Guide to Trading Securities

Table of Contents:

Exotic Options – 5 Examples of Exotic Options

Exotic options are–as their name implies–more complicated than commonly traded vanilla options. For example, exotic options may have multiple triggers that determine the option’s profitability or have more than one underlying securities. These options are generally traded over-the-counter rather than on traditional options exchanges like the Chicago Board of Trade (“CBOT”).

In this article, we’ll take a look at five examples of exotic options and how they differ from traditional vanilla stock options.

Compound Options

Compound, or split-fee, options are simply options on options. That is, buyers are purchasing the right to acquire another option at a certain price and time rather than equity or other underlying assets. These options can include call on call (“CoC”) (“Cacall”), call on put (“CoP”) (“Caput”), put on put (“PoP”), or put on call (“PoC”) arrangements, providing traders with greater leverage than traditional options.

Figure 1 – Compound Call Option – Source: Amex.com
Figure 1 – Compound Call Option – Source: Amex.com

These options are typically used in the foreign exchange and fixed income markets, since there are uncertainties about the option’s risk protection. For example, caput options are useful in the mortgage market to offset the risk of interest rate fluctuations between the time a mortgage commitment is made and the date that the mortgages are scheduled to be delivered to the trader.

Barrier Options

Barrier options change in value in leaps as soon as the stock price reaches preset price or time barriers. For example, an option might pay out a 5% premium to the strike price if it’s exercised after one month. These options can include up-and-out, down-and-out, up-and-in, and down-and-in varieties depending on where the spot price starts and where it has to move in order to be knocked in or out.

Be sure to read the Ten Commandments of Options Trading

Figure 2 – Barrier Option Tree – Source: Global-Derivatives.com
Figure 2 – Barrier Option Tree – Source: Global-Derivatives.com

Barrier options are primarily used in the foreign exchange and equity markets in order to purchase options for a smaller premium. For example, if a trader believes that an equity will rise in price – but not beyond a certain level – they can purchase a barrier option at that level and pay less premium than a traditional option. They can also be used in the opposite situation when using put options.

Lookback Option

Lookback options have payoffs that depend on the maximum or minimum underlying asset’s price over the life of the option. That is, the option enables holders to “look back” over time to determine the payoff amount. The two types of lookback options are floating strike – where the strike price is determined at maturity – and fixed strike – where the strike price is fixed.

Figure 3 – Lookback Option Comparison – Source: Amex.com
Figure 3 – Lookback Option Comparison – Source: Amex.com

Lookback options are most commonly used on major U.S. index equities and futures, providing investors with a way to avoid timing issues. Since they remove that risk, these options command a much higher premium than traditional options. Lookback options are also only settled in cash, since they involve looking into the past to determine the trade’s current profitability and timing.

Chooser Options

Chooser options give the purchaser a fixed period of time to decide whether the option will be a European call or put option. For stocks without a dividend, the same strategy can be obtained using one call option and one put option with the same strike price in what’s commonly referred to as a straddle strategy. The difference is that chooser options don’t require the holder to pay for both options entirely.

Simple Chooser Option
Figure 4 – Simple Chooser Option – Source: Business, Management and Education

Chooser options are most commonly used when the trader expects large price fluctuations ahead, such as during FDA decisions or patent litigations, although the majority of the exotic options are issued on larger equity indexes. As opposed to a straddle, traders can often establish chooser options at a lower upfront cost, although the profitability dynamics of the trade may vary.

See also Don’t Fret, Salvage Your Losing Position With Options

Rainbow Options

Rainbow options differ from traditional options in that they are linked to two or more underlying assets. In order for the option to become profitable, all of the underlying assets must move in the predicted direction. For example, a rainbow option might allow the buyer to exchange 10 shares of MSFT for one share of IBM, which means they’d make money if MSFT shares rose relative to IBM shares.

Figure 5 – Rainbow Option – Source: Amex.com
Figure 5 – Rainbow Option – Source: Amex.com

Rainbow options are most commonly used when valuing natural resources, since they depend on both the price of the natural resource and how much of the resource is available in a deposit. Traders use rainbow options to bet on both the price and quantity of a natural resource deposit before the option will take effect. Of course, the use of two variables makes these options riskier than traditional options.

The Bottom Line

Exotic options provide a great way for traders to take advantage of different trading dynamics that traditional options can’t address. However, the trade-off is that these options almost always trade over-the-counter, are less liquid than traditional options, and are significantly more complicated to value. Traders should keep these issues in mind before using these options in live trading.

For more information, see the following resources:

• Amex Exotic Options Dictionary
• OptionTradingPedia.com
• Exotic Options And Hybrids


Penny Stock Success Stories – 5 Penny Stock Success Stories

For traders and investors, the allure of penny stocks can be great. Where else can you buy a ton of shares for not much capital outlay? For traders, this means not having to deal with hefty margin debt or cash calls, and if these lotto tickets actually take off it can be the difference between a buying a Porsche or a Hyundai for your next car.

Yet, not all penny stocks are the same. In fact, most are dangerous scams that are basically designed to take away traders’ and investors’ hard earned cash. Those that trade on the over the counter bulletin board (OTCBB) exchanges usually fit that description.

However, using the Security & Exchange Commissions (SEC) definition of penny-stocks leads to a much different grouping of companies. Under the SEC’s explanation of a penny stock, any firm trading for under $5 fits the definition. While that does include plenty of small and micro-cap firms, it also includes some very well-known names like telecom giant Sprint (S). The firm spent much of the last few years under that $5 per share barrier.

This just goes to show you that not all “penny stocks” are dangerous. They can lead to some great returns. Here are some of the penny stock success stories of the last few years. All charts created using Yahoo Finance.

Plug Power (PLUG)

Plug Power stock chart

Who knew that hydrogen fuel cells could be sexy? The technology—which has been around for decades— has always languished in the land of high costs and zero profitability. Those facts didn’t seem to matter for fuel cell stock Plug Power (PLUG).

Shares of PLUG have pretty much traded under $5 for much of its history and over the last 52-weeks actually sank all the down to just 26 cents a share. However, shrewd investors snapping up shares have been treated to a monster 744% gain over the last year. A series of new supply deals and a potential return to profitability has lit a fire under the penny stock. Shares of PLUG still trade for just under $5 per share – that could mean that more gains could be in store for traders (or potential losses).

Be sure to also read Who Has the Most Subscribers?

General Growth Properties (GGP)

General Growth Properties Stock Chart

The financial crisis was not kind to commercial real estate firms – especially those that had a hefty dose of debt. Take mall-operator General Growth Properties (GGP) for example. GGP was unable to refinance the heavy debt burden that came with its massive acquisition strategy during boom times; and as a result, GGP was forced to declare bankruptcy.

See also A Brief History of Penny Stock Chaos

However, this story does have a happy ending for shareholders. Unlike many bankruptcy cases—where investors get nothing—General Growth was able to work things out with its creditors and re-emerged in better financial condition. GGP stock still had plenty of value. In fact, it managed to rise from a low of just 59 cents to today’s price of $24. That’s a gain of 3,865%.

Monster Beverage Corporation (MNST)

Monster Beverage Corporation Stock Chart

Despite being founded in 1935, Monster Beverage (MNST)—previously known as Hansen’s Natural—spent much of its lifetime ignored and unloved. Back in 1995, you could buy shares for as little as 69 cents.

All of that changed as the energy drink and natural foods revolution took off. Monster’s products became the leading drink of choice for those seeking an extreme caffeine fix and the stock took off. After adjusting for the several share splits that MN has taken over the years, investors in MNST during the lean years would be sitting on 100,600% gains. That makes MNST one of the best performing stocks of all time.

BJ’s Restaurants (BJRI)

BJ's Restaurants stock chart

While it’s not as big as some of its competitors in terms of number of restaurants or establishments, BJ’s Restaurants (BJRI) has managed to turn from obscure penny stock into a big success story. Building on its initial 17 bar and grills, BJRI now operates over 151 eateries. In that time, the share price has grown as well.

Back in 1997, investors could snag shares of BJRI for less than $2. However, after Wall Street found out about the growing sales and success, shares of BJ’s have grown considerably. Since hitting a low of just 88 cents, investors in BJRI shares would have realized gains of nearly 3,900%.

Be sure to also read about the 10 Traders Who Cost Their Companies Billions

Quality Systems (QSII)

Quality Systems stock chart

To say that Quality Systems (QSII) was ahead of its time would be an understatement. The firm was founded back in 1974 as a healthcare software and tech provider. However, that was before cost management and digital health records really became a thing. After its IPO in 1982, QSII spent much of its time trading below $1 a share.

This has all changed over the last few years, as hospitals, doctor’s offices and other medical care providers have sought the “cloud” and other tech solutions to keep costs down. QSII stock has been in the crosshairs of that revolution and investors have been rewarded – to the tune of 1,400% gains over the last few years.

The Bottom Line

Penny stocks are often maligned, as the majority of them have the possibility to go bankrupt. However, as you can see from the stories above, if you are able to invest in a stable company that other traders have not yet discovered, the returns can be astronomical. We are not advising that you start picking up penny stocks, but instead start looking under the hood to find a good investment no matter what the stock price is.


Darvas Box – Dow Futures: What Every Trader Needs to Know

The Dow Jones Industrial Average (DJIA) is a prominent stock market index that tracks 30 blue chip U.S. stocks, providing a representation of the U.S. stock market as a whole. Futures provide a way to trade the index, by betting on the direction the index will move. Futures are used by retail day traders, longer-term traders and institutional traders.

There are three types of Dow futures, the E-mini Dow, DJIA and Big Dow DJIA. These cater to different types of traders, although the E-mini is by far the most popular and the only Dow contract really used by individual traders.

