An Embryonic Deal

Taking Up A Rights Issue

I have 2029 shares in Lloyds Banking Group PLC (code lloy), a FTSE100 company, and so am offered the chance to buy that number of shares in a rights issue, at thirtyseven pence per share.

I was at my accountant's office on Friday week when the message from my broker came in. (My accountant handles my shares). The price on the market was fiftyseven pence. It seemed like a no-brainer, buy and sell on the same day and make a profit, but it was not that simple, it never, or rarely, is. (I have not done this type of deal before). I asked to see the share on a graph, and said I would take up the offer.

I spoke to my broker on the phone, and he said the date of the rights issue is Monday, fourteenth December next. I told him to buy and sell on the same day, and, if the price is climbing, to wait for it to go up further, he said they always would. He said I would need to send eight hundred and fifty euros, to cover the cost of the shares (750) plus his company's transaction fee (100). He emailed bank account details.

I went to my bank and found that to transfer the money would cost twentyfive euros to do it within two days or nothing or fifty cents in four days. I chose the free option.

At home, I looked at the graph on Sharescope and found the share had been trading somewhat flat for the last few days. I did some calculations.

If the market price moved down to .37, I would lose 100 euros, the transaction cost. If it stayed at or around .57 I would make 1156 gross, 1056 net, a profit of 206. Break-even (no loss or profit) = 850/2029, =.41/share.

My brother somewhat got cold feet, and, after another phone call, I found that the last time I could cancel the deal, at no cost to me, is market closing time on Tuesday next, eighth December. The date of the transaction is Monday fourteenth next.

My accountant said the broker consensus is that people should take up the rights issue, and such consensus will probably push the price up. He confirmed that the price usually moves up on the day of issue.

For every penny the share price goes above 41 pence, I make 2029 pence, that is 20.29 euros. The lowest price of the last thirty days was 52.47 pence, apart from recent figures. The price has now been moving up for two days. It moved within a range of .51 to .61 since the offer was made, well above my break-even point. The last time it went as low as .41 was in the middle of July last, since then it has always been above that figure.

Trading is a matter of getting all your ducks in a row, you must understand everything about what you are doing, inside out and backwards. Why would I not take up this issue and hold the shares? First, because I have meagre resources. Secondly, traders say an investment is a trade that went wrong.

I think it was the excellent book on mathematics, Against The Gods, that said that if you have a chance to make a sure hundred or a possibility of making two hundred or nothing, take the hundred.

I am not certain that I will make a profit on this deal, or even that I will take it up, I have until the end of Tuesday to decide that, but I want to know everything about it before I act. I hope there is nothing I have overlooked. If the deal succeeds, capital gains tax will be payable at the end of the year, but only if my capital gain for the year exceeds the threshold.

This deal, if taken, will not be a gamble, but a calculated risk.

Below are prices (pence) on LLOY since the offer was made:

2009..... .....Open..... High..... Low.......Close..... Gross (low * 2029)..... Net Profit (Gross-850)
Fri 27 Nov 56.00..... 61.52.... 54.62.... 58.60..... 1108.24 (euros)........... 258 euros
Mon 30 ".. 56.68..... 58.87.... 54.59.... 55.15...... 1107.63......................... 257
Tue 1 Dec. 55.50..... 56.35.... 53.38.... 54.14...... 1083.08........................ 233
Wed 2 " ....54.50...... 54.56.... 51.11..... 53.10...... 1037.02........................ 187
Thu 3 " ......54.21...... 57.06.... 54.21.... 55.45...... 1099.92........................ 249
Fri 4 "........ 54.76...... 56.95.... 52.20... 56.00...... 1059.13......................... 209
Mon 7 "
Tue 8 " ENTER - take deal or leave it, last day to cancel transaction, day 1 of trade if taken
Wed 9 "
Thu 10 "
Fri 11 "
Mon 14 " EXIT - date of deal, buy and sell on this day, close deal.

The net profit figures shown above are calculated by multiplying the low of the day by the number of shares (and subtracting the cost), but I would hope that my broker would sell at or near the day high on the exit date, 14th December next.

Here's Hoping,

David ****

PS This is partially written in response to A Certain Person who said anyone can tell about a deal they made that turned out successfully. Mainly, I write what is on my mind.
Two other thoughts occur to me.
1. In spread betting, there is no transaction fee and no tax to pay on winnings. That is why it is growing in popularity.
2. Longer term trades have the characteristics of a slow-motion day trade.

Losing At Spread Betting

I am a loser, overall, when it comes to spread betting. (This is by way of response to A Certain Person's comment on my last post on this subject. He made the mistake of mistaking the example for the thing exemplified, I was explaining the mechanics by way of example).

Broadly speaking, I have lost maybe one thousand or one thousand five hundred euros in this racket.

