Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Netflix
It’s fair to say that the fortunes of Netflix have taken a turn for the worse over the past few months; from reaching highs just shy of $700 at the end of 2021, Netflix is now trading below $200.
The sharp falls in trading price have followed two most recent poor earnings reports and disappointing guidance from senior executives. For now, the Netflix share price is consolidating in a range between $162 to $205.
However, a glimmer of hope emerged in the closing week of the 15th; Netflix stock achieved its best performance since January this year, rallying a little over 8% and closing at highs.
The most recent problems for Netflix seemed to arrive all at once. Concerns over peak subscriber growth in developed markets, increased competition from a growing number of streaming rivals, and a more discerning consumer feeling from the inflation pinch all adding to existing woes.
On the first quarter drawdown, billionaire Bill Ackman (Pershing) loaded up on Netflix stock, however, after earnings disappointed in the following quarter, Ackman bailed on the position and stated that "..in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty."
Ackman’s Pershing realised a $400 million loss in the process, and the point stands that Netflix is undergoing a fundamental transformation. One of the major changes is the push for an ad-supported tier to drive an uptick in subscription rate, and markets will certainly be anticipating further details within Tuesday’s earnings report.
The streaming giant has also recently announced a partnership with Microsoft as their global advertising technology partner. On the surface, this is a win-win proposition. Netflix gains expertise and tech support from Microsoft, while Microsoft gains exclusive advertising access to the Netflix audience, which could boost their offering in the advertising industry in an attempt to close the gap between giants still leading the way, such as Google.
There is plenty to focus on following the most recent Netflix earnings report. Netflix had previously forecast the loss of a further two million subscribers in the second quarter of this year. Will this turn out to be the case, and are further subscriber losses likely to be expected?
Just how big the FX hit may be also remains to be seen. Netflix’s steadfast refusal to hedge its FX exposure has cost them over the years. The recent strength of the USD could mean these costs climb to new highs.
So, there remain plenty of questions as Netflix embarks on a new business trajectory. Will introducing an ad-supported tier signal the start of a necessary transition? Or do tougher challenges await?
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Twitter
In case you might have missed the news last week, Elon Musk and his team of lawyers have stated their intention to withdraw Musk’s highly publicised bid to acquire Twitter, with the prospect of a long, drawn-out legal battle now on the cards.
This decision was, however, somewhat anticipated amid speculation that he was significantly over-paying for the social network.
Musk’s original offer was a $43 billion purchase of Twitter at $54.20 per share. At the time, this was a noteworthy 38% premium above the trading price of ~$45.81 per share.
In recent weeks, the trading price has been falling, and after the news broke the price action certainly didn’t inspire confidence, plunging over 10%, trailing below the 20-day moving average, and closing right on the lows of the day at $36.78.
However, this slump in valuation is a pattern that has occurred within most US tech stocks since April. Twitter’s new share price of $33.50, down 9% in early Monday trading last week, is arguably a more accurate reflection of the social network’s prospects.
Generally speaking, Twitter’s sluggish stock performance isn’t solely in response to Elon’s whims. The economy is stalling globally and economic headwinds are becoming more severe.
Twitter is also struggling to grow its user base, and some analysts have suggested that social advertising spending is likely to be cut, which Twitter relies heavily on for a source of revenue, as companies tighten their belts to grapple with the economic environment.
But, according to the termination letter, one of the main reasons that Elon is pulling out is not due to Twitter’s recent stock performance, but instead due to the prevalence of bots on the site and doubts over Twitter’s ability to determine how many monetisable daily user accounts (mDAU) the social media network actually has. Twitter, however, insists that fewer than 5% of the stated mDAU are false or spam accounts.
On top of this, Twitter’s recent firing of two high-ranking employees and a third of the talent acquisition team are cited within the termination letter. Under the terms of the merger agreement, the company must “preserve substantially intact the material components of its current business organisation.” Musk’s team claimed that the proper process was not followed.
It’s also possible that Twitter’s valuation was ‘protected’ by Musk’s buyout price, which is important to note. Since the acquisition deal was announced, Twitter is currently trading down by roughly 20%. However, Snap is also facing similar issues, down notably more at around 57%. Investors should therefore take note of wider market movements and tech stock valuations when considering their investment strategy.
