Showing posts with label Terms. Show all posts
Showing posts with label Terms. Show all posts

Sunday, May 31

Naked short selling

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Naked short selling is the selling of a stock without prior ownership of the stock. In other words, one sells a stock which he does not owned or has not borrowed. This is often done in an attempt to profit from the difference in the selling price or buying price. For example, if you sold 1 lot of a counter at $1.00 and buy back 1 lot of the same counter later at $0.90, you will gain a profit of $0.10 per share or a total profit of $100.

SGX has imposed rules on naked short selling. If the naked short selling results in failed delivery of the shares to CDP, SGX will impose penalties on the person who perform this transaction. The penalty currently stands at 5 percent of the value of the transaction or a minimum of $1,000. Additionally, SGX will buy back the shares on the third day of the transaction from 1130am onwards on behalf of that person with a processing fee of $30. After the completion of this buying in, SGX will publish the list of securities which have been bought, the volume and dollar-value at 8:30 am the following business day.

My advice to those who wish to carry out short selling is do not use naked short selling. There are other cheaper and better ways of carrying out short selling. This includes the use of Contracts for Difference or CFD in short, Securities Borrowing & Lending or SBL in short, which is available through some brokerages, or the Extended Settlement Contracts or ES contracts in short, which has been introduced by SGX not long ago.
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Monday, April 13

Liquidity

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I received quite a number of mails that ask me on what is liquidity so I thought it will be good to do a post regarding this. Liquidity with regards to stocks can be defined as the trading volume of the stock. You can also see it as a measure of the number of times which the stock change hands between buyers and sellers. I have taken a snapshot of some of the stocks listed on SGX which you can see below and highlighted the trading volume with a green rectangular box. In a nutshell, if the trading volume is low, it means that the stock has a poor liquidity and vice versa.


Liquidity is an important factor for stocks as it affects whether you can buy or sell your stocks easily and the difference between the buying and selling price, which is also known as the spread. If you purchase a stock which has a low liquidity, you may have problems selling it as there may be a lack of buyers. Even if there are buyers, they may not be willing to pay the price that you wish to sell your stock at, and this may result in an unfavourable selling price for you.
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Thursday, March 19

What is contra ?

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Contra is the buying or selling of stocks without having to pay for the cost of the stocks. Once you buy the stocks on contra, you will have to sell the stocks after a period of time. At the end of that period, you will have to pay for the difference between your initial buying price and selling price.

Currently, the period of time offered by the local brokerages to settle your payment and pay for the difference between the initial buying and selling price is 3 days although the period of time can be extended depending on your relationship with your broker, credit record and the frequencies of trades that you carried on with the brokerage.

For example, you bought 2 lots of SGX at a price of $5.00 on Monday which is also known as T+0. 3 days later which is on Thursday, also known at T+3, you will have to sell those 2 lots of SGX which you bought on Monday. Assuming you sold those 2 lots of SGX at a price of $5.20 on T+3, your profit before brokerage fees would be ($5.20 - $5.00) * 2 lots * 1000 shares =$400 since 1 lot is equal to 1000 shares and you will not have to pay for the cost of buying the 2 lots of SGX which before brokerage fees is $5.00 * 2 lots * 1000 shares = $10,000.

However, if you sold those 2 lots of SGX at a price of $4.80, you will have to pay for the losses since your selling price is lower than your purchase price. Thus your loss before brokerage fees in this case is ($5.00-$4.80) * 2 lots * 1000 shares = -$400.

Contra can be dangerous when there is a sudden unexpected market movement and you do not have enough funds to pay for it. Let us consider the following case with reference to the previous examples. For example, on T+3, the price of SGX suddenly plunge to $3.50 and you have no choice but to sell it at this price. Thus your loss before brokerage fees in this case is ($5.00-$3.50) * 2 lots * 1000 shares = -$3000 and that will be disastrous if you do not have the funds to pay for it.
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Sunday, March 1

SIBOR

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SIBOR stands for Singapore Interbank Offered Rate and it is set by the Association of Banks in Singapore (ABS). It is the rate at which banks borrow or lend fund to each other. SIBOR is important because the interest rate of many of the variable rate housing loans in Singapore are often pegged to SIBOR.

There are different kinds of SIBOR such as the 3 months and the 12 months SIBOR and the different types of SIBOR being used are often being specified in the housing loans. Moreover, SIBOR is often used by the banks as a benchmark to set the interest for their fixed deposits and savings account.

Many variable rate housing loans are based on SIBOR as it is transparent. You can get the daily SIBOR rate from financial websites and it is also published in the Business Times daily.
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Monday, February 2

Rule of 72

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Rule of 72 is a simplified estimation of how long it takes for an investment to double given a fixed interest rate. It comes in especially handy when you have to make a guess on how long it takes and you do not a calculator on hand to perform any calculations. The Rule of 72 is used for compounding interest.

