Preferred Shares vs Common Shares: Legal Implications that must be understood before investing.

I recently read a news article written by an investment advisor about the benefits of investing in preferred shares. At first glance this article seems to be extremely accurate, at least from a financial perspective. For example, I presented the ‘bare bones’ of this case to some of my colleagues (investment professionals) and none seemed to have any major quarrels with any aspect of this article. It seems the legal implications of many of the statements made throughout this article are not held as common knowledge by the majority of investment professionals, which is unnerving as these are the people whom are though to have specialized knowledge with regards to all aspects of investing.

Discussing the investment terms presented in this article seemed basic and at first I was uninterested. Financial professionals distinguish between two kinds of shares on a daily basis: preferred shares and common shares, but is it really that plain and simple?
Preferred shares are thought of more as a debt security as the article suggests. The general consensus is exactly the position of the article: a regular fixed dividend, a chance of share appreciation, leading position over common shareholders when a company is wound up, and no voting privileges. After income taxes, preferred shareholders are though to collect their dividends ahead of the common shareholders and these dividends are also thought to accumulate if not paid.

The article goes on to discuss different terms that are very regular with preferred shares. Preferred shares tend to be bought for their regular cash flows and as a result, like debt, their price appreciates when interest rates fall and vice versa. Common features of preferred shares are presented in the article: retractable / callable, the shares may be bought back by the company at the company’s or unit holders option…they may participate in profits through extra dividends…some have variable dividends with a floating rate…and they may have warrants attached or be convertible to Common Shares.

Common Shares on the other hand are though to carry the right to vote to elect the board and the right to receive dividends when they are declared; upon windup they are thought to receive the last ‘pick at the pie’.

Even a seasoned investment professional would not appeal the presentation of preferred shares provided in the article; however, from a legal perspective there are many incongruent statements produced that should be understood by all professionals in the investment industry, especially if they want to avoid any potential law suits.

The first thing to notice is what kinds of securities the law distinguishes. The consensus is wrong to automatically think common and preferred shares. These are not kinds of shares, only marketing jargon. Within the law in British Columbia there are two kinds of shares according to S.52 of the Business Corporations Act (BCA): par and non par. Par shares meaning they have a stated value on the books, while non-par shares have no underlying value. This distinction comes from old law that sought to keep previous owners and new share owners on equal grounds when purchasing shares; however, the majority of Provinces today no longer allow for par shares, and instead require all shares to be of the non-par variety.

The second thing to notice is what a share actually is. From a financial perspective, even many professionals still believe that a share is a part ownership in the underlying business. This is incorrect however. The legal definition of a share is a ‘choses in action’ or ‘the right to sue’. What shares really are is a bundle of rights produced by the constitutional documents of a company according to S.56 of the BCA; the name preferred and common have no legal distinction within the BCA.

Some other key features of shares may be clarified by discussing major sections of the BCA with regards to the legal nature of shares. S.107 provides that a share certificate is produced when shares are created; these days it is uncommon for the certificate to be transferred to a share owner, instead the certificates are held in trust. S.111 provides that a central list of the share owners is kept by the corporation, which includes the number and class of shares held and the amount held by each share holder.

The next major sections to notice are S.113 and S173. S.113 states that a share is transferable as provided by the articles of the company. This may affect the liquidity of the shares and should be known before purchasing. S.173 provides that unless the articles state otherwise, all shares carry one vote per share. This could have major implications on the actions taken by the company since without restriction, common and preferred shares will have the same vote.
One of the more interesting sections of the BCA governing shares includes S. 64, which states that a share must not be issued until it is fully paid; however, a share can be paid in a number of ways: money, property, or past services actually performed.

Now that some of the more prominent sections of the BCA have been discussed it may help to clarify the distinction of classes of shares by looking at some case law. From International Power v. McMaster for example, the judge makes it clear that calling a share common versus preferred does not determine which shareholders participate in the residue of a company when it is wound up. The distinction is made through the articles of incorporation and if there is no distinction or restriction made then all classes of shares will participate equally in any residue.

A further application that we learn from the case of Devall v. Wainright Gas Co. Ltd is that dividends, even if stated in the articles as cumulative are not payable unless and until the board declares them. If the board deems it more beneficial to the company to setup a reserve fund then the board is not incorrect in doing so as long as it is in the company’s best interest.

Common and preferred shares are not as easily distinguishable and generic as I once thought. The most important thing to remember is that the constitutional documents will determine the exact rights and restrictions on the different classes of shares. Understanding the exact details provided from these documents can dramatically affect the liquidity (ease of share transfer), and value of a security. It is very surprising that the legal implications of share rights and restrictions are not even discussed within the Canadian Securities Course or Canadian Practices Handbook—the financial industry licensing requirements. Hopefully the Canadian Securities Institute, investment licensing body, will update their training materials to include such important lessons in the near future.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio

Investing in the Adult Industry: Loads of money to be made, but who will invest?

Former hedge fund specialist Francis Koenig in 2005 founded the first institutional investment company to focus specifically on sex industry related investments. Koenig has gone from Wall Street to Los Angeles and believes there are fortunes to be made by matching adult entertainment companies with investors.

This is not the first time an ethically sensitive investment situation has been highlighted in the stock market; there are companies that focus strictly on gambling / casino investments, war / weapons investments, etc. These industries are all very profitable and even from a first glance you can tell the adult industry will be no different.

We have all heard of the brands: Playboy, Hustler, Vivid, etc. Most can even put a face to the names: Hugh Hefner, Larry Flint, etc.

But did you know:

25% of all internet searches involve the adult services industry!

So what is wrong with all these investments?

This is really a question about ethics and how far down the rabbit hole you want to go. If you motivation is strictly to profit in the stock market then all these ethically sensitive investments can produce healthy returns. Sometimes the more outrage something produces the better. More outrage means the topic will remain a media hot button issue and will remain within the headlines and types of companies love the attention; ‘there is no publicity like free publicity.’

However, if you hold yourself to a higher moral standard you may want to rethink some of these investments. If you decide that you do not want to be a part of such investments you need to be more active than the average investor. This requires investigation because not many investors actually know what they are investing in when they buy a mutual fund or even a stock index.

All mutual funds will have to disclose the investments that they have participated in over a given year to investors; however, they do not need to go any further. The next question is what did these companies that the fund I invested in, invest in? This is where the investigation becomes a bit more difficult, but you can see the cycle will continue…what did these companies that the fund invested in, invest in, and what did those investments invest in….?

So it all comes down to personal preference…making money is one thing we all want, how we make that money is up to the individual.

This article was written as a response after viewing a recent press release on msnbc.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.

How to Profit: Oil and Gas Crack Spread

Oil and Gas Crack Spread: How to Profit from an unrealistic Spread.

Spread out of whack: Natural Gas Crack Spread

When you hear oil and gas futures traders talking about the crack spread what they really mean is the difference between the price of crude oil and petroleum products extracted from it. The ‘Crack’ can be though of as cracking raw oil into the various components that it will become when processed: gasoline, kerosene, diesel, heating oil, jet fuel, asphalt, etc.

Normally, futures traders will focus on the crack spread for gasoline and heating oil. During the winter the focus tends to be on the heating oil crack spread while the remainder of the years the focus tends to be on the gasoline crack spread.

Large Oil refiners and oil and gas companies may trade crack spreads to hedge price risks for the products that they offer while speculators will try and predict where the market is heading and profit from the change in oil vs gas/heating old differentials.

Speculating on the various crack spreads is for more sophisticated investors; however, it does not need to be a difficult thing. Many of the large commodities exchanges have simplified the trades needed to perform such strategies. The NYMEX for example offers virtual crack spread futures by combining a basket of underlying futures contracts that correspond to the various oil production outputs. With the basket futures you only need a single transaction to organize a trade as opposed to buying and selling a full basket of futures yourself to participate.

So what should I be looking for to make money?

When crude oil rises:

If other products appear to be flat or more up in price to a lessor degree then the crack spread will be diverging. These spreads tend to remain within a range that could be correspondent to actual costs associated with their production. A large jump in oil prices without a corresponding large jump in gasoline prices for example, throws the spread outside the comfort zone. As a speculator you are look to spot that divergence and profit from it.