Uncertainty around Twitter’s acquisition is likely to continue for the duration of any legal battle, and against the current economic backdrop, we’d expect to see investors exercise more caution, as we await to see whether Twitter’s share price can ride out the storm.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Micron Technology
The link between market trends and supply chain disruptions is inextricable, as demonstrated by Micron’s earnings report last week.
What’s more, the bullwhip effect is in full blast. When demand is strong, retailers over-order from manufacturers, who in turn over-order from their supplies. Ultimately, this leads to inventories that are severely skewed away from actual consumer demand.
Whilst Micron’s earnings report started positively with strong profitability and free cash flow, its stock remained stagnant. Investors should consider the decrease in industry demand, as well as the change in market conditions, before completely writing off Micron as a prospect.
However, research firm Gartner predicts worldwide PC shipments could decline by 9.5% this year. If true, the company’s attempt to clear some of its excess inventory will prove challenging.
Looking ahead, concerns around a recession are likely to see investors exercise more caution. As a company, Micron will have to navigate these concerns, as well as look at how to rebuild its stock price which has nearly halved this year.
Luckily, the strong employment landscape is likely to help cushion the severity of any upcoming recession.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance.
Inflation. It is in the headlines, your local shop, your costa coffee, your work lunch, your energy bills, your date nights - it is making financial life for most people pretty miserable, and with the highest rise in the cost of living for 40 years, it is understandable. But if you cannot beat them, join them, thus, I am on the lookout for investment options for my portfolio that can benefit from the rising prices.
The financial markets are in turmoil currently, partly as a result of the challenging economic conditions, so my ISA value relative to this time last year is not a welcome sight.
Why investors are worried
With inflation expected to continue rising, income investors like me are worried. Particularly as the FTSE 100’s yield is only 3.73% currently. To put this into context, the maximum dividend yield of the FTSE 100 index over the last 20 years was back in 2020. At one point during that year, it was at 7%, which would have at least been commensurate with the current level of inflation investors are faced with today.
Consumer price rises, currently at 9% compared to the same point last year, are expected to trend even higher this year. So, with persistent price rises looking like the medium-term norm, where can I turn to find investments that may provide an inflation-protected income, or growth, in the meantime?
Three places to consider investing
I would not normally invest in single stocks. But considering my portfolio is well-diversified, across assets, sectors and regions, mainly through a range of open-ended funds and investment trusts, a tactical move is justified considering the current market challenges.
Imperial Brands (LSE:IMB) is a good place to start. Tobacco stocks are cheap, and the British cigarette maker is one of the cheapest. The stock trades around 6.8 times projected 2022 earnings, significantly lower than the sector average of 11.4 times. It is also one of the highest yielding income stocks in the FTSE 100 currently, at 9%.
Alternatively, Phoenix Group (LSE:PHNX) is a stock with a yield in line with inflation, with additional growth potential. Its shares are now yielding over 8%. As interest rates rise, an insurance company’s liabilities (in the form of life policies) decline. In addition to this, the company is now writing more new business than the decline in its legacy business, so it is likely that the current dividend has the potential to grow from here.
These are two relatively high-income-producing stocks, which perform as well, or if not, better, in a high-inflation environment. As an income-focused investor, I ideally need returns yielding real returns above inflation. These stocks have the potential to provide this for me in the medium to long term.
Finally, core infrastructure stocks are another option that offers better inflation protection qualities than the wider stock market. Research and index providers, LPX AG, ran the numbers to prove this (up until May 2022). Core infrastructure stocks, as measured by the NMX Infrastructure Composite, have returned 9.9% per year since 1999. Seven percentage points more than the average inflation rate. It dwarfs the performance of the MSCI (6.6% per annum). The data shows that these stocks (as measured by the index) perform even better when inflation edges higher. For example, when the average inflation rate is above three per cent, the average excess return of infrastructure stocks over the MSCI World is 8.1 percentage points.
Final thoughts
There are no guarantees here, but these are the types of businesses and assets that seem more capable of defending against the effects of inflation than others. This is a key reason why I intend on buying these shares. Of course, all this is assuming that inflation will remain a problem and interest rates are going to rise on a sustained basis. Those are both possibilities but not certainties.
