A bit of swap, a dabble of ETF

Due to some recent stuff going on at work, I’ve been learning a little bit more about some non-traditional types of investments – index traded funds, ETFs, options, futures, and swaps. Since I’m getting the knowledge (and knowledge is power?), I thought I’d pass it all along to you.

Most of what I know is involved with the differences between these types of funds, but I will try to give a short summary, and end with why you might care – especially if you are looking to invest a bit yourself.

Let’s start with options first. Stock options are exactly what they sound like – they are a contract giving the right, within a certain period, to buy or sell a specific number of shares of a specific stock. However, there is no obligation to buy/sell at all, and the contract can be fulfilled at any time during the agreed-upon period. There’s a formula for calculating whether or not the option risk is worth it, but I don’t really understand how this works. There are also exchange-traded options which are options on a range of funds, mimicking an ETF.

So – futures.  Basically, they’re the same as options, except you make an agreement to trade stock (or a group of stocks) on a certain day.  There’s no backing out or choosing which day to trade.   You’re making a best-guess as to what will be happening in the future market, and through this prediction and the associated risk analysis, you’re speculating that one stock or group of stocks will do well.  There’s more to it having to do with marking-to-market, which I don’t really understand, but hopefully I will sometime soon.  At the moment, I really don’t know why people would buy futures, other as a sort of balance to risk in other areas (i.e., hedging) using the sale (or short) of the future to protect and counterbalance an investment in the same industry.  Forwards are a similar exchange that are traded between individuals rather than through an exchange, increasing risk for both parties, and they are not marked to the market daily, meaning that drastic market changes don’t get calculated until the end of the agreement.

Swaps are kinda like futures and options, but they are a little different – and I’m talking strictly about equity swaps here.  The key difference is that swaps, like forwards, are traded between individuals rather than on an exchange.  This means that there is less security for the parties involved.  Also, different brokers tend to offer extremely different swaps due to their own investments.  Maybe they are looking to offload a particular index for awhile either as a hedge for themselves or to manipulate their own portfolio in some way – then they’d be much more likely to swap the rate of that index at a deep discount.  Swaps usually deal with cash flows, rather than actual trading of stocks or indices – instead, they seem to refer to the pricing of an index and a comparative interest rate over a certain period.  Again, not really sure the advantage of one of these, unless you know things I don’t.

So, lastly, indexed funds and ETFs.  I’m lumping these together since they’re basically only different in their  tradablility.  ETFs can be traded throughout the day, where indexed funds use the closing price of the previous day.  basically they are groups of funds in a range of flavor, allowing you to invest in an index or across a broad spectrum of funds.  They are similar to a mutual fund, but more flexible and more liquid (and cheaper).  You don’t pay as many fees on them, but they are also not heavily managed.  If you want to invest in barrels of apples across the board, you’re getting the bad apples as well as the rest of the bunch.  However, if a specific commodity or area starts doing really well or really badly, you can get in and out of these types of funds fast.

To conclude – indexed funds and ETFs, yay!  They rock the personal investor, especially if you are espousing a specific area of investment.   The others, pretty much stay away, until you (or I) do a little more studying up on how to use them as balances and counters to other things you might want to do.

The Ouzel refuses to drown

Last night I went to an on-campus Amnesty screening of Total Denial: Doe vs. UNOCAL. It was interesting as an informational tool, both on Burma and on some recent decisions in the US court system. After the events of last summer and fall in Burma, I had a little more information on the situation, so it was good to see some firsthand information and firsthand footage. The two complaints I really had were related to both of those – the firsthandedness of some of the footage meant that it was extremely shaky camera-wise and often quite blurred, making some events hard to understand. Also, some of the film splicing seemed to not make sense, or was at least not explained. (oh, another part of the burning forest. that’s sad. wait, why do I love the hammock?). But still, I’m glad I went and saw it. There was even a college-age girl who had been in Burma during the Saffron Revolution who offered her thoughts and stayed to answer questions.

I remember stories of even the monks, normally sacred and protected members of the community, being tortured and killed. It impacted me, but I had no real call to action from the events. Also at this time I’d purchased the hardcover book Saving Fish from Drowning by Amy Tan for $6 in the bargain book section of the COOP. I began to read it, unaware that this story too would revolve around Burma.

The title revolves around the story of a monk who went out every day and always came home with a basket of fish. A parishioner asked him how he could eat fish while still holding true to his Buddhist beliefs. The monk explained that all the fish they ate were fish he had found drowning. When he tried to save them, unfortunately they died, and he was forced to eat them. But still, the next day he would try to save some again.

The story itself is even more bizzare – it’s the story of a dead woman following the tour group she was supposed to lead around Asia, as retold through a medium, the record of which is discovered by Amy Tan when she runs into some paranormal society library to escape bad weather. It tells quite a bit about the situation and history of Burma, and the ways in which the country’s government reacts to the spotlight of the outside world. It tells of how people are changed by their experiences and interactions, or not changed; how situations are reflected and refracted and adapted when hit by more direct or different light. But it leaves the reader oddly unsatisfied, despite interest, imagery, and a mostly coherent plot.
You may ask of this story, why all the hocus-pocus? Why all the indirectness? Why the confusing and dithering conclusion of the book? Plenty of authors have made bold statements regarding war-ravaged areas of the world – if Amy Tan was interested in this one, why not take a stand? Why not give us some solutions, or idea on where to begin? Why not inspire us to make a difference?

I think the answer has something to do which what we think a story is supposed to give us. I am reminded of part of the movie The Hours, where Virginia Woolfe says the artist has to die so that everyone else can relearn the value of life. Perhaps Saving Fish From Drowning is something like this. Perhaps it teaches us to value a little more what we have. Perhaps it is not meant to give answers or give hope for future change or even enlighten, but simply to remind us of what we have. I’m not sure I know what to do with that type of story right now – have I lost my ability to empathize? Or am I simply realistic about what change I can accomplish?

The story is not yet over. Nobel Peace Prize winners, including Desmond Tutu, are continuing to take a stand, are continuing to effect peaceful change through trade restrictions and other political international moves. Perhaps this will be enough, and things will change. Perhaps the pressure for change will again grow in support of this region, forcing the country once again into the public eye. I remain tentatively hopeful for the betterment of the world.