How to profit: When there is a divergence as above, to profit you would shot sell the crude futures contract and buy the gasoline or heating oil futures contract with the same expiry to keep things simple.

When the price of oil falls and the crack spread narrows:

Under this scenario you would just do the opposite: sell the crude oil futures contract and buy the gasoline or heating oil futures contract. Again, keep things simply and just use the same expiry dates.

The Basic Rule of Thumb: Sell the overpriced product and Buy the under priced product.

If you do not understand futures they you can also perform these trades using options

Google Earth Investment Application:

Investment Opportunities in Canada

To Income Trust or not to Income Trust: Looking for Capital Gains from Income Trusts and a Steady Income Stream.

If you have been invested in the market recently then you have experience the major shock waves of highs and lows. Everyone is looking for the next big growth story, but what about a nice Capital Gain coupled with a steady flow of income?

Income Trusts have seen better days. Everyone has had their hate on this instrument and it is reflected in market prices. The first blow was the Conservative Governments change to the tax consequences of owning Income Trusts and the pain did not stop there. There has been a negative sentiment about these assets every since and again we are seeing 56 week lows. I also experienced this pain, but these are growing pains and you can’t make the next milestone without stretching.

This sound’s like opportunity knocking at the door: who doesn’t want to buy a nice steady income stream on the cheap? All those disgruntled investors that lost as a result of the new tax implications that is who.

But how long can this negative sentiment last?

It will last until you see a small group enjoy the great returns that Income Trust produce when purchased at the right time and it is too late to enjoy the full benefits of being an early wagon hopper. The right time may be now or it may be in the future; however, I’m betting on a near term appreciation and love the fact that I can by a high yielding trust for cheap.

If your interested in Income Trusts you need to do the proper research to find one or a few that are right for your portfolio. The best thing to do is to consult with a professional investment advisor who can help you make the right decisions.

Here is a list of Income Trusts that I am currently following and discussing with my investment advisor:

Bonnett’s Energy Services Trust (BT.UN: TSX)

Canfof Pulp Income Fund (CFX.UN: TSX)

Deepwell Energy Services Trust: (DWL.UN: TSX)

Enerflex Systems Income Fund (EFX.UN: TSX)

Enervest Diversified Income Trust: (EIT.UN: TSX)

Progress Energy Trust (PGX.UN: TSX)

Sentry Select Diversified Income Trust: (SDT.UN: TSX)

Strategic Energy Fund: (SEF.UN: TSX)

Stoneham Drilling Trust (SDG.UN: TSX)

Trinidad Energy Services Income Trust (TDG.UN: TSX)

Wajax Income Fund (WJX.UN: TSX)

Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

The Canadian Dollar hit a 130 year high on November 7, 2007 at $1.1027 (U. S.). This new valuation of the dollar will take some getting used to. Already there have been some business outcries for the Bank of Canada to step in and lower rates to cool off the appreciating dollar. This I do not believe to be the proper course nor do I think the economic situation to be so dire.

There are a number of reasons why the Bank of Canada should not step in.

First, lowing interest rates will only cause inflation throughout the Canadian Economy. The primary responsibility of the Bank of Canada is to keep inflation reasonable stable between 1-3% a year. Currently we are sitting at 2.5% and that is exactly where we should be.

Second, suggesting that a higher Canadian dollar will cause massive job cuts is ridiculous. The unemployment rate is near record lows; talk a walk down the street in Vancouver or Calgary and you will find it impossible not to be inundated by all the help wanted ads. These jobs won’t completely dry up just because our goods have become more expensive for Americans.

Third, all the banter about cutting rates is coming from the manufacturing sector. It has been displayed overtime that situations such as a higher dollar only leads to efficiency. Either become more cost efficient at producing or you shouldn’t be producing at all. This is the type of situation that yields major innovations.

Fourth, the U.S. Dollar is depreciating relative to all major currencies. The world has become a much more global atmosphere than we have seen in the past and as a result markets are able to react much more efficiently. As a result, by lowering interest rates the Canadian Economy will not keep pace with the other major currencies.

Fifth, there is a global power shift going on. The U.S. has been the dominant economy for many decades and that is changing as economies like China, India, and even the European Union as a trading block fight to become the new dominant trading powers. While this competition occurs, Canadian exports will shift from the U.S. to these other areas.

Sixth, Canada is resource rich and Uncle Sam is hooked. Canada dominates the commodities market because it is the safest source of oil, gas, metals, energy, etc. The world sets the prices for these commodities so the United States will keep coming back to Canada to buy these inputs as the price will not be affected by a higher dollar.

How to Make Money with the Soaring Canadian Dollar:

There are a number of ways to do this and I will describe a few:

1) Simply buy in to the Canadian Economy. The simplest way and safest way to do this would be to purchase some high grade Canadian Government or Corporate Bonds. These will yield a respectable percentage, most likely between 4 and 7 percent and at the same time you may also extent your return through a tax free currency appreciation.

2) Buy the TSX index. This way you are diversified and can reap the benefits of an expanding Canadian economy. The TSX has averaged over 10% annually over the past number of decades.

3) Buy the Canadian Banks: the Banks have outperformed the market significantly over the past decade. There are a lot of smart people working at the banks and they always seem to find better investment opportunities than even a sophisticated individual. Take the old adage 2 heads are better than one and augment it to 1000 heads are better than one.

4) Buy Commodity Stocks: don’t sit on the sidelines. If commodities are hot like they are and there is a global infrastructure boom going on and increasing buy, buy, buy. Lot for the next big commodity. Currently my favorites are uranium and natural gas as both should see boom times again soon.

5) Buy Companies that service Commodity Companies: These companies experience a boom at the same time as there are more new projects to service.

6) Be a Manufacturing Vulture: look for large quality manufacturing companies that the market

has hammered as a result of the higher Canadian dollar. This is when these companies are innovative and develop better efficiencies. When they become more efficient they become more profitable and huge gains can be made.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.

Online Broker Survey: Who Should You Invest With?

The online brokerage business has been growing rapidly within Canada and the United States. The Big Banks are not the only major players as there are many independent Brokerages participating and this has lead to dramatic cost cutting and improved services.

According to the latest Globe and Mail Survey of the online brokers dated October 6, 2007, more and more brokers are now charging under $10 a trade as long as the investors account has a minimum of $50,000 to $100,000; this is a huge reduction in costs to investors who were previously paying $24 to $29 per trade.

This Globe and Mail Survey evaluated the online brokers based on 7 points: Costs and Fees, Customer Satisfaction, Tools and Research, Website Utility, Website Security, Trading Platform, and Investment Selection. The survey results were interesting because the top two brokerages were independents followed by the cash rich banks.

The online brokers surveyed included 14 and ranked as follows:

1. Qtrade Investor
2. E*Trade Canada
3. TD Waterhouse
4. BMO InvestorLine
5. Credential Direct
6. RBC Direct Investing
7. ScotiaMcLeod Direct Investing
8. Questrade
9. TradeFreedom
10. Disnat
11. CIBC Investor’s Edge
12. National Bank Direct Investing
13. HSBC InvestDirect
14. eNorthern

In this ranking, the target audience considered is mainstream investors who have RRSPs, are interested in more than stocks and the focus for the evaluation was online service.

To determine if opening an online direct investment account if right for you answer the following 5 questions:

1. Have I acquired the amount of investment knowledge to invest successfully?

2. Do I know where and how to research stocks, bonds, options, futures?

3. Do I know what types of investments are RRSP eligible?

4. Do I have the time to research investments to make informed decisions?

5. Will the cost savings outweigh the time and effort required for me to invest effectively?

If you answered no to any of the above questions then opening an online brokerage account is not the best method for you to invest. Under this scenario an investors is better served by receiving guidance from an investment professional such as an investment advisor. Why face the ‘sink or swim dilemma’ when there is a boat?

Personally, I have toyed with the idea of opening an online brokerage account; however, I feel that I get a lot more out of employing an investment advisor who can provide me with lots of great ideas and opportunities that I otherwise would not encounter; further, I feel spending my time on my career and family is more important than saving $50 a trade.

