Weekend.... Time to have fun & get a bit lesson

Before starting giving a bit hard tips, it's better for me to start with some introduction to you all. As nowadays, we are trading in Indonesia Stock Exchange (IDX), which only allows us to trade on stocks, warrants, ETFs & bonds. It seems that even we have a lot of trading instruments, we still don't know what they are. Well, actually, there are a lot of instruments of trading that we can trade. There are stocks, warrants (call & put), options (call & put), futures, ETFs, Bonds, Commodities, Forex, etc. A bunch of trading instrument that can give us profit & yet, all of them have different risk profile. Before we continue, we must know that the tradable instruments some are listed on Indonesian Commodities & Derivatives Exchange (ICDX), like Commodities (Gold & Olein) & Forex (4 pairs). I'll start to explain one by one based on the risk profile.

1. Bonds (Example: Surat Utang Negara (SUN), SUKUK, ORI007, etc)

Bonds is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. (source: Wikipedia)

There are two types of bonds Government Bonds & Corporate Bonds. Each of them has different risk also, Government Bonds is relatively safer than Corporate Bonds as Corporate Bonds is only guaranteed by the company, once the company collapse, the bonds will just becoming a piece of 'rough' paper. Unlike Corporate Bonds, Government Bonds is better as it is guaranteed by a country, and it has a lower chance of failure of payment when the Bonds is mature (maturity depends on the period).

Even though we know that Government Bond usually has a lower coupon (interest rate) than the Corporate Bond. Yet, back to the risk, Corporate Bond is riskier than the Government one. Ask yourself before investing, in Indonesia Bond cannot be easily traded at Online Trading, unlike in US< we can trade Treasury Bills or Treasury Bonds easily in the Online Trading Platform.

2. Exchange Traded Funds (ETF)

ETF is an investment fund traded on stock exchanges, much like stocks. (source: Wikipedia)

In IDX, we have only two ETF (R-LQ45-X & R-ABFII), R-LQ45-X moves base on the LQ45 Index, when the LQ45 Index moves up, so does the R-LQ45-X. R-LQ45-X is launced by Indo Premier Securities & R-ABFII by Bahana TCW Investment Management, both are ETF which are 1st launced at 18th December 2007. For a quite conventional investor, we can choose ETF as our alternative before entering the stock market.

Unfortunately, ETF in Indonesia isn't as liquid as the stocks or ETF in other country. In US, there are 3 biggest ETF (DIA, SPY, QQQQ) all are ETF of the biggest US Index (Dow Jones Industrial, S&P500, Nasdaq).

ETF nowadays can be traded by using Online Trading Platform which makes us easier nowadays in order to liquidate the securities.

3.Stocks

Stocks are units of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Stocks are divided into two types, Preferred Stock & Common Stock (usually that's traded in IDX). (source: Wikipedia)

Investors or traders who are purchasing on stocks, only expect two things, which are Capital Gain & Dividend Gain. Capital Gain is the profit of the price increase of the value of the stock. Unlike Capital Gain, Dividend Gain is the profit that is gained when the company earns profit & share the profit to the investors in certain amount, no matter of the share price. Long term investors only expect on the dividend & rarely they expect on the capital gain, vice-versa on traders.

There are two types of open position transaction in stock, long buy & short sell. Long Buy means we buy the stock to open the position & we expect that the stock price will go up. Short Sell means we sell the stock first to open the position with the expectation of buying back later when the price is decreased. Example: Today AAPL closed at $282.52, if I expect the price will again hit $290, then I will Long Buy the AAPL & close my position when it reached $290, but if I expect the price will hit a low at $275, then I do a Short Sell at $282.52 & Close my position at $275.

When we short a stock, then we will be margined, which depends on the exchange policy. Why the short position is margined?? This might be a BIG question, but I'll answer it for you all. When we buy a stock, for example BUMI.JK at Rp2,225, the potential of maximum loss is only Rp2,175 or BUMI.JK is equal to Rp50 or even the company is liquidated the Maximum Loss is only Rp2,225. In contrast, if we short sell BUMI.JK at Rp2,225, we don't know what is the limit of BUMI.JK's price, the limit is only sky, even above sky there's still a sky, that's why to limit the risk, the exchange do a margin policy in order to limit your risk. Once the limit is broken then they will do a forced close of the position also known as Margin Call.

4. Warrants & Options (Call & Put)

Warrants & Options have the same meaning, which are the rights to exercise an underlying / securities at certain price on certain time and both rights have expiry date. Both of the have Delta, Theta, Gamma & Vega. But we are not going to talk further as these things are too complicated, but if you all interested to know, try to Google the "Black Scholes Model". This is the answer.

There are two types of warrants & options, Call & Put, each of them represents different expectations. Call represents the expectation that the underlying will increase in price & the Call value will also increase, while Put is the contrary. The different is in warrants, short sell is only allowed in one day trade, but in options, short sell is allowed until expiry date.

In Options we can choose the strike price, in warrants there are no strike price. But again, the possibility of becoming zero for warrants & options is very big which means once you buy & expiry unexpectedly, you will lose all of your money. Example, you buy Call Options at $95 of underlying XYZ, but once at the expiry date, XYZ is below $95+premium, then your options will be expired worthless, so does warrants, if the price of exercise is at $94, but at the expiry date, the price is below $94+premium, then you'll lose your money unless you exercise them & hold the underlying. Premium is the excess price of warrants & options buying. Example: XYZ at $95 you buy Call $94 at $1.2, the excess of $0.2 is the premium, so BEP is at $95.2. If you buy warrants at $2, and the price is at $95, exercise price is at $94, then the premium is $1 and BEP is at $96.

5. Forex (Foreign Exchange or FX or Currency market)

Forex or Foreign Exchange or FX or Currency market is a worldwide decentralized over-the-counter financial market for the trading of currencies. (source: Wikipedia)

This securities is quite risky as this exchange moves 24 hours in trading day, so the movement is quite unpredictable, but once you've got the techniques, you can be rich immediately. This trading is also requiring margin as we are trading in lots, not only one unit. This securities is very sensitive to the news especially economic data and investment climate in a country.

Some traders use FX to hedge their real money (bills or coins) in order to reduce the risk of being decline in value. But some people prefer using options to hedge their money.

6. Futures

Futures Contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). (source: Wikipedia)

There are a lot of Futures contract which depends on the underlying agreed, can be stocks, index, commodities, etc. Futures is very volatile yet if you are expert at this kind of contract you can be a very rich person. But in order to trade this contract you must have a lot of money to hold you position unless you'll be very easy to be called (Margin Call). Futures Contract usually expired within 3 months, so it only has 4 contracts per year which are one per quarter.

Happy Reading^^

Disclaimer ON!!!