Be sure to also read 30 Bizarre Facts About the Dow 30 Companies

Dow Futures Liquidity

Dow Futures are very liquid, especially the E-mini Dow futures. Between 100,000 and 300,000 E-min Dow futures change hands each day, providing adequate liquidity for both day traders and longer-term traders. (For futures news, analysis and education be sure to bookmark FuturesKnowledge.com)

Dow Futures Volume
Figure 1 Daily E-mini Dow Futures Volume over 30 Trading Days

Source: CMEgroup.com

DJIA futures contracts are less liquid, with daily volume ranging from 0 to 3000 contracts.

Big Dow DJIA futures are even less liquid, with daily volume typically under 50 contracts, and often 0.

Who Uses Dow Futures and Why?

Day traders, swing traders, hedgers and hedge funds all trade E-mini Dow futures. The liquid market allows for all these traders to attain and exit positions.

Trades are usually taken for speculative reasons, anticipating the future direction of the basket of 30 stocks. Buy a future and if the value rises, you reap a profit. Sell a future and if the value drops, you can also profit. Therefore, traders can profit from either up or down markets.

Hedgers or hedge funds may also use Dow Futures to hedge other positions. For example, if long a large contingent of stocks these traders may sell some E-mini Dow futures to hedge the long positions. That way, if the index falls (and likely many of the stocks in the fund’s portfolio as well) the loss will be partially or fully offset by the gain attained by the short futures position.

Institutional traders may use DJIA or Big Dow DJIA for the same reasons mentioned prior, although due to lower volume these instruments are used less frequently.

The Commitment of Traders Report tracks futures position data for commercial traders, speculators and large traders. The information is publically available, so all traders can see on which side of the market commercial, large and speculative positions are being taken. While this may not always explain “Why traders are doing what they are doing,” it does show what major market players are doing in the market.

Dow Futures COT
Figure 2. E-Mini Dow Futures with Commitment of Traders Net Positions

Source: Timingcharts.com

Dow Futures Terms and Expirations

Each Dow futures contract has an expiry date, on the third Friday of the contract month. Traders will typically close out futures positions before expiry, and re-establish positions in futures contracts where the expiry date is further out.

Nearly all futures volume takes place in the contract near expiry. For example, if it is February, nearly all the trading volume will be in the March contract. If it is April, then nearly all the volume will occur in the June contract. When the June contract is about to expire, volume will shift into the September contract.

Dow Futures Terms
Figure 3. Dow Futures Terms and Expirations

Source: CMEGroup.com

Dow Futures Exchange

All Dow futures are cleared through the Chicago Mercantile Exchange (CME). E-mini Dow futures change hands via electronic transactions only.

DJIA change hands through electronic transactions as well as open outcry (symbol: DJ) on the trading floor.

Big Dow DJIA futures change hands via electronic transactions only.

Any trader who utilizes a broker with access to CME products can trade Dow futures electronically.

Dow Futures Pricing, Volume and Specification Information

For current information Dow futures volume, prices and to see to when contracts are expiring, visit www.cmegroup.com. Click on “Products and Trading” and select “Equity Index.”

Choose the Dow futures contract you’d like information on.

Dow Futures Info
Figure 4. Dow Futures Information

Use the Quotes tab for daily pricing information. The Settlement tab shows pricing data, estimated volume and prior day open interest. Click the Volume tab to recent volume and open interest data (preliminary or daily finals).

The Time & Sales shows recent transactions, and the Contract Specs tab provides the particulars of trading Dow futures (similar to figure 3). The Margins tab shows what it costs to initiate and maintain positions. The Calendar tab shows when each contract begins and ends trading, and settlement dates.

Dow volume and current prices are also typically available on large financial sites.

Dow Futures Margin

Opening a futures position requires that you put a margin payment. Margins payments vary by the type of Dow future.

Dow Futures Margin
Figure 5. Dow Futures Initial and Maintenance Margin

Source: CMEGroup.com

Brokers often provide day traders with reduced initial margin rates. Initial margin is the amount needed to initiate a trade for one contract. Maintenance margin is the amount needed in the account to maintain the position.

The Bottom Line

Dow futures are used by all sorts of traders, from speculative day traders to institutional hedgers and longer-term traders. The E-mini Dow futures have the most volume, and are thus the most suitable for retail traders. While the three Dow futures have various tick values, the liquidity of the E-mini allows you to customize your trading position to gain the proper exposure for your account size. All the Dow futures trade via electronic means, and are cleared through the CME. Margin requirements vary by contract, with the E-mini requiring the least initial margin. This again makes the E-mini the logical choice for retail traders looking to trade Dow futures.


Live Cattle Trading – The Definitive Guide to Cattle Futures

Beef. It’s what’s for dinner. It can also be what’s in your portfolio. As the emerging world continues to modernize, a protein rich diet is on the minds of the growing global middle class. Demand for beef continues to grow at unheard of levels. Analysts estimate that there are nearly 1.3 billion cows being grown for food across the world. That longer-term demand could make cattle one of the profitable investments for traders and investors alike. As with the vast majority of the natural resources space, agricultural commodity cattle is readily available as a traded futures contract.

Understanding just how the cattle market works isn’t difficult; it takes a bit of legwork from traders and investors to get started. And once they do, the rewards of trading cattle futures can be immense.

The Cattle Futures Market

For investors and newbie traders, cattle are traded via futures contracts. These financial instruments give the owner the obligation to purchase a set amount of a commodity—in this case cows—at a certain time for a certain price. Originally, the idea of futures was designed to allow end-users the ability to buy the commodities they need for their operations. However, today, anybody with a brokerage account can trade the financial instruments and gain access to the commodities market.

In terms of the cattle subsector, there are basically two kinds of cows traded as futures contracts: Feeder and Live. The basic differences in the two kinds come down to age and weight. Cows fall into the “Live” category from calf stage until they reach a weight of around 600 to 800 pounds. This usually takes around six-to-10 months for the calf to grow to the necessary weight. From that point they are then transferred to feeder lots—which can hold up to 50,000 cows at some mega farms—and they fall into the “Feeder” category.

Once there, cattle are fed a diet of corn, soybeans, sugar beet waste and various grains in order to encourage rapid weight gain. Feeder cattle are generally slaughtered when they hit a weight of around 1,250 pounds. That process usually takes three to four months. The entire process from calf to steak can take as little as just two years. There are seven states—Arizona, California, Colorado, Iowa, Kansas, Nebraska, and Texas—that produce the vast majority of the cattle for eating in the United States.

Cattle TypeDescription
Live CattleCows from the weaned calf stage until they reach a weight of around 500 to 800 pounds. Six or ten months of age.
Feeder CattleLive cattle that are transferred to feeder lots in order to encourage rapid weight gain. Sent to slaughter at a weight of around 1250 pounds. Three to four months after Live Cattle stage.

In terms of buying futures and investing in cattle, there are only two exchanges that offer standardized Live and Feeder cattle contracts – the Chicago Mercantile Exchange (CME) and Brazilian Mercantile and Futures Exchange (BM&F). However, for most traders and investors, the Chicago MERC is the only real game in town [see also Top 21 Trading Rules for Beginners: A Visual Guide].

The CME’s Cattle Futures

Futures contracts on the CME are available in the two varieties of cattle as well as in both electronic and open outcry trading. Open outcry is when traders stand in a “pit,” shout, and use hand signals to relay information about buy and sell orders.

For live cattle (ticker LC in the open outcry market, LE in the electronic exchange), the CME’s contract represents 40,000 pounds of 55% Choice / 45% Select Yield Grade 3 live steers – these are the USDA specifications on the type of meat each cow can yield. The futures contract is priced in cents per pound and features contracts for the months of February, April, June, August, October and December. Volume is more robust for the electronic marketplace, with the number of trades significantly outpacing pit trading.

For feeder cattle (ticker FC and GF, for open outcry and electronic trading, respectively), the Chicago MERC’s futures contract is similar to its live cattle contract. Priced in pounds, the futures contract is worth 50,000 pounds of 650-849 pound medium-large #1 and medium-large #1-2. Again, those gradings are set to USDA standards. Contracts are available for the months of January, March, April, May, August, September, October and November. Like the CME’s futures for live cattle, volume on the electronic exchange is quite swift compared to the open outcry pits.

Future ContractSymbolContract Size
CME Feeder Cattle Futures – Open OutcryFC50000 pounds
CME Feeder Cattle Futures – CME Globex (Electronic Platform)GF50000 pounds
CME Live Cattle Futures – Open OutcryLC40000 pounds
CME Live Cattle Futures – CME Globex (Electronic Platform)LE40000 pounds

Both cattle types are available to trade Monday through Friday from 9:05 am to 1:00 pm central time. Electronic trading of these contracts can be done for an extra 55 minutes each day. Options, which give owners the right to buy, are available on all of these contracts as well.

What Investors Should Know About Trading Cattle

As with much of the commodities complex, investors can use the previous cattle futures contracts to either hedge their own food consumption or profit from rising global demand. Meat prices have risen quite fast over the last few years, as much of our cattle crop is now going overseas. Buying cattle futures today helps lock–in rising prices when you go to pick out your Fourth of July steaks.
At the same time, cattle ranchers can short futures to lock in a selling price for the herds they produce, while meat producers like Tyson or Hillshire Farms can go long to secure a purchase price for meat they will need later.

Aside from rising global demand, there are several factors that tend to move the cattle markets.

One of the biggest is the price of feed. Investors looking into trading cattle futures must pay attention to the prices for corn, wheat and soybeans, as higher feedstocks will trickle down to meat prices. If the cost of feed is too high, cattle is usually sent to slaughter earlier and at lower weights. This tends to lower prices for cattle futures [see also 25 Bizarre Futures Contracts].