The Best Place to Start Investing in Stocks: Canada’s Big 5 Banks

Royal Bank of Canada (RY)

Toronto Dominion Bank (TD) * Michael Assoline’s Pick (Analyst @ Raymond James Financial)

Bank of Nova Scotia (BNS)

Bank of Montreal (BMO)

Canadian Imperial Bank of Commerce (CM)

Add National Bank of Canada (NA) to get ‘the big 6 banks’

If you wanted to find consistency and a healthy income stream from a stock where would you turn?

Investing in Banks is a great base for stock portfolio investment because of the steady cash flows they offer and there performance consistency. Banks are ‘cash cows’ as they are mature businesses with relatively slow yet consistent growth and produce steady cash flow streams through dividends.

According to Michael Assouline, investment analyst at Raymond James, “Want to beat the market? Put your money in Canada’s Big Five banks. It’s as close to a sure-fire bet as you can make.” Mr. Assouline’s claim is not speculative, data from the past decade is proof: The top performing of the big 5 banks, the Royal Bank of Canada (RY) has blown the S&P/TSX index out of the water producing an average annual return of 19% while accumulating a 484% return inclusive of dividends over the decade, beating the S&P/TSX index by a substantial 330%.

Well of course the Royal Bank of Canada (RY) outperformed the market; it is the top performer of the big 5 you say! However, even the laggard of the group, the Bank of Montreal (BMO), outperformed the market by 160%. This seems outrageous; however, the cumulative return inclusive of dividends over the past decade for the Big 5 Banks was about 18% a year.

So when should I buy and which Bank stock should I buy?

The Key features that must be considered when evaluating Bank Stocks are P/E ratios and Dividend yields; although, many other variables may be considered. My advice is to look to the P/E and Dividend yield for entry points and if you think yourself more astute than the market sell when things become too good in your view.

If you buy any of these banks your investment is very likely to beat the market if you hold the investment long enough. This means even if you bought at a market top you can still be profitable over the long run. The best time to buy though is when the market turns its back and beats up the stocks: probably when yields creep up above 4 or 5 %.

Ethical Investing and Socially Responsible Investing: Where to Begin

Ethical Investing and Socially Responsible Investing

Ethical Investing and Socially Responsible Investing tend to be used by investors interchangeably.

So what exactly is Ethical Investing and Socially Responsible Investing?

Before discussing Ethical Investing you must first have a basic understanding of Investment in general.

Investment can be though of as placing discretionary funds (money that is left over after paying all expenses) to work with the anticipation of use at some point in the future. In return for saving those funds today, an investor requires compensation.

When determining how an investor would like to be compensated they will need to consider two elements simultaneously: risk and reward.

Risk refers to the amount of risk investors are prepared to take in order to receive a certain return. A very basic definition of risk would be the probability of a successful outcome investors may assign to a certain investment, generally, the greater the uncertainties the greater the risk. To determine what investments are right from a riskiness perspective an investor will need to consider the following: Are you risk averse (don’t want risk)? Risk neutral (willing to take on a degree of risk in order to receive a greater return)? Or Risk loving (willing to take large risks with the potential of receiving larger returns)?

Reward is the desired amount you would like to receive from an investment. Risk and Reward tend to be correlated very strongly—as the potential reward increases so does the potential risks.

Ethical Investors just throw a third variable into the mix: Responsibility.

Responsibility can mean different things to different people. This is a variable Taylor made to individual preferences; however, a generic definition is the way that a corporation conducts its business: Is there goal to increase profits or leave the world a better place?

For example, an investor who deems investing in weapons or cigarettes to be unethical would not invest in a company that produces either because they believe it irresponsible.

To determine what a company invests in and to what degree you will consider a company unethical can take some detective work. You will need to ask yourself questions like: would I invest in a company that supplies companies involved in what I deem as unethical and will I invest in companies that buy products from companies I deem as unethical.

For example: Would I be willing to invest in a mining company that sells iron to a weapons manufacturer who will turn this raw material into a weapon. Or would I invest in a company that buys paper from a company that also makes cigarettes. Another concern would be whether an investor would consider investing in a company that produces alcohol for example but donates to an AA Group to help alcoholics with their problems.

Combining these three variables you get the 3 R’s of Ethical Investing: Risk, Reward and Responsibility. The degree to which you incorporate each variable and the significance of each in your investment decisions will guide your investment strategy.

Some valuable resources for ethical investing include:

Canada
Ethical Funds
Social Funds

America
Socially Responsible Investing
Corporate Socially Responsible News Wire

Just remember when engaging in Socially Responsible Investing or Ethical Investing personal choice is key to the Responsibility Variable while the goal is still to maximize profits while minimizing risk. Also, it has been displayed over the past 20 years that many investments deemed socially responsible have outperformed peers and this may be a direct result of management at many companies adhering to higher standards.

Investing in Uranium: Playing the Recent Slump in Prices

Investing in Uranium

The price of Uranium has been extremely volatile over the past year from a high of just over $300 (USD) per Metric Tonne in June of 2007 to a recent low of $75 (USD) per Metric Tonne as of October 11, 2007.



This price drop has drastically affected major Uranium producers with some stock prices dropping by half. As the world commodity boom and demand for energy continues to escalate, it is time to invest in Uranium while stocks are extremely cheap to reap the benefits of the rebound in Uranium prices.

Many analysts have stated that Uranium has hit a bottom and is ready for a rally as Demand from China, India and other expanding economies will continue to drive prices higher. Investors thinking about playing this scenario should look to Canada for Uranium investment opportunities as Canada is the largest producer in the World.

As a result of the price slide in Uranium there are many great bargains to invest capital. The following investments may be appropriate for those who believe in the long term appreciation of uranium prices:

Cameco (CCO): The stock is currently over 30% below its recent high in June.

Cameco is the worlds largest producer of uranium concentrates. Cameco Corporation (Cameco) is primarily engaged in the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries. Its mines are principally located in the uranium-rich Athabaska basin in northern Saskatchewan.

The Company has a 31.6% interest in Bruce Power L.P. (BPLP), which operates the four Bruce B nuclear reactors in Ontario. The Company wholly owns Zircatec Precision Industries, Inc., whose primary business is the fabrication of nuclear fuel bundles. Cameco's 52.7% subsidiary Centerra Gold Inc. (Centerra) is involved in the exploration for and the development, mining and sale of gold. Cameco has four segments: uranium, fuel services, nuclear electricity generation and gold. In June 2006, the Company acquired a 19.5% interest in UNOR Inc, whose principal properties are 226 mineral claims in northwestern Nunavut on the Hornby Basin.

Dension (DML): The stock is currently trading at over a 60% discount from its 52 week high.

Denison Mines Corp. (Denison), formerly known as International Uranium Corporation, along with its subsidiary companies and joint ventures is engaged in uranium exploration and production. The company’s principal assets are a 22.5% interest in one of the world’s largest uranium facilities at McClean Lake in Northern Saskatchewan and a 25.17% interest in the Midwest Uranium Project. Denison also has embarked upon an active exploration program at the McClean, Midwest, Wheeler River, Wolly, Waterfound and Mongolia properties.

Denison also acts as manager for Uranium Participation Corporation. Uranium Participation Corporation is a publicly traded company that is involved in the buying, holding and selling of uranium in concentrates.
Further, Denison is engaged in mine decommissioning and environmental services through its Denison Environmental Services (DES) division.


Uranium One Inc. (UUU): Currently trading at over a 22% discount to its 52 week high..

Uranium One, Inc., formerly SXR Uranium One Inc., is engaged through its subsidiaries in the acquisition, exploration and development of properties for the production of uranium in South Africa, Australia, Canada and the United States and gold in South Africa. The Company owns 70% of the operating Akdala Uranium Mine in Kazakhstan and is also developing the South Inkai and Kharasan Uranium Projects in Kazakhstan. Uranium One owns the Dominion Uranium Project in South Africa, as well as the Honeymoon Uranium Project in South Australia. In the United States, Uranium One has extensive property holdings in Wyoming, Texas, Utah and New Mexico, including the Shootaring Canyon Mill and the Hobson ISR facility. Uranium One is also engaged in uranium exploration activities in the United States, the Athabasca Basin of Saskatchewan, South Africa, Australia and the Kyrgyz Republic.


