Investing: Single Stock Futures

Single Stock Futures (SSF) allow investors to profit in both bull and bear markets and hedge against some of the weak performers in their portfolio.

SSF are futures traded on individual stocks. Holding a SSF guarantees the sale of purchase of its underlying share upon expiry of its contract at an agreed price. As it derives its value from the price of its underlying security, it's assumed the SSF is similar to a warrant. However, there's a distinct difference; the SSF doesn't carry a strike price (the stated price per share for which the underlying stock may be purchased by the option i.e. warrant holder upon exercise of the option contract). This means that by holding a single SSF, investors either pay or receive payment for 1,000 underlying shares, which is its standard contract size, upon maturity. Because cash payment is received or made, actual physical shares don't change hands. This process is called a cash settlement.

Before being permitted to trade SSFs, investors must maintain cash reserves in a trading account that is equivalent to 10% - 25% of the underlying stock's value. This 'initial margin' functions like a good-faith deposit, providing assurance those investors can meet their obligations if the SSF moves against their position (that is, the price falls after the SSF has been acquired).

The low margin requirement to trade a SSF provides the opportunity for an investor to trade the same amount of stock that a traditional investor does but for less than one-fifth of the cost and compared to buying shares on margin, SSFs require less money to trade.

So, SSFs free up more funds for investments. Meaning, lower margins indicates greater leverage and greater leverage allows investors access to more investment products with a smaller capital.

Many industry participants believe trading SSFs is straightforward. Buy or go 'long' on a SSF if you expect the price of its underlying share to appreciate. Should the price going down, then sell or 'short' the SSF.

Leverage is a powerful benefit but do remember that this means you could lose large amounts as well. It's important that investors monitor the performance of SSFs closely as the value can surge and collapse very quickly.

Gains and losses are posted to the SSFs trading account at the end of each business day. This procedure, called 'mark-to-market', is performed by the futures broker that conducts the trading transactions. If performance of the SSF runs contrary to the position that was taken, additional funds must be added to maintain the minimum margin requirements and to continue trading the SSF. Failure to meet this margin would result in forced liquidation of the SSF contract.

The ability to 'short' a SSF is often cited as its main advantage. This term refers to selling a security that the investor doesn't own. This is similar to regulated short selling (RSS) for selected stocks, which is slated to begin in the third quarter of the year, but there's one big drawback with RSS. The 'up tick' rule only allows investors to short the share if its last price movement was 'up'. This rule is designed to keep short-sellers from driving down the price of a falling share even further than it would go otherwise. SSFs are exempt from this rule as they can be sold 'short' at any time.

This is why SSFs can be used in both bull and bear markets. During volatile periods, SSFs offer investors a quick way to neutralize risk by hedging. Bear in mind, a complete SSF trade consists of a buy and a sell transaction. Thus, the 'sell' must be followed with a 'buy' to close the position. If the contract is held till maturity, your position will be evaluated with the price of the SSF on that particular day. If your positions generate a loss, you'll be asked to top up your trading account. On the other hand, if a profit has been made, you're allowed to withdraw funds. Like other derivatives, trading in and out of SSFs is done very quickly, either within a single trading session or over a few days. One such strategy called spread trading, can be applied when the investor believes the price of one share will fall or rise in relation to another stock. By buying a SSF contract on a share that is expected to rise and going 'short' with a SSF on the other stock, the investor can profit from the spread between both securities.

These strategies are supported by the low cost of trading. SSFs are extremely cheap at approximately $10 per transaction, which is much lower than general share transaction fees.

While SSFs are not an overnight success, the development of today's investing environment calls for many different tools, which make it possible for the informed investor taking advantage of different market conditions. In conclusion, investors should take note of the SSFs benefits while being aware of its risks.

Michael Russell Your Independent guide to Investing

Retirement Planning & 401 K Investing: Secrets to Keeping the IRS Out of Your 401K

At some point in the future, you will no longer be working where you are. Whether it’s because you retire, get laid off or change employers, it’s your responsibility to be prepared. It’s a necessity -- your retirement depends on it.

That’s because when it comes to your pension funds, you have several options open to you when you leave your job. And if you don’t know what those options are, and choose the wrong one, you will have the IRS smack dab in the middle of your IRA. This means your chances of having the opportunity for long-term tax deferred wealth building become very slim.

Option 1: Taking a lump-sum distribution (cash out)

Off the top, you will lose 20% of your accumulated money because your employer is required to withhold this amount for federal taxes. Cashing out your retirement plan is counted as receiving ordinary income, and depending on your tax bracket (ordinary rates now reach 35%) you may end up owing even more than that 20%, and that doesn’t include the state taxes that may apply as well.