Weather can also be a huge market mover for the cattle market. High temperatures not only kill feed, but can also make it difficult for cattle to put on weight. Again, the less weight a cow has, the less its worth. Extreme cases of poor weather can wipe out entire herds, causing longer-term futures to spike, while crashing short dated ones. Bovine spongiform encephalopathy—i.e. mad cow disease—can also spring out of nowhere and drastically reduce herd counts.

Aside from these environmental factors, the thing that moves the cattle market the most is the USDA’s monthly Cattle on Feed Report. The report tells the amount of cattle placed in feedlots that will eventually be sent to market as well as the number of cattle shipped out to the slaughterhouses. You can see how powerful the Feed Report is. The below chart is the current June 2014 contract for Live cattle and it dropped on May 20th – 21st, when the latest USDA report was announced. Showing more cattle on hand than expected.

cattle futures prices

The Bottom Line

When it comes to beef, playing the cattle futures marketplace can yield some pretty juicy gains for traders and investors. The key is to focus on the various factors that can influence the prices of cattle. From feed prices to the weather export, these factors have more of an effect on both live and feeder cattle pricing than actual demand.


– Indian Stock Market: A Trader’s Guide

There are a total of 21 stock exchanges in India, with the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) being the largest. Both offer stocks with volume and opportunity as India and the exchanges continue to grow and attract foreign investment. Before investing on these exchanges, traders should know the regulations, size of the market, the indexes, liquidity, as well domestic ways to invest in India, such as ETFs and American Depositary Receipts (ADRs).

Size and Liquidity

According to the Securities and Exchange Board of India there are 21 stock exchanges in operation in India. The BSE and NSE are the largest Indian exchanges, satisfying the needs of nearly all foreign investors.

The BSE is slightly larger, with a market cap of US $1.076 trillion and the NSE with US$1.051 trillion, as of January 2014. For comparison, the NSE and BSE are similar in size to the Australian Stock Exchange ($1.298 trillion), although significantly smaller than the major U.S. exchanges [see also Best US Stock Market Investing Sites].

The Nasdaq has a market capitalization of $5.998 trillion and the NYSE $17 trillion.

There are two main Indian indexes that traders use to track stocks: the CNX Nifty 50 (NSE) and the S&P BSE Sensex, which are composed of 50 and 30 well-established and diversified stocks, respectively.

Prominent Stocks

There are a large number of very liquid and large market capitalization stocks, both on the BSE and NSE. Highly liquid and active stocks are listed each day on the exchange home pages: NSEIndia.com and BSEIndia.com.

When looking for high volume stocks, the number system used in India may be confusing at first, as the comma use in numbers is different than in North America.

A very active stock on the NSE is Unitech (NSE: UNITECH) typically trading more than 30M shares per day. On the exchange, volume is listed as 7,34,77,483. Remove the decimals and group the numbers in threes starting from the right. The volume becomes 73,477,483.

Figure 1 shows a number of stocks that are heavily traded on the NSE. “LTP” stands for Last Traded Price. The Traded Value is listed in Lakhs; to get the value in Indian rupee, multiply the number provided by 100,000. Current exchange rates are listed on the NSE home page for converting prices and Traded Value into U.S. dollars or other currencies.

Most Active Stocks
Figure 1. NSE Most Active Stocks (May 14, 2014)

A number of stocks are listed on both the NSE and BSE, and are actively traded on both.

BSE Most Active Stocks
Figure 2. BSE Most Active Stocks (May 14,2014)

Some investors are more interested in market capitalization and stability than volume. Figure 3 shows the largest companies according to market capitalization on the NSE. The list is the same for the BSE.

Largest Companies by Market Capitalization
Figure 3. Largest Companies by Market Capitalization – NSE (and BSE)

Figure 3 (and many Indian stock sites) shows the company values in “Rs. cr” This stands for Indian core. Multiply the number by 10M to get the value in Indian rupee. The 434,073.71 Rs. cr value of TCS becomes Rs. 4,340.74B (roughly US$72B).

Several of these companies are mostly owned by the Indian government(s). Governments own 89.65% of Coal India, 75% of NTPC, 68.94% of ONGC, 58.6% of SBI. For a complete list of Indian stocks partially owned by government, see the Institutional Holdings – Central Government/State Government.

The state ownership doesn’t affect traders much. Volume in these stocks is lower than the Most Actives listed prior, but several hundred thousand shares still change hands each day.

Risks and Regulations

The NSE and BSE have slightly different market hours and processes. These are listed below. For those unfamiliar with this process, the Continuation Trading or Normal Market times are when prices are most transparent and trading is similar to traditional market hours in the U.S. Continuous Trading takes place between approximately 9:10 AM and 5 PM on the BSE, and 9:15 AM to 3:30 PM on the NSE.

Pre-market and post-market trading is available, but prior to the open, and following the close, there is an auction where orders are placed but not immediately filled, and then at a specific time a price is given on all orders based on supply and demand. This can lead to non-transparent pricing, as those placing orders do not know the price they will receive [see also Best Trend Trading Setups With Examples].

The NSE has cut the trading day up into three sections.

A) Pre-open session
Order entry & modification Open : 09:00 hrs
Order entry & modification Close : 09:08 hrs*
*with random closure in last one minute. Pre-open order matching starts immediately after close of pre-open order entry.

B) Regular trading session
Normal Market Open : 09:15 hrs
Normal Market Close : 15:30 hrs

C) The Closing Session is held between 15.40 hrs and 16.00 hrs

The BSE has a similar structure, except at different times.

BSE Market Hours
Figure 4. BSE Market Hours

Once trades are initiated, margins are payable daily based on how much the stock moves. This is a complex calculation utilizing the stock’s standard deviation, and makes sure the holder of the stock has enough equity in their account to withstand typical moves in the stock. For detailed descriptions of the calculation used to calculate margins, see NSE Margins.

The risks associated with Indian stocks are those associated with any stock. India is a large and diverse economy, offering stocks with great potential, but losses also occur. Trading stocks with high volume and large market capitalization provide some stability, although won’t guarantee profitable trades.

Indian stocks are priced in another currency, so not only do investors need to concern themselves with the direction of the stock, but also the currency. A decline in the Indian rupee will have a dampening effect on returns once the stock is sold and the rupees converted back to the U.S. dollars.

Before investing in a foreign market it is important to understand how that market operates. Make small trades at first, until comfortable with the process and regulations. Once experienced, then move on to trading your typical position size.

RELATED: Invest in the US Stock Market with Stock Advisor by Motley Fool. Read the Review.

Domestic Ways to Invest

There are a number of ways to invest in India stocks from within the U.S.

ETFs are traded on U.S. exchanges, priced in U.S. dollars and provide a basket of Indian stocks.

India ETFs (May 13, 2014)
Figure 5. India ETFs (May 13, 2014)

Another way to invest directly in Indian companies is through American Depositary Receipts (ADRs). These are foreign companies listed on U.S. exchanges, so they are easily accessible to investors and priced in U.S. dollars.

ADRs stock list
Figure 6. ADRs

The Bottom Line

There are 21 stock exchanges in India, but the NSE and BSE are most prominent. Volume is plentiful in many stocks, and those seeking investment will find many large companies to trade. Market hours and how trading takes place outside of normal hours will require getting used to; trading during normal market hours is recommended until the auction process is fully understood. For those not looking to move funds outside the country, ETFs and ADRs provide a way to invest and trade in Indian stocks on U.S. exchanges and in U.S. dollars.


Set Or Th En – Thai Stock Market: A Trader’s Guide

Stocks in Thailand are traded on The Stock Exchange of Thailand (SET). In 1999 the SET established the Market for Alternative Investments (MAI), which is an exchange where small Thai companies can offer shares to the public.

Stocks on the MAI have smaller market capitalizations than those listed on the SET and are less established. Both exchanges offer stocks with volume and opportunity for global inventors. Before investing, traders should understand Thai stock regulations, the size of the market, major indexes, liquidity, Thai currency, as well as ways to domestically invest in Thailand.

Thai Stock Market: Size and Indexes

According to the World Federation of Exchanges, as of January 2014 the SET had a market capitalization of $346 Billion. For comparison, the Nasdaq has a market capitalization of $5.998 trillion and the NYSE $17 trillion.

While there are a number of SET indexes focusing on various stock groups within the Thai economy, there are three main indexes.

  • The SET (Composite) Index represents the price movement of all common stocks listed on the SET.
  • The SET 50 and SET 100 Indexes are based on the price movements of the 50 and 100 largest companies, according to market capitalization, listed on the SET.

Current index prices and updates are available on the SET homepage at http://www.set.or.th/en/

Thai Stock Market: Prominent Stocks and Liquidity

Thai stock prices are in Thai baht, and while the exact exchange rate fluctuates, 1 Thai Baht equals about $0.03 USD. Therefore, divide the Thai Baht price by 33 to get an approximate price in USD. For current exchange information see XE.com: Thai Baht to USD

There are a large number of very liquid stocks on The Stock Exchange of Thailand, and the Market for Alternative Investments. Daily top gainers, top losers and most active stocks are updated daily on the SET Top Ten page.

SET Most Active Stocks
Figure 1. SET Most Active Stocks (May 20, 2014)

Source: http://marketdata.set.or.th/mkt/topten.do?language=en&country=US

The following are the most active stocks on the MAI exchange:

Thai Stocks Trading Volume
Figure 2. MAI Most Active Stocks (May 20, 2014)

Source: http://marketdata.set.or.th/mkt/topten.do?market=mai&language=en&country=US

Some investors are more interested in market capitalization and stability than volume. Figure 3 shows the largest companies according to market capitalization on the SET (these 20 stocks have the largest market cap of the SET 50).