Paladin Resources (PDN): Currently trading at of a 40% discount to its 52 week high.

Paladin Resources is an Australian uranium exploration and development company. Paladin Resources Ltd operates in the resource industry, with a principal business of evaluation and development of uranium projects in Africa and Australia. Its wholly owned projects include the Langer Heinrich Uranium Project, which is located in Namibia, Southern Africa, and hosts surficial, calcrete type uranium deposit; the Kayelekera Uranium Project, which is located in northern Malawi, Southern Africa; the Manyingee Uranium Project, which is located in the north west of Western Australia, and hosts sandstone deposits, and the Oobagooma Project, which is located in the West Kimberley region of Western Australia, and hosts sandstone deposits. Its joint venture with Quasar Resources Pty Ltd covers two exploration licenses in the northern Frome Basin in South Australia.

An investor that wants be diversified within Uranium investments may want to consider investing in an investment vehicle such as The Uranium Participation Corporation (, which invests the majority of its assets in uranium.

How to compare Mortgage Products

The best way to compare mortgage products from various lenders is to make a Mortgage Comparison Chart. From the chart it is easy to compare the positive and negative features and characteristics of any mortgage. This will help an investor make informative decisions about which mortgage product best suits their risk level.

The following Mortgage Comparison Chart is only a brief method of analysis and you should consult with a mortgage professional. Completing a chart such as the following will help an investor make more informative decisions regarding debt financing before purchasing a property.

This examples draws on mortgage products offered by the Canadian Imperial Bank of Commerce (CM) and the Scotia Bank (BNS).

Mortgage Comparison Chart

Institution	CIBC	Scotia Bank
Mortgage	Better Than Prime Mortgage	Unlimited Rate Mortgage
Mortgage Features	Term: 5 years Closed Rate: Variable	Term: 3 years Closed Rate: Variable
Characteristics	Rate: 1.01% below CIBC Prime for first 9 months, 0.25% below CIBC Prime rest of 5 year term.	Rate: 0.25% below ScotiaBank Prime Rate for full 3 year term.
Current Prime Rate	6.25% APR	6.25% APR
Current Rate on Mortgage	5.24% (first 9 months) 6.00% (rest of 5 year term)	6.00% (full 3 year term)
Amortization Period	Up to 40 years (additional insurance charges apply)	Up to 40 years (additional insurance charges apply)
Payment Frequency	Weekly, bi-weekly, semi-monthly, monthly	Weekly, bi-weekly, semi-monthly, monthly
Payments	May fluctuate with changes in interest rates	Stay the same: if rates increase more of payment goes to interest, if rates decrease more of payment goes to principle
Flexibility	Lock in to a closed, fixed rate mortgage with a term of 3 years or more without prepayment costs. Prepay up to 15% of original mortgage amount annually without penalty. Original payments may be increased up to 100% during the term without penalties.	Early renew at any time to any closed term, fixed rate mortgage product with term of 3 years of longer with no interest penalty. Prepay up to 15% of original mortgage amount annually without penalty. Original payments may be increased by 15% each year for current term without penalties.
Special Deals		May choose between either 0.25% Below Scotiabank Prime Rate or Cash back of 1% of loan amount with Scotiabank Prime Rate * with cash back you must repay the prorata amount provided if the mortgage is paid out, assumed, transferred or renewed before maturity.

How to adjust your Mortgage Payments and Total Mortgage Payout

The top 2 variables affecting your mortgage:

1) The Amortization Period
2) Interest Rates

Amortization Period: Full time period until the mortgage debt matures (commonly 25 years, and now up to 40 years)

Increasing the amortization period lowers the monthly payment amount while increasing the total payout for the mortgage as less of your monthly payment is attributed to the principle debt and instead is applied to the interest. Decreasing the amortization period would have the opposite effect: higher monthly payments, decreasing the total payout on the mortgage as more of the payment is applied to the principal debt and less to interest payments.

Interest Rates: Whether a variable rate or a fixed rate.

Generally, the interest rate tied to the term increases with the length of the term—a normal yield curve (risk tends to increase with time); however, at this point in time the yield curve is very flat and inverts slightly at the 4 year horizon. This is significant because normally as the term increases, so does the monthly mortgage payment and total mortgage payout; as a result of the inverted curve, locking in a 5 year term will afford a mortgagor a lower rate than locking in at with a 2, 3, or 4 year term producing lower monthly payments and a lower payout.

The difference between the Term of the mortgage and the duration or amortization period of the mortgage:

Term: this refers to the time period negotiated by the mortgagor and mortgagee and the underlying contract negotiated. Usually this will be 5 years or less and will include details such as interest rates--fixed or variable, and at what rate; also included are any options such as early repayment without penalties.

Amortization period or duration: this refers to the entire length of the mortgage. Commonly this is 25 years; however, due to the fact that wages have not risen as quickly as housing costs in much of Canada or the past 20 years you can now amortize a mortgage debt over up to 40 years. This will normally require additional mortgage insurance however.

Other things that need to be considered when negotiating a mortgage: closed term vs open term, legal fees, property surveys, moving costs, and unforeseen costs.

Closed term means you can not pay the mortgage back without penalty over the term while open term means you are able to pay the mortgage back early--normally you will pay a higher rate for this option.

So how do I lower my payments?

1) Get a lower rate: consider a variable mortgage--interest rates tend to be lower. Also, consider a closed term--interest rates also tend to be lower this way.

2) Change the amortization period: how is this done?

Consider changing your payment frequency. It is surprising how much faster a mortgage is payed off when your payments are made weekly as opposed to monthly or semi-monthly. You can keep the same total payment for the month but divide it up into 4 weekly payments.

To make your payments lower you could also increase the amortization period; however, this will mean a larger total payout in the end.

Here are some useful links for estimating what size of mortgage you can afford and how changing a few options will effect your payments:

Canada Mortgage -Great Calculators for estimating what you can afford
Genworth

Don't forget that buying a home is usually the biggest investment a person makes in their life so make sure you get the most from your mortgage. Owning Real Estate tends to be a good hedge against inflation; however, investing in the stock market on average will yield a much greater return so do diversify.

When to Buy and Sell Stocks

When to Buy and Sell Stocks:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS), etc.

How to Buy: check for cushion in earnings to eliminate risk that a fall in earnings could erase dividend. Buy when yield is attractive relative to stock’s’ history.

When to Sell: Fundamentals start to deteriorate (losing market share, adding too much debt, acquisition of unrelated business, no research and development or share price has appreciated 30 to 50 percent and yield becomes unattractive)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Often huge companies: Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL), Kraft Foods (KFT)

Grow in 10 to 12 percent range with high degree of certainty.
Can be bought when undervalued for 30 to 50 percent gain.
Offer good protection from recessionary times, (Sub Prime Mortgage Meltdown)

How to Buy: Value, with historically low P/E

When to sell: P/E rises above historical average, or if growth starts to slow down, or new products fail

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG), etc.

How to Buy: Make sure plenty of room for expansion, Note whether expansion is speeding up or slowing down. Be careful if the P/E on the stock is greater than the growth rate of the business.

When to Sell: Watch for end of rapid growth phase. Sell if P/E ratio is well above the current growth rate or if company has expanded as much as it reasonable can (Watch out Starbucks (SBUX)). Also, look upon unanimous Wall Street buy recommendations and heavy institutional ownership as sell signals.

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense, manufacturing.

Ford (F), Honda (HMC), Toyota (TM), Boeing (BA), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Sales and Profits rise and fall in response to an expanding or contracting economy. Timing is everything and stock swings are huge.

How to Buy: Watch sales and inventory trends and cost cutting plans. Buy after extended period of misery when business conditions start to look better.

When to Sell: economic slow down begins potting up in the media, inventories begin to rise, hiring ceases, the Fed indicates possible rate cuts may be necessary. Some Cylicals are front runners while others are laggards so look for where a specific industry falls in its cycle.

Turnarounds (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur (Be the Vulture).

Magna International (MGA), General Motors (GM), Merck (MRK), Pfizer (PFE)

How to Buy: Ask touch questions. Can company survive raid by creditors? How much cash and debt? What’s left for shareholders? Is the company simultaneously cost cutting and growing sales?

