Your Stop Loss Is Critical When Day Trading Futures
Stop loss orders are great insurance policies that cost you nothing and can save you a fortune. They are used to sell or buy at a specified price and greatly reduce the risk you take when you buy or sell a futures contract. Stop loss orders will automatically execute when the price specified is hit, and can take the emotion out of a buy or sell decision by setting a cap on the amount you are willing to lose in a trade that has gone against you. Stop loss orders don't guarantee against losses but they drastically reduce risk by limiting potential losses.
With my system the only stop I use is what I call an emergency stop. My stop loss is automatically made when I make my initial trade at two points. It is only for emergencies, like news I wasn't expecting, or anything that will make the market gyrate drastically and I never enter a trade without it. However I never expect to use this stop loss to exit my trade. I simply will not let the market move against my trade entry more than a tick or two. If I find that I exited the trade too soon I just reenter the trade but if the trade continues to move against me I have saved the loss of one or two points per. contract. Usually I will only have to exit and reenter a trade one time if I have entered a trade to early. This means I only lose a small commission per contract instead of fifty dollars per point- per contract, when trading the e-mini, and taking what many consider
a normal loss.
Trading the futures markets is a challenging but profitable opportunity for educated and experienced traders. However it is not easy, without a great trading system, and even traders with years of experience still incur losses. Finding a good trading system and trading in small increments with an emergency stop loss in place will allow those relatively new to futures trading to be successful. Once you have learned the skills you need to trade with consistent profits it will not be a problem but until that time it is absolutely critical that you do not take unnecessary losses. If you are new to trading futures you should never trade until you have a mentor with a trading system that gives you consistent profits.
A great way to protect profits if you have not established an exit strategy is the trailing stop. The trailing stop loss is an order that is entered once you enter your trade. Your stop price moves at a specified distance behind the market price. Trailing stops are raised when a price rises, in a long trade, but will remain stationary when it falls. Trailing will only occur when the market price moves in favor of the trade to which the order is attached. The trailing stop order is similar to the stop loss order, but you use it to protect a profit, as opposed to protect against losses. Trailing stops are designed to lock in profit levels and they literally trail along your increasing profit and adjust your stop loss levels accordingly. Often traders will find tailing stops confusing because they change them while in an open position. This is not a wise practice, and should be avoided. It is an indication that you are not sure of your trade and if one is not sure of a trade it would be wise to exit immediately. Trailing stops are ideal because they allow for further profit potential to enter due to momentum, while limiting risk. Trailing stops are an important component to a trader's risk management unless they have an exit strategy in their system that might serve them better.
The market order is the simplest and quickest way to get your order filled to enter a trade or to use as a stop loss. A market order is a trade executed at the current market price and they are often used to exit trades to ensure that the order has the best possible chance of execution. A market order to exit is simply an order used to exit the trade immediately. Be aware that in a fast-changing market sometimes there is a disparity between the price when the market order is given and the actual price when it is filled.
Stop loss orders are used to exit trades, and are always used to limit the amount of loss, but some day traders use them as their only exit, while other traders use them as a backup exit only. If one uses them as their exit they will risk more than is necessary and might want to find a better system to trade. Stop loss orders allow you to define your risks before you open a position and in my opinion that risk should be minimal. Stop loss orders are one of the easiest ways to increase your chances of survival when trading commodities and futures and they are a powerful risk-management tool.
Original pictures take http://www.netotrade.com/learn/trading-basics/infographics/tips-for-traders/?A=677 site
Any investor wishes to make money in HYIP. Finding a successful high yield investment program is not enough to maximize your high yield investments. Certainly it is not easy to maximize your return on investment from best HYIP. The main point of this article is the strategies how to find fruitful and prosperous HYIP and to maximize your interests from this HYIP.
Before we start to discuss the strategies, we should find an answer to the question what is best HYIP. Well, it is difficult to answer because there are various possibilities. For some investors the fruitful HYIP is HYIP with huge daily interest, for other HYIPers the fruitful HYIP is HYIP with instantly withdraw. Undoubtedly, all these investors are right.