Why did I lose? I jumped in with the big boys when I was a small fish. I took a position on Apple (a share price at the time at probably one hundred and twenty dollars) and it went against me. That position could have either made or lost a lot of money, relatively speaking. Everything is relative, in this case to the size of one's trading capital. I lost on some other shares as well. I also made profits, but my losses outweighed my gains.

Have I learned anything from my mistakes? I hope so. First, I ceased to trade. Second, I commenced paper trading (no money involved), taking theoretical positions on shares within my price range, in which the loss, hopefully, could not be more than fifty to a hundred euros per bet, fifty preferred.

What is the result? I have been winning on paper for the last three months.

There are pitfalls in trading in the markets. A share may "gap", upwards or downwards, that is jump in price way above or below yesterday's closing price and, if it goes against you, going right past your stop loss, in which case the spread betting company closes your bet at the first available opportunity, and you have lost more than you bargained for. This does not happen very often, and, of course, it can work in your favour as well.

You will always have losing trades, and if you can't take losses (emotionally or financially) you should not trade. You must be Mr. Supercool.

There is such a thing as a "guaranteed stop loss", which means that if the price moves beyond your stop loss, you are stopped out at the stop loss price. Beginners are advised to use these, but there is some difficulty in obtaining them.

Spread betting companies make their money on the spread, that is, the difference between the buying price and the selling price, that is why it is called spread betting. When you place an up bet, it is called "buying" and, to get out of the trade (if it has not been stopped out), you "sell", and vice versa for a down bet. There are only a few points in the difference between the buying and selling price, increasing with the price of the instrument (for example, a share), and, for a guaranteed stop loss, the spread is greater. Some of the companies advertise themselves as having "tight spreads".

My brother said that in my last piece on this subject I did not mention filters. Of course, you always "filter" the market using your intelligence to find bets which meet your criteria. However, the Sharescope program, which I use has computerised filters, which may be tailor made to suit your approach.

There are over four thousand shares on the New York Stock Exchange (NYSE), and you don't want to look at them all. I have various filters in play, both for up bets and down bets, resulting in my being presented with sometimes between, say, ten and twenty graphs to look at. Of course, I don't bet on them all, I use my eyes to look at the graph, for example to see whether there is much momentum behind the movement I am looking at. If not, it is a no-no, as far a I am concerned. This, itself, is probably capable of being filtered by the program. Learning is a continuous process of refinement. Whenever you introduce a new filter, the result is a smaller number of items for you to choose from. I am still learning, it never stops.

How do you learn? Go to the best sources. There are many good books on the subject of trading, get the best.

As regards stop losses and where to place them, there are many approaches. Choose the one that suits you best, that you understand and seems to work for you. Too close, and you get stopped out on a jiggle in the price. Some people use a factor such as twenty per cent below the price. An ideal book would list every approach to every aspect of trading and the new trader would pick the ones that suit him best.

I have only ever done one day trade, as mentioned in my last piece, day trading does not suit me, you have to stay looking at your computer screen until the trade ends. It is somewhat frenetic. You choose the type of trading you do according to your personality type. My trades theoretically last up to about twenty days in duration, but have never lasted that long.

A trade is exited in one of two ways, either you are stopped out, the price hits your stop loss, in which case you may have made or lost money, because you may have moved your stop loss in the direction of the bet and gone beyond the break-even point, or you sell out. Why would you sell out? Again, this is done according to your philosophical approach. If the price goes flat for three days, I get out, or if it seems to be going nowhere, which is more or less the same thing.

The trend following system is not perfect, nothing is, and does, of course deliver some false signals. Over the last three months, on paper I have lost on more than fifty per cent of my bets but my profits have outweighed my losses by a good margin. Cut your losses and let your profits run.

People should test their systems on paper or on computer or both before they enter the market but should remember that when real money is at stake they may act differently. Women have been said to be good traders because they are process oriented, they ask themselves "What is the right thing to do now, what is the rule" whereas men, on average, are goal oriented and, if so, think of the money they might make or lose, and make a decision based on emotion, a wrong decision. And women are said to be the emotional gender. You must be process oriented, with a rule for every occasion.

Practice makes perfect, the rules become second nature. You instantly know what to do in every eventuality.

There are only four states to the market, up, down, sideways and volatile, the latter two being signals to get out fast or not to get in. You must be responsive and adaptable, adapting to suit market conditions. Go with the flow, as the hippies used to say.

Make money slowly.

As you win, you increase your trading capital. If your trading capital increases by ten per cent, you increase your bet size by ten per cent.

"The most powerful force in the universe is compound interest" - Albert Einstein.

I hope this may clear up some confusion about trend following and spread betting.

As with everything else, dedication is required in order to succeed.

David (where are those asterisks?)