Furthermore, if you are younger than 59½ (age 55 in some limited cases) you will be penalized for an additional 10% off the top. So, our old pal Uncle Sam just slashed your retirement savings you have accumulated for your Golden Years by a third or more!

Avoid this entirely. (In fact, it’s difficult to even think of it as an “option.”)

For example, Dan, age 50, left his job. He had $100,000 in his employer's 401(k) plan. Dan decided to take the money from the plan and open a self-directed IRA account. As a result Dan's former employer sent him a distribution check for $80,000 -- Dan's $100,000 account balance, less 20% withholding. To avoid all income taxes and penalties, Dan must not only deposit the $80,000 check within 60 days of the distribution, he also must deposit $20,000 (the amount withheld by his employer) by that same date. The $20,000 must come from sources outside of the distribution. If Dan does not have $20,000 from other sources, that amount will be treated as a distribution and will be subject to income taxes and penalties.

Sure, Dan will get this $20,000 back in the form of taxes withheld when he files his tax return, but that could take a number of months. Why go through this hassle when using the correct transfer method will avoid the 20% withholding and will not make you scramble to find funds to cover the withholding amount?

Build Your Wealth and Retire Financially Secure With Your 3 Other Options

Your other options include (1) leaving your money with your former employer’s plan; (2) rolling it over to your new employer; or (3) rolling it over to an IRA.

Each of these options will help keep the IRS out of your IRA, if you choose wisely and follow all the rules, which can be complex. However, there’s more to consider than merely the tax implications. What about growth? Safety? The next Enron?

Retire Financially Sound or Retire With Debt – It’s Your Responsibility To Make The Right Choice

So, in conclusion, taking a lump-sum distribution (cash out) from your 401K means that all the money you withdraw will be subject to income tax at ordinary income rates that now reach 35%. And don’t forget that additional penalty of 10 percent on top of the ordinary income tax if you leave your job before age 55. This will leave you with no tax deferred wealth building for you and your family, which means there is a good chance you will not retire financially secure. Is that what you want for you and your family?

Avoiding all the pitfalls and dangers can be accomplished by choosing the right kind of rollover for your IRA, based on your specific, individual and unique situation.

Remember, this is your retirement nest egg. The better you can protect it and invest it, the farther along the road to a glorious retirement you will find yourself.

Paul Hooper, President of Marketracker Capital Management, Inc. can help you keep the IRS out of your IRA. Learn how to make smarter choices with your money by emailing paul@marketrackeronline.com to receive a FREE SPECIAL REPORT full of ideas and tips on how to keep the IRS out of your IRA and roll it over in a way that will lead you to a life of prosperity. Be sure to include SPECIAL REPORT in the subject line to ensure a safe delivery.

Investing Your Talent for God’s Glory from Matthew 25:14-30

PRIEST

Matthew 25:14-30
The Parable of the Talents

14 “For the kingdom of heaven is like a man traveling to a far country, who called his own servants and delivered his goods to them. 15 And to one he gave five talents, to another two, and to another one, to each according to his own ability; and immediately he went on a journey. 16 Then he who had received the five talents went and traded with them, and made another five talents. 17 And likewise he who had received two gained two more also. 18 But he who had received one went and dug in the ground, and hid his lord’s money. 19 After a long time the lord of those servants came and settled accounts with them.

20 “So he who had received five talents came and brought five other talents, saying, ‘Lord, you delivered to me five talents; look, I have gained five more talents besides them.’ 21 His lord said to him, ‘Well done, good and faithful servant; you were faithful over a few things, I will make you ruler over many things. Enter into the joy of your lord.’ 22 He also who had received two talents came and said, ‘Lord, you delivered to me two talents; look, I have gained two more talents besides them.’ 23 His lord said to him, ‘Well done, good and faithful servant; you have been faithful over a few things, I will make you ruler over many things. Enter into the joy of your lord.’

24 “Then he who had received the one talent came and said, ‘Lord, I knew you to be a hard man, reaping where you have not sown, and gathering where you have not scattered seed. 25 And I was afraid, and went and hid your talent in the ground. Look, there you have what is yours.’

26 “But his lord answered and said to him, ‘You wicked and lazy servant, you knew that I reap where I have not sown, and gather where I have not scattered seed. 27 So you ought to have deposited my money with the bankers, and at my coming I would have received back my own with interest. 28 So take the talent from him, and give it to him who has ten talents.

29 ‘For to everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away. 30 And cast the unprofitable servant into the outer darkness. There will be weeping and gnashing of teeth.’

