For many investors, BAT stocks are their best chance at multinational exposure. Even more so if they hand-pick their own portfolio. These companies are large enough to garner regular attention from financial news media. Moreover, they’re a focal part of the global economic landscape. 

Here’s a closer look at BAT stocks: the companies that comprise this group and why they’re so popular with investors around the world. 

Meet the Companies in BAT

The term “BAT stocks” is relatively new. Its use amongst investors began in 2015. Furthermore, it marks the rise of Chinese tech stocks and their growing prevalence in investors’ portfolios. And while it’s an acronym that’s likely to change as more Chinese startups creep into consideration, here’s a look at the founding members of the BAT stock group:

• Baidu (NASDAQ: BIDU). This is the largest search engine provider in China. Founded in 2010, it handles over 6 billion search queries per day in China alone. It currently owns 80% of search engine market share in China, amounting to 640 million daily active users. It’s often referred to as China’s Google. 
• Alibaba (NYSE: BABA). Best thought of as a Chinese version of Amazon, Alibaba is an online shopping network that has two distinct facets. The first is a customer-facing portal (Taobao) that operates in much the same way Amazon does. The second is a B2B business portal (Tmall) that makes it easy for companies around the world to access Chinese suppliers and manufacturers. 
• Tencent Holdings (OTCMKTS: TCEHY). Tencent Holdings is best compared to Berkshire Hathaway in terms of its structure. While it owns and operates major services like WeChat and TikTok, it’s best known for its investment activities. It has an active stake in more than 600 companies, including tech companies, video game publishers, digital payments, smartphones and more. 

Some people also include the Chinese company Xiaomi (OTCMKTS: XIACF) in this group, creating the acronym BATX.

These stocks are prolific in their exposure and easily the most valuable public companies in China. They’re also poised to get bigger as Chinese technology continues to expand on a global platform, and more global investors begin to see the potential for investment ROI. 

BAT vs. FAANG

BAT stocks are largely seen as the Chinese equivalent to FAANG stocks in the United States. While the names of the companies have changed since investors coined FAANG, this acronym is still used broadly in financial media to refer to the following mega caps:

• Meta Platforms (Facebook) (NASDAQ: FB)
• Apple (NASDAQ: APPL)
• Amazon (NASDAQ: AMZN)
• Netflix (NASDAQ: NFLX)
• Alphabet (Google) (NASDAQ: GOOG)

There are many similarities between these two groups. Aside from the fact that they’re all mega cap companies, they’re all also technology focused. Moreover, they have significant impact in a social sense, you likely know someone with a Netflix subscription and a TikTok account (Tencent Holdings). Above all, these are the stocks investors use as a measure of market and sector performance. In many ways, BAT stocks are China’s version of FAANG stocks. 

Criticisms of BAT Stocks

While they’re immensely popular with investors around the world, BAT stocks do face substantial criticism. Specifically, there are many institutional funds and investors in the United States that refuse to invest in them.

The primary criticism of BAT stocks is that these companies aren’t held to the same financial reporting transparency as U.S. companies. Investors looking at public financial records can’t always be certain that the figures they’re given accurately represent the company. In fact, the United States Securities and Exchange Commission (SEC) has issued statements warning investors about the efficacy of financial reporting from Chinese companies. 

The other chief criticism of BAT stocks is that they’re subject to interference from the Government of the People’s Republic of China. There have been many instances in the past of government influence on private sector Chinese companies, such as banning products or requiring compliance with new, specific laws. Many investors feel like the potential for government overstepping could affect the integrity of BAT stocks. 

Finally, like FAANG stocks, many investors deem BAT stocks overvalued. Despite obfuscation and confusion in their financial reporting, these stocks tend to trade at extreme multiples beyond earnings and profits. 

Why Invest in BAT stocks?

Despite criticisms, many investors still flock to BAT stocks because of their tremendous potential. Not only are they ubiquitous companies in China, they’re powerful and lucrative enough to stand on the world’s stage with the likes of FAANG stocks. They represent many of the same opportunities of FAANG stocks, just in another country. 

The other reason to invest in BAT stocks is to capitalize where others avoid. While there’s risk associated with investing in Chinese companies, there’s also tremendous upside. Those willing to take a risk on BAT stocks could find themselves reaping profits that others willingly avoided. It’s important to remember that even with obfuscation, there’s clear and present demand for these companies and their services within the most populated country in the world. China often operates as a walled garden, which means it needs its own FAANG stocks. BAT stocks are the answer. 

Should You Invest in BAT Stocks?

If you’re a momentum investor that’s comfortable taking on a healthy amount of risk, BAT stocks offer interesting prospects. These companies are gigantic and powerful, and generate significant returns with products and services that are widely used. There’s speculation about their financial accounting and transparency, but it’s a known risk. For those who believe in companies that grow too big to fail and too ubiquitous to fall out of favor, BAT stocks are worth the investment.

The post What are BAT Stocks? appeared first on Investment U.

While the name sounds a little over-the-top, the benefits of a mega backdoor Roth IRA are hard to overstate. These plans not only remove the Roth contribution barrier for high-income earners. They also allow people to contribute even more of their income to a tax-advantaged account, above and beyond IRS limits. 

