Terms Beginning With 'd'

Derivatives Clearing System

  • January 09, 2020
  • Team Kalkine

DCS or Derivatives Clearing System is a client-server design operated by ASX Clear Pty Limited to settle and clear equity-associated derivative products. DCS captures reported derivatives trades from the ASX trading system and broadcasts them to the appropriate participants in near real-time. Moreover, it offers several reports to participants automatically, including collateral reports, exercise reports, financial reports, position reports and reconciliation reports.

What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours.  One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job.  Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price.  Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility.  Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening.  Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating.  People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows.  What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives.  Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets.  After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy.   Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex.  Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies.  Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well.  The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood.  Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc.  Real-time market information flow   On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research.  Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours.  Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group.  What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently.  It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin.  Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses.  Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.   

What are ETFs? ETFs are similar to funds where pooled money of investors is managed by a fund manager, who runs the ETF. These funds invest in equity, debt, commodity or any other asset class, depending on its offering. Good read: Mastering the Basics of Investing in ETFs Price of the ETF is based on a value of net assets in the fund and is subject to change each trading day consistent with underlying changes in the value of net assets. Since ETFs are traded in markets just like shares, the quoted price of an ETF either reflects a discount to its NAV or a premium to its NAV. Investors have flocked to ETFs because of low-cost proposition and opportunity to take exposure in a specific pool of assets, which are professionally managed by an investment team with the investment manager. Some ETFs are also used as a proxy to define sentiment in an underlying sector, commodity or index since ETFs are actively traded in market hours, incorporating the latest information in prices. Fund management businesses have continued launching new and innovative ETFs, which have seen great demand over the past.    Read: Gold ETFs register massive capital influx; while PDI, GPP, ERM, AME, RED Under Investors’ Lens Large and popular ETFs have also defied liquidity problems because of large scale investor participation. But it remains a problem with lesser-known ETFs with small market participation. ETFs also pay distributions to the holders that are either derived through interest income, dividend income or capital gain. Active and Passive ETFs With ETFs markets growing strongly as ever, there remains a divide between active fund managers and passive fund managers. Passive investment strategies have grown immensely popular among market participants over time. This strategy is cost effective. Many seasoned investors such as Warren Buffett, John C Bogle- founder of the Vanguard Group have endorsed passive ETFs. Active ETFs do not track a benchmark, and performance is not tracked to any given index. These funds are based on countries, sectors, market capitalisation, asset classes, etc., and active investment management allows a manager to beat the returns delivered by broader markets or indices. If you look at the great investors like Warren Buffet, Philip Fisher or Peter Lynch, they have set themselves as a preamble for active investors, and their record of delivering sustainable returns over the long term continues to attract investors to active alleys of markets. Since Passive ETFs are designed to match returns of respective benchmarks, there is no scope of delivering outperformance no guarantee that fund will not underperform the benchmark. However, the expenses charged to investors are relatively lower compared to Active ETFs. Passive ETFs are cheaper than Active ETFs because the use of resources is limited in the former. Since they are designed to match the benchmark and its underlying securities, trading in Passive ETFs is mostly automated running on algorithms, and stock picking is not required, thereby no research. Read: ETFs: Investors Up the Ante and ETFs Run the Show for Long-Term Returns ETFs based on asset classes and style Sector ETFs: These are the most common type of ETFs in market. Sector ETFs track specific sectors like Information Technology, Consumer Staples, Consumer Discretionary, Metal & Mining. These are similar to index funds but are actively traded in stock exchanges. Equity ETFs: Equity ETFs may include equity-focused Sector ETFs. As the name suggests equity, these funds invest in stocks independently or are benchmarked to a specific index. Perhaps, Equity ETFs are the most common ETFs. Fixed Income ETFs: These funds invest in fixed income instruments and pay distributions out of the interest earned on bonds. Further Fixed Income ETFs can be separated as investment-grade ETFs, high-yield ETFs, Government bond ETFs. Commodity ETFs: Commodity ETFs invest in physical commodities like precious metal, agricultural goods, natural resource. These funds include products like Gold ETFs, Oil ETFs, Grain ETFs, Silver ETFs. Good read: Investing in Commodity ETFs Short ETFs: Also known as inverse ETFs, these funds are designed to benefit when the benchmark is falling. Short ETFs hold short positions in the benchmark index futures or constituents of the index to benefit from fall in value or prices. To know more about short selling read: Minting Money While the Asset Price Tanks; Enter the World of Short Selling Leveraged ETFs: Leveraged ETFs use derivatives to amplify the returns and risks of a fund. These are also called geared ETFs. Leveraged ETFs may also hold equity or bonds along with the derivatives to amplify the net asset value movement of funds. Do read: All You Need to Know About Exchange Traded Funds Why investors prefer ETFs? Passive investment vehicles continue to appear compelling to a large investor base, and there are numerous reasons driving the demand for passive investment vehicles. Low-cost and no minimum investment: ETFs have lower expenses compared to traditional mutual funds, and most of the funds have no minimum investment criteria. As a result, the market for ETFs has grown strong, due to its reach to investors with limited capital. Must read: Mutual Funds vs. ETFs: Which Are Better? Exposure to specific asset classes: Investors with large portfolio also use ETFs to enter to into specific asset classes like Gold ETF or Commodity ETF, but not limited to sector ETFs, theme-based active ETFs like technology, mobility, e-commerce etc. Portfolio diversification: ETFs provide investors with an opportunity to diversify a portfolio of concentrated stocks by including exposure to specific sectors, indices, and commodities. More importantly, the diversification is available at a low-cost investment, which further drives the need for ETFs in a portfolio. Accessibility: It is perhaps the most compelling value ETFs provide to investors. Since ETFs are available on stock exchanges like shares, investor participation remains strong, and some popular ETFs boast high liquidity levels. Read: Confused on How to Invest in ETFs? We Have Some Tips! Further read: 6 Reasons to look at ETFs    