I guess than each investor wishes the fruitful HYIP which is online for a long time, not just several weeks or a few months. Moreover, each investor wishes that fruitful HYIPs must have fast support. Some HYIPs reply to your questions within 1-2 days and, of course, it is too long! I am a potential investor and I need to get an answer immediately!
Certainly, you can find many answers in FAQ section of a great number of HYIP web sites but sometimes you need information which you can not find there. If HYIP has phone support so it is very good, you can always phone them and get answers to your questions.
According to many experienced online investors, one of the most important things for the fruitful HYIP is fast withdraws. No one wants to wait 1 or 2 days till they receive payment. Certainly, everyone wants to get money within few hours. Fruitful HYIPs have to pay fast.
All investors agree with me that HYIP security is significant in online investments. Of course, the fruitful and prosperous HYIP must have the server protection to guarantee that users' accounts are safe and secure. Real fruitful HYIPs spend a lot of money for hosting and advertising as well as Ddos protection and security.
If HYIP has Prolexic Ddos protection it is a really good sign of seriousness of this high yield investment program because according to online security data, Prolexic Ddos protection costs more than $2000 per month.
Daily interests are the subject of many hot discussions on online HYIP forums because investors have very different opinions. Some people prefer 10-20% daily and other like 1-2% daily. Undoubtedly, the prosperous HYIP invests money into Forex trading and to other contemporary industries. So if HYIP earn money in Forex they can not offer 10-20%. It is impossible and each investor knows that.
Now the time is to discuss ways how to maximize your HYIP. After having found the fruitful and prosperous HYIP, the key to having successful investments is to build a safe, diversified portfolio and to extract your own money as quickly as possible. This will limit risk to your capital because if one programme closes, you will still have the others to fall back on.
Before investing in any programme, you should do a little research on it. I mean you should remember the main features of prosperous HYIP, namely daily interests of no more than 2-3%, excellent support, high qualified web site design of the HYIP company and best users' account protection.
Besides, HYIP scripts are easily to get a hold of and this makes it easier for fraudsters and scammers to operate. One of the things to look for is the programmer's reputation if they are paying consistently.
When the investor makes any online investment, his aim is to extract his money as quickly as possible. This is because the investor wants to be able to invest using the profit he made from the high yield investment programme to protect his own capital. For example, a typical investment could be $100 then, after 30 days, the investor would extract his own money and re-invest the profits so that he is making risk that he uses other people's money.
Another meaningful thing is that the investor will need to make use of referral systems to explode his profits from his investments. This is when the investor recommends someone to the programme and receives commission for it. This usually creates residual income for the investor which means him the opportunity to invest more of other people's money to make even more cash.
This article will help you find fruitful and prosperous HYIP and maximize your high yield investments. To grab my collection of golden rules successful HYIP investing visit
Original pictures take https://www.btcethereum.com/blog/2017/11/22/wealth-managers-being-bombarded-with-investor-requests-to-buy-bitcoin/ site
With Property Investment You can Retire Young And Live Off Your Profits.
In the fast-paced, exemplary world today, money matters more than most other things. This is the era of LPG (Liberalization, Privatization, and Globalization.) People are interested in exponential growth of money rather than slow growth. So, instead of saving all your income and using it for your post-retirement life, you can invest your income in a judicious manner to multiply it and earn much more from it. Investment properties are a hot option for that kind of a plan. Investment property is a property that is not occupied by the owner, usually purchased specifically to generate profit through rental income or capital gains. There are lots of convincing reasons for you to realize the benefits of investment properties.
Property investment is where you make a small investment into a property, typically one still being built, which is known as an off plan property and then go on to rent it out to get good dividends, and then once raised in price, you can sell it to gain a profit or to purchase more property.
