For many investors, earning income used to be an easy and simple process. You would invest $100,000 on, say January 1 and over the next five years you would earn a steady 8% on that investment. At maturity, you would get your $100,000 back and you would have renegotiate your term deposit rates with your banker. Over the years, the process became marginally more complicated. Rates on term deposits dropped, allowing fewer people to enjoy the lifestyle they had become accustomed to. And so the choice of investment changed as well. Instead of term deposits, investors might have shifted into fairly safe government or corporate bonds. For a slightly higher rate, investors needed to take on a little higher risk. And while bond prices would fluctuate between the day you bought and the day the investment matured, at the maturity date the face value of that bond was repaid to the investor. It was all good.

But as many people know quite well these days, fixed income investments like bonds come with considerably more risk. In periods of increasing rates, those bond prices will drop. And while the face value will be repaid at maturity, there is always the “what if” of needing the investment prior to that maturity date. With liquidity such a big concern for a lot of investors, they have had to look elsewhere. And of course, to add salt to the wound, rates are just not as attractive as they used to be.

This is how dividend paying securities have gained a lot of traction recently. With the expected rate increases in the near future as well a need for liquidity thanks to the current economic state, dividend paying stocks have meant a return to higher income while taking on only marginally greater risk. Companies like General Electric, most of the big Energy companies, many solid banks both domestic and international, as well as many other blue chip companies will pay income in the form of dividends. This income, as a percentage of the price of the security, is what is known as the dividend yield.

The dividend yield on any given security will fluctuate each time the security trades at a new price. For example, a $3.00 dividend on a $50 stock is a 6% yield; but once that stock goes to $75, that yield drops to 4.5%. In other words, as the security price increases, the yield drops. This is exactly how things work with bonds. And like bonds, the income stream to the investor remains the same.

For example, an investor who bought at $50 will control the same amount of shares regardless of what happens to price. As well, the income will always be 6% of their investment. If they invest $100,000, the income will always be $6,000, even when the security price rises to $75 and the yield drops to 4.5%. So when the stock price increases, the <i>value of the investment</i> will increase on paper. The income remains the same at $6,000.

Essentially, dividend yield matters only when the original investment is made. As the security price increases, the yield will drop, but the investor’s income in dollar terms remains the same. The biggest difference with stocks versus bonds is that the investor will have a little more pressure to sell at market prices. But the problem will be how to replace the original income.

So while dividend yield only matters when making the original purchase, comparing one dividend for one stock to another dividend on another stock whenever a change is made in one’s portfolio becomes an ongoing concern. And investors needs to stay abreast of these yields, rising or otherwise, so that they know what the “going” rates are.

–> Have you considered Dividend Funds? Find out the Top Dividend Fund Pick by MutualFundSite.org.

Chris has more than 17 years of financial services experience. He currently manages a website about Roll Roofing at Roll-Roofing.com where he discusses different roll roofing alternatives.

Article Source: http://EzineArticles.com/?expert=Chris_Blanchet

The first page of search engine research tells you that: “Investors use hedging strategies when they are unsure of what the market will do”— isn’t that always the case? Further along you learn that there are many different kinds of strategies, nearly all of which rely upon some sort of derivative betting mechanism.

But what is hedging all about in the first place?

Conspiracy theorists have their hands in the air. What’s that? Portfolio hedging strategies were created to expand the market for the first generation of derivative products— options and futures contracts. Hmmm, not so far fetched an idea, really. Just back up a bit and think about what they are trying to accomplish.

Hedges are designed to massage your market value numbers, a kind of security blanket that softens the highs and lows of the market cycle. But why focus on the fluff of transient market values in the first place? Cycles eventually correct themselves without the unnecessary drama, guesswork, risk, and trading fees.

It’s not the market value of the portfolio that is of primary importance. It’s the actual content of the portfolio and how you deal with the natural dynamics of the securities you own. Why can’t the media reinforce that kind of stuff instead of the emotion of the month?