National Securities Clearing Corporation (NSCC) was established in 1976 as a subsidiary of Depository Trust & Clearing Corporation (DTCC). The Corporation performs clearance, settlement, risk managing, central counterparty services and a guarantee of accomplishment for specified transactions in the financial industry.

What are Hedge Funds? A hedge fund is a managed pooled fund for alternative investment method which employs trading into complex products including equities, derivatives, real estate, currencies and many others. The performance of the fund is measured in absolute return units.  As the name suggests, hedge fund tries to “hedge” the risk associated with a particular investment choice based on the price relevant information. Hedge fund managers choose from the variety of options from stocks to bonds and commodities to currencies. Sometimes they may invest their own money to a fund to leverage the magnifying effect of the investment. How did it start? Alfred Winslow Jones is regarded as a pioneer in the field of hedge fund management, and he launched the first hedge fund in 1949. Alfred structured the funds by finding the loopholes in the regulations and reaping benefits from them. Alfred formed an investment partnership and committed his own money in the partnership. He fixed his remuneration in the form of performance incentive, which was 20% of profits. Alfred, in his endeavour, combined shorting and leverage, and hedged them against the market movements and reduced the risk exposure. He chose equal short and long positions for his portfolio. The overall impact of the combination of long and short positions, his portfolio became more stable with lower risks. Why opt for Hedge Funds  Image source - © Kalkine Group 2020 Many fund managers joined Alfred to gain fame and fortune. Some of them even went to start their own fund houses and an SEC report of 1968 reported 140 hedge funds in the United States of America. During the stock market boom of the late 1960s led to a belief that Hedge Funds underperformed than the overall market. Many hedge fund managers dropped the idea of long term and short term positions and did not feel the need for risk hedging. To take the benefits of the market boom, many fund managers moved out from the Alfred technique of lowering market movement risks. The fund managers moved boldly to the riskier strategies, which led to heavy losses in 1969-70. The bear market of 1973-74 drove a massive plunge in hedge funds and saw closure of many such funds due to heavy losses. During the mid-80s, hedge funds again became centre of attraction for large investors due to the Julian Robertson’s Tiger Fund. The fund was one of the many global macro funds that used leveraged investments in securities and currencies after careful assessments of global macroeconomic and political situations. Tiger Fund, in 1985, correctly forecasted the end of the four-year trend of the US dollar appreciation against currencies of Europe and Japan and speculated in non-US currency call options. A report in the year 1986, reveals that since its inception, Tiger Fund gave an average of 43% return to its investors. During the late 1990s, hedge fund suffered one of the largest losses. Quantum Fund lost US$2 billion in 1998 during the Russian debt crisis. Tiger Fund lost more than US$2 billion in trading of Japanese Yen with respect to the US dollar. The losses and redemption of money by the investors led to the closure of the Tiger Fund in 2000. What are the different types of hedge funds? Hedge funds can differ based on the strategy chosen by the manager after consulting the investors. The strategy is laid out to the investors through a prospectus before going forward with it. This makes a hedge fund more flexible as investors are always aware of about where the funds are going. Thus, hedge funds