No investment today offers the stability and simplicity along with the excellent returns offered by investing in property. The stock market can offer high returns, but it is a very volatile and unsteady place. This is especially true for non-professionals and there are so many external factors that can effect your financial investment. Not to mention the fact that the major stock markets have generally been underperforming and property investment stands head and shoulders above other forms of investments. There are a lot of options when it comes to investing in property, as you can choose the option of investing in Commercial property such as industrial/offices, hotels, apartments, retail shops and the list goes on. It can be a residential property; you can buy it and sell it at a higher rate for capital gain or rent it for regular dividends.
Property is now the wise investors weapon of choice. No other investment allows you to purchase with other people's money (Equity partners) and then pay this back with other people's money (the rental income from tenants). If you own a property, you can release equity against that property. Although there is no law that states that your property will increase in value year on year, it is accepted that a well maintained property in a reasonable area will appreciate in value.
Here are some points which are sure to make you flabbergasted about the profits of property investment.
50% of individuals mentioned on The Times Rich List made their money through investing in Property.
A property worth just 4000 30 years ago would be today worth around 225,000
Equities or Stocks can be volatile, as with the .com crash, whereas a property is historically stable.
It is well documented that on average the value of a property doubles every 7 years.
Property investments provide equity growth and they maintain good cash flow and not to mention, the capital appreciation is higher than any other type of investment. According to figures from FPD Savills Research, the total net return including capital appreciation on a prime central London property was 18.6% last year. In the UK, the total net return was 16.3% and in Spain it was even a stronger performance during last year.
The benefit of investing in a property is that you can remove the emotion from the purchase and look at the property as an investment vehicle. This opens a lot of options for you. You can utilize your re-assignable contract option and sell at a substantial profit prior to completion, carrying no redemption penalty or you can take the "buy to let" situation and generate a good reliable rental income, including substantial capital appreciation.
Original pictures take http://infographicjournal.com/how-to-buy-investment-property/ site
The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 1997, to Professor Robert C. Merton, Harvard University, and to Professor Myron S. Scholes, Stanford University, jointly. The prize was awarded for a new method to determine the value of derivatives.
This sounds like a trifle achievement - but it is not. It touches upon the very heart of the science of Economics: the concept of Risk. Risk reflects the effect on the value of an asset where there is an option to change it (the value) in the future.
We could be talking about a physical assets or a non-tangible asset, such as a contract between two parties. An asset is also an investment, an insurance policy, a bank guarantee and any other form of contingent liability, corporate or not.
Scholes himself said that his formula is good for any situation involving a contract whose value depends on the (uncertain) future value of an asset.
The discipline of risk management is relatively old. As early as 200 years ago households and firms were able to defray their risk and to maintain a level of risk acceptable to them by redistributing risks towards other agents who were willing and able to assume them. In the financial markets this is done by using derivative securities options, futures and others. Futures and forwards hedge against future (potential - all risks are potentials) risks. These are contracts which promise a future delivery of a certain item at a certain price no later than a given date. Firms can thus sell their future production (agricultural produce, minerals) in advance at the futures market specific to their goods. The risk of future price movements is re-allocated, this way, from the producer or manufacturer to the buyer of the contract. Options are designed to hedge against one-sided risks; they represent the right, but not the obligation, to buy or sell something at a pre-determined price in the future. An importer that has to make a large payment in a foreign currency can suffer large losses due to a future depreciation of his domestic currency. He can avoid these losses by buying call options for the foreign currency on the market for foreign currency options (and, obviously, pay the correct price for them).
Fischer Black, Robert Merton and Myron Scholes developed a method of correctly pricing derivatives. Their work in the early 1970s proposed a solution to a crucial problem in financing theory: what is the best (=correctly or minimally priced) way of dealing with financial risk. It was this solution which brought about the rapid growth of markets for derivatives in the last two decades. Fischer Black died in August 1995, in his early fifties. Had he lived longer, he most definitely would have shared the Nobel Prize.