Thai Market Cap
Figure 3. Top 20 Stocks on SET by Market Capitalization

Source: http://marketdata.set.or.th/mkt/sectorquotation.do?sector=SET50&langauge=en&country=US

Non-voting Depository Receipts (NVDR) are also available for trade. NVDRs trade like the underlying stock and investors can receive dividends, but all voting rights are stripped. Foreigners to Thailand cannot own more than 49% (cumulative) of a company; if that limit has been reached, additional foreign investment in that company is not allowed. NVDRs have no such restriction, making them a viable option, or even first choice, for investing in Thai companies.

The SET provides current volume and price data on all NVDRs: http://www.set.or.th/set/nvdrbystock.do

Thai Stock Market: Operation and Risks

Thai trading hours are different than those in the U.S. Notably, there is an intermission that separates the trading day into a morning and afternoon session.

Figure 4 shows how the trading day operates.

Thai stock market hours
Figure 4. SET and MAI Trading Hours

Source: http://www.set.or.th/en/products/trading/equity/tradingsystem_p2.html

During the Auction period, orders are collected and matched at one price based on supply and demand; this creates the Open and Close prices. Automatic Order Matching is equivalent to the U.S. markets, where bids and offers interact with each other for instant execution.

There are multiple order types available, including limit orders, market orders, market-to-limit order (market only to current bid or offer), at-open order (buy/sell on open) and at-close order (buy/ sell on close).

Shares are traded in board lots, which are 100 shares of a stock each. Stocks that consistently trade at a value above 500 baht can be traded in 50 share lots.

Spreads vary by the price of a security.

Thai stock spreads
Figure 5. Spreads by Market Price

Source: http://www.set.or.th/en/products/trading/equity/tradingsystem_p5.html

The risks associated with Thai stocks are those associated with any stock. Thailand is an emerging economy, offering stocks with great potential, but losses also occur. Trading stocks with high volume and large market capitalization provide some stability, although it won’t guarantee profitable trades.

Capital gains are tax-exempt (in Thailand) for individual investors; dividends are subject to a 10% withholding tax and interest income has 15% withholding tax .

Thai stocks are priced in Thai baht, so not only do investors need to concern themselves with the direction of the stock, but also the currency. A decline in the baht will have a dampening effect on returns once the stock is sold and the baht converted back to the U.S. dollars. An increasing Thai baht has a positive effect on returns.

Before investing or trading in a foreign market, it is important to understand how that market operates. Make small trades at first, until comfortable with the process and regulations. Once experienced, then move on to trading your typical position size.

Domestic Ways to Invest

There are a number of ways to invest in India stocks from within the U.S.

ETFs are traded on U.S. exchanges, priced in U.S. dollars and provide a basket of Thai stocks.

Thai ETFs Available in U.S.
Figure 6. Thai ETFs Available in U.S.

Source: ETFdb.com

Another way to invest directly in Thai companies is through American Depositary Receipts (ADRs). These are foreign companies listed on U.S. exchanges, so they are accessible to investors and priced in U.S. dollars. Currently there are no ADRs listed on major U.S. exchanges such as the NYSE or Nasdaq, but 55 ADRs are available in the U.S. in the over-the-counter (OTC) market, which is less regulated than the major exchanges.

Sampling of Thai ADRs
Figure 7. Sampling of Thai ADRs

For a full list of currently available Thailand ADRs, see topforeignstocks.com

Sponsored ADRs are issued in participation with the foreign underlying company, whether as unsponsored ADRs are not.

The Bottom Line

Thailand is an emerging economy and while the size of the market remains small compared to the U.S. there are many stocks that provide significant volume and market capitalization to warrant foreign investment. Stocks are priced in Thai baht, and the exchange rate fluctuates, which could result in improved or reduced performance. Foreign investors can trade NVDRs with no restrictions but may face foreign ownership restrictions when attempting to buy regular stocks (if there is lots of foreign investment in those stocks already). ETFs and ADRs provide a way for investors to participate in the Thai market using U.S. exchanges and U.S. dollars.


Interest Rate Futures – Definitive Guide to Interest Rate Futures

The futures market enables traders to speculate on price movements by agreeing to purchase an asset at a certain price on a set date in the future. For example, a trader buying corn futures can lock-in the price of corn one year out into the future. If corn prices rise above the agreed upon price, the trader would realize a profit on the trade without ever taking physical delivery of the corn.

In this article, we’ll take a look at how traders can speculate on interest rates using interest rate futures and some considerations when making those trades.

Interest Rate Futures 101

Interest rate futures are derivatives contracts with an interest-bearing instrument, like a Treasury, as their underlying asset. For example, a one-year futures contract on a 30-year Treasury bond might be priced with a 5% yield. Traders might purchase the futures contract if they believe that interest rates will fall to 3% in a year, since the price of the bond moves inversely to the prevailing interest rate at the time

Figure 1 – 30 Year Treasury Bond – Source: YCharts
Figure 1 – 30 Year Treasury Bond – Source: YCharts

There are several different types of interest rate futures, depending on the underlying instrument being used:

  • Treasury bills (“T-Bills”) are short-term futures contracts traded on the Chicago Mercantile Exchange (“CME”). T-Bills have maturity dates that are usually less than a year into the future.
  • Treasury bonds are longer-term futures contracts traded on the Chicago Board of Trade (“CBOT”). Treasuries have maturity dates ranging Treasury notes, Mortgage bonds, and Certificates of Deposits (“CDs”) can be used to make similar trades. Treasury notes have maturity dates that are usually two-to-10 years out into the future.
  • Eurodollars are futures contracts written on a 3-month interest vehicle denominated in U.S. dollars but deposited in offshore banks. These contracts are traded on the CME and are among the most liquid futures in the world.

Most interest rate futures, particularly Treasury securities, involve relatively high dollar amounts of $1 million or more. These dynamics keep many smaller traders out of the market, with most participants being larger sophisticated trading operations using the trades as a hedge more so than a tool for speculation. However, individual trades do have some options for placing similar bets.

Trading Interest Rate Futures

The most popular interest rate futures are the 30-year T-Bond, 10-year Note, 5-year Note, 2-year Note, and Eurodollar. Before discussing the details, it’s important for traders to understand how the Treasury markets function. The face value of most bonds is $100,000, which means that the contract sizes are also $100,000. Each contract trades in handles worth $1,000 or 1,000 points apiece.

Of course, Treasury bonds don’t trade with even handles and each tick is equivalent to 1/32 of a full point or $31.25 ($1,000 / 32). Bond quotes are therefore given in the format 101’25 or 101-25, which would mean 101 handles and 25/32nds and yield a value of $101,781.25 ($1,000 * 101 + 25 * $31.25). These calculations are important to understand in order to determine profits or losses.

The exception to the rule is the Eurodollar futures contract, which has a $1,000,000 contract size with a handle value of $2,500 and a tick value of $25.00. Unlike Treasuries, these contracts can also trade at half and quarter tick values, which adds to the complexity when calculating profits and losses. The basic contract values can be calculated by moving the decimal point and multiple each full tick by $25.00.

Figure 2 – London 3-month Eurodollar Rate – Source: YCharts
Figure 2 – London 3-month Eurodollar Rate – Source: YCharts

Quick Example of a Trade

Let’s take a look at a complete example of a trader that purchases an interest rate futures contract and sells it within a year for a profit.

Suppose that a trader believes that interest rates are going to fall and purchases a futures contract on a 30-year Treasury bond for 102’23. The cost of the trade would be $102,718.75 using the same calculation as above. Notably, the trader chose the 30-year Treasury bond in order to experience less volatility than the short-term term options available, such as the 5-year or 2-year Treasury notes.

In a little less than one year, the trader’s predictions have come true. Interest rates have fallen and the bond’s price has risen to 103’24, which implies a valuation of $103,750 using the calculation above. With the initial purchase price of $102,718.75, the trader is sitting on a profit of about $1,031.25 or a gain of a little over 1% from the trade due to the rise in underlying interest rates.

Figure 3 – Trade Data – Source: Author
Figure 3 – Trade Data

Other Considerations for Traders

Trading interest rate futures requires the ability to predict the future direction of interest rates above all else. In most cases, interest rates rise when an economy is growing and fall when an economy is faltering. Central banks are responsible for setting these interest rates in most cases, although the markets can certainly have an impact in pushing them to take monetary policy actions.

Traders should also keep a few things in mind when dealing with interest rate futures, including the following points:

  • Maturity Dates Matter. The length of the bond’s maturity date is critical in determining the volatility of the trade. In general, short-term bonds are much more volatile than long-term bonds due to interest rate changes.
  • Large Contract Sizes. Interest rate futures have contract sizes ranging from $100,000 to $1 million, depending on the type of bond, which could preclude smaller traders from participating in the trades.
  • Quick Movements. Monetary policy decisions, such as overnight lending rates, can have a large and fast impact on interest rates, and these decisions can be quite unexpected at times, leading to higher volatility.

The Bottom Line

Interest rate futures are a great way to either hedge a portfolio against interest rate exposure or speculate on future interest rate changes. While trading these futures contracts is a bit more involved than many commodities, traders can use relatively simple calculations to determine their profits and losses. The downside is that the contracts are large in size (>$100,000) and can be quite volatile at times.


– Here’s What a Collapsing Company Looks Like in 5 Charts

After the 2008 financial crisis, the collapse of a company is something that seems less far-fetched than it used to. Still, finding a company that is on the verge of collapse is quite a difficult task. To help our readers pick out stocks that are displaying red flags, we used the example of BlockBuster (formerly under the ticker BB) and examine its stock’s collapse. The once dominant video rental service (and dividend-payer) saw technology dethrone its market share and send its stock into a tailspin.