Nevertheless, I am dependent on my portfolio income and believe inflation will continue to persist. This requires me to seek out undervalued stocks to add to my portfolio that still has the ability to pay out growing income despite the volatile market environment.
If the current climate persists, assets that yield real returns (an investment return above inflation) will be vital to me maintaining my income and capital growth objectives.
About the author: Henry Adefope is an Associate Director at global communications and advocacy firm, SEC Newgate UK, and an investment commentator. He directs communication activities for major investment brands across a host of strategies and asset classes. Clients have included Vanguard, State Street Global Advisors, BNP Paribas, Barings, and RBC Global Asset Management. He began his career at Goldman Sachs and Broadwalk Asset Management and is a Chartered MCSI member of the Chartered Institute for Securities & Investments, as well as a member of the CFA Society.
Disclaimer: This article does not constitute financial advice. All investments are made at the reader’s own risk.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Coinbase
Although we are talking about stocks, in the past few weeks the spotlight has been on cryptocurrency market movements and stocks related to them. It’s fair to say that it’s been a rather eventful week for the crypto market…
Ethereum lost 21%, Bitcoin was down to its lowest level since December 2020, Solana plunged 24% and Cardano dropped 22%.
The individual coins themselves have suffered from dips, exacerbated by crypto lenders such as Celsius and subsequently trading giant Binance pausing withdrawals, swaps and transfers on their platform. As a result, there has been a significant shift in sentiment within the crypto space, which is sure to affect stocks that are directly linked. One such stock is Coinbase.
Despite reaching a market cap on IPO day of $86 billion, Coinbase has fallen from grace, reaching values below $13 billion, with the stock now being on a clear downtrend following its IPO open price of $381. With current sentiment toward cryptocurrency cooling, this dip may carry on.
The majority of Coinbase revenues come from transaction fees and commissions. If there’s less trade - reducing the value of the traded assets - it seems inevitable that the company revenues would take a hit. This is exactly what happened as total trading volume dropped from $547 billion in Q4 to $309 billion in Q1 2022, and retail monthly user transactions fell from 11.4 million in Q4 2021 to 9.2 million in Q1 2022. Those factors combined have seen total revenue fall 27% compared to last year, as Coinbase reported a net loss of $430 million in the first quarter.
On top of that, there is a clear correlation between cryptocurrency value and Coinbase’s share price. For example, an overlay of the Ethereum price chart and Coinbase price chart show a really strong correlation between the two.
From a business perspective, Coinbase announced in February this year its plans to add 2,000 employees across Product, Engineering and Design in 2022. However, this only added to expenditures resulting in the company then freezing its hiring process in June while also rescinding employment offers and refusing to rule out further job cuts.
Traders who are debating whether to invest or sell the stock should take into account the current market sentiment on cryptocurrency and weigh up the pros and cons of buying the dip, while also evaluating whether the company’s plans are viable. Questions to ask oneself: will the shares recover, and most importantly, are you willing to invest in them?
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance. Trading cryptocurrency is not available for UK retail clients.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Tesla
Despite a positive start to June, Tesla’s shares failed to hold above the 20-day working average, showing that the downward trend is still firmly intact.
However, with business magnate Elon Musk continuing to make headlines, it shouldn’t come as too much of a surprise that shares have taken a tumble. Just recently, he declared that approaching a recession was a “good thing” and later denounced remote working for Tesla employees.
Musk also told Tesla executives to pause all hiring and cut 10% of the total workforce. A move which has drawn strong criticism but also concern that talented employees will be deterred.
Despite this, Tesla’s AI Day scheduled for September 30th will showcase the Optimus Robot and the company remains a leader in the autonomous vehicle space.
Investors are right to be wary given Tesla is down by over 40% from all-time highs. However, ongoing geopolitical events have meant supply chains have been squeezed, another factor in the extent to which shares have been impacted.
Investors should sit tight to see whether Tesla stock was right to be criticised as overvalued or if Elon Musk can prove the critics wrong.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance.
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Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Palantir
The market has been ruthless in recent times, meaning that the current investing environment isn’t one for the weak-willed. Dips and troughs have affected companies across the board including Palantir, although all may not be lost.