Black, Merton and Scholes can be applied to a number of economic contracts and decisions which can be construed as options. Any investment may provide opportunities (options) to expand into new markets in the future. Their methodology can be used to value things as diverse as investments, insurance policies and guarantees.
Valuing Financial Options
One of the earliest efforts to determine the value of stock options was made by Louis Bachelier in his Ph.D. thesis at the Sorbonne in 1900. His formula was based on unrealistic assumptions such as a zero interest rate and negative share prices.
Still, scholars like Case Sprenkle, James Boness and Paul Samuelson used his formula. They introduced several now universally accepted assumptions: that stock prices are normally distributed (which guarantees that share prices are positive), a non-zero (negative or positive) interest rate, the risk aversion of investors, the existence of a risk premium (on top of the risk-free interest rate). In 1964, Boness came up with a formula which was very similar to the Black-Scholes formula. Yet, it still incorporated compensation for the risk associated with a stock through an unknown interest rate.
Prior to 1973, people discounted (capitalized) the expected value of a stock option at expiration. They used arbitrary risk premiums in the discounting process. The risk premium represented the volatility of the underlying stock.
In other words, it represented the chances to find the price of the stock within a given range of prices on expiration. It did not represent the investors' risk aversion, something which is impossible to observe in reality.
The Black and Scholes Formula
The revolution brought about by Merton, Black and Scholes was recognizing that it is not necessary to use any risk premium when valuing an option because it is already included in the price of the stock. In 1973 Fischer Black and Myron S. Scholes published the famous option pricing Black and Scholes formula. Merton extended it in 1973.
The idea was simple: a formula for option valuation should determine exactly how the value of the option depends on the current share price (professionally called the "delta" of the option). A delta of 1 means that a $1 increase or decrease in the price of the share is translated to a $1 identical movement in the price of the option.
An investor that holds the share and wants to protect himself against the changes in its price can eliminate the risk by selling (writing) options as the number of shares he owns. If the share price increases, the investor will make a profit on the shares which will be identical to the losses on the options. The seller of an option incurs losses when the share price goes up, because he has to pay money to the people who bought it or give to them the shares at a price that is lower than the market price - the strike price of the option. The reverse is true for decreases in the share price. Yet, the money received by the investor from the buyers of the options that he sold is invested. Altogether, the investor should receive a yield equivalent to the yield on risk free investments (for instance, treasury bills).
Changes in the share price and drawing nearer to the maturity (expiration) date of the option changes the delta of the option. The investor has to change the portfolio of his investments (shares, sold options and the money received from the option buyers) to account for this changing delta.
This is the first unrealistic assumption of Black, Merton and Scholes: that the investor can trade continuously without any transaction costs (though others amended the formula later).
According to their formula, the value of a call option is given by the difference between the expected share price and the expected cost if the option is exercised. The value of the option is higher, the higher the current share price, the higher the volatility of the share price (as measured by its standard deviation), the higher the risk-free interest rate, the longer the time to maturity, the lower the strike price, and the higher the probability that the option will be exercised.
All the parameters in the equation are observable except the volatility , which has to be estimated from market data. If the price of the call option is known, the formula can be used to solve for the market's estimate of the share volatility.
Merton contributed to this revolutionary thinking by saying that to evaluate stock options, the market does not need to be in equilibrium. It is sufficient that no arbitrage opportunities will arise (namely, that the market will price the share and the option correctly). So, Merton was not afraid to include a fluctuating (stochastic) interest rate in HIS treatment of the Black and Scholes formula.
His much more flexible approach also fitted more complex types of options (known as synthetic options - created by buying or selling two unrelated securities).
Theory and Practice
The Nobel laureates succeeded to solve a problem more than 70 years old.
But their contribution had both theoretical and practical importance. It assisted in solving many economic problems, to price derivatives and to valuation in other areas. Their method has been used to determine the value of currency options, interest rate options, options on futures, and so on.