Self Mastery And Spread Betting

I do a little spread betting, currently only on paper. I use technical trading methods (trend following), looking for patterns on share graphs, as distinct from fundamental methods, where a person studies price-earnings ratios and a lot else besides.

Both methods work, when properly applied, that is, they are profitable.

Someone wrote a book called A Random Walk Down Wall Street, claiming share prices were completely random and there is no profitable methodology.

Warren Buffet, the richest man in the world, uses fundamental methods, and successful technical traders say 'Look at my bank balance'.

Technical trading is simpler, there are less parameters, that is why I chose it.

Basically, the books say, there are three requirements (a three legged stool), method, money management and discipline. The third rule is, follow the rules.

As to method, A speaker described two hundred different methods, all of which work. They are all, as it were, the same only different, involving patterns of movement. Someone said all successful traders develop their own style, a methodology that suits them and works for them and that they understand. A person may do as I am doing now, test out their chosen methodology in the real world, in real time, on real data, and, when satisfied, enter the real world of spread betting.

Tests have been done over ten or more years of data.

I use a standard computer with the Sharescope program in the version which gives daily closing prices (there is also a real time version for day traders). This costs about three hundred pounds a year for the data feed, giving the share prices. The program also provides graphs with moving average lines and other features, and is easy to use.

Bets may be placed on line with a spread betting firm with a few key entries and mouse clicks.
You don't even need a computer. A man in his seventies uses only the Financial Times closing prices and telephones in his bets.

Money management basically means never risking more that ten or fifteen per cent of your trading capital at any one time and never risking more than you can afford to lose.
The minimum bet sizes are approximately fifty cents a point (a movement of one cent) on American shares. Bets may also be placed on currencies, commodities (oil, etc.) and indices, both in an upward and downward direction. Stop losses should be placed, and may be moved as often as you like, at no cost to you.

I took a day trade on Google some time ago, betting fifty cents a point, using the spreadbetting company's own real time graph, and made a profit of one hundred and three euros within about an hour. From looking at graphs, I knew that Google sometimes moves up or down about twenty dollars in a day (two thousand points), and it appeared to be shooting up. I placed a bet, with my first stop loss set back at a position where I would lose about twenty euros if the share moved down (I was betting upwards). I moved my stop loss up every few minutes as the price rose, staying a bit behind the price to allow for fluctuations, moving it probably fifteen times in all. Shortly after entering the trade, the bet was at break even, then it moved into what is called 'locked in profit', i.e., if the price moved backwards it would have hit my stop loss, the bet would have ended, and I would make the points gain multiplied by the bet per point (fifty cents). Eventually, when I had the final stop loss placed, the price moved backwards, hitting my stop loss, and the bet was over.

I would not normally bet on Google because, at over five hundred dollars a share, the amount I could lose would be too great.

On paper, for testing purposes, I limit myself to shares having a value between ten and fifty dollars.

It has been said that there is a continual turnover of traders, not just in spreadbetting. They come in, lose all their money, then new ones come in. Only ten per cent of traders are successful and stay the course.

What differentiates them? One word: discipline.

And the failures? Where do they go wrong? A myriad of ways. Greed is a big factor. They have a few wins, then abandon money management, then everything goes wrong.
Or egotism comes into play, they think their success is due to themself, not the system, abandon the system, and that is the end.

In trading, you will, of course, always have losses, no system is perfect, otherwise everyone would do it, but most people would still probably lose because they would not follow the rules.

Keep your losses small (use stop losses and bets-per-point appropriate to your budget) and let your profits ride, that is the maxim. You can lose on seventy per cent of your bets and still make a profit.

It is the same in every walk of life, in every occupation. So many people know the rules, so few follow them. Learning the rules is basically simple, mastering the self is the hard part. Look at the great snooker players, they are masters of self control.

I do my virtual trading with my brother, it takes an hour or less per day. One day my brother told a friend of ours that we had ten bets out and everyone of them won. "Were you using the system?" our friend asked. Of course we were, otherwise we might as well stick pins in paper to pick our bets. We had similar success on at least one other occasion. By and large, over the last few months, we are winning on paper. In reality, I would limit myself to three bets out at any one time, but for practice purposes we limit the number to ten.

Someone said about investing in real shares, your portfolio should not include more than ten shares, because otherwise it is too hard to keep track of them.

Regarding technical trading, one of the traders whose books I bought said he could teach it to an eleven year old and he would out-perform most fund managers.

Have you ever asked yourself why there are so few successful people in any walk of life? The magic ingredient is dedication, putting purpose first, putting what you are doing first, which means putting the self aside. Humility wins, egotism fails. (The meek shall inherit the earth).

The true masters are masters of self-mastery. Or to put it another way, in mastering a subject, you master yourself.

The rules are simple, following them is the hard part.

I am not sure whether I will actually enter the real world of spread betting, though I have accounts with two spread betting firms, I prefer writing.