PRIEST

I am not going to make this a long sermon but I want to stress some points in this story that many people do not know. A talent in this story is a measure of weight and in the times of Jesus, this was a measure of weight of between sixty and eighty pounds. If this was silver then five talents would make a person very rich. Today he would be more then a millionaire.

Well everyone wants to be a millionaire. People say that it takes money to make money, so let say I gave you one talent. Let’s say I gave you $200,000. How many of you couldn’t make some money out of that?

Don It’s good to see you in church. Tell me, you used to be a fisherman. Would two hundred thousand dollars set you up in a good trawler?

DON

I could Captain one and manage another two with that sort of money. PRIEST

Well Jesus is making a point here. How lazy would a person be if they had two hundred thousand dollars and put it under their bed and did nothing with it.

If you have a talent, God wants you to use that talent and do good for Him and humanity. Don’t push your talents aside and go after money and waste all that money keeping up with the Jones’. You can never have a better car and a better house and a better looking garden then your neighbour’s.

If your talent is knitting, a few dollars a month can have you knitting jumpers in front of the TV and missionaries in poor countries can do a lot of good with those jumpers. What is little money here in Australia is plenty of money in Africa and China.

If you have been given a gift from God, don’t squander your life coveting your neighbour’s possessions and working to have all the best of everything, take some time and money and invest in your talent and become so good at it that it brings in a great reward for God.

If you are a good sower, sow things and let people who are poor be blessed. You never know how a poor person may come to love your God when it’s your jumper keeping them looking smart and warm during a cold winter.

If your gift is singing. Don’t worry about singing up on the lead microphone come and sing in the choir and sing as part of a team. Sing your heart out and get lessons and get better at singing. Who knows one day you might even record a few songs and people could be really blessed with what you do.

If you are good at something, don’t chase money and success with your life, invest some time and money into your talent and make it shine so that the God who gave it to you may get some credit for His wonderful gift He gave you.

There are plenty of people who don’t know God who make their talents shine without Him. Don’t bury your talent, invest it like they have.

I pray that all your readers are blessed by this passage out of a screenplay I am currently writing. I think the priest did a nice short but meaningful sermon on the talents. I pray that you would use your talents to God’s glory.

Matthew shares his faith on the streets of Sydney through conventional evangelism and prophetic evangelism, he preaches sometimes at the churches he attends, and is part of an online prayer website where he prays for people online at http://www.online-prayer.net

He writes articles here each week when he gets the time and would love to hear from you if you have a question for him.

Market Update: The Need For Bread & Butter Investing

Remember back when George Bush Sr. was defeated, in large part because people felt he did not address the tough economic conditions that voters faced? In fact, there became a slogan that reminded him "It’s the economy, stupid!" Since the voters felt like he did not properly address those issues, he was replaced.

As real estate investors, we are facing a similar situation today.. "It’s the real estate market, stupid!" Read most any news source and you will rapidly convince yourself that these are not the exploding markets seen during 2003, 2004, and parts of 2005. So as a real estate investor, what are you going to do? While I let you mull over that question, let’s digress a little.

In our next article, I highlight two trips that I took last week; one to a resort location in Florida and one to resort location in Texas. Want to talk about a Dr. Jekyll and Mr. Hyde scenario. In one location, I wouldn’t wish a property there onto my worst enemy (even though I love the location) and in the other, I would buy the right property there without a second thought.

An interesting discussion ensued as my staff and I discussed bringing out a project from the second location. What we discovered was that even though it was a great opportunity, we also realized it does not have the "sex appeal" that many properties have had in the past. Yet, when we analyzed what we considered to be solid opportunities, we came to the conclusion that many fit this category: very solid, no brainer opportunities even though they have a very low sizzle factor.

After continued discussions, my staff encouraged me to put the Florida/Texas article on hold for a week and write about what is probably forefront in many real estate investors minds.. What now for real estate investors?

THE MARKET CHANGE

Here is a news flash for you:

Explosive Growth In The National Real Estate Market Has Slowed Or Reversed

Hopefully that does not surprise or concern you. The period of time that we have traveled through was phenomenal for investors.. Off the charts. IT WAS ECONOMICALLY IMPOSSIBLE TO CONTINUE THAT GROWTH RATE.

On the other hand, experienced real estate investors KNOW that there are still perfectly good opportunities out there now, will be 6 months from now, 1 year, etc. However, for many investors, they must come to grips with what were unrealistic expectations fueled by the explosive market. Let me give you an example.

I can show you several projects where you can walk into $20,000 of real, no BS equity and be able to cashflow the project. But, in the day and age of fast, easy money in real estate, unless somebody thinks they are going to score a quick $50K -$100K, then they just YAWN at $20K in equity.