Today, we no longer use the original formula. The interest rate in modern theories is stochastic, the volatility of the share price varies stochastically over time, prices develop in jumps, transaction costs are taken into account and prices can be controlled (e.g. currencies are restricted to move inside bands in many countries).
Specific Applications of the Formula: Corporate Liabilities
A share can be thought of as an option on the firm. If the value of the firm is lower than the value of its maturing debt, the shareholders have the right, but not the obligation, to repay the loans. We can, therefore, use the Black and Scholes to value shares, even when are not traded. Shares are liabilities of the firm and all other liabilities can be treated the same way.
In financial contract theory the methodology has been used to design optimal financial contracts, taking into account various aspects of bankruptcy law.
Investment evaluation Flexibility is a key factor in a successful choice between investments. Let us take a surprising example: equipment differs in its flexibility - some equipment can be deactivated and reactivated at will (as the market price of the product fluctuates), uses different sources of energy with varying relative prices (example: the relative prices of oil versus electricity), etc. This kind of equipment is really an option: to operate or to shut down, to use oil or electricity).
The Black and Scholes formula could help make the right decision.
Guarantees and Insurance Contracts
Insurance policies and financial (and non financial) guarantees can be evaluated using option-pricing theory. Insurance against the non-payment of a debt security is equivalent to a put option on the debt security with a strike price that is equal to the nominal value of the security. A real put option would provide its holder with the right to sell the debt security if its value declines below the strike price.
Put differently, the put option owner has the possibility to limit his losses.
Option contracts are, indeed, a kind of insurance contracts and the two markets are competing.
Complete Markets
Merton (1977) extend the dynamic theory of financial markets. In the 1950s, Kenneth Arrow and Gerard Debreu (both Nobel Prize winners) demonstrated that individuals, households and firms can abolish their risk: if there exist as many independent securities as there are future states of the world (a quite large number). Merton proved that far fewer financial instruments are sufficient to eliminate risk, even when the number of future states is very large.
Practical Importance
Option contracts began to be traded on the Chicago Board Options Exchange (CBOE) in April 1973, one month before the formula was published.
It was only in 1975 that traders had begun applying it - using programmed calculators. Thousands of traders and investors use the formula daily in markets throughout the world. In many countries, it is mandatory by law to use the formula to price stock warrants and options. In Israel, the formula must be included and explained in every public offering prospectus.
Today, we cannot conceive of the financial world without the formula.
Investment portfolio managers use put options to hedge against a decline in share prices. Companies use derivative instruments to fight currency, interest rates and other financial risks. Banks and other financial institutions use it to price (even to characterize) new products, offer customized financial solutions and instruments to their clients and to minimize their own risks.
Some Other Scientific Contributions
The work of Merton and Scholes was not confined to inventing the formula.
Merton analysed individual consumption and investment decisions in continuous time. He generalized an important asset pricing model called the CAPM and gave it a dynamic form. He applied option pricing formulas in different fields.
He is most known for deriving a formula which allows stock price movements to be discontinuous.
Scholes studied the effect of dividends on share prices and estimated the risks associated with the share which are not specific to it. He is a great guru of the efficient marketplace ("The Invisible Hand of the Market").
Original pictures take http://doomcycle.com/tag/frazetta-friday/page/2/ site
Gold. Rare, beautiful, and unique. Treasured as a store of value for thousands of years, it is an important and secure asset. It has maintained its long term value, is not directly affected by the economic policies of individual countries and doesn't depend on a 'promise to pay'.
Completely free of credit risk, although it bears a market risk gold has always been a secure refuge in unsettled times. Its safe haven attributes attract wise investors. Gold has proved itself to be an effective way to manage wealth.
For at least 200 years the price of gold has kept pace with inflation. Another important reason to invest in gold is its consistent delivery within a portfolio of assets. Its performance tends to move independently of other investments and of key economic indicators. Even a small weighting of gold in an investment portfolio can help reduce overall risk.
Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class.
Portfolios that contain gold are generally more robust and better able to cope with market ncertainties than those that don't. Adding gold to a portfolio introduces an entirely different class of asset.