Below, we present five charts that illustrate BlockBuster’s downfall.

A Stock with Downward Momentum

BlockBuster went public in late 1999, at the height of the internet bubble. It was able to navigate the bursting of the bubble: better than most, but it did not take long for the stock to start its fall from grace:

failing company chart example

BB peaked at a price of $29.45 on 5/1/2002, a top that quickly made way for a swift drop less than a year later. Though it regained some lost ground in 2003, the following years would see nothing but losses for the stock.

Volatility Spikes

Another way to look at BB’s collapse is to examine its daily movement in percentage terms. Though it may have hit its peak in 2002, the stock became extremely volatile from 2008 on, even seeing its price jump by more than 100% in a single trading session:

failing company chart example

As its stock continued to lose ground, its movement on a day-to-day basis became very erratic and unpredictable, a sign of a stock that is faring quite poorly.

Spiking Volume for BB

As its price continued to decline and its volatility increased, BB saw its daily volumes swell as traders tried to step in to make a profit:

failing company chart example

Take note of how daily volume spikes increase as BB moves downward. Its highest volume day came on 9/28/2011 when it traded 69,030,600 shares. That day saw the stock jump 75%, only to lose a respective 86% and 40% in its following two trading sessions.

BB vs. The Competition

One of the biggest competitors (and reasons why BlockBuster went bankrupt) is Netflix (NFLX), a stock that has continued to perform well in recent years. The chart below outlays the daily percent change in both BB and NFLX from the day the latter made its public debut (5/29/2002) until late 2009, once BB had already lost 99% of its value.

failing company chart example

Had we continued this chart through today, NFLX would be up over 5500% while BB would look like nothing more than a flat line that gradually sinks to -100%.

BB in Search Volume

Here is a chart that may not immediately come to mind when evaluating a stock. This chart represents the number of Google searches for “BlockBuster” over the last 10 years. A clear trend emerges, as the searches continue to dwindle as the years go on, almost in tandem with BB’s price [see also A Stock Trend You Never Considered: Comparing Search Traffic and Stock Performance].

Bonus: A Trip Down Memory Lane

As an added bonus, the following image is a screen capture of BlockBuster’s website on 2/29/2000.

failing company chart example

The Bottom Line

Finding a company on the verge of collapse is typically a culmination of a number of factors, including some that we did not mention above. Always be sure to keep an eye out for red flags to ensure that your holdings are stable and secure.


Pre Market Quotes – Pre-Market Quotes: What They Are and What They Mean

Most traders and investors are familiar with the famous opening and closing bells at the New York Stock Exchange, which are rung at the beginning and end of each trading day by special guests or parties. Notable bell ringers range from athletes like the New York Yankees’ Joe DiMaggio to former South African President Nelson Mandela to companies undergoing large initial public offerings (“IPOs”).

While the opening and closing bells mark the end of normal trading hours, traders and investors can still make trades in what’s known as pre-market or after hours trading sessions. These sessions don’t have nearly as much liquidity as normal market hours, but they enable traders and investors to acquire or dispose of positions that they might be concerned about holding through the next day’s open [see also 25 Stocks Day Traders Love].

In this article, we’ll take a look at pre-market and after hours trading, what it means for traders and investors, and how they can get involved.

How It Works

Pre-market and after-hours trades are placed just like trades made during regular hours, with the only difference being limited information and liquidity (see Figure 1). While regular hours trading automatically involves multiple ECNs, pre-market and after-hours trades may only be placed on a single ECN since participation by ECNs and market makers in pre-market or after-hours trading is voluntary.

Extended Hours Order
Figure 1 – Extended Hours Order – Source: InteractiveBrokers

Different brokers have different rules governing their extended hours trading sessions and processes. For instance, some brokers only permit pre-market trades made one hour before open, while other brokers may allow pre-market trading as early as 4:00am Eastern Time. These differences, as well as ECN routing differences, can make a big difference in execution times and prices.

Reading Quotes

Pre-market and after-hours quotes are provided in much the same way as regular hours quotes, although the information can be a bit more difficult to find. Some exchanges, like the NASDAQ, provide free pre-market and after-hours quotes and charts on their website (see Figure 2). Traders and investors can also find the information in many popular brokerage platforms.

Be sure to also read What Is Day Trading

GE Pre-Market Quote on NASDAQ
Figure 2 – GE Pre-Market Quote on NASDAQ – Source: NASDAQ.com

In general, pre-market quotes provide traders and investors with a leading indicator for regular hours trading. For example, pre-market quotes can provide a close estimate of a stock’s opening price and potential daily volume (see Figure 3). These metrics are particularly important in volatile stocks that announced after-hours news the day before, such as an after-market earnings announcement.

Traders and investors closely watch pre-market and after-hours trading in the major indexes like the Dow Jones Industrial Average. For example, the NASDAQ-100’s pre-market indicator calculates the last sale prices of the index’s securities during pre-market trading from 4:00am to 9:30am Eastern Time. The data might show how technology stocks are poised to open after overnight news is digested.

Apple Inc. Gap Up Prediction
Figure 3 – Apple Inc. Gap Up Prediction – Source: StockCharts.com

While traders and investors should keep an eye on these indicators, it’s also important to remember that the pre-market price doesn’t necessarily reflect the opening price or daily trading range in any way. In fact, individuals or institutions may engaged in pre-market trading in order to try and impact the opening price by setting expectations that can prove quite different than regular hours sentiment.

See also Top 21 Trading Rules for Beginners: A Visual Guide

Risks to Consider

The U.S. Securities and Exchange Commission (“SEC”) outlines eight risks that are associated with trading in pre-market or after-hours sessions:

1. Inability to See or Act Upon Quotes. Some brokers only allow traders to view quotes from the ECN they are using, which means that quotes from other ECNs may not apply to them unless the orders are routed.

2. Lack of Liquidity. Stocks trade fewer shares during pre-market or after-hours sessions, which means that it may be difficult to execute some trades, particularly at desirable prices.

3. Larger Quote Spread. Fewer shares traded during pre-market or after-hours sessions means that the spreads between bid and ask prices is likely wider than during regular market hours.

4. Price Volatility. News announced pre-market or after-hours might have a greater impact on stock price given the limited trading activity, which means price fluctuations can vary greatly.

5. Uncertain Prices. Stock prices traded pre-market or after-hours might not reflect the prices of those stocks during regular hours, particularly during uncertain times following earnings or news announcements.

6. Bias Towards Limit Orders. Many ECNs only accept limit orders during pre-market or after-hours trading, which means it’s important to check and see if these remain in effect during regular hours.

7. Competition with Professional Traders. Many pre-market and after-hours traders are professionals with large institutions, such as mutual funds or hedge funds, who have access to more information.

8. Computer Delays. Online trading involves the potential for delays in showing market information or executing trades in pre-market, after-hours, and regular hours trading, which traders should always consider.

The Bottom Line

Pre-market and after-hours trading provides traders and investors with a means to buy and sell outside of regular market hours. While these types of orders can be convenient in many situations, traders and investors should consider the many risks involved, such as limited liquidity and lack of information. Traders and investors should also consult their brokers to understand exactly how the trades function.


Japanese Stock Market – Japan Stock Market: A Trader’s Guide

The Japanese stock market is one of the largest in the world, listing the stock for some of the world’s most recognized brands, including Mazda, Nissan, Sony and Toshiba. The main stock exchange in Japan is the Tokyo Stock Exchange (TSE), and while a major global exchange there are several things to be aware of before diving as a foreign investor/trader. Traders should understand Japanese stock regulations, the size of the market, major indexes, liquidity, Japanese currency, as well as ways to domestically invest in Japan.

Japan Stock Market: Size and Indexes

According to the World Federation of Exchanges, as of January 2014 the Tokyo Stock Exchange (TSE) had a market capitalization of $4.421 trillion, making it the third largest stock exchange in the world after the NASDAQ and NYSE. The NASDAQ has a market capitalization of $5.998 trillion and the NYSE $17 trillion.

While there are a number Japanese stock indexes, there are two main indexes, as well as another which isn’t linked to the TSE.

  • TOPIX tracks the market value of domestic common stocks listed as TSE First Section, which are the largest stocks on the exchange. There are several other TOPIX indexes, including the TOPIX 30, 100 and 500 which track the largest 30, 100 and 500 stocks on the TSE.
  • The JPX-Nikkei Index was introduced in 2014, and includes 400 stocks which are screened for a number of different factors, including debt, deficits, liquidity and return on equity. While the index showcases how strong companies are doing, which meet the eligibility criteria, it may not reflect the Japanese stock market as a whole.
  • The Nikkei 225 is the most popular Japanese stock market index but was not developed by the TSE. This index tracks the 225 companies listed on the TSE First Section.

Current index prices and updates are available on the TSE website at Stock Price Index – Real-Time.

Japan Stock Market: Prominent Stocks and Liquidity

Stock prices on the Tokyo Stock Exchange are in Japanese Yen (JPY), a heavily traded global currency. The price of Japanese Yen can vary drastically with other currencies over time. As of May 21, 2014 the USD/JPY exchange rate is hovering around 100 (100 Yen for every $1); for a current exchange rate information see XE.com: USD to JPY.

As one of the world’s largest exchanges, the Tokyo Stock Exchange offers a wide of array of highly liquid stocks, rivaling the Nasdaq. Many stocks, especially those which are part of the major indexes are analyzed and tracked by major financial websites and financial news channels around the world. Major global brands are listed on the TSE, including Mitsubishi, Toshiba, Mazda, Hitachi, Sony and Nissan.

