Borrowers will default, markets will collapse, but Gold will skyrocket
Could Brexit be the best thing to happen to the London Stock Market? The last time Britain refused a big idea from Europe, the exit from the Exchange Rate Mechanism back in 1992, the similarities are encouraging.
Exchange Rate Mechanism was a financial precursor to the euro, where attempts to pitch the pound against the deutschmark failed spectacularly and the date September 16th 1992 became known as Black Wednesday. The initial reaction back then was one of negativity, with many economists predicting it all to end in tears.
However, Black Wednesday soon proved to have a very definite silver lining as sentiment switched from fear to greed before settling in to one of the biggest bull runs. The FTSE 100 trended upwards for the remainder of the century. The low that it had plunged to on a hectic trading day of 2,221 went on to hit 6,930 on December 31st 1999.
There are significant differences between today and 1992. Back then interest rates were much higher than they are today, they were raised to 12% on Black Wednesday, but were cut in half within months as the Treasury steered the economy off the rocks of recession. Sceptics will argue the same thing could not happen again, but sterling’s double-digit devaluation against both the dollar and the euro since the start of year has already boosted the competitiveness of British exports making them cheaper for foreign buyers. Companies and investors receiving revenue overseas will have already found that the deflating sterling has improved the value of that income when converted. Although hopes of a quarter point proved premature last week, if Mark Carney does move from the current rate of 0.5% to 0.25% next month, then interest rates will have halved again.
So where does this leave the trading community. Well currently alternatives to equities are fairly ghastly. Cash deposits are pointless, bonds seem sure to lose you money and property is too dear and dangerously illiquid. So stocks and shares are the best for an income starved world.
Taking the FTSE 100 as an example, the average yield is 3.8% but many blue-chip companies pay more than that. Glaxo Smith Kline dividends equal 4.8% of current share price, Legal & General yields 6.4% and BHP Billiton 8%. Yields such as these pay investors to be patient as politics and media calm down and the economy to perk up. Others argue that there could be substantial gains made from takeovers and mergers as the shrinking pound will make British assets seem cheap to foreign bargain-hunters, an example of this, and a decent trading tip, American cinema chain AMC, paying nearly £1bn to buy Odeon and UCI networks.
Bad news can create good prices for the long term investors willing to seek opportunities in short-term setbacks, and although there is still a great deal of uncertainty about the economic and political outlook, there are still exceptional opportunities and a lot of markets will be looking on the bright side of Brexit.
Using The Position Trading Strategy To Profit In The Stock Market
Learning about position trading strategies is key to anyone interested in trading stocks in the stock market. Position trading can be a highly profitable way to trade stocks for stock market traders who do not have time to constantly keep track of their stock positions. Position trading is a strategy in which a trader buys or sells short a position in a stock prior to a pending stock-specific event to take advantage of an anticipated move higher or lower in the price of a stock. Position trading is not a difficult stock trading strategy to grasp, what is difficult is finding suitable position trading opportunities and implementing the position trading strategy correctly.
Implementing Position Trading Strategies
While the media is full of stories of day traders making thousands of dollars a day scalping profits from extremely short term stock trades and hedge funds using high frequency trading strategies to reap quick profits from thousands of stock trades per day, the fact is that most individual investors do not have the time or equipment necessary to engage in these speculative trading practices. Position trading strategies are more suitable for individual investors that want to try making money trading stocks, but cannot commit the time or resources to day trading or high frequency trading strategies.
These are the steps involved in position trading:
Identify position trading opportunities, which can include a wide variety of potential stock moving events, including but not limited to: new product rollouts, seasonal events (such as seasonal sales spikes), anticipated government policy changes, company events (such as industry conferences), and company earnings reports.
Buy or sell short (short if you are anticipating a price drop) a stock position far enough in advance of a potential stock moving event to take advantage of anticipation buying or selling that may start causing the stock’s price to increase or decrease prior to the expected event.
It is important to set a stop loss to preserve position trading capital. A stop loss order should be entered to protect a stock position from unexpected events that cause a move in the stock’s price that is not anticipated. A stop loss order is particularly important when position trading, since position traders do not have the time to constantly monitor the news flow associated with a stock that they hold a position in. A stop loss will limit any unexpected losses and help a position trader sleep better at night.
Set a realistic sell or buy to cover target price by using a limit order, so that if the position trade reaches the anticipated price level, the position trade will be automatically closed and a profit will be earned from the trade without having to actively monitor a stock’s price action.
While holding a position trading stock position, it is a good idea to check the news flow associated with the stock(s) you are holding at least once per day to assess whether new developments associated with the stock require adjustments in the position trade or even closure of the position trade. For example, if your position trade is the anticipation of a new product launch, and a news story comes out that says the product launch has been delayed for three months, you may want to rethink the position trade.
An Example of Position Trading Strategies
Position trading can be done on both the long and short side of stock trading. Meaning, a position can be taken in a stock expecting a move higher (long) or a move lower (short).
A good illustration of both long and short position trading strategies is the annual Apple Computer (AAPL) Worldwide Developers Conference. Traders have identified a trading pattern associated with this annual Apple conference. Apple’s stock often trades higher in the days prior to this widely followed developers conference, as AAPL stock traders buy AAPL in anticipation of potential stock moving announcements from the conference. Buying a long position trade in AAPL a few weeks before the conference and selling the AAPL long position just before the conference can be profitable, if AAPL rises in anticipation of the developers conference. If the developers conference ends without any significant positive announcements, the price of AAPL usually drops, as short term traders close their long AAPL positions. The post-conference price drop provides a short position trading opportunity that involves selling AAPL short during the conference and covering the AAPL short position for a profit during the post-conference selloff.