Gold is unusual because it is both a commodity and a monetary asset. It is an 'effective diversifier' because its performance tends to move independently of other investments and key economic indicators.
Studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.
Gold improves the stability and predictability of returns. It is not correlated with other assets because the gold price is not driven by the same factors that drive the performance of other assets. Gold is also significantly less volatile than practically all equity indices.
The value of gold, in terms of real goods and services that it can buy,has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined.
Traditionally, access to the gold market has been through: investment in physical gold, usually as gold coins or small bars,or, for larger quantities, by way of the over the counter market; gold futures and options; gold mining equities, often packaged in gold-oriented mutual funds.
Original pictures take http://www.netotrade.com/learn/trading-basics/infographics/tips-for-traders/?A=677 site
The communication innovations we have around us today like the internet, financial newspapers, and special interest television channels focused on investing like CNBC are a high speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks. You have to remember that the news media are constantly competing to survive against other stuff you can watch. If they dont always sound like they know exactly what is going on then you wont watch their presentations. If you dont tune into their show then their ratings go down. If their ratings go down they get fired and their show gets cancelled.
This means that financial journalists are in the business of finding great stories and sounding like authorities no matter what. The stock market is a great place for them to dig up news scoops to feed to the public. They dont really check their facts very well and sometimes not at all. This means that if some insider wants to feed you a line of bull manure then all they have to do is maintain good connections with financial journalists, sponsor an investment show, or outright buy an investing TV channel like Jack Welch the CEO of GE did when he set up CNBC. What a great way for inside executives to control the flow of news information to the public then to actually own one of the only financial news channelsbut not so great for you!
These journalists also kick up the fire by bringing in so-called experts to talk about each side of some topic that real experts would not consider important.
This just makes it all the more confusing for the public to understand what is important when buying or selling a stock. Shows on CNBC like Closing Bell, Kudlow & Company, and Mad Money do nothing but confuse and misdirect the attention of most individual investors in the public. Even worse this means that the financial news media allows overpriced stocks to be recommended through analysts in the inside web that inside executives are dumping on the public because they are trying to get out. This actually happened at the top of the bull market in 1999. For a great historical description of what happened read Maggie Mahars book entitled Bull.
The famous Yale University Economist, Prof. Bob Shiller, Ph.D. is particularly harsh on the media in his book Irrational Exuberance. Dr. Shiller is one the economists that Alan Greenspan respects most and where he got the term Irrational Exuberance. He portrays the media as sound-bite-driven where superficial opinions are preferred over in-depth analyses. I agree whole heartedly with him and contend that it is also done just because the industry would rather have the retail investor confused and emotionally pliable to get you to buy and sell when they want with total disregard for your best interests!
People who had invested their life savings in the stock market were ripped off in the stock market because the financial news media and analysts were hyping up what a great buy stocks were at the very top of the market in 1999 and 2000. At the same time inside corporate executives were selling out everything they had. What is amazing is that our federal government in the form of the Security Exchange Commission never did a thing about it. There was never a blanket case taken or an outcry that almost all of the inside executives had somehow magically sold out of the market six months before the market crashed.
Here is the valuable tip I want you to consider: when you are a beginner investor it is important that you DO NOT WATCH THE FINANCIAL NEWS OR READ THE FINANCIAL NEWSPAPERS! Dont let the stock market industry lead you around by the nose like livestock to the slaughter house. Dont listen to what they want you to listen to. You should focus on learning what is important in the stock market and the mass media will only confuse you until you have educated yourself.
