Pricing
When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).
For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.
With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »
What if a stock has run out of steam and we’re anticipating a period of consolidation or lower volatility for a period of time? What if we have identified a range-bound stock and we want to take advantage of this price pattern behavior? We can achieve this by trading low-risk, high-reward options strategies! The two strategies we’ll discuss in this chapter are the Butterfly and the Condor, both of which produce profits provided the price remains within a certain price range, determined by the Exercise prices we select.
Butterflies
The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):
Butterfly with Calls
Step 1 Buy 1 lower strike (ITM) call
Step 2 Sell 2 middle strike ATM calls
Step 3 Buy 1 higher strike (OTM) call
There are two key points here:
- The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
- The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.
Read the rest of this entry »
The good news about this investing sin is that you have a number of ways to reduce its negative impact. Here are some steps you can take to reduce your gluttony and find a more healthy balance between active trading and watchful waiting:
A. Reserve 5 to 10 percent of your portfolio for aggressive trading.
Just as a diet isn’t designed to eliminate all food—or even all junky food—a good regimen for the investing glutton isn’t to cut trading entirely. For whatever reason, you enjoy and need the action of buying and selling. What you don’t need is for this need to eat away at your portfolio. Therefore, reserve a small percentage to feed this habit. If you only actively trade 100 shares instead of 1,000, you probably won’t do much damage.
Remember, though, that this 10 percent high-end percentage is absolute! Invariably, a time will come when the actively traded 10 percent will be performing well, and the inner glutton’s voice will say, “Don’t be a sucker; you’re a much better investor now than before; up the percentage to 20 percent?’ Do not heed this voice. It is the same voice the dieter hears after losing ten pounds, the voice that says, “Another slice of chocolate cake won’t hurt you? Read the rest of this entry »
The policy of most jurisdictions is to treat the mutual fund as a company subject to corporate or income tax only on its ordinary business (i.e. net income arising from holding investments), and exempt it from taxation on its gains from buying and selling investments. In the US, provided the gains and net income are distributed, the fund does not pay federal income tax on either. Taxes are the responsibility of and paid by the shareholders under a ‘pass-through’ arrangement, whether they choose to receive cash or reinvest their entitlement. Read the rest of this entry »
Valuation
The value of a mutual fund depends on the prices or values of the underlying securities and other assets held by the fund. The manager must carry out regular valuations of the fund’s property, so that the prices at Which shares or units may be bought and sold can be calculated. Regulations usually prescribe how often Valuations must be performed. In the UK, for example, the required minimum frequency is twice each month The majority of funds are valued on a daily basis, but some managers prefer a weekly valuation, and some carry out more than one each day. Read the rest of this entry »
