Tag: derivatives

What are derivatives?

Derivatives are financial instruments, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement.

Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are typically used to hedge risk, or to exchange one rate of return for another. For instance, some derivatives swap a floating rate of return for a fixed rate of return.

Most often, derivatives involve some sort of futures the value of which will depend on the future movement of the underlying asset.

Futures and other derivatives offer extraordinary opportunities for leverage, but if you could consistently beat other traders by a factor of 5%, you could eventually acquire a measurable fraction of all the money in the world.

Mind you, you can have lengthy runs of good luck in futures or derivatives trading. But eventually you’ll hit a patch of bad luck with catastrophic losses.

In the end, we view all futures-linked or derivative deals or funds as gambles rather than investments, because they don’t earn dividends or interest, and they don’t profit from the buildup of capital that you get through investing in stocks. They can only profit by outguessing other futures traders by a wide enough margin to offset commissions and other trading costs, plus MERs if you invest in derivatives through funds or ETFs.

At TSI Network, we recommend using our three-part Successful Investor philosophy:

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Discover how to build greater wealth with less risk, claim your FREE digital copy of How to invest in stocks: Canada investor advice on building a balanced stock portfolio now.

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Why investors should be wary of many new ETFs

Why investors should be wary of many new ETFs
September 7, 2017||ETFs

While new investment products can be enticing, a lot of new ETFs mean higher prices and more risk.

The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term.

However, as often happens after the successful launch of any new investment… Read More

Pat: Can you suggest some U.S. ETFs that are set up to move in the opposite direction of particular stock indexes, rather than in the same direction? Regards.

August 15, 2017||How To Invest

A: U.S.-based ProShares offers a range of exchange traded funds for U.S. stock indexes. Of these ETFs, the company offers three types:

1) ProShares Short ETFs are designed to move in the opposite direction of the underlying index. For example, ProShares Short S&P500, $32.90, symbol SH… Read More

Q: Pat: A substantial part of my portfolio is in U.S. equities. The U.S. withholding tax on the dividends results in considerable leakage of my returns. My question is, are there any ETFs that shadow, say, the S&P 500 and reinvest dividends internally and therefore bypass the dividend tax on my account? That would leave me with only the capital gains (or losses) to pay. By the way, the advice I get from the Wall Street Stock Forecaster has put me in a very good position over the years. Thank you.

May 30, 2017||How To Invest

A: We’ve long advised holding 20% or more of your portfolio in U.S. stocks. We see exposure to U.S. stocks, and the U.S. dollar, as a valuable form of diversification. It also gives you a hedge against a drop in the Canadian dollar, especially if… Read More