Recommended reading:
1. Mahar, M. Bull! A History of the Boom, 1929-1999 (New York, HarperBusiness , 2003)
2. Shiller, R., Irrational Exhuberance, (New York, Broadway Books, 2000)
Original pictures take http://doomcycle.com/tag/frazetta-friday/page/2/ site
Cyprus as an investment is good news these days for capital appreciation. Since joining the European Union in May 2004 the island has opened up to investors and seen prices go up by 30% with high demand for apartments in the Southern part of the island. There is a company to help people to invest in Cyprus using either a UK SIPPS with assistance from the UK government. Advice is required from a financial advisor before this route is used. Use the services of a professional organisation like Living Cyprus.com find them at http://www.living-cyprus.com for free advice and property for sale in Cyprus. Take a look and enjoy.
Andrew Walters is an acknowledged expert on pensions and in particular can provide advice on the suitability of using a Self Invested Personal Pension Plan (SIPP) to fund the purchase of a property in Cyprus.This is an area that we have had a lot of interest in, but reliable advice and information is hard to come by and so a talk with Andrew is definitely to be recommended, if this is something that you have heard about and would like to find out more.
For starters, if this is a type of transaction that you have not heard of or had not previously considered, here is a brief guide provided to us by Andrew on this topic.
We would like to stress that in providing this information, we are not providing an opinion on this funding option nor should this guide be considered as an alternative to independent financial advice which may be sought in the UK via Andrew at EYFS Ltd or any other authorised firm in the UK.
SIPPS another funding option for you?
As I write this in November 2005, we are in one regime with the expectation of a new regime beginning in April 2006. This article is written from the current perspective but makes reference, where relevant, to the new regime which will be effective from April 2006.
This article is based upon my understanding of current and proposed legislation. It is not exhaustive nor should it be assumed that any particular funding option is going to be suitable for you based only on the reading of this article. No liability is accepted for any actual or consequential loss arising from the use of this article as the basis of making a financial commitment without also seeking independent financial advice as an individual.
What is a SIPP?
A SIPP is a Personal Pension Plan with a self investment option. Which means that in addition to the usual choice of insurance company funds you may be offered via your personal pension plan you may also invest in a wide range of assets of your own choosing such as : individual shares or probably of more interest in this context property.
Who can have one?
To some degree anyone who has pension monies in the UK, albeit if future funding is a requirement the definition changes to anyone who is eligible to take out a personal pension in the UK which is just about everybody who is resident in the UK!
What is often overlooked is that two or more individuals can, in the right circumstances team up to use their SIPP plans to buy a property or other asset together.
This does of course have implications, but could in the right circumstances increase your funding potential and enable you to spread the inherent investment risk across a number of people.
Why havent I heard about them before?
SIPPs have been around for more than ten years but have traditionally been the province of serious investors or advisers managing large funds on a discretionary basis.
They have previously had limited appeal to smaller investors as the additional charges can tend to dilute any potential gains for smaller investors provided by the increased investment horizon. This is not to conclude that they are terribly expensive just that the charging structure is more complex. Its a horse with a course!
The reason that most people will not have come across them is that whilst previously, property purchase has always been possible via a SIPP, it has always been limited to commercial property within strict guidelines (and in the UK) a property with any aspect of residentiality was specifically excluded.
Another tricky limitation was the exclusion of any purchases from yourself, anyone in your family or a connected 3rd party this was always a bind because most of the best investment opportunities that arose in my experience fell into this category!
The Government intends, according to its indications, to lift these significant barriers from April 2006 and from then on residential properties for occupation or let in the UK or abroad will be potential investments for a SIPP and the rules on purchases from connected persons is to be relaxed - hence the considerable interest!
How do they work?
Usually a SIPP is established on a deferred basis as an add on to a personal pension plan that is the personal pension plan is established with a view to self investment in the near or more distant future and as such starts out like any other personal pension plan.
[Stakeholder pensions have not embraced SIPP functions and so if your pension fund is currently in one of these plans and you wish to self invest, a transfer may be necessary. This should not be contemplated without taking independent financial advice.]
Self investment via a SIPP is made through a trustee (usually an employee of the insurance company or a scheme administrator).
In brief, you complete a form detailing the proposed investment and the trustee has to approve it. Normally, when buying authorised unit trusts, investment trusts or securities this just amounts to a rubber stamping procedure.
