Money Management - Part 2 - Investments/Financial Instruments

First part - https://steemit.com/money/@negamax/money-management-money-saving-hacks-part-1

In this installment we will learn about investment and multiple financial instruments. From stocks to options to currency pairs.

Value of Things

Every monetary transaction is exchange of value agreed upon by both parties. From buying food at the restaurant to plane tickets, all goods have their value advertised in prevailing currency and people buy them for various reasons. Mostly for adding value to their life. Understand this, money = value. You are buying something which has value to you. It could be pleasure, education, life decision and in exchange you are giving money to them, which they seem fit and discovered and held by market forces.

Time and efforts are another kind of value, which eventually gets converted to money and whole cycle repeat. Even #Steem is bound by the same principles. Authors, content creators add value in terms of articles, advice, videos or do something good for the community in terms of marketing, creating a new app and gets community standing and monetary rewards in exchange. Now SBDs are both #investments and #money. Because of long term vesting built into the platform. Dismantling the Steem's financial structure is matter of another post altogether. This post is simply for #education towards #investment options.

Currency Itself

Many people don't see cash as investments. But #Bitcoin is investment right? And it is cash as well, we can all agree to that today. It has strong a huge economy around it and many goods can be purchased using it. Need another example. Recent example of Venezuela should make things clearer. Massive #inflation makes it useless for normal people to use Venezuela's currency. Black market rates for USD exchange are through the roof. People are much better holding USD as compared to VEF (Venezuelan currency). If it was a free market, that's exactly what people had done. And that's why free markets are important for a functioning economy. As they remove the possibility of artificial price manipulations by adding more actors.

Stocks

If you have understood the concept of value and money and the fact that currencies are different in terms of their underlying economic strength, understanding stocks would be natural. On a crude level stocks are currencies issued by a corporation which can be freely exchanged to prevailing currency on a stock exchange. While a currency's value is governed by stability of the government, underlying economy of the country; a stock's value is governed by chances of the corporation generating money. A stock buyer is essentially buying a legal chunk of the corporation and betting that it (the #corporation) will outperform the savings account rate offered by banks. Now, keyword above is chances. In a global economy, these chances go up and down with new legislations, new inventions, new discoveries and new challengers. That's why a stock's value fluctuate. Yesteryears winners go bankrupt, new kids mint nouveau riche.

That's why information and projections are extremely important in creating stock models. Also, biggest losers in stocks in normal folks. Who have neither the information (news sources gets the information last) and nor the mathematical knowhow to create projections. Having said that a low cost Index Fund would almost always outperform holding cash. Index Funds consist of fittest corporations. Yes, someone can make a lot by #betting on the right stock. But most people would be better off buying index funds. They can diversification, strength, good corporate principles straight out of the box.

The goal of investment should be to beat inflation. Think that's aiming low? Just look around and see how much money is being sucked from people who think they can beat the market on gut feeling.

Options

We all know about evil options. They are the most misunderstood financial instruments. I have made shit ton of money trading options. Before you go about jumping on buying options, read what I have written in bold above. Options are a derivative. No, not the differentiation and integration from Newton but something far more simpler. Value of an option tracks value of something else. That's why derivation. As simple as that. 

So why does they fluctuate so much?

This is indeed the right question. Options have another variable to them, time. After that time, they expire i.e. settles. Remember the #Brexit? Markets fluctuated heavily after the vote. Germany's DAX has gone down 10% in matter of days. Options are instruments to arrest volatility or to gain from it. I assure you, anyone betting on increase in price had been wiped on. Anyone betting on, on the other side would had made much more money. Let's expand on this example. If this is unclear, post in comments; I will try to explain further.

Current value of DAX = 10100 (say)

Options - 10000 (call 130, put, 10)

Call = Value will go up if underlying value go up

Put - Value will go up if underlying value go up

Let's say these options were to expire in June. The value of call and put will be set to value of DAX on the closing date. And they will fluctuate based on movement of the index and possibility of movement in index.

Still with me?

Now say before Brexit vote, values were as follows

10000 DAX put = 10

10000 DAX call = 130

DAX = 10100

Next day, market opens at 9400. What would happen to call and put options above?

call would be near zero now. Still governed by market forces. Remember there are still days to settlement. But put will likely be above 600!! Yielding immediate gain of 6000%

And this value will keep on changing until expiry date. Different exchanges has different dates for it. Most has it has last day of the month, or last thursday. Simply put, it's a pre agreed date.

Hopefully, this essay was of use to you. As always comments are welcome.

Tags : #economy #politics #life #steem #money #invesetments #investment #stocks #bonds #bitcoin