Carry Trading: What Is It and How to Profit From It?

This article will describe this long term trading strategy used mostly by institutional investors. We will be highlighting rewards and risks in a simple way to make it possible for you to use it as well.

With carry trading, you can make or lose money even if the price of a currency pair remains static for a long time. It will also help you understand the reasons behind some of the market's moves, especially during volatile and risk-off periods.

What is carry trading?

Even though it is possible to have carry trades in a variety of financial instruments and investments, the basic premise is the same.

Positive carry trading occurs when someone borrows an asset with low interest rates to finance the investment in an asset with a higher return. For example, borrowing money at 2% and then investing the funds in an asset that pays 5%. This is easily done in the Forex market because currencies are traded in pairs, so a positive carry trade is obtained when a trader buys ("carries") a high interest rate currency (for example, AUD) and sells a low interest rate one (such as JPY).

Negative carry trades, as expected, are the opposite of positive carriers strategy. This situation happens when the yield of holding an asset isn't sufficient to cover its financing costs. For example, shorting AUD/JPY.

So how does this type of trading work in Forex?

Because you're holding positions overnight, interest much be debited/credited when the contracts are swapped, depending on the interest rate differential between the two currencies, and whether you're long or short. You always "receive" interest on the currency you own, and "pay" on the currency you sell. Then the differential is debited/credited on the account.

If the currency you bought had a higher interest rate than the other one in the pair, that's a positive carry. The opposite would be the negative carry.

How to make profit with this financial instrument?

The best potential carry trades are obviously the ones where there is a big interest rate differential between the two currencies, but that alone is not enough. For a trade to be profitable, your position should at least maintain its value over time. However, in some cases, if the interest rate differential is very big it may be possible to make money even if the market moves slightly against your position.

Remember this type of trade does not yield good profit in a very short run. Instead, the trade yields good profit with a long term strategy.

Article Source: Here

How to Invest in Stocks: Stocks That Serve As A Portfolio Cushion

For nine years in a row stock market has been bullish. Investors fear that companies are traded at extremely overvalued prices, which will eventually be revealed and end in a market pullback. We've picked three relatively safe stocks that may help to protect you in times of uncertainties.

Procter & Gamble

Procter & Gamble (NYSE: PG) is a stock that guarantees an increase in sales, dividends and cash flow in the long term.

P&G boasts an impressive portfolio of 65 brands falling into 10 categories. 21 of these brands each produce at least $1b in sales every year, and 11 of these 65 brands each generate at least $500 million in sales annually.

The brands are strong, trustworthy and thus recession-resistant. During economic downturns, people will naturally reduce spending, but are unlikely to ignore personal hygiene. The necessity to brush their teeth or wash hair will make people stay loyal to a trusted product lineup.

Another important thing about P&G is the great dividend payouts. They have been increasing for sixty years in a row, and are expected to grow further. The company's dividend yield exceeds 3%.

Ford Motor Company

The automobile manufacturer is valued at about $44.2 billion with positive free cash flow at about $12.8 billion a year. A good value producer, right? Free cash flow can be either repaid to shareholders or reinvested back in the business. If a consistent cash generator is labeled as 'safe', then Ford ( NYSE: F ) is a safe pick.

Ford's price-to-free cash flow (P/FCF) ratio is relatively low - 3.5. Generally, a P/FCF under 5 means that the market undervalues a company which represents excellent opportunities for investors. Regardless of a low price per share now, such a stock may grow in the future to reflect the company's true value.

Additionally, Ford pays rock-solid attractive dividends at 4.8%, its debt is well-structured and its management is time-proven. S&P Global Market Intelligence forecasts that over the following five years the car maker will keep growing at an annual rate of about 16%.

CVS Health

The American healthcare giant needs no introduction. It manages over 9,700 pharmacy stores in the USA, Puerto Rico and Brazil, over 1,100 MinuteClinic locations and retail network of over 68,000 pharmacies.

CVS Health (NYSE: CVS) is a large-scale company. Additionally, it's America's biggest pharmacy benefits manager (PBMs) having processed almost 1.3 billion prescriptions in 2016. The business size matters here, as it enables economies of scale to be achieved and negotiate better prices with drug producers, which eventually results in value increase.

The CVS dividend yield is appealing as well - 2.5%, which is likely to grow further. The company trades at only 12 times expected earnings and the stock is underpriced which will protect an investor in the event of a market crash.

Conclusion

Our three picks are just some pieces of advice. Investing money in stocks requires some diligent research. Browse the stock market players for stable dividends, optimal free cash flow and possibly undervalued prices, and add a safe investment to your portfolio. However, nothing is guaranteed in a market crash environment. Especially, an income from investing in stocks.

Article Source: HERE