When to Sell: After it’s turned around and all troubles are over. Also if inventories start to rise faster than sales, or debt increases, or if P/E ration gets too high in light of earnings growth. At least take some of your profits once the company is back on track.

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

How to Buy: Ask probing questions: What’s the value of the assets? How much debt is there and is debt increasing? Is there a catalyst (corporate raider) in the wings to help unlock the value?

When to Sell: After the market appreciates the value of the assets. Once it’s in the news you know it is time to, at minimum, take some profits.

Major Stock Categories

The Major Stock Categories:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL)

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG),

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense.

Ford (F), Honda (HMC), Toyota (TM), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Turnabouts (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur.

Magna International (MGA), General Motors (GM)

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

What is the Bottom Line?

It does not matter which Major Stock Category an investment falls under. A successful investor will always need to answer to the best of his or her ability the 5 most important stock investment questions:

1. Why this company?
2. Why now?
3. What return is expected?
4. Over what period of time?
5. What could turn this into a mistake?

A Note on Technical Stock Analysis

Technical Analysis

1. Support and Resistance Levels: derived from human behavior
   
2. Resistance levels are found at previous highs and previous lows: when a stock goes above highs; it has "broken out". When a stock goes below lows; it has "broken down"
   
3. Conservative clients should stay away from volatile stocks
   
4. Stock Traders thrive on volatility for buying and selling opportunities
   
5. Helps establish psychology influences of stock performance

Technical analysis tends to only be useful for making short term decsions such as establishing entry and exit points in the near term. For investors with a long term focus the emphasis should be on Fundamental Analysis.

Another use of technical analysis is for options pricing. When looking at the (VIX) - Stock Market Volitility Index - an options trader can establish whether option premium levels are good or bad. Good premiums are usually afforded by high volitiliy and Bad from stability.

Most Important Qualitative Analysis For Stock Picking

Qualitative Analysis to pick the "best stocks"

The Key to winning stock picks is an investors ability to seek outstanding companies at sensible prices, not mediocre ones at bargain prices!


The top 13 Questions to use to find Red Hot Stocks:

1. What is companies primary business?
   
2. Do you understand that business?
3. Are future results predictable?
   
4. Is the company a leader (number one or two) in its industry?
5. Does the company have a record of generating substantial free cash flow? (allows company to with stand slumps, seize investment opportunities, increase dividends, or repurchase shares)
6. Does the company produce an attractive product(s) or service(s) that are needed and likely to be needed for a long time in the Future?
7. Lack competition?
8. Low overhead?
9. Portable?
   
10. Free of regulation?
11. Management competent?
12. Likely to become better, not just bigger?
13. Can you buy it below intrinsic value?

Basic Stock Evaluation

How to do a Basic Stock Evaluation

There are a few common variables to assess when evaluating a stock:

1) Profitability: Does the company make a lot of money?
2) Growth: past, present, future—major driver of stock price
3) Financial Health: Strong Balance Sheet—the company can weather a storm.
4) Value: the stock is available at a discount (on sale) compared to its historical value, compared to its competitors, compared to its intrinsic value.

1) Profitability: (Return on Capital and Return on Equity) (ROC) & (ROE)

Return on Equity (ROE)
(ROE) Low numbers (> 12%), especially if declining, (Look elsewhere)
Steadily increasing ROE speaks well of company management.

Measure of profitability
Also indicates internal growth potential (ability to self-finance growth without borrowing money or issuing new common shares)

2) Growth:
Earnings and Sales Per Share (EPS)
Primary determinant of share price movement
Rapid and consistent growth is highly desired
(harder to manipulate through accounting practices than earnings)
Look at Value Line Charts (visual of cash flow growth)
issue of more common stock (dilutes EPS)

Dividend Growth
Some companies pay out too much in a good year and then reduce them in a bad year (can hammer stock)

3) Financial Strength
Capital Structure: Excessive debt? Shareholder risk increases with the proportion of debt in a company’s capitalization
A company with zero debt can’t go bankrupt!
(Free Cash Flow Per Share): Cash Flow – (dividends + Capital spending): Capital Spending requirements that deplete CF over long haul is bad, Short term good.

Long Term Debt:
Examine long-term debt load in terms of absolute numbers and its trendàstable or declining trend suggests good financial health

Current Position
To asses solvency: pay attention to cash and marketable securities; monitor receivables closely. Receivables increasing at rate faster than sales (perhaps some money owed to company is not being collected)
Inventories: should not grow faster than sales (Red Flag)

4) Value:
High/Low
The valuation of a stock relative to its own history: P/E, Price/Cash Flow, Price/Sales, Price/Book Value compare past 5 years (Watch out for cyclical companies)
The valuation of a stock relative to others in its peer group: compare to see if stock is above of below where it traditionally sites in terms of the entire market of stocks
Quickest way to evaluateà compare cash flow line (the value line) or earnings line to see if company is above or below the line (stocks at or near line may be undervalued)

Best Way to Find Hot Stocks

The Best Way to Find Hot Stocks is to do some research. Once you have made a list of stocks you are interested in it is beneficial to do a full analysis of each company or get someone with more knowledge of investments such as an investment advisor to carry out the rest of the research.

The Best Place to research stocks for initial discovery is through Research Reports, Newsletters, Magazines, and investment blogs.

There are many good sources to discover stocks: Investors Digest, the Money Letter, The Money Reporter, the Zweig Forecast, The Economist, Wall Street Journal, etc.

The newest method to find great stocks to invest in is to search blogs. Google Search: Investment Advice Blogs -- and you will find a number of great blogs listing hot stocks and good opinions about the stock market in general.

Another place to look for stocks to invest in is through Annual Reports and Broker's Packages. You can usually get these by phoning up any public company and asking to be sent a 'Broker's Package'. Do note that these are usually glossy sales packages that make the issuer look as good as possible. Make sure you look at the Auditors notes at the end of the Annual reports for 'juicy details'.

The common element in all of this research is that once it is printed it is old news and the future is anybodies guess. You can make more informative decisions about the future by doing your research however. So if you want to take the luck and gambling aspect out of investing do your homework. You can never eliminate all of the risks from the stock market but you can significantly improve your chances of success.

Investment Theory

Investment Theory

Modern Investment Theory or Modern Portfolio Theory can become quite complex; however, the basic theory of investing revolves around a couple of key concepts: capital is a scarce resource, and return is a variable of risk. In other words, money available for investment is not infinite so people are willing to pay to borrow it and generally, the greater the risk associated with an investment, the greater the potential rewards.

The goal of portfolio theory is to diversify your investments in a way that will maximize your returns while minimizing the risks associated with those returns. This is done by investing in a number of different investment vehicles as well as investing in a number of uncorrelated/unrelated industries.

For example,
40% Fixed Income (bonds, debentures, commercial paper), 40% equities (stocks), 15% cash (GICs, term deposits, savings account), 5% derivatives (options, futures)

Further, within these fields your investments should be diversified through unrelated sectors:
Resource, Financial, Technology, Health Care, Industrial, etc.

This is not an exhaustive list but a very basic outline. Each individual is faced with a unique set of qualities that will effect how much they should invest in certain sectors and how much they should invest in each type of security.

Let's Talk Equity

Let's Talk Equity

When discussing Equities in North America we are really focusing on stocks. Owning a stock will provide you with partial ownership of whatever company that stock is attached to and will entitle you to certain rights with regard to that company; however, the exact details of the rights given will depend on the type of stock.

There are many different forms of stock that trade in the equity markets but there are two basic types: common shares, and preferred shares.

Common shares are the most abundant and commonly held form of stock—hence the name. Generally, common stock has voting rights in corporate decisions, and may receive dividends when declared by the company.

Preferred shares are the second most abundant. These shares have priority over common stock in the distribution of dividends and also take a priority claim to assets if a company faces liquidation due to bankruptcy. However, these shares usually have no voting authority and may be restricted to a stated dividend amount. Essentially, this could mean that if an extra dividend is declared, the preferred shareholders may not participate.

How is stock issued?

