Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader®, an
"A New Approach to Balancing Your Portfolio"
by Martha Stokes, CMT
One of the most daunting challenges for independent investors today is how to keep up with the onslaught of changes occurring in the financial markets. Not only are there far more financial markets you now have access to, there are far more “trading instruments” to consider. The term “trading instrument” refers not to “day trading” as most independent investors assume, but is a general term from the professional aka institutional side of the market. Trading is simply a term for any transaction in the financial markets. The retail side tends to confuse many terms used by the institutions. Another confusing term is “derivatives” often these are assumed to be the "terrible trading instruments"’ that caused the banking debacle, ruining the lives of millions of Americans and the collapse of the economy.
Derivatives however are not just for the giant investment banks. These trading instruments also are a vital part of modern business activities. With a 640 Quadrillion notional value, the Derivatives Market is many times the size of the US GDP. This one financial market is the powerhouse of the global economy.
How are derivatives used? Corporations in high risk, heavy investment industries such as natural resources use derivatives to "insure" against a massive loss. As an example an oil drilling company would buy derivative as an insurance policy against the uncertainty of the cost of drilling a well. Or a mining company could buy a derivative to insure a mining operation. Corporations use derivatives constantly nowadays as a means of mitigating and lowering risk. Smaller to mid-sized banks buy interest rate swaps to lower their exposure risk to rising interest rates. Mutual Funds lower their risk when they invest in foreign currencies by buying currency index derivatives.
All of these derivatives transactions are legal and provide a simple, low cost way to insure against losses while lowering risk and exposure. By using derivatives both corporations and mutual funds are able to better posture their companies for uncertain future events.
As an independent investor, you also can use derivatives for mitigating your risk. Exchange Traded Funds are one form of derivative that is less risky than stock options and far easier to use, buy, sell, and manage. With options you have the added complexity of time decay, multiple chains, more speculation and the looming expiration. ETFs are bought and sold just like stocks. They can be used to offset the risk of loss during corrections and bear markets.
There are thousands of ETFs that are ideal for long term investors. More and more index ETFs for every industry are being created each day. Mutual funds are flocking to ETFs and abandoning options as a means of controlling risk. You should consider following their lead.
Martha Stokes, CMT and CEO of TechniTrader®
TechniTrader® the Gold Standard in Stock Market Education™
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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