Investment Tips, I would like to emphasize NEVER ever double you money in one investment program.

Takes your monies once their reach 20 - 30% in profit.

Put the maximum 50% in profit if you confidence enough with your investment program and move to another venture.

Its better to play safe though and hope stay on the right track making money to fully possible extent

Investment Tips (1)

By Yuliarko Sukardi

As many investors may know, Online Investment Programs offered via the internet are mostly end up with losses or scam.

Extensive due diligence in credible and worthwhile offshore investment programs is substantially needed prior to invest your monies in.

It should be noted that there are major difference between real investment programs and HYIP or High Yield Investment Programs.

The main characteristics of HYIP are define as follow:

# High daily rates

# Compounding system is allowed

# Low minimum initial deposit (principal as minimum as 1 usd)

# Long holding periods of principal (usually takes 6 months or 1 year)

# Referral commission is availableIf you willing to play your monies with fun, HYIP can be a money game you are looking for.

You should know when to get in and when to get out of the game, since HYIP adopt a ponzi/pyramid scheme which means the new comers pay the old members.

It just a matter of time when this program will collapse (short period in fact, when the number of new comers is less than or even the same as the old members).

Hence the chance to get win as an old members is higher than the new comers.

But if you really are a genuine investor you should be wise enough not to have a look at that one.

Do and Don't in the Stock Market

DO

Always check all information when trading.

Have a proper investment plan.

Invest wisely and prudently.

Be aware of a stock's true value.

Take the time to understand stock market principles, practices, cycles,
and its ups and downs.

Know your strengths and weaknesses.

Protect your portfolio and share capital.

Minimise your risk, and maximise your returns.


DON'T

Make the same mistakes.

Follow-the-crowd without doing sufficient research.

Invest following your emotions.

Be impatient.

Be greedy.

Invest in one place.

Diversify your investments.

Over-borrow.

Loan repayment is not an investment.

Listen to rumours.