The basic method of stock issue results when a company files a prospectus with the local securities commission. Once approved, an initial public offering (IPO) is granted and the company will sell the stock to the public. Usually, the IPO is sold either totally or partially to the underwriters (companies or persons that advise the company on the offer) and these underwriters may sell directly to the public or hold the stock. Most of the time, the underwriting firms are offered the stock at a small discount to compensate them for risks that they may have taken on and compensate them for advising on the issue. This places the stock in the primary market (the market of first sale).

Once the initially sale has occurred, all subsequent sales will occur in the secondary market. This market is what we know as the stock exchanges: NYSE, Nasdaq, TSX, CVE, etc.

Buying stock on the exchanges is very simple these days. The only requirement is that you have an account opened with a brokerage firm whether it is with a bank subsidiary, financial institution or online brokerage.

Top 6 Stock Picks: Oil and Gas

Top 6 Oil and Gas Stock Plays:


Top 6 Stock Picks: Oil and Gas

1) Cyries Energy: Formed in July, 2004 as a result of the merger between CEQUEL Energy Inc. and Progress Energy. The company is a high-growth junior exploration company and operates in the greater Peach River Arch Area of Alberta and targets medium-depth, multi-zone prospects mainly. Management currently owns about 19% of the shares.

Rating: Strong Buy

For more information about this company visit http://www.andrewjohns.ca/EN/main/299/317/866/researchfocus_cys.html where you will have access to some of the latest research reports for free.

2) Duvernay Oil Corp: Trades a premium cash flow multiples compared to its direct competitors. This company is a high-growth intermediate company that focuses on drilling multi-zone wells targeting Triassic and Cretaceous sandstones in northeast BC and northwest Alberta. Management controls about 20% of the stock.

Rating: Strong Buy

For more information about this company visit http://www.andrewjohns.ca/EN/main/299/317/866/researchfocus_ddv.html where you will have access to some of the latest research reports for free.

3) ProEx Energy: Just like Cyries Energy, ProEx formed in July 2004 from the merger of Progress Energy and CEQUEL Energy. ProEx Energy operates mainly in northeastern British Columbia and is focused on full-cycle exploration and development. Management controls roughly 30% of the stock.

Rating: Strong Buy

For more information about this company take a look on Google Finance under ticker: PXE.TO

4) Suncor Energy: Suncor is a large Canadian integrated Energy company operating in the Oil Sands of Alberta and Saskatchewan. The company is focused on Oil Sands, Natural Gas, Energy Marketing and Refining. This company has experienced a great upward price trend linked to its ability to grow.

Rating: Buy

For more information about this company visit http://www.andrewjohns.ca/EN/main/299/317/866/researchfocus_su.html where you will find recent research reports by Raymond James Financial free of charge.

5) Talisman Energy: Talisman Energy is an independent Canadian based oil and gas company involved in exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids. This company operates throughout North America, the UK, Europe, South East Asia, and North Africa.

Rating: Buy

For more information about this company visit http://www.andrewjohns.ca/EN/main/299/317/866/researchfocus_tlm.html where you will find Research Reports by Raymond James Financial Free of charge.

6) TriStar Oil & Gas: Was formed in 2006 form the merger of StraPoint Energy Trust and Acclaim Energy Trust The company is focused on acquiring producing properties and drilling to exploit the undeveloped land. TriStar operates in Alberta and Saskatchewan.

Rating: Buy

For more information about this company visit google finance and search TOG.TO



You should not buy any of these stocks without first consulting a financial professional to determine whether the risks associated with each would be beneficial or resonable for your own portfolio.

GDP Growth, Inflation, and the Yield Curve

Current information about the most important variables effecting the stock market. The article discusses GDP Growth, Inflation and the Yield Curve environment and how these variables are effecting the TSX stock market, the Canadian US dollar exchange rate, and bond yields.

read more digg story

GDP Growth, Inflation, and the Yield Curve

GDP Growth: Statistics Canada reported a rise of 2.8% in GDP annualized over 2006. The latest report available indicates an increase in GDP of 0.3% in May, 2007 after remaining nearly unchanged through April. Strong increases in retail and wholesale trade were present while a drop in oil and gas exploration constrained overall growth. GDP Growth is expected to remain strong through 2007 at an estimated 2.6% and subsequent 2.7 % in 2008.

Higher interest rates combined with an ease in housing starts and slowing profit growth will slow economic growth; however, a number of external factors, mainly a resurgence of the US economy, will keep the overall growth in the Canadian economy near 2.6% in 2007.

As a result of the anticipated growth remaining strong but constrained, the Bank of Canada is likely to hold off on interest rate hikes in the near term. As interest rates remain stable so too will consumption of capital investments as no higher rates will force consumers out of the market and no lower rates will attract new consumers. This policy will continue unless inflation increases, which would result in an increase in interest rates from the Bank of Canada to decrease consumption, or inflation decreases, which would result in a decrease in interest rates to revitalize consumption. Further, as a result of the continued moderate growth in GDP the yield curve has remained stable with a positive long term trend, the stock market although experiencing volatility has held gains through the year and the Canadian dollar has strengthened substantial against the green back and other major currencies throughout the year..

Inflation: Statistics Canada reported in July, 2007 a rise of 2.2% year over year in total CPI, which was identical to increases over the past 3 months. The Cost associated with owned accommodation was attributed for the fourth straight month to represent the most significant portion of the CPI rise. These price increases were offset by falling prices for gasoline, computer equipment and supplies, and natural gas.

Rising inflation due to a world wide economic expansion has caused many Nations to raise rates over the past few quarters in an attempt to ease inflation concerns. With the latest data placing inflation within the Bank of Canada’s target rate of between 1% and 3%, the case for a pause in interest rate policy remains strong. However, caution should be taken as a result of the latest interest rate movement in the US, a half percentage point decrease.

A pause in interest rates generally will not fane or dampen GDP growth and yield curves will remain stable. However, the market will normally predict a rate cut or increase before it is implemented by the Bank.

If the Bank of Canada decides GDP growth will decelerate too much without action, they will decrease interest rates at their September press release and many effects will ensue: the yield curve would steepen in a positive direction, increased consumer spending, yields on fixed income investments become less attractive than stock market gains, debt service costs decline, new equity becomes easier to place, equities rise on justified higher price/earning multiples, the expansion of the economy increases pace, unemployment falls, while inflation would likely increase pace.

Yield Curve: Long term yields on Government of Canada benchmark bonds have decreased recently as a result of market concerns of a pending rate cut in the future. As of August 22, 2007 the current yield was 4.49%. Yields on 3 month Treasury bills have also recently decreased but at a faster rate to 4.01% as of 21 August, 2007. This amounts to spread of 0.48% and implies a normal sloped yield curve that has recently steepened. This positive slope reflects investors expectations for GDP and inflation to grown in the future.

The TSX has experienced substantial gains over the past year while volatility has also been substantial. Under the current yield curve conditions the stock market still remains more attractive to investors than fixed income instruments and the outlook for the Canadian dollar is for further strengthening against the US dollar over the coming years.

Top 10 Option Investment Strategies

Top 10 Option Investment Strategies:

Neutral to Bullish Strategies

1) Long Call: Simply buy a call option on a stock. This provides unlimited upside potential and caps the associated risk at the amount paid for the stock option. For Example, say you have $1600 and think Google (GOOG) will increase in value: say it is currently trading at $500 a share but you only have enough money to buy 3 shares. Instead of buying the shares you decide to buy call options on Google (GOOG). Let’s say you want to be conservative and only buy options trading write at the money (strike of $500). Now you just need to choose the expiration month (do you think the stock will increase in value soon or will it take a while?) Say you believe Google (GOOG) will increase in value within 1 month. You buy September 500 Calls for $16 (you have $1000 so you can afford 1 contract (sold in 100 board lots). As long as Google (GOOG) Trades at $516 at expiration in September you have made a profit.

Say GOOG is trading at $550 at expiration of the call options:

If you had bough 3 shares your profit would be ($550-500)*3 = $150.

If you bought the Call Options your profit would be {(550-500)-16}*100 = $3400.