If a portfolio has a semi-guaranteed “base income” of 4%, a 4% cushion (or hedge) is always in place, one that grows annually with proper asset allocation management, and adds to the market value in upward cycles— nah, too simple.

Once upon a time (long before Quants, Swaps, and million dollar bonuses) investors knew that they could not know “what the market will do”— in direction, duration, range, or vacillation. They recognized that neither humans nor human created machines could predict the future with any degree of accuracy. So they learned how to deal with uncertainty.

They recognized the cyclical nature of the major variables that moved the market cycle, and they developed a strategy that actually worked for decades. Long-term investors navigated the peaks and troughs of the market cycle with the now obsolete, eyes wide shut, buy-and-hold approach.

This dinosaur lost its potency as soon as the markets became accessible to virtually everyone— professional investors, custodians, and trustees (in the old days) understood investing, risk vs. reward thinking, diversification, fundamental analysis, and income generation.

Those safer “good old days” are gone.

Cultural changes, the need for instant gratification, the paramutual, product mentality of the modern investment arena, and the growth of the financial services industry brought fast and furious directional change that undermined the safety of the playing field.

Today’s unprepared (but well-heeled masses) are quick to accept the candy-coated, easy to own and abuse, gambling chips distributed by the Wall Street gaming institutions and blessed by their over-lobbied senatorial henchmen.

Unfortunately, trustees, custodians, and sales professionals’ job preservation instincts led them to the dark side as well.

Most people paint themselves into a market-value-only-assessment corner by investing in multi-security products and by ignoring the all-important income bucket of their portfolios. Wall Street propaganda doesn’t allow investors to focus on anything but market value, creating the need for “protective” hedging techniques.

But what do these phony insurance policies promise, and what do they actually protect?

The lack of education and general unpreparedness of newly enabled investors opens the doors for all forms of schemes, scams, techniques and hedges — all designed to limit the bottom line impact of perfectly natural market forces.

Why do we jump through all of these “prevent-defense” hoops? Because we just don’t know how or have the patience to design and manage a classic, safer, plain vanilla, stocks and bonds portfolio. The market cycle is the favorite son of the investment gods. You either make it your friend or fail as an investor!

The ultimate investment portfolio hedging strategy is one that only requires simple to understand investment techniques like the portfolio income “hedge” described above— part of the Working Capital Model’s QDI, and the centerpiece of the Market Cycle Investment Management methodology.

The other two features of this approach (one that has guided its users through, around, and over the three financial meltdowns of the past 40 years) are explained briefly below. The “I” in QDI is for income.

“Q” is for quality. If you study the long-term behavior of Investment Grade Value Stocks, and high quality income CEFs, you’ll discover that they hedge themselves more effectively than any artificial mechanism ever could.

Take a look at their histories, put a hypothetical $100 in each whenever they fall 20% from their 52-week high, and sell them when they produce a 10% profit. How many millions would you be worth today?

“D” is for diversification. Absolutely never allow any position in your portfolio to exceed 5% of total portfolio working capital (i.e., the total cost basis) and never start a position anywhere near maximum exposure.

Be honest now, how many losses would you have reduced, and how many profits would you have pocketed had you respected the QDI?

Put your investment portfolios on cruise control, with a hedging strategy approved by the investment gods— really.

Steve Selengut
http://www.sancoservices.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”

It would appear that the euphoria over gold has quickly diminished and many of gold’s
greatest proponents, who were calling for gold to go over $2,000 an ounce, appear to
be disheartened and shell-shocked by the recent sharp downturn in gold.

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There’s an old adage in trading and it goes like this, “they slide faster than they glide.”
This is true of all markets and what it means is they go down faster than they go up.

In my new video on gold, I share with you some of the thoughts I have right now on
this market. We could be looking at some great buying opportunities if just a few
components fall into place.

http://www.ino.com/info/589/CD3208/&dp=0&l=0&campaignid=3

You are more than welcome to watch this video there is no charge and no registration
requirement.

