I’m continually dismayed how many “conservatives” are anti-business. Every time a dem/liberal/socialist/marxist creates some scheme that will hurt business and by extension capitalism, these “conservatives” get in line. I quote the term “conservative” because how can a person be truly conservative if they are so ignorant about how our country and capitalism works?
The current bit of fraud coming from the dems in Washington is their so-call “Financial Reform.” It’s no reform. If they wanted to actually do some “Financial Reform” they’d be all over Frank and Dodd and tearing apart Fannie Mae and Freddie Mac. That’s where the real crimes are being committed and I wouldn’t be surprised if Frank and Dodd was at the center of it all.
Be that as it may, CitiBank is the current target. This a really strange since CitiBank has been under government control for a year and gave almost $1,000,000 to Obama’s campaign fund. Supposedly CitiBank did not notify the proper authorities about some hedge funds and when shorting some stocks. From the information coming available on the internet, CitiBank complied with all the current law and regulation. It’s all a setup to control the entire financial system of the country.
Hedge Funds are the current boogyman of the dems. There are a lot of so-call conservatives (like RINO Olivia Snow) who think Hedge Funds are bad, evil and MUST BE CONTROLLED OR ELIMINATED. Far from it, hedge funds are a creation of the business cycle and the only reason they’re being reviled is that some very smart and savvy people made money—in some cases a lot of money, using them. If someone made/earned money playing the stock market, it MUST be evil. Just ask any socialist.
For those who don’t know what a hedge fund is, let me educate you a bit about how stocks are bought and sold on the exchanges and what are derivatives.
Buy low, sell high. This is the basic principal of stock trades. Buy some shares, wait for the price to go up, sell the shares. The difference is your profit known as capital gains. Short-term capital gains occur when you hold the stock less than a year before selling it. Long-term capital gains occur when stock is held a year or more before selling it.
You can also make money when the price per share goes down. This is called “shorting” the stock. It is just like “buy low, sell high” except the sequence of events is reversed. It’s “sell high, buy low.” So, how can you make money selling a stock before you buy it? By selling short. The mechanism is that you buy the right to sell the stock at a given price. If/when the price of the stock goes down, you buy it at the lower price and then sell it at the previous guaranteed higher price. The difference between the price you bought it and the guaranteed selling price is your profit. If the price of the shorted stock goes up, you must buy at the higher price and you lose money. When shorting stocks you must have sufficient funding in your trading account to cover the difference if the shorted stock goes the wrong way.
A number of large financial companies went bankrupt when their trader was wrong. The knowledge of what to buy, whether the price goes up or down and how to make money in either case marks the professional trader. Some call playing the stock market gambling. For the uneducated and uninformed, it is. It isn’t for the professional.
That’s why they make BIG bucks. When they are right, they make a ton of money for their employers and the employers want to keep the real performers working for them. To do that, they pay well and if the trader meets his goals, he’s rewarded well with bonuses. Many traders prefer to have a better bonus system and a lesser salary because they get a better reward for their performance. It’s called incentives.
Derivatives work the same way as buying and sell stock, except that instead of owning actual stocks, you own options for the stocks. The classic option function, a Call, is taught using real estate as an example. A person is interested in some real estate, but isn’t sure if he can afford it or there is some reason why he must delay the purchase. It he waits, someone else can buy the property before he’s ready. So, the person will buy an option-to-buy. This gives the prospective buyer a right-to-buy for a specific period of time at a given price. If the prospective buyer cannot follow-through all he is out is the price of the option. If the price of the property goes up, the buyer has the price locked-in at the lower value.
The options for stocks works the same way. For instance, I think the stock of AAA Company will go up but I don’t have the money to pay the full amount of the stock. Instead I will buy options for a given number of shares with an expiration date six months in the future. If the price today is $5 a share and in six months it grows to $7 a share, I can exercise my option-to-buy at the end of six months, sell the stock and make a profit of $2 a share. The actual mechanism of buying the shares and selling them is automatically performed your brokerage house. You can keep the shares if you have the money in your account to pay the full price. Most traders don’t and just retain the profit difference.
The act of buying an option and selling it high is a Call. Again like selling stock, if the price goes down, you must pay the difference and lose the price of the option.
There is also the option equivalent of shorting stocks called a Put. The Call and Put are the basic functions of derivatives. There are other more complex trades but basically they all revolve around Calls and Puts.
Hedges can deal with either stocks or options. In most cases financial institutions and trader do a little of both. There is an old adage called, “Don’t put all your eggs in one basket.” This applies to stock trading as well. Traders, like gamblers, cannot read the future. They think a stock will go up or down but none are absolutely sure so they “hedge” their bets. If a trader thinks he can buy XX shares and sell them at a profit, he may make some hedge trades to offset his losses in case the trade goes toes-up. In some cases, he may short some shares of the same stock. Or he may buy some Puts to offset some Calls. Or he made buy some shares in a hedge fund.
Another way of thinking of hedges is car insurance. We pay a monthly premium to cover our loss in case of an automobile accident. That insurance is a hedge against possible loss. We don’t want to have to file a claim, but we also don’t want to pay heavily for damages or a new car if something happens. That’s is what a hedge—or investment in a hedge fund is all about.
All these functions are necessary for a smooth operating trading system. There have been a number of mechanisms built over the decades to prevent wild swings in market prices such as those that lead to the 1929 crash. Bear in mind there has been many stock market crashes since 1929 and before. When the system breaks the market repairs itself if left alone. Some companies lose money, some go bankrupt, some tighten their belt and rebuild their profit margins. The bottom line, however, is that in almost every case, the market has fixed itself without external manipulation.
When the government interferes with the natural corrective activities of the market, stocks continue to go down. The external constraints of government blocks or diminishes the forces that would fix the situation. Bailouts allow companies to continue the practices that got them in trouble. If there were no bailouts, the failing companies would either have to put their houses in order—or go bankrupt and out of business. The more governmental control, the less the market can react and the downward slide continues. Traders lose their usual means of determining share and price movement, previous market trends no longer function and many traders stand pat or make fewer trades.
This has been a long post. Much longer than I’d intended. I played the market a while ago as a hobby. I had a small brokerage account and I made some money with options. Sometimes a lot. I also lost money on trades. All-in-all I broke even when I quit a couple of years ago. It was an education.
So many people are ignorant how our market and financial system works. That leaves them vulnerable to the dems and their lies. Unfortunately, many “conservatives” don’t know nor care how the market works and get suckered into the dem/liberal schemes. It’s their own ignorance that trips them up.
Before you fall for the “new” financial reforms proposed by Obama, educate yourself and discover the truth what these proposal will do to the market and to you.
A number of brokerage houses, such as ThinkorSwim and OptionsXpress have a virtual trading system that lets you play instead of investing actual money. These are real trading houses but you only need a few thousand dollars to open an account. Yes, that’s a lot of money, but you don’t have to spend it to get the training available for free. (Disclaimer: I have had accounts in the past with both brokerage houses. I no longer have any connection with either nor receive any remuneration from either business.)