Getting Comfortable With Position Trading Strategies
Usually, the stock market offers ample position trading opportunities to implement position trading strategies. Position trading from the long side works best during flat to bullish markets. Position trading from the long side can be difficult or impossible during sharp market selloffs, as the broad downward movement of stocks during a market selloff may negate any potential position trading gains from long positions. During market selloffs, also known as bear markets (when the selloff is prolonged and severe), position trading from the short side should be considered.
Most of the time required to be successful at position trading involves the time necessary to research stock market news and events to find suitable positions trading opportunities, and checking in daily for news updates once a position trade has been established. To get comfortable with position trading, it is recommended that novice position traders do paper trades inititally, instead of using real money to learn about position trading. A paper trade is simply writing on a piece of paper when you would buy or sell short, what stop loss you would set, and what limit price you would set to sell or buy to cover your position trade, without actually committing any money to the trade. See how these paper position trades work out, and take the time to thoroughly learn about position trading before putting any money at risk in the stock market.
The Royal Mint in the UK is now offering the option to trade gold through their pension schemes.
Through a trading website, Sipp and SSAS investors will be able to choose from the Mint’s different bullion holdings through two options. Via the Royal Mint Refinery they will be able to buy 100 gram and 1 kilogram bars while through Signature Gold service, customers will be able to purchase and own a fractional amount of a 400 ounce gold bar. The gold will be stored at the Royal Mint’s own bullion vault.
The cost for this is 1% per annum to store the gold at the Royal Mint Refinery as gold bullion bars. The storage fee for the Signature Gold service is 0.5%, both charges being based on the average daily market value of the gold being held in the vault.
Chris Howard, director of bullion at the Royal Mint, states that: ‘The Royal Mint benefits from a centuries-old reputation as a trusted bullion provider and manufacturer of coins on a global scale.
‘The move to make Royal Mint gold bullion available for holding within pension schemes opens us up to a whole new marketplace. This is a natural progression in The Royal Mint’s aim to provide the complete one stop bullion solution.’
How to invest in Commodities
Commodities are classed as physical assets and include metals such as gold, silver, platinum and copper, oil and gas, and also ‘soft’ commodities such as wheat, sugar, cocoa beans and coffee. Often referred to as the fifth asset class as they differ from conventional investment asset classes of cash, fixed interest debentures, equities and property.
Commodities play an important part in everyday life and with little correlation with the stock market and currencies, are useful for the purpose of diversification within investment portfolios.
Traditionally, most people did not know how to invest in commodities as doing so required large amounts of capital, time and expertise. These days there are a number of different methods to the commodity market making it easy for the average investor to participate.
There are typically four ways to invest in commodities – either directly by buying it physically, or buying shares in commodity companies, or indirectly through funds or investment trusts and through the use of futures.
Recently this has become a very popular way to invest in commodities. A futures contract is an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price. Futures are available on all commodities such as crude oil, gold, natural gas, as well as agricultural products such as cattle or corn.
Many of the participants are actual commercial or, in some cases, institutional users of the commodities they are trading. The remaining participants, which in most cases, are individuals, are traders who hope to profit from the changes in the price of the futures contract. Positions from these individuals are typically closed out before the contract is due and never take physical delivery of the commodity.
The first step to investing in a futures contract requires opening a brokerage account and completing the subsequent forms acknowledging that the risks are understood.
Each commodity contract requires a different minimum deposit, depending on the broker, and the value of your account will increase or decrease with the value of the contract. If the value of the contract goes down, you will be subject to a margin call and will be required to place more money into your account to keep the position open. Due to the huge amounts of leverage, small price movements can mean huge returns or losses, and a futures account can be wiped out or doubled in a matter of minutes.
Future contracts will also have options associated with them. Options are derivatives and help limit the loss to the cost of options.
It’s the purest form of commodity purchase
Leverage allows for huge profit if on correct side of trade
Long or short can be chosen easily.
The minimum-deposit accounts allow control over full-size contracts which typically would not normally be affordable.
Futures are very volatile and direct investment into these carries a considerable risk. Not suitable for an inexperienced investor.
Leverage magnifies the gains but also the losses
A trade can go against you very quickly and the risk of losing your deposit and more is very real.
Stocks & Shares
Many investors looking for commodities play use stocks, which are a lot less volatile than the futures market. When investing in stocks, research has to be undertaken into the company as well as the underlying commodity.
Gold companies allow investors to invest in mining equipment, drillers, retail companies or diversified gold companies. The stocks are easy to buy, hold, track and ultimately trade and sector can be chosen.
Trading is easier as investors usually have a brokerage account setup
Stocks are usually highly liquid
Public information on companies is readily available
Stock prices are not a direct result of the underlying commodity
Prices may fluctuate due to company specifics as well as market specifics
Exchange Traded Funds and Exchange Traded Notes
Exchange traded funds (ETFs) and exchange traded notes (ETNs), trade like stocks, and investors to participate in commodity price fluctuations without investing directly in futures contracts.
Commodity ETFs usually track the price of a particular commodity or group of commodities that comprise an index by using futures contracts, although a few back the ETF with the actual commodity held in storage.
ETNs are unsecured debt designed to mimic the price fluctuation of a particular commodity or commodity index, and are backed by the issuer. A special brokerage account is not required to invest in ETFs or ETNs.
Because they trade like stocks, there are no management fees and thus provide an easy way to participate in commodity investment
A big move in the commodity may not be reflected in the ETF or ETN
ETNs have credit risk associated with the issuer