2) Put Writing (Short Put): Simply sell put options on a stock. This provides you with the option premium while your maximum risk is strike price of the option minus the premium received. Your max risk scenario would only occur if the price of the stock went to $0. For this strategy an investor will normally have a neutral to bullish market forecast. Say you are interested in Apple (AAPL) and think it will appreciate in value or remain the same. You can sell Puts on Apple (AAPL) and received the option premium in exchange for the risk that the stock may decrease in value up to the expiration of the stock options you sell. Say Apple (AAPL) is trading at $120. To be conservative you write put options with a strike price at the money ($120) for $6 each and an expiry in 1 month. Say you only write 1 contract, you will receive $600. While you are waiting for the option to expire you can invest that $600 elsewhere say in Google. At expiry, as long as the Apple (AAPL) is trading above (120 – 6 = $114) you have made a profit.

3) Married Put: This strategy is implemented by buying the stock and buying a put on the stock. This provides you with protection against a price decline while you can still participate in all upside in the stock price. The risk/reward profile is very similar to the Long Call; that’s why this strategy is also referred to as a ‘synthetic call.’ Lets go with Starbucks (SBUX). You buy 100 shares at $25 a piece for $2500 and want to protect yourself against a decline in Starbuck’s (SBUX) stock price so you buy puts right at the money because you are being very conservative. Say you only want to protect your stock from a decline for 1 month. You buy puts with a strike of $25 1 month to expiration for say $1. Now, the most money you can loose over the month is the $1 you paid for the put while you still can participate in any upside so as long as the Starbucks (SBUX) is trading above $26 at expiration you have made a profit.

Neutral to Bearish Strategies

4) Long Put: Simply buy Put Options on a stock. This strategy is implemented when an investor has a bearish forecast for a stock. Say you think Google (GOOG) will decrease in price over the next month. Instead of shorting Google (GOOG) you decide to buy put options on Google (GOOG) because you don’t want to put so much money at risk. Say Google (GOOG) is trading at $500. If you were to short the stock you need to be able to cover you position. Say you have $1500, you would be able to cover shorting 3 shares. If you buy puts and are conservative you could write at the money $500 puts for one month out for say $15. You could afford 1 contract (100 shares). If you had just shorted the stock you would profit as long as the stock declines in value, but you have unlimited up side risk. With the put options on google (GOOG) your risk is limited to you initial investment while your rewards could be substantial.

Say Google (GOOG) in one month is now trading at $450:

If you shorted the stock your profit would be ($500 - $450) * 3 = $150

If you purchased the puts your profit would be ($500 + $15 - $450) * 100 = $6500

5) Call Writing: Simply Write (Sell) call options on a stock. This provides you with the option premium while your maximum risk is infinite (the stock can potential increase to infinity, ha). For this strategy an investor will normally have a neutral to bearish market forecast. Say you are interested in Apple (AAPL) and think that it will depreciate in value over the next month or remain the same. You can sell Call options on Apple (AAPL) and receive the option premium in exchange for the risk that the stock may increase in value over the month. Say Apple (AAPL) is trading at $120 and you are going to be conservative and write put options with a strike price at the money ($120). You receive $5 in premium. As long as the price of Apple (AAPL) is less than (120 + 5 = $125) at expiration, you have made a profit.

6) Protected Short Sale: This strategy is implemented by shorting the stock and buying a call option on the stock. This provides you with protection against an increase in the price of the stock while you can still participate in the decline in the stocks price. The risk/reward profile is very similar to the Long Put; that’s why it is also know as a ‘synthetic Put.’ Let’s go with Starbucks (SBUX) again. You can short 100 shares at $25 a piece for $2500 and want to protect yourself against a rise in the stocks price so you buy calls on Starbucks (SBUX) right at the money because you are conservative. Say you only want to protect your stock from a decline for 1 month. You buy calls on Starbucks (SBUX) with a strike of $25 and 1 month to expiration for $1. Now, the most you can loose over the month is the $1 you paid for the put while can still participate in any decrease in the stock price. As long as Starbucks (SBUX) is trading for less than $24 at expiration you have made a profit.

Neutral Option Strategies:

7) Short Straddle: This strategy is implemented by simultaneously writing a put and a call option on the same stock with the same strike price and the same expiration date. This way, as long as the stock price remains somewhat stable you will profit. For example, say Google (GOOG) is trading at $500 and you think it will remain near that price over the next month: sell google (GOOG) $500 Calls for $16 and sell google (GOOG) $500 Puts for $15, both with expirations of about 1 month. As long as the price of Google (GOOG) at expiration in one month is trading above ($500 – (15 + 16) = $469) and below ($500 + (15 + 16) = $531) you have made a profit.

8) Short Combination (Short Strangle): This strategy is similar to the Short Straddle as you write a call and a put option; however, the difference is that with a short combination you use different strike prices. This way you can increase your window of profit opportunity just incase there is a price move. For example, say Apple (AAPL) is trading at $120/share and you think the price will remain somewhat stable over the next month but are a bit more causes than the Short Straddle Investor: sell Apple (AAPL) $130 Calls for $2 and sell Apple 110 (AAPL) Puts for $3; both with one month to expiration. As long as the Apple Shares remain above (110 – 3 – 2 = $105) and below (130 + 3 + 2 = $135) you have made a profit. This way you will receive less option premium but are more likely to make a profit.

9) Long Straddle: This strategy is the opposite of the Short Straddle; an investor will simultaneously buy a call option and a put option on the same stock with the same strike price and same expiration date. Investors use this strategy when they think a large price more will occur in a stock but are unsure of which direction the stock will move. This strategy can work well when a major anticipated decision is about to be made for the stock: buy-back program, law suite, new technology, earnings reports, presidential election. For example, say the United States Presidential Election will occur in the next month and you want to find a way to profit. Some stocks will move depending on which candidate wins and you decide to focus on Starbucks (SBUX). Say one candidate wants to increase taxes on milk and the other wants to decrease them. You know this will effect Starbucks (SBUX) bottom line so you decide to implement a long straddle because you are not sure which candidate will win. You buy calls and puts with the same strike price on Starbucks (SBUX) and same expiration month. When the decision is announce the stock will most likely move dramatically in one direction. As long as the stock moves in one direction more than the amount that you paid in option premium you will profit.

10) Time Spreads (Calendar Spreads): This strategy is implemented by buying and writing an equal number puts or calls on the same stock with different expiration dates but the same strike prices. Normally time spreads have a neutral basis but they can also be designed for a bullish or bearish basis. For example, sell $500 Calls on Google (GOOG) with 1 month to expiration and buy $500 Calls on Google (GOOG) with 6 months to expiration. You can make a profit if the Calls with a shorter time to expiration erode in value faster than the longer term calls. This tends to work as the time value component of an options value usually erodes faster the shorter the term to expiration. However, you need to consider other aspects of the options price like volatility.

Neutral Market Stock Option Strategies

Neutral Market Option Strategies

There are 5 common Neutral Market Option Strategies implemented by investors: Short Straddle, Short Combination, Long Straddle, Long Combination, and Time Spread.

1) Short Straddle: This strategy is implemented by simultaneously writing a put and a call option on the same stock with the same strike price and the same expiration date.

When to use a Short Straddle:

• An investor feels the stock will remain at or very near to the strike price

• An investor is willing to accept a large amount of risk in exchange for the stock option premium received.

For example: write the XYZ June 30 Put and also write the XYZ June 30 call.

2) Short Combination (Short Strangle): This strategy is similar to the Short Straddle as you write a call and a put option; however, the difference is that with a short combination you use different strike prices.

When to use a Short Combination:

• An investor feels a stock will remain between the two strike prices

• An investor is willing to accept a larger risk in exchange for the option premiums received.
For example: write XYZ June 20 Puts and Write XYZ June 30 Calls.


3) Long Straddle: This strategy is the opposite of the Short Straddle; an investor will simultaneously buy a call option and a put option on the same stock with the same strike price and same expiration date.

When to use a Short Combination:

• An investor feels a stock will experience a large price move but is not sure in which direction it will occur.

For example: Buy XYZ June 30 Puts and buy XYZ June 30 Calls.

4) Long Combination (Long Strangle): This strategy is similar to the Long Straddle as it involves buying a put option and a call option on the same stock; however, you use different strike prices.