Stock on the TSE go by a “code,” which is similar to “symbols” in U.S. markets.

Most Active Nikkei 225 Stocks
Figure 1. Most Active Nikkei 225 Stocks (May 21, 2014)

Source: Reuters

The stocks listed in figure 1 are also some of the largest capitalization stocks listed on the TSE, as they are part of the Nikkei 225 which tracks only First Section stocks— the largest on the exchange.

Japan Stock Market: Operations and Risks

The trading day is split into a two sessions, a morning session from 9:00 AM to 11:30 AM, and an afternoon session from 12:30 to 3:00 PM, Japan Standard Time.

Primary order types are limit and market orders.

For TOPIX 100 stocks priced under 10,000 Yen the tick size, or minimum incremental movement, is 1 Yen. This is roughly $0.01 U.S (subject to exchange rate). For other stocks, not in the TOPIX 100, the tick size will vary based on price, as shown in figure 2.

Japan Stock Spread
Figure 2. Tick Size by Price

Source: Tokyo Stock Exchange

Daily Price Limits prevent a stock price from swinging beyond certain levels. These levels are based on the prior day’s closing price. Figure 3 shows these levels for stocks priced under 5,000 Yen. For a full list see the TSE Trading Rules.

Japan Stock Movements
Figure 3. TSE Daily Price Movement Limits

Source: Tokyo Stock Exchange

The risks associated with Japanese stocks are those associated with any stock. Japan is a robust global economy and market leader in technology development, offering stocks with great potential, but losses can always occur with trading. Trading stocks with high volume and large market capitalization provide some stability, although won’t guarantee profitable trades.

Japanese stocks are priced in Japanese Yen, so not only do investors need to concern themselves with the direction of the stock, but also the currency. A decline in the Yen will have a dampening effect on returns once the stock is sold and the Yen converted back to the U.S. dollars. An increasing Yen has a positive effect on returns.

Before investing or trading in a foreign market it is important to understand how that market operates. Make small trades at first, until comfortable with the process and regulations. Once experienced, then move on to trading your typical position size.

Domestic Ways to Invest

If you’re not quite ready to have your money half-way around the world, there are a number of ways to gain exposure to the Japanese market and Japanese stocks domestically, using U.S. markets and U.S. dollars.

One way to do it is through ETFs. ETFs provide traders with exposure to a basket of Japanese stocks, traded on U.S. exchanges and are priced in U.S. dollars

Japan ETF List (as of May 21, 2014)
Figure 4. Japan ETF List (as of May 21, 2014)

Source: ETFdb.com

Another way to invest directly in Japanese companies is through American Depositary Receipts (ADRs). These are foreign companies listed on U.S. exchanges, so they are accessible to investors and priced in U.S. dollars. Currently there are 17 ADRs listed on the NYSE or Nasdaq. There are 269 ADRs listed on the over-the-counter (OTC) market, which is less regulated than the major exchanges.

Japanese ADRs on Major Exchanges
Figure 6. Japanese ADRs on Major Exchanges

Source: Topforeignstocks.com

Sponsored ADRs are issued in participation with the foreign underlying company, where as unsponsored ADRs are not. The ADRs listed on the OTC market are mostly unsponsored.

The Bottom Line

The Tokyo Stock Exchange is a robust global exchange, rivaling the NASDAQ in size. There are a multitude of stocks offering significant volume and large market capitalization to warrant foreign investment. Stocks are priced in Japanese Yen, and the exchange rate fluctuates which could result in improved or reduced performance. Instead of investing in stocks directly on the Tokyo exchange, ETFs and ADRs provide a way for investors to participate in the Japanese market using U.S. exchanges and U.S. dollars.


Binary Options Trading Guide – Binary Options – What You Need to Know

Options are notoriously difficult to value given their flexibility, but certain types of options are easier to use than others. Binary options, also known as all-or-nothing options, provide a cash or asset payoff only if certain conditions are met. Given their simplicity, the options have grown increasingly popular over time, moving from over-the-counter to exchange-traded transactions with significant liquidity.

In this article, we’ll take a closer look at how binary options work and when traders should consider using them as an alternative means to profit.

Be sure to also read our guide Options 101: American vs. European vs. Exotic

Binary Options 101

Binary options are essentially “all or nothing” bets that an asset will reach a certain price over a certain period of time. Often times, traders use binary options as a way to speculate on a yes/no event, such as an FDA approval or interest rate decision, in order to avoid the risk of holding a physical position. The options themselves are also growing increasingly popular, which has improved liquidity over time.

Binary Options Example
Figure 1 – Binary Options Example

For example, suppose that in February a trader believes that the S&P 500 SPDR ETF will close above $190.00 by the end of May. While the trader could go long SPY or buy a more traditional option, they could instead buy 10 binary call options at a cost of $20.00 a piece or $200.00 in total that pay out $100.00 a piece if the price closes at or above $190.00 level by May.

There are several different types of binary options, including:

  • Cash-or-Nothing – The binary option buyer receives a cash payout or nothing at expiration depending on the price at the point of expiration.
  • Asset-or-Nothing – The binary option buyer receives the underlying asset as a payout or nothing at expiration depending on the price at expiration.
  • Call/Up Option – The trader is buying a binary option in the same way that an options trader is buying a call option on a stock.
  • Put/Down Option – The trader is selling a binary option in the same way that an options trader is writing a call option on a stock.

Risk and Rewards

Binary options provide traders with a unique way to profit in many different markets by making all-or-nothing bets, but there are many risks and other considerations that investors should contemplate before buying or selling.

Binary option benefits include:

  • Set Risk-Reward Ratio – Traders have a clear idea of the risk versus reward when trading binary options, since the risk is limited to the cost of the option and the reward is limited to the payout of the option.
  • No Market Risk – Traders that buy and sell binary options don’t have to worry about market risks like slippage or having their positions stopped out by volatile trading that might occur suddenly or overnight.
  • Significant Flexibility – Traders have many different choices when it comes to binary options, which means that they can find solutions that match their needs instead of settling for less-ideal solutions.

Binary option risks include:

  • Complete Loss – Traders may lose their entire investment with binary options, which is significantly less likely when purchasing individual stocks or bonds given that few companies go bankrupt.
  • Uneven Odds – Traders may find that binary options provide worse odds than purchasing individual options or assuming the risks associated with making outright trades, which makes due diligence very important.
  • Liquidity – Binary options aren’t as heavily traded as traditional options, which means that traders may have difficulty buying or selling the options at favorable prices before they are exercised at expiration.

See also the Ten Commandments of Options Trading

Valuing Binary Options

Binary options are valued with the Black-Scholes model, similar to the way traditional stock options are valued. The key difference in valuing binary options is taking volatility skew into account, which can involve a more sophisticated analysis based on call spreads. Since the skew is usually negative, the value of a binary call option is higher when taking the skew into account in valuation.

Volatility Skew
Figure 2 – Volatility Skew – Source: Timera Energy

Binary options are also interesting because they provide additional insights that aren’t available when looking at a stock or plain vanilla options. In finance, stocks have expected returns already priced in and vanilla options provide the market’s estimate of upcoming volatility. Binary options add to that by showing the market’s anticipated skew – that is, patterns that arise in implied volatility.

The Bottom Line

Binary options provide traders with a way to bet on future price direction in an all-or-nothing manner, which provides a very specific risk/reward profile. Traders should carefully weigh the many risks and rewards associated with binary options, including diversification and liquidity concerns. Valuing binary options is similar to plain vanilla options, but must account for volatility skew, which provides interesting insights into the market.


Cheese Futures – 25 Bizarre Futures Contracts

While some of these seemingly bizarre futures contracts see volume on a regular basis, many have yet to catch on, or are meant for a very specific and niche clientele. Not all these futures are “bizarre”; the underlying products are likely familiar in many cases, but most people just aren’t aware that these products are tradable via futures contracts in the U.S. Here are 25 bizarre futures, separated into four broad headings: Food, Energy, Volatility & Currencies, and Spreads.

Bizarre Food Futures

You may know the food, but you probably didn’t know that futures were traded on it. Futures allow a farmer or a producer to lock in a price for their crop, animals or product for later delivery.

1. Cheese

Yup, you can trade cheese futures on the Chicago Mercantile Exchange (CME) under symbol CSC. Volume is between 50 to 300 contracts per day. The contract size is 20,000 pounds of cheese.

2. Milk

Milk is also traded via futures contract. On the CME Class III (symbol: DC) and Class IV (symbol: GDK) milk are traded; Class III milk is used to make hard cheeses and has daily volume between 500 and 2000 contracts per day. Class IV is used to make butter and dry milk products, and has daily volume between 0 and 250 contracts per day.

The contract size is 200,000 pounds of the milk.

3. Non-Fat Dry Milk

Trading under symbol GNF, each contract traded on the CME is for 44,000 pounds of non-fat dry milk. Daily volume is typically between 10 and 200 contracts.

4. Dry Whey

Used as a protein supplement, dry whey trades on the CME under symbol DY. Each contract is for 44,000 pounds and daily volume is typically between 1 and 100 contracts.

5. Butter

Butter isn’t bizarre, but most people don’t know it trades on the CME under symbol CB. Each contract is for 20,000 pounds of butter and daily volume is between 50 and 300 contracts.

6. Oats

Most people have heard of wheat, corn and soybean futures, but oats also make the list. It trades on the CME under symbol ZO. One contract is for 5,000 bushels (approximately 86 metric tons) and daily volume is between 100 and 2,000 contracts.