Last week, while we saw signs of resurgence from dip buyers rallying the stock up 9.5%, following a couple of 5% increases weeks beforehand, the stock remained down 15% over the last month. It did, however, push above its 20-day moving average for the first time since March, leaving investors’ eyes on the stock.
Palantir’s earnings report published on May 5th was initially met with an air of dismay from investors. The stock jumped down from $9.41 and fell to $6.43. However, by simply glancing at their earnings report, it would be hard to understand why investors might be disappointed. Total revenue grew 31% YoY from 2021, commercial revenue increased by 54%, and the firm’s customer count increased by 86%; all of which indicate promising growth.
Taking a closer look into these results sheds light on investors’ dismay. While total revenue grew by 31% to $446 million, Palantir’s current market cap is just over $18 billion, with a price to earnings ratio of 68 meaning that it may be overvalued. For comparison, the price to earnings ratio of the S&P 500 is around 23.
Palantir’s goal is to continue growing revenues by 30% each year and if the firm hits those goals, revenues will be nudging towards $1 billion annually. A large part of their business still resides in data analytics contracts with US defence and intelligence agencies, although they have made inroads in the private sector of late and have recently teamed up with commodity trading giant Trafigura.
What this will mean for Palantir’s share price and valuation in the short-term is still uncertain, but what is certain is that investors will need to pay close attention to the market and potential government rate hikes to make an informed decision on their trading.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance.
This does not mean that we should abolish money, it just means learning from our mistakes. It means not following tradition for tradition’s sake, but seeking solutions for newer generations. This is a topic for another time, right now we should talk about the present, trading platforms. The current developments in this field are integral and there are so many trading platforms out there.
What is your specialisation?
Trading in something that you are not familiar with usually results in losses. This is why it is essential to know your trading specialisation. When it comes to selecting a trading platform, you should always do your research. First, this means uncovering where your trading expertise lies. Second, it means exploring different platforms that specialise in your selected stocks. For example, if you trade tech stocks you do not want a platform that sells wheat stocks.
There are many trading platforms out there with many different features. These platforms usually offer insights into the news that can affect on stock prices. You always want a platform that can predict the price of the stock you are familiar with. Depending on the stock, you can also find tools that can help no matter if you are a beginner or a pro. AI is especially helpful and advanced platforms will usually offer such help.
Doing what you like
Specialisation is not only important for efficiency but also for love for the job. This does not mean that you need to be crazy fond of the stock, but you should enjoy doing it. It should make complete sense when you see a price dip or go high. When you see that stock it should not invoke a feeling of dread. It should not invoke a feeling of despising your job and make you wonder why you are doing all of this.
Trading can be fun if you do it the right way. It is important to find this way because first, you will benefit monetarily from this. Second, your job will be less stressful because you will not hate it. Of course, it will be stressful at times, but you can reduce the stress to minimal levels when you like doing it. Again, this should not be confused with the toxic trend of hustle culture, never do that. It is just a simple need to moderately like what you are doing for money.
Do not fall for scams
When you find a platform, first you need to make sure that it is not a scam. When you see something on the internet that is too good to be true, it really is too good. Always be varied and use your brain when you look at the benefits of a certain platform. If you do not do that, you can lose not only money but also a lot of your personal information. A lot of it is at stake when you mindlessly look for a trading platform with dollar bills only in your sight.
You should look at trading platforms that existed for a lot of time, the experienced ones. The platform should be clear about the information that it provides, no snake oil selling. Sign-up fees or any other fees should always be clearly stated and upfront. The platform should be used by a host of people that you can contact and get more information. Do not be afraid to ask people around in order to gain more information.
Types of scams
A typical scam will start by luring you with very high returns with only a small investment. Not only will the returns be high, but they will also provide you with the money ASAP. They will tell you that a famous person already made that much money and show you some fake images and quotes. The worst part is, that the website will look completely legit, it will not look like a scam. Only through thorough investigation and asking questions can you uncover a trading scam.
Clear interface
A good trading platform will have a clear and user-friendly interface. You can not trade efficiently if every option is not intuitive and easy to understand. You will just lose money if you use a platform that is not made with the purpose of a person using it. A lazy interface is also a great way to see if the platform cares about its users.