To use the Rule of 72, all you have to do is to divide 72 by the amount of fixed interest rate to approximate how long it takes for the investment to double. For example, if an investment offers a fixed interest of 5%, it will take 72 / 5 = 14.4 years for the investment to double. If the fixed interest rate is 3%, it will take 24 years for the investment to double.
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Wednesday, January 14

What is CAGR ?

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CAGR in short, stands for Compounded Average Growth Rate. It stands for the average returns needed per annum to be able achieve the current amount of profits or losses from the original capital.

For example, you have invested $10,000 into an investment product for the past 3 years. For the past 3 years, the year to year returns were 10%, -6% and 15% respectively. Thus your initial capital would have grown to a level of $11,891 as given by the workings below.

Initial capital : $10,000
1st year return : $10,000 * 10% = $1,000
Final capital for 1st year : $10,000 + $1,000 = +$11,000
2nd year return : $11,000 * -6% = -$660
Final capital for 2nd year : $11,000 - $660 = $10,340
3rd year return : $10,340 * 15% = +$1,551
Final capital for 3rd year : $10,340 + $1,551 = $11,891

So what is the average returns for the past 3 years ? The formula is given below,



Thus for the previous examples, if we subsitute in the numbers, the formula will look like,


If we crunch the numbers and multiply by 100 to get the answer in terms of percentage, the answer will be 5.94%. To double-check the answer, we can do it by the long method again.

Initial capital : $10,000
1st year return : $10,000 * 5.94% = $594
Final capital for 1st year : $10,000 + $594 = +$10,594
2nd year return : $10,594 * 5.94% = $630
Final capital for 2nd year : $10,594 + $630 = $11,224
3rd year return : $11,224 * 5.94% = +$667
Final capital for 3rd year : $11,224 + $667 = $11,891

This means that on average, the initial capital of $10,000 grew at an average of 5.94% to achieve a final capital of $11,891. CAGR is often seen in the returns of stocks and funds where the returns is often given as CAGR as it is the average returns of the stocks and funds over a period of time.
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Saturday, January 10

Defining risk

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The definition of risk is an important concept since it plays an important role in deciding on the way which we do our investment. As taken from investopedia, risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. In the business academia, risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment or in other words, risk is also the volatility of the investment.

The above definitions explains why stocks are riskier than bonds and bonds are even more riskier than fixed deposits. For example, stock A has a volatility that has a price range from $4 to $8. It has a higher risk as there is always a chance that one could have bought the stock at at the peak of the range i.e. $8 and if the stock does not rebound, one could suffer losses. Furthermore, there is always the possibility that the company could collapse, leaving the stock of the company worthless. As such, bonds are less riskier as the price of bonds are much less volatile and in the event of the collapse of the company, the funds that are liquidated from the sale of the company will be paid to the bondholders before stockholders. Comparatively, fixed deposits offers capital protection but the returns is likely to be poor. Thus, fixed deposits are said to be the safest form of investment among the three.

What is not being said is that you will also be taking on a huge risk if you put your money in safe investments such as fixed deposits. This is because the returns offered by such form of investment is likely to be very poor and the return is unlikely to beat inflation in the long run. Effectively, you will be losing money since the buying power of your cash will be eroded over time. I have attached a chart of the historical inflation rate of Singapore below.


My definition of risk is rather different from the conventional definition. To me, risk is when one buys something without knowing and understanding throughly on what he is buying. If you think about it, it is a rather simple statement but one which has a lot of implications. I am rather surprised that when people buy electrical appliances such as a TV or a washing machine, they will often read about the specifications and do some thinking about whether that appliance is a worthy buy. However when it comes to investing their money, many of us often turn to friends or acquaintances to decide on what to invest in and often, even though they have may good intentions, they may not be the best people to consult on matters regarding investment.

I can't stress enough about knowing and fully understanding the investment that you are putting your money in. For example, stocks are considered to be risky in the conventional sense because it is volatile. However, what happens if you can buy it at the lower range of the volatility such as the current bear market now ? If you can buy it near the lower range, you are actually carrying less risk because the downside is rather limited already. What happens if you found a fundamentally strong and monopolistic company available whose stock is available at a very low price ? Will you still think that it is risky to buy this company given that this company is able to generate profits year after year due to the nature of its business ? I can just go on and on with the list of examples.

Thus it is of utmost importance to understand what you are investing in. If you are investing in stocks of companies, you should look through the annual report and financials of the company before deciding. If you are investing in an investment product, you should read through the prospectus thoroughly. Only then, you will be able to reduce the risk that you are carrying when you are investing.
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