However, when something more individual is proposed like a property the trustee needs to satisfy himself that the proposed investment is allowable (within Inland Revenue rules) is permissible (within the scheme rules) and is suitable (satisfies the basic needs of an investment). In practice, this is usually quite straightforward since it only makes sense to propose investments that work at all of these levels.
Once the trustee is satisfied then the investment/purchase may proceed subject to all of the usual hurdles such as a valuation, conveyance of legal title, stamp duty etc.
If a scheme is already established, then a property transaction through a SIPP should not take significantly longer to complete. Where there is no SIPP established or the transaction is reliant on funds being transferred in from other schemes it is likely that the transaction may be significantly protracted and you would be well advised not to promise your vendor any completion dates that are too optimistic.
If the purchase is being made completely from existing funds the trustee will ensure that payment is made under your guidance. If the scheme needs to borrow money to fund part of the purchase which it may do then the trustee will need to apply for funds, this can usually be from a lender of your choosing. The point to note is that it is the SIPP that is borrowing the money and not you so the transaction must satisfy the lenders criteria in its own right.
SIPPs can currently borrow up to 3 times the scheme assets. For example, if the scheme has 100 000 in assets it may borrow (subject to approval) potentially another 300 000, which means that you could go shopping with 400 000!
Unfortunately, under current rules you cannot buy residential property and by April 2006 (when you can) the scheme borrowing facility is to be capped at a more realistic 50% of scheme assets. In the same scenario as above this would reduce your shopping capacity to 150 000.
Once completed the property becomes a scheme asset administered by the trustee. It is very important that you understand the implication of this. The property is not yours it belongs to the scheme. It can be sold but the proceeds return to the scheme for re-investment. You cannot sell the property and personally pocket any of the proceeds.
With all significant financial commitments you are well advised to take independent financial advice prior to commitment funds and this is definitely the case with this type of transaction.
Advantages
In the UK, these schemes are fantastically tax efficient.
Tax relief on new contributions to eligible investors at at least the basic rate and at their highest UK rate of tax if this 40%.
Virtually tax free growth on investments whilst within the scheme.
No capital gains tax upon disposal of assets and rents on leases / lets are paid into the plan tax free.
Any interest on scheme borrowings will usually be relieved too.
Normally no inheritance tax is payable on scheme assets either
But, perhaps the biggest advantage is that it introduces a source of funds your existing pension plans - to potentially enable you to buy your property (from April 2006) which have not previously been available to you.
Whats more, new substantially increased contribution limits mean that money can be accumulated faster in schemes than at present.
and Disadvantages?
The property is not your asset it cannot therefore be considered as collateral for any other borrowings, nor can you sell it and pocket the proceeds.
Future capital gains and rental income will be potentially taxable in Cyprus (but not the UK) exposure will vary depending on how you choose to hold the property and the figures involved. IHT doesnt exist in Cyprus though fortunately. It is not therefore likely to be the most tax efficient investment that you could hold in a UK pension but still could be worthwhile.
Your choice of property may prove to be a poor investment as a result of any of the following: low capital growth or even a slump in property values, Poor rental income
If you stay in the property or reside in the property you will be expected to pay the going rate but at least you are paying it back to your own pension!
At some point, unless any property subsequently becomes a relatively insignificant part of your pension fund, you will have to sell the property to derive an income as this is, it should be remembered, the primary purpose of any pension plan! It may not, therefore, be advisable that you purchase a property late in life that you intend to live in until your death via a SIPP.
How do I find out More?
Any IFA in the UK should know what a SIPP is, but few will know the intricacies of the plan and in particular how it can be suitably harnessed for the potential purchase of a property abroad. Using my links in Cyprus, I am making it my business to put together robust and reliable means to make this possible via developers and lawyers and so I believe that I may be well worthy of consideration for assisting you with this type of transaction back in the UK.
Original pictures take http://cyprusprop.com/advanced-search/p_id/16367 site