Support
A good trading platform will offer exceptional customer support. When something goes wrong, and it does happen, you want to solve the problem hastily. This is why it is important to have 24/7 customer support that can solve a problem right away. If the customer support does not provide you with clear information, you can mark that as suspicious. You do not want to spend hours deciphering instructions from customer support because of their incompetence.
These core concepts should serve as a sort of Occam’s razor when choosing your trading platform. If a platform can not suffice these basic needs, you should definitely avoid it. Just think about it, would you move into a luxury house if the walls are made to last only a few months? Would you hop in a car that has a 25% chance of blowing up when you turn the engine on?
If something can not fulfil the barest minimum, you should not look for higher values in it. It is all about covering the basics first and then moving on to the higher concepts. You can not learn how to do a backflip if you can not perform some squats. Once you see a weak point, that should not make you feel discouraged. It is just about avoiding mistakes and moving forward, and that applies to trading platforms.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Peloton
2022 arguably hasn’t been the most accommodating environment for traders. With many stocks tumbling this year, including titans such as Google and Microsoft who are down 23-24% from their all-time highs, as well as other household names like Disney and Facebook (Meta) who are 47-48%, many companies are seemingly bearing the brunt of the “post-pandemic recovery”.
This is currently the case for Peloton, which is now down by over 90%.
Following its IPO in September 2019, its trading price began $2 below its IPO price at $27 before hitting $17.70 in March 2020. The pandemic did however help boost its value, with gyms closed, social distancing measures and limits to time outdoors put in place, people embraced Peloton’s social and physical offering, resulting in the stock trading at all-time highs of $171.
Looking back, traders who invested while the price was low and got out when the price reached new highs were blessed with decent returns. Those who held on may not be feeling so good about their position now that the stock is trading back beneath pre-pandemic lows.
When any stock reaches low prices similar to Peloton, traders often question whether this represents an opportunity to buy while low, ie: a tradeable low, or if this will become the ‘normal’ price. While buying something at a 90% discount may seem like a fantastic deal, the case isn’t as straightforward when it comes to navigating and predicting global financial markets.
Some may argue that Peloton’s share price is down for a reason other than general market lows, such as the classic case of a company being overvalued during a bull market due to short-term demands, before hitting its actual price soon after. Others may instead believe that the company still has potential post-pandemic and traders should get on board whilst value is low.
In any case, what one can do is look at the facts. In the last quarter, Peloton reported a total of approximately 7 million members with 2.96 million connected fitness subscriptions. However, they also recorded their biggest quarterly loss of -$757 million since going public and have borrowed $750 million to recapitalise. As well as this, the company has more inventory than anticipated, with vast amounts of stock sitting in warehouses rather than homes.
Nevertheless, the company is continuing to push for new products after recently soft announcing on Twitter that their rowing machine is on the way.
On many levels, FaaS (Fitness-as-a-Service), or ‘connected fitness’ is a promising concept in the digital era. One crucial question for investors to now consider is whether that idea can translate into a solidly profitable business, especially as the global economy searches for a post-Covid re-balance.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Not investment advice. Past performance does not guarantee or predict future performance.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
AMD
What a week. Many of the companies within the S&P 500 have experienced severe falls which have in turn majorly affected the index. Stability within stocks has been almost nonexistent and traders will be tested for their resolve when choosing whether to sell losing assets, or buy further stocks in the current dip, hopeful of an increase.
While stocks for the majority of S&P companies have been turbulent, there are a few whose share price has remained relatively stable in comparison; AMD is one of them.
After having recently experienced a 48% fall from its November high, AMD has bounced back and though it has dipped and risen a few times following AMD’s recent earnings report, it will be interesting to see whether any upside momentum can be sustained in the current environment.
AMD’s latest earnings report has confirmed record quarterly revenues of $5.8 billion (+71% YoY) and they forecast even stronger growth going forward as an upcoming increase in data centres and cloud computing is expected to only boost demand for their computer chips.
On top of this, the company is looking to diversify its markets, entering into automotive tech and 5G mobile networks such as through the acquisition of Xilinx, a major player in the integrated circuits industry. AMD is also looking into integrating Xilinx’s AI optimised circuitry into their CPU products for increased performance.