can be of the following types: Macro: These hedge funds aim to profit through macroeconomic trends. These macro parameters may include global trade, interest rates, forex policies, etc. Equity: These hedge funds involve investments into stocks nationally and internationally, both. This is accompanied by a hedging position against stock market downfalls by shorting overvalued stocks. However, the striking feature of this type of hedge fund is that managers pick up undervalued stocks and split the investment between going long in stocks and shorting others. Relative-Value: This type of hedge fund takes advantage of inefficiencies existing in the spread. A Spread is the difference between bid price and ask price of a security. Event-based: These involve those funds that seek to gain from inefficiencies brought on by corporate events, corporate restructurings, mergers, and takeovers, etc. How is a hedge fund different from a mutual fund? In operation, hedge funds and mutual funds may sound the same as they both involve a pooled sum of funds being invested. However, there are some fundamental differences between both. These include: The need for accredited investors: Hedge funds are only open to certain accredited wealthy investors holding high level of capital. However, mutual funds are open to non-accredited investors as well. Liquidity: Hedge funds do not maintain daily liquidity, whereas mutual funds are much more liquid. Hedge fund investors may only liquidate after the specified subscription period is over. This period may be a quarter long or a month long depending on the type of fund. Investment instruments: Hedge funds investors can invest in various types of investments other than stocks. These include bonds, commodities, exchange rate, etc. However, mutual funds invest in stocks. This makes hedge funds much riskier than mutual funds. Regulations: Hedge funds are subjected to less regulatory checks are compared to mutual funds. Some hedge fund managers may not even be required to register the fund with the Security Exchange Authority. However, mutual funds are subject to greater level of regulations and must provide higher level of disclosure than that required by hedge funds. How is it doing now? The hedge fund industry has evolved substantially, and their numbers are in thousands and managing trillion dollars of investment around the globe. Their Modulus Operandi has also evolved over the year. They ask their investors to put the money in locking period of a minimum of 1 year. Hedge funds are usually open to qualified investors. The fees charged by the fund managers are also generally on the higher side, around 2% of the underline asset value plus the performance fee on gains generated. The basic principle of hedging the investment has now changed, and the key focus is to maximise profits or to give higher returns on the investments. To achieve higher returns, fund managers often put their money on higher risk elements. Fund managers use leverage to increase the spread of profit, but at the same time, leveraging can incur more loss than the actual investment would have made. Speculative investment has the potential of higher risk and huge losses. Being said that, the past financial blunders of hedge fund have also provided expensive learning and experience to the fund managers. Building upon the legacy, hedge funds have given higher returns over the years. The average rate of returns of hedge funds attracts most of the wealthy investors towards them. They invest in anything from bonds to securities to currencies and even real estate. There is no fixed rule of investment or instrument for investment, and no definition could cover the entire system of hedge funds. What are the two sides of investing in Hedge Funds? Image source: ©Kalkine Group

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