But let’s put this in perspective. Suppose I could show you a very low-risk, cash flowing opportunity that puts $20K equity in your pocket and has good upside. YAWN, right? How much money would you need to invest in CD’s to accomplish that? Right now, CD’s are paying around 5% so you would need to tie up $400,000 to create the same net effect. Ok, forget the CD idea. Let’s consider investing in an index fund or its equivalent. Historically, this has AVERAGED 11% returns but we all know it may take 10+ years to "average" to 11% with many down years in between. So, you would need to invest about $180,000 to "average" that $20K return this year.

Bottom line is that if we get NORMAL appreciation, we get reasonable CASHFLOW, and we BUY RIGHT, we can far exceed the returns of other available investments and we can do this with very low risk (depends on property choice). This is how plain Jane real estate investment has worked for ages.

BREAD & BUTTER INVESTMENTS

In exploding markets, one of the great things is that you can buy just about anything and it will work out in your favor.. At least, until the music stops and you are left without a chair. In more normal (or even declining markets), there are still PLENTY of opportunities but we just have to be a lot more selective.

Do you want to know the major difference between a new investor and a savvy, 20-year veteran with lots of battle scars? They focus on different things.

New Investor: How much money will I make? Savvy Investor: What is upside potential relative to downside?

As I will show in an example below, the savvy investor works hard to put themselves in situations where there is MINIMAL RISK but yet VERY HIGH UPSIDE POTENTIAL. They are not naïve enough to think that all their investments will explode. They just know if they put themselves in enough good reward/risk situations, then some investments will break even/lose a little, some will make reasonable returns, and some will explode and make them more money than they ever dreamed possible.

An interesting side point is that this is the same formula that many successful stock traders use. They develop a system by which they minimize any money at risk (by placing stops and covers) while letting the upside potential be great; a high Reward to Risk ratio. With real estate investors, it is the exact same concept. The bread and butter basic for any investing is not "buy low and sell high." Rather, it is buy with minimal risk and with high upside potential. For real estate investors, the ingredients for creating this bread and butter investment are simple:

Buying Right: They like to buy below market to add safety. In many cases, they know 5-20% or more below a stable market provides tremendous security.

Appreciation: They base their purchase decision on conservative appreciation estimates. They look for the RIGHT INGREDIENTS for explosive growth but never count on it occurring. When it does, they get a homerun.

Holding Costs: Using rents & cashflow, and possible appreciation during a construction phase, they try to either minimize their holding costs or create a slight positive cashflow.

Natural Demand: The want to see that there should be lots of natural demand for their investment whenever they are ready to sell or to rent out. This way, they know they have a good exit whenever they chose.

When these components are present, and the numbers make sense, they buy the investment. Successful investing is a simple, and boring, as that.

A BORING EXAMPLE

Let me give you an example of a personal investment that I did in the Destin FL area. This occurred before GetPreconstructionDeals.com was formed but illustrates several key points. Here are the details:

Preconstruction Townhomes Purchase Price: $200,000 Fair market value at time: $210,000 Build Time: 9 Months Market Rents: $1,200 - $1,300 "Expert Estimates" Of Value $235,000 after construction Down Payment $20,000

If you looked at the property, the plans, etc., absolutely nothing remarkable about this project. For most, this property was a first class YAWN! The people buying high flying condos on the beach laughed at this "opportunity". Unfortunately, many of these same high flyers are now facing -$10,000 or more negative cashflow, per month, on the beach. What we knew was that there was a need for this type of product and that getting this rented would be easy if we did not sell it immediately.

From a risk standpoint, we knew there was almost zero risk since at worst, we could rent these out and break even. We saw no way that the prices would likely reverse backwards from this point. From a reward standpoint, it looked like that if everything played out as planned, we could probably net $20K from a $20K investment, over a 9-12 month period. YAWN! Not bad but not substantial.

From a homerun side, yes the ingredients were in place for Destin to keep exploding but Destin had already seen 2 years of substantial appreciation. Would it continue? I was not counting on it. Long story short, the explosion did occur and the value of those townhomes exploded to $315,000.. That was pure "luck" but was created by investing when all the right ingredients were in place. When you do that repeatedly, then sometimes you will get "lucky". Since the peak, the value of these units has fallen back to around $270,000 which is still great when you paid $200,000 for them and they are cash flowing.

Copyright 2006 GetPreconstructionDeals.com

Dr. Chris Anderson is the founder of http://www.GetPreconstructionDeals.com and is referenced in many venues including the New York Times and USA Today. Get his weekly, thought provoking articles by signing up today!

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