All the best,
Adam Hewison
President of the INO.com
Co-founder of MarketClub

Extra Income Or Insurance on Stocks You Own?

Covered Calls is a name for an option strategy that is flexible enough so that it can be adapted to different market conditions. It is important that you first decide what type of covered call strategy best fits your personal risk profile. Is your focus simply earning extra income on stocks you already own, or protecting the value of your shares? What you are about to read will show you how.

A Stock Owner Who Wants More Than Just Dividend Income

If this is you, then you’re a long term stock holder. You’ve probably purchased a stock some time ago and hopefully, it’s worth more today than when you bought it. Perhaps you have an IRA or superannuation fund and would like to see a greater return on investment? Or maybe you just believe this stock is a good long term investment and want more?

In that case, you need to be aware of a few things. When you sell call options, in return for the premium you receive, you’re exposing yourself to the risk of the stock being called away from you – i.e. you may have to sell it at the agreed ’strike price’ for the options you have sold. If you’ve held the stock for a while, there may be capital gains tax implications to consider. You would want to ensure your strike price is greater than the price you originally bought the stock for, otherwise you could make a capital loss. So your decision to implement this covered call strategy will depend on where your stock is today, in relation to when you purchased it.

If today’s price is above your purchase price, then this covered call strategy could be a nice way to bring extra income over dividends. The best strategy here, would be to sell call options for the next month out. The reason for this, is that during the last 30 days of an option contract’s life, the “time value” in out-of-the-money options declines at an exponential rate. So if you sell call options at a strike price of say, $2.50 above the current market price and within the next month, the underlying stock either goes nowhere, or declines, you get to keep the option premium, or buy it back (to protect yourself from an unexpected price rise) within a few days of expiry, for next to nothing. You have a made a profit from selling high and buying back low, or letting it expire worthless, as the case may be.

You may not be able to do this every month if you want to keep your stock. It will depend on where the current market price is in relation to your original purchase price. You may be prepared to let the stock go, if called away, providing it is above your purchase price. That’s your decision. Either way, your one simple fundamental rule if you’re an investor and not a trader, is to wait until you can sell call options at a strike price above your original purchase price. That way, you can’t lose.

Another use of covered calls for the stock owner, is to provide a form of insurance over your shares. Let’s say you own 500 XYZ shares which you purchased for $15 a year ago and the current market price is now $20. You want to hedge your investment in the event of XYZ falling back to $15 or less. So you sell 5 “deep-in-the-money” near month call option contracts on XYZ at a strike price of $15 and receive $5.50 x 500 in premium = $2,750 credited to your account. At the same time, you purchase 5 near month “out-of-the-money” $15 put option contracts on the share and pay $0.25 x 500 = $125. Your net income is now $2,625 less brokerage.

Should the share price fall below $15 before expiry, your put options allow you to sell them for that price, thus protecting you from a catastrophic collapse due to some bad news. You have covered the cost of these put options with the extra $0.50 above the intrinsic value in the $5 ITM call options. If the share price is close to $15 near expiry date and you are nervous about further falls, you may wish to consider selling the next month out deep-in-the-money call options and purchasing OTM put options at the same strike price of say $12.50. Again, you should receive enough premium from the ‘deep ITM’ call options to cover the cost of the put options plus any potential further capital loss on falling share prices.

The downside of this covered call strategy, is that since you have written deep ITM call contracts, if the stock price is above $15 at expiry date, you are likely going to be called to sell your shares at $15. But you have already received the extra $5 in premium earlier so there is no loss. But if the current market value of the shares has risen to say $24 by now, you have foregone the potential gain on the shares you would have otherwise made. But it’s a great choice in a bear market or at what you believe to be the top of an uptrend.

Owen has traded options for many years. Visit his popular site to discover the advantages of Option Trading and how a well chosen Covered Call Strategy can provide a trading edge over the markets.

Article Source: http://EzineArticles.com/?expert=Owen_Trimball

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