When to use a Long Combination:

• An investor feels a stock will make a large price move but is unsure of the direction.
For example: buy XYZ June 20 Puts and buy XYZ June 30 Calls.

5) Time Spreads (Calendar Spreads): This strategy is implemented by buying and writing an equal number puts or calls on the same stock with different expiration dates but the same strike prices. Normally time spreads have a neutral basis but they can also be designed for a bullish or bearish basis.

When to use a Short Combination:

• An investor feels the stock will remain around the strike price.
For example, the investor writes a near term option with a strike price near the stocks current market price and buy’s a long term option and hopes the time value of the near term option will erode in value faster than that of the long term option.

Neutral Option Strategies Chart

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Option Strategy	Market Volatility Forecast	Maximum Reward	Maximum Risk	Break Even Price
Short Straddle	Declining	Premiums Received	Infinite	Strike Price +/- Premiums Received
Short Combination (Call Strike > Put Strike)	Declining	Premiums Received	Infinite	1. Call Strike Price + Premiums Received, 2. Put Strike Price – Premiums Received
Short Combination (Call Strike < Put Strike)	Declining	Premiums Received – (put strike price – call strike price)	Infinite	1. Call Strike Price + Premiums Received, 2. Put Strike Price – Premiums Received
Long Straddle	Increasing	Infinite	Premiums Paid	Strike Price +/- Premiums Paid
Long Combination (Call Strike>Put Strike)	Increasing	Infinite	Premiums Paid	1. Call Strike Price + Premiums Paid, 2. Put Strike Price – Premiums Paid
Long Combination (Call Strike < Put Strike)	Increasing	Infinite	Premiums Paid – (Put Strike Price – Call Strike Price)	1. Call Strike Price + Premiums Paid, 2. Put Strike Price – Premiums Paid
Time Spread	Declining	Market Price of Long Option – Net Premium Paid

Bearish Option Strategies

Bearish Option Strategies

There are 6 common Bearish Option Strategies implemented by investors: Long Put, Protected Short Sale, Covered Put Sale, Short Call, Bear Put Spread, and Bear Call Spread.

1) Long Put: This strategy is implemented by simply buying a put option on a stock that an investor feels will decline in value. The Long Put is a popular strategy because of its simplicity and is used by investors who want a leveraged and limited risk method to participating in an expected decline in a stocks price.

The success of this strategy will depend on 3 conditions:


· Picking a stock that will decrease in price


· Picking an expiration month with a long enough duration for the stock price decrease to occur.


· Picking a strike price that will maximize the profit earned when the stock price decreases.

How to select an Expiration Month


Buy a near-term Put Option: The advantage is Leverage with fewer dollars at risk; however, the option will experience rapid time decay.


Buy a long-term Put Option: The advantage is getting more time for the stock to decrease in price; however, there is more money at risk since you must pay a higher premium for Options with longer durations to expiration.

How to select a Strike Price


Buy out of the money put options: This affords lower cost and more leverage; however, a larger move in the stock price will be required to exercise.
Buy in the money put options: This provides a better chance of making a profit but more dollars will be at risk since you must pay a greater premium.

2) Protected Short Sale: This strategy is implemented by purchasing a call option on a stock while shorting the stock. If a stocks price rises above the strike price of the call option the investor will exercise the right to buy the stock. In essence, the call acts as insurance against an increase in the price of the stock. Further, this strategy is often referred to as a “synthetic put” as it has a similar risk/reward payoff as buying a put option.

When is it used?

This strategy is used when an investor is bearish on an underlying stock but concerned about near term price risk. Usually this strategy is used when an investor has profited from a decrease in the value of a stock and wants to lock in their profit.

How Do You Choose a Strike Price?

Normally, the investor will choose an out of the money option. The closer the call options strike price to the current market price of the stock the greater the level of protection against a price increase, but the greater protection comes at a higher cost.

3) Covered Put Sale: This strategy is implemented by short selling a stock and writing (selling) an equivalent number of put options on that stock. Writing the put options obligates the investor to buy the stock from the option buyer if the stock price decreases below the strike price and the option buyer decides to exercise the option. Essentially, the covered put writer is foregoing the right to participate in the depreciation of the stock below the strike price in exchange for receiving the put option premium.

When is it used?

The Covered Put Sale is used by investors for 2 reasons:


a. The investor feels there is limited downside potential for the stock and as a result is willing to forego decreases in the stock price below the options strike price in exchange for receiving the options premium.


b. The investor wants some limited upside protection from shorting the stock which comes from receiving the put premium. The net cost of short selling the stock is lowered by the put premium amount received.

How do you choose the Strike Price?

The more bearish the investor is the further out of the money the put should be. By writing a deep out of the money put option the investor is able to participate in a larger decrease in the stock’s value; however, a further out of the money put option will provide a smaller amount of option premium.

4) Call Writing: This strategy is implemented by simply selling call options on a stock. The investor implementing this strategy will be expecting the underlying stock chosen to stay at or decrease below the strike price. Fundamentally, the call writer will profit when the stock price remains at or below the strike price as the call will expire worthless while the investor keeps the premium.

When is it used?

Call option writing is used by investors to generate additional income.

How do you choose the Strike Price?

Choosing a strike price will depend on the investors market forecast:


a. If the investor is bearish, writing call options at the money or in the money would be best as there will be more option premium offered for writing the call options.


b. If the investor is neutral to slightly bearish, writing an out of the money call option would be best as it is less risky. These will contain less option premium for writing the options but it is much less risky because the stock price will have to increase considerable for the option to be exercisable.

5) Bear Put Spread: This strategy is used when an investor is moderately bearish on a stock (the bearish equivalent of the Bull Call Spread). The Bear Call Spread is implemented by buying a put option while simultaneously writing a put option with a lower strike price. The options will be identical except for the strike price (use same expiration, same stock).

When is it used?

Bear Put Spreads are used when:


a. An investor feels a stock will decrease only slightly and is willing to forgo any depreciation in the stock below the strike price of the written put in exchange for the premium received for writing the lower strike price put.


b. An investor wants some limited upside protection from purchasing the higher strike price put option. This protection comes from the premium gained by writing the lower strike price put, which lowers the net cost of purchasing the higher strike price put option.

How to choose the Strike Price?

The strike prices used will depend on how bearish an investor is. The greater the bearishness of an investors forecast, the further out of the money and further apart the strike prices should be. When an investor is less bearish the strike prices used should be closer to the current market price of the stock and the strike prices should be closer together.

6) Bear Call Spread: This strategy is implemented by writing a call option while simultaneously buying a call option with a lower strike price. The options used will be identical except for the strike price (use same expiration, same stock).

When is it used?

Bear Call Spreads are used when:


a. An investor feels there is some limited downside for a stock but is not as confident as an outright call writer and as a result buys the higher strike price call to cap upside risk.


b. An investor wants additional income.

How to choose the Strike Price?

The strike prices used will depend on how bearish an investor is. The greater the bearishness of an investors forecast, the deeper in the money and further apart the strike prices should be. When an investor is less bearish, the strike prices used should be closer to the current market price of the stock and the strikes should be closer together.

Bearish Option Strategies Chart

Option Strategy	Market Forecast	Maximum Reward	Maximum Risk	Break Even Price
Long Put	Outright Bear	Strike Price – Premium Paid	Premium Paid	Strike Price – Premium Paid
Protected Short Sale	Outright Bear with near term concerns	Stock Price Received – Premium Paid	Premium Paid + (Strike Price – Stock Price Received)	Stock Price Received – Premium Paid
Covered Put Sale	Neutral to Bearish	Premium Received + (Stock Price Received – Strike Price)	Infinite	Stock Price Received + Premium Received
Short Call	Neutral to Bearish	Premium Received	Infinite	Strike Price + Premium Received
Bear Put Spread	Moderately Bearish	(Strike Price of L. Put – Strike Price of S. Put) – Net Premium Paid	Net Premium Paid	Strike Price of Long Put – Net Premium Paid
Bear Call Spread	Neutral to slightly Bearish	Net Premium Received	(Strike Price of L. Call – Strike Price of S. Call) – Net Premium Received	Strike Price of Short Call + Net Premium Received