7. Rice

Rice is another food not often considered a futures tradable good, yet the market is fairly active with 200 to 2,000 contracts changing hands daily. It trades on the CME under symbol ZR and each contract is for 2,000 hundredweights (approximately 91 metric tons).

8. Orange Juice

Considered by many traders to be one of the craziest markets to trade based on daily price gaps, Frozen Concentrated Orange Juice futures trade on Intercontinental Exchange (ICE) under the symbol OJ. Each contract is for 15,000 pounds of orange juice solids. Four hundred contracts or more typically change hands daily, with volume capable of spiking to 20,000 contracts.

Futures contracts are traded on many other foods and “soft” products, such as cocoa, sugar, coffee, canola, barley and cotton

Bizarre Energy Futures

9. Emission Allowances

The CME and Intercontinental Futures Exchange (ICE) both offer emissions products. The most active product on the CME is the In Delivery Month European Union Allowance Futures Contract (symbol: EAF), trading between 0 and 10,000 contracts daily. Each contract is for 1,000 European Union Allowances (EUA); each EUA is an entitlement to emit one ton of carbon dioxide-equivalent gas. They were introduced as a way to potential curb carbon dioxide emissions.

The ICE EUA Futures (monthly) contract is slightly more active, and trades under symbol C.

10. Electricity

There are 205 electricity futures contracts listed on the CME, most of which do zero volume on a daily basis. ICE also offers a significant number of electricity contracts. The futures contracts are based on electricity prices around the world.

While these markets aren’t typically actively traded day to day, some days see significant volume. The PJM Western Hub Real-Time Off-Peak Calendar-Month 5 MW Volume contract, trading on the CME under symbol N9L typically has a lot of open interest and some days can see volume of more than 100,000 contracts. Several other electricity contracts trade in a similar fashion – high volume some days, but no volume on most days.

11. Uranium

The radioactive substance trades on the CME under symbol UX. Each contract is 250 pounds of Uranium. There is typically open interest in the contract but there is very little, if any, volume on a day-to-day basis.

12. Highway Diesel Prices

Trading on the CME under symbol AA5 the EIA Flat Tax On-Highway Diesel Futures are based on the average weekly price (adjusted for tax rates) of highway diesel as published by the Energy Information Administration (EIA). The contract is for 42,000 gallons of diesel.

On most days the contract does no volume, but spikes occasionally up to 1,000 contracts per day.

13. Retail Gasoline Prices

Hedge price increases at the pump with EIA Flat Tax Retail Gasoline Futures (symbol: JE) on the CME. The contract is based on the weekly average retail price of regular grade gasoline, adjusted for tax rates. Each contract is for 42,000 gallons of gasoline, the there is typically zero volume and negligible open interest.

14. Ethylene

The flammable gas trades via the Mont Belvieu Spot Ethylene In-Well Futures (symbol: MBE) on the CME in 100,000 pound units. There is typically open interest in the contract but volume is sporadic, with 0 to 500 contracts changing hands daily.

A similar contract is based on the average ethylene price (extracted) for Mont Belvieu and trades under the symbol MBR; it has similar volume to the former.

Bizarre Volatility & Currency Futures

15. Freight

The CME and ICE offer a number of different “freight route” futures contracts, allowing for the hedging of freight costs through various regions. The Freight Route TC2 (Baltic) Futures (symbol: TM) on the CME typically has some open interest and sporadically trades a few contracts per day, with no volume on most days.

16. Currency Volatility

The Euro Quarterly Variance future on the CME (symbol: VEQ) tracks the volatility of the euro. While there is general open interest in the contract, there is typically no volume.

Similar contracts are available for different time frames and for the Yen, Australian dollar and British Pound.

17. Israeli Shekel Futures

The CME offers trade in a number of small illiquid currencies. Israeli Shekel futures are one example, trading under symbol ILS. Daily volume ranges from 0 to 300 contracts, with most days near 0. Each contract is for 1,000,000 Israeli shekel.

18. Euro/Polish Zloty

Another small currency tradable via futures on the CME is the Euro/Polish Zloty (symbol: EPZ) cross-rate futures contract. It trades several to several hundred contracts daily, and each contract is for 500,000 Polish zloty.

19. Gold Volatility Index Futures

Trading under symbol GVF on the CME this future tracks the volatility of gold. There is typically no volume and no open interest.

A number of other silver and gold variance and volatility based futures trade on the CME, including Gold Quarterly Variance and Silver Calendar Variance futures. These also typically have no volume and no open interest.

Bizarre Spread Futures

There are many seemingly bizarre spread futures that are based on the difference between two more commodities or products.

20. Germany (De)-Netherlands (Nd) Sovereign Yield Spread Futures

These futures trade under symbol DNV and are based on the difference of the yield-to-maturity of German and Netherlands government-issued bonds. The contract is based on yields, where 0.01 points = 1 basis point = 100 Euros. Typically there is no volume in this contract.

21. UK-Italy (It) Sovereign Yield Spread Futures

Similar the German-Netherlands contract, the UK-It contract trades under symbol KTV. 0.01 points = 1 basis point = 100 Pounds Sterling. This contract also typically has no volume.

There are a host of other sovereign yield spread futures listed on the CME including U.S – Netherlands , U.S.-UK, and UK-France. All typically have no volume.

22. Gulf Coast Fuel Oil vs. European Fuel Oil

Quite a mouth full, the Gulf Coast No. 6 Fuel Oil 3.0% (Platts) vs. European 3.5% Fuel Oil Barges FOB Rdam (Platts) Futures trade on the CME under symbol GCU. The price of the contract is determined by the difference of the average prices of the two underlying contracts. The contract is actively traded, with daily volume between 50 and 2000 contracts.

23. Crack Spread Futures

The 3.5% Fuel Oil Barges FOB Rdam (Platts) Crack Spread Futures is based on the difference between the 3.5% Fuel Oil Barges average price and Brent Crude Oil (ICE) futures. Volume ranges between about 20 and 1500 contracts daily. The contract trades on the CME under symbol FO.

24. Gulf Coast Gas vs. RBOB Gasoline

The price for each Gulf Coast Unl 87 Gasoline M1 (Platts) vs. RBOB Gasoline Futures Contract is equal to the average of the Platts U.S. Gulf Coast Unl 87 gasoline pipeline mean minus the NYMEX New York Harbor RBOB Futures. The contract sees volume on the CME most days, with daily volume between 50 and 2000 contracts.

25. Soybean-Corn Price Ratio

The price of this contract is determined by the soybean futures price divided by the corn futures price. It is called the Soybean-Corn Price Ratio Synthetic future (symbol: CSI) and is available through the CME. The contract typically has no volume and no open interest.

The Bottom Line

In many cases the underlying product(s) of these futures aren’t that bizarre; however, the fact that they can be traded via a futures contract is unknown to most people. Some of these futures have an active market, although typically the volume is sporadic and considered low by many traders’ standards. Most of these contracts are traded by companies that have some sort of vested interest in the underlying product(s), or use the futures for hedging purposes. The average trader is likely wise to seek profits in on more liquid, less bizarre markets.


Dow 30 Companies – 30 Bizarre Facts About the Dow 30 Companies

The Dow Jones Industrial Average is comprised of 30 of the biggest companies in the world, and is often referred to as the Dow 30. These blue chip stocks are well-known in the investment world as well as the consumer space, and there are some fun and interesting facts behind these juggernauts that you may not have known. Below, we present 30 bizarre or interesting facts for each of the Dow 30 components.

3M (MMM)

  • Founded: 1902
  • Headquarters: Maplewood, Minnesota
  • Market Cap: $93 billion

The company’s founders originally sold what they thought was corundum to manufacturers, but they soon learned that they were selling a worthless mineral called anorthosite

anorthosite futures trading

American Express (AXP)

  • Founded: 1850
  • Headquarters: New York City, New York
  • Market Cap: $95 billion

The company was originally founded as an express mail service operating out of Buffalo, NY.

blue and red letterbox

AT&T (T)

  • Founded: 1983
  • Headquarters: Dallas, Texas
  • Market Cap: $189 billion

When its government-backed monopoly was dissolved in 1984, the company split into 24 different firms known as “Baby Bells.”

Liberty Bell picture

Boeing (BA)

  • Founded: 1916
  • Headquarters: Chicago, Illinois
  • Market Cap: $97 billion

After WW1, used military planes flooded the market and put many airplane manufacturers out of business. To stay alive, Boeing built dressers, counters, furniture, and boats, among other things.

world war 2 bomber plane

Caterpillar (CAT)

  • Founded: 1925
  • Headquarters: Peoria, Illinois
  • Market Cap: $66 billion

Caterpillar’s early tractors became instrumental in WW1 for pulling and transporting heavy artillery and supplies.

construction equipment

Chevron (CVX)

  • Founded: 1984
  • Headquarters: San Ramon, California
  • Market Cap: $238 billion

In 1948, Standard Oil of California (later to become Chevron) found the Ghawar oil field in Saudi Arabia, the largest in the world. The Saudi government has kept most of the information concerning the field under wraps in recent years, but it is estimated to contain 71 billion barrels of oil.

chevron oil refinery

Cisco Systems (CSCO)

  • Founded: 1984
  • Headquarters: San Francisco: California
  • Market Cap: $119 billion

Founders Leonard Bosack and Sandy Lerner were forced to resign from Stanford when it was discovered that they had stolen one of the University’s routers for Cisco’s first products.

router picture example

E I du Pont de Nemours and Co (DD)

  • Founded: 1802
  • Headquarters: Wilmington, Delaware
  • Market Cap: $63 billion

DuPont was founded as a Gunpowder Mill in 1802 after its founder, Eleuthère Irénée du Pont, fled France to escape the French Revolution.

gunpowder picture example

Exxon Mobil (XOM)

  • Founded: 1999
  • Headquarters: Irving, Texas
  • Market Cap: $439 billion

The company is the result of a merger between Exxon and Mobil, both of which were originally part of John D. Rockefeller’s Standard Oil Company that was broken up by the government in 1911.

exxon picture example

General Electric (GE)

  • Founded: 1892
  • Headquarters: Fairfield, Connecticut
  • Market Cap: $269 billion

GE is responsible for the largest tax return in U.S. history, as the report clocked in at approximately 24,000 pages. That would take up about 237 MBs if submitted electronically.

