04 Apr 2019

From Bitcoin to Futures: Topical Financial Subjects Explained

  • Financial Advice
  • General Interest

Having worked with the medical profession for many years, I find that busy professionals have little time to carry out in-depth research on topics unrelated to their own work. Once they get a chance to look at how their own investments are performing they are often full of questions as to how different financial vehicles work. I’ve outlined four areas that often come up. If there is something you would an explanation on or would like to have discussed please feel free to email it to me.

What Is the S&P 500 Index?

The S&P 500 or Standard & Poor’s 500 Index is a weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. It is often used in discussion to assess how people believe the US economy is doing or about to do.   It gives a much broader view of US company performance than the Dow Jones which only holds 30 stocks.

The S&P 500 gives a higher percentage allocation to companies with the largest market capitalizations (market price x number of shares). The market capitalization of a company is calculated by taking the current stock price and multiplying it by the outstanding shares.

It is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. It includes the FAANG stocks, Facebook,  Amazon, Apple, Netflix, and Google, all of which have a huge influence on its performance.

What is a Futures Contract?

A futures contract is a legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation to buy the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide the underlying asset at the expiration date.

Futures contracts are used by two categories of market participants: hedgers and speculators. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased, while portfolio managers and traders may also make a bet on the price movements of an underlying asset using futures.  For example an oil producer would like to know how much they will get per barrel in three months time, and the refiner would also like to know how much they will pay, giving them both certainty in their cash flows.

Futures are available on many different types of assets. There are futures contracts on stock exchange indexes, commodities, and currencies.

What is Bitcoin?

Bitcoin is a digital currency created in January 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. It offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.

There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.

Bitcoin is one of the first digital currencies to use peer-to-peer technology (blockchain) to facilitate instant payments. Balances are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. A public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. A private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize Bitcoin transmissions.

What is an Annuity?

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one’s assets.  Defined benefit pensions and Social Welfare? are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

At present with Bond yields and interest rates so low Annuity rates tend not to be as attractive as they give quite low income returns for the money invested.