With the company expecting revenues to reach $6.5 billion in the second quarter, things look promising for investors. However, as the current economic climate has highlighted, nothing is certain and investors should always be mindful of any risk-reward trade-off.
When thinking about whether to sell stocks in case of further dips, or buy more stocks while they’re down, this decision is entirely in the hands of each individual investor, but our advice is to only trade what you can afford to potentially lose.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.
Starbucks
Recently, there’s been a surge in the selloffs of hyper-growth stocks which has deterred many investors from any hopes of positive returns this year.
Apart from energy, sectors including healthcare, technology and industrials have all performed worse than their previous quarters.
However, one stock that has escaped the trend is Starbucks. If we take the last earnings report, Starbucks beat on overall revenues, narrowly missing on the Earning Per Share metric owing to an increase in supply chain and labour costs.
Despite this, during a time when companies have spiked their prices in line with inflation and seen a drastic decline in customer demand, Starbucks have not.
Strong leadership from their CEO Howard Schultz, partnered with their decision to suspend the $20bn buyback programme, and instead investing more into their staff and stores, have all played a part in the stock’s success.
Looking ahead, the pace of unionisation amongst Starbucks employees needs attention, especially given that forty US Starbucks shops have already voted to unionise. Internal conflict between employees and management will be an issue, and if it results in poor publicity, it’s one that shareholders will feel the brunt of.
However, if negotiated efficiently, the company can enjoy the consumer shift from goods to services - a trend that will hopefully boost the bottom line and reassure investors.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
But there’s no need to panic. Forex options might be complicated, but they also come with potential. This article will explore forex options, how they can be used, and contextualise them in the broader framework of being cautious while trading.
What is a forex option?
A foreign exchange option is a way of securing the right to purchase a foreign exchange pair at a particular time and at a certain price. Rather than actually settling the transaction at the outset and moving the value across, the forex options system is instead a contract: it’s a way of securing yourself the possibility, or option, to purchase at a later date if you so wish.
How can they be used?
Often, forex options are used to manage risk. Say you want to purchase the US dollar/British pound currency pair, and you’re assuming that the US dollar will go up. You could go ahead and do that but also purchase the option to essentially have the reverse if the market goes in the pound’s favour. This will cost you more, but you’re, in essence, taking the risk that your profit from the initial dollar pound transaction will be enough to recoup your initial investment and cover the cost you paid for the option.
There’s some key terminology associated with this approach. One term is “strike price”: this refers to the agreed price that will kick in if the option is taken, such as the sale price or the buy price. And another is “expiration”: this refers to the point at which you have to decide whether or not to use your option. While it may seem desirable to have your option open indefinitely, this isn’t an available choice in the forex world.
Another way that forex options can be used is for pure speculation. This is where the option itself is the trader’s focus, rather than an actual transaction for which the option is playing a risk management role. Usually, people do this because the cost of buying an option is cheaper than the cost of buying the actual foreign exchange currency pair. This way, they can have more of their capital involved in the transaction and also make the most of what is known as “leverage”, which is essentially borrowing money from the broker to expand the size of the capital put down.
A note of caution
Before plunging into forex options trading, it’s vital that you do your research and find out some more about the risks involved. This is where sites such as Forex Traders, where you can learn to trade forex and get top information, really come into their own.
It’s a complex part of the trading industry, and the risks involved in being a beginner who gets overly involved in forex options trading without full knowledge of what could go wrong are high. They could certainly lead to your capital being lost. So, while you may think you know it all from reading one or two articles, it’s best to instead treat those articles as stepping stones to more information about just what forex options can offer. Information, as is widely known, is the key to ensuring that you are empowered to make the best decisions – so it is worth spending time making sure you only use good sources.
Overall, it’s definitely worth exploring the prospect of forex options if you’re a newbie in the foreign exchange trading world. These financial instruments can provide you with all sorts of plus points: they can allow you to hedge when it comes to your other forex positions, for example, or they can be used for speculation in their own right with the prospect of making money.
It’s certainly worth remembering that they are complex and potentially volatile instruments that may cause you to lose money. But if you do your research and ensure you’re clued up on how they work, you’ll be able to go into the transactions with some confidence.