GE picture example

Goldman Sachs Group (GS)

  • Founded: 1869
  • Headquarters: New York City
  • Market Cap: $74 billion

Henry Goldman resigned in 1917 (during WWI) under pressure from partners due do his pro-German stance. This left the company in the hands of the Sachs family.

Goldman picture example

Home Depot (HD)

  • Founded: 1978
  • Headquarters: Marietta, Georgia
  • Market Cap: $108 billion

Home Depot built its first two stores in spaces that it leased from JC Penney (JCP).

Home Depot picture example

Intel Corp (INTC)

  • Founded: 1968
  • Headquarters: Santa Clara, California
  • Market Cap: $132 billion

Intel was founded by the potent combination of a chemist, a physicist, and a venture capitalist.

Intel picture example

IBM (IBM)

  • Founded: 1916
  • Headquarters: Chicago, Illinois
  • Market Cap: $97 billion

The famous Styx song Mr. Roboto would have featured a protagonist with a completely different brain, had it not been for IBM.

IBM picture example

Johnson & Johnson (JNJ)

  • Founded: 1886
  • Headquarters: New Brunswick, New Jersey
  • Market Cap: $285 billion

The company was founded by three brothers who were inspired by a speech given by Joseph Lister, a pioneer of sterile surgery.

Joseph Lister picture example

JPMorgan Chase and Co (JPM)

  • Founded: 1916
  • Headquarters: New York City
  • Market Cap: $97 billion

John Pierpont “JP” Morgan, founder of JP Morgan, avoided serving in the American Civil War by paying a substitute $300 to take his place.

JP Morgan picture example

McDonald’s Corp

  • Founded: 1940
  • Headquarters: Oak Brook, Illinois
  • Market Cap: $102 billion

The McDonald’s “Golden Arch” logo was nearly abandoned in 1960, but psychologist Louis Cheskin urged the company to keep it because it had a Freudian effect of subconsciously reminding people of a woman’s nourishing breasts, making them hungry.

McDonald's picture example

Merck & Co (MRK)

  • Founded: 1891
  • Headquarters: Whitehouse Station, New Jersey
  • Market Cap: $162 billion

The origins of Merck date back to 1668 when Jacob Friedrich Merck bought a drug store in Darmstadt, Germany.

Merk picture example

Microsoft (MSFT)

  • Founded: 1975
  • Headquarters: Redmond, Washington
  • Market Cap: $330 billion

Microsoft founders first founded a failed company called Traf-o-Data that read raw data from traffic counters and created reports for engineers.

Microsoft picture example

Nike (NKE)

  • Founded: 1971
  • Headquarters: Washington County, Oregon
  • Market Cap: $330 billion

Nike’s slogan is based on the final words of Gary Gilmore, who was executed in 1977 after being convicted of two murders. When asked for his last words upon his execution, Gilmore replied, “Let’s do it.”

Nike picture example

Pfizer (PFE)

  • Founded: 1849
  • Headquarters: New York City
  • Market Cap: $186 billion

Much of the penicillin used for Allied troops during the D-day landings during WWII was made by Pfizer. As an added bonus fact, Pfizer’s founder, Charles Pfizer, had quite an impressive beard.

dday picture example

Procter & Gamble (PG)

  • Founded: 1837
  • Headquarters: Cincinnati, Ohio
  • Market Cap: $221 billion

During the American Civil War, P&G won contracts to supply the Union army with soap and candles. Not only was that a big contract at the time, but it also acquainted the troops with P&G products, helping their sales and popularity even after the war subsided.

Procter & Gamble

The Coca-Cola Company (KO)

  • Founded: 1886
  • Headquarters: Atlanta, Georgia
  • Market Cap: $179 billion

John Pemberton created the original Coca-Cola recipe in an effort to combat his morphine addiction.

Coca-Cola picture example

Travelers Companies (TRV)

  • Founded: 2004
  • Headquarters: New York City, New York
  • Market Cap: $32 billion

Travelers issued the first-ever policy for space travel for the Apollo 11 flight in 1969.

Travelers picture example

United Technologies Corp (UTX)

  • Founded: 1975
  • Headquarters: Hartford, Connecticut
  • Market Cap: $109 billion

The company is derived from a parent company that was also the origins of United Airlines and Boeing.

United Technologies

UnitedHealth Group (UNH)

  • Founded: 1977
  • Headquarters: Minnetonka, Minnesota
  • Market Cap: $76 billion

UnitedHealth Group is the largest health carrier in the U.S.

UnitedHealth picture example

Verizon Communications (VZ)

  • Founded: 1983
  • Headquarters: New York City, New York
  • Market Cap: $200 billion

The name “Verizon” was chosen from a list of 8,500 potential company names; $300 million was spent marketing the name once it was chosen.

Verizon picture example

Visa (V)

  • Founded: 1958
  • Headquarters: Foster City, California
  • Market Cap: $133 billion

Visa was launched in 1958 when Bank of America mailed out 60,000 unsolicited credit cards.

Visa picture example

Wal-Mart Stores (WMT)

  • Founded: 1962
  • Headquarters: Bentonville, Arkansas
  • Market Cap: $256 billion

Wal-Mart sells coffins of all shapes and sizes. Customers can even get a casket for the family pet if they so choose.

Wal-Mart picture example

Walt Disney Co (DIS)

  • Founded: 1923
  • Headquarters: Los Angeles, California
  • Market Cap: $143 billion

During WWII, the Canadian and U.S governments commissioned Disney workers to produce training and propaganda films; by 1942, approximately 90% of the company was working on war-related films.

Disney picture example

The Bottom Line

In most cases, these facts are just meant for fun rather than any kind of investing advice. If you were surprised by any of these facts, it’s a good reminder to look under the hood of a company before making an investment. Thorough research is one of the greatest tools an investor can use.


Scalping Strategies – Day Trading Rules for U.S. Investors

Retail day trading was prevalent throughout the 1990s and 2000s with the introduction of online trading accounts. Since then, high-frequency trading firms have made day trading more competitive and less profitable for retail traders.

Regulators concerned about inexperienced retail traders introduced new rules designed to limit day trading to professionals. These rules have also helped to ensure that even professional day traders don’t take on excessive leverage that could interrupt the market.

Click here to see what day trading is all about.

Let’s take a closer look at these rules and how they impact both retail and professional day traders.

What Is a Day Trade?

Day trading refers to the buying and then selling (or selling short and then buying) of the same security on the same day.

If you purchase a security without selling it on the same day, then the trade isn’t considered a day trade. These longer-term trades are known as swing trades or position trades, and they’re not subject to day trading rules (although margin account rules still apply).

Be sure to check this article to know how to choose the right type of technical indicator.

Day traders generate a profit by taking advantage of small price movements or by providing liquidity in exchange for ECN rebates. For example, a day trader might use a fading strategy following an earnings announcement to capitalize on the short-term overreaction and subsequent reversion to the mean.

What Is a Pattern Day Trader?

Pattern day traders use margin accounts and day trade four or more times within five business days. Brokerage firms might designate a customer as a pattern day trader based on their trading history or other factors – even if they haven’t met the technical definition of a pattern day trader.

Once you become a pattern day trader, you’re subject to the rules and regulations for as long as you have the account – even if you don’t day trade for a five-day period. However, you can contact your broker if you cease day trading and they might be able and willing to change the coding on your account.

Cash accounts are not subject to these rules, but they must adhere to another set of rules. In particular, cash traders cannot place day trades that result in free riding – or the sale of securities bought with unsettled funds. If a day trader is caught free riding, he or she will be required to pay for securities with cash upfront for 90 days.

Margin Requirements

Pattern day traders must maintain at least $25,000 in equity (cash and eligible securities) when placing day trades. They cannot use cross-guarantees with other accounts to meet these requirements, which means that the entire amount must be present in the same account as the trades are placed.

If the account falls below these levels, the broker will place a day trading minimum equity margin call on the account. The trader has five business days to meet the margin call. Otherwise, the trader’s buying power will be restricted for 90 days or until the margin call is satisfied.

In addition to FINRA’s margin requirements, many brokers have their own house margin requirements. These requirements vary depending on the broker, but they are always more stringent than FINRA’s requirements.

Buying Power Limits

Pattern day traders may trade up to four times the excess maintenance margin in the account, as of the close of the previous business day, which is more than the 2-to-1 leverage available for overnight positions. The excess maintenance margin, or exchange surplus, is equal to the difference between the account equity and margin requirement.

Any trades exceeding the buying power limitation will trigger a margin call from the broker. At that point, the trader has the option to fund the account to meet the margin call, or the broker will sell securities to meet the required amount.

Different Rules for Different Markets

Pattern day trading rules only apply to U.S. equity markets. Futures, commodities and foreign exchange markets aren’t subject to the same strict regulations. Many day traders prefer these markets for that reason – especially if they don’t have more than $25,000 in risk capital.

Be sure to check our News section to keep track of the latest news.

The Bottom Line

Traders should take the time to understand FINRA’s pattern day trading rules to avoid any costly problems. If you want to avoid these regulations, you can use a cash account instead of a margin account or trade in different markets, such as futures or currencies.