Here’s a closer look at mega backdoor Roth IRAs: how they work, how to set one up and why they’re a popular tool for tax-free investment growth. 

A Look at Contribution Limits

As mentioned, there are limits on how you can save for retirement using a Roth IRA. For starters, your income needs to stay below specific high-earner thresholds: under $144,000 if you file individual taxes each year and under $214,000 if you’re married and filing jointly. Taxpayers exceeding these levels aren’t eligible to make Roth contributions. 

If you are eligible to make contributions to a Roth IRA based on your income, you’re still capped at how much you can set aside. Here are the IRS limits for contributions in 2022:

• Individuals can contribute $6,000 to a Roth IRA annually
• If you’re over 50, you can make another $1,000 in catch-up contributions

To understand how the mega backdoor Roth IRA strategy works, it’s also important to consider 401(k) contribution limits. If you’re under 59½, you’re capped at $20,500. Yet, the federal limit for total dollars contributed to a 401(k) in 2022 is $61,000. Herein lies the crux of the mega backdoor Roth IRA strategy.

How the Mega Backdoor Roth IRA Works

If you’re capped at $20,500 in 401(k) contributions, but the federal limit for total dollar contributions is $61,000, it creates a major contribution gap between what you put away for retirement each year and what you’re allowed to put away. This opens the door for a mega backdoor Roth IRA.

The mega backdoor Roth IRA works by transferring after-tax contributions to a 401(k) into a Roth IRA using in-service distributions. Individuals can contribute up to the difference between regular contributions to their 401(k). This includes employer match and the federal limit of $61,000. For example, if there’s no employer match and no after-tax contribution restrictions by the plan, an individual could feasibly save another $40,500 to their Roth IRA each year!

Not able to make in-service distributions? No worries! You can execute this same strategy within an employer-sponsored 401(k). Moreover, you will not have to remove money from the account. 

Requirements for a Mega Backdoor Roth IRA

While the practice of creating a mega backdoor Roth IRA is simple enough, there are a few important criteria that dictate whether it’s possible. Much of it depends on the plan structure of your employer’s 401(k) program:

1. You must work for a company that offers a 401(k) program
2. The 401(k) program must allow for after-tax contributions
3. 401(k) program must also allow for in-plan Roth conversions
4. The 401(k) program must allow for in-service distributions 

This is where some individuals run into trouble. For example, the employer’s 401(k) plan may put a cap on the after-tax contributions an employee can make in a given year. They might limit contributions to 10% of the employee’s salary or cap contributions at a dollar figure like $20,000. This effectively limits the growth potential of the mega backdoor Roth IRA, since it sets the contribution limit short of the federal maximum. 

Potential Problems with a Mega Backdoor Roth IRA

As you might imagine, creating a mega backdoor Roth IRA comes with a bevy of tax considerations. If investors aren’t careful, they could find themselves with an accidental tax bill. It’s important to work with a qualified CPA or tax professional to set up both the contribution conversion process and in-service distributions, to avoid any confusion and to avoid taxable events. This includes making sure that you’re not claiming after-tax contributions as deductions on your annual income taxes! 

When to Use the Mega Backdoor Strategy

The mega backdoor Roth IRA strategy is for individuals who have already maxed out their 401(k) contributions, and who want to set aside more funds for retirement in a tax-advantaged account. Typically, this means high-net-wealth individuals and high-income earners who may otherwise find themselves disqualified from Roth accounts. 

Like a regular backdoor strategy, it’s a great way to get more after-tax dollars into investments that will grow tax-free over the life of the investment. Individuals planning far into the future can use the mega backdoor Roth IRA strategy to boost their accumulation power by orders of magnitude. 

Capitalize on Federal 401(k) Contribution Limits

A mega backdoor Roth IRA isn’t just a way to circumvent the restrictions associated with Roth IRA rules—it’s also a way to massively expand the potential savings associated with them. Instead of a $6,000 maximum contribution limit each year, you’ll have the power to set aside up to $40,500 in 2022! This is a massive upgrade in tax-free retirement savings. When you consider the power of compound interest on these savings, it’s clear that few investment strategies offer such prolific potential.

The post What is a Mega Backdoor Roth IRA? appeared first on Investment U.

Bear call spreads allow speculative traders to bet on the poor performance of a stock, without the inherent risk that comes from outright shorting it. Stacking call options makes it possible to hedge risk, without giving up too much in potential returns. It’s a way to speculate about poor price performance without actually exposing yourself to it. 

Here’s a look at bear call spreads: how they work, their benefits and successful strategies for deploying them. 

An Introduction to Vertical Spreads

Before we can talk about bear call spreads, it’s important to have a fundamental understanding of vertical option spreads. The concept of a vertical spread is simple, and involves two options. Here’s how one works.

A trader buys an option for ABC Company at $X, while at the same time selling an option for the same company at a different strike price, $Y. This strategy hedges against losses by limiting the amount of risk the trader exposes themselves to. Buying an option creates the potential for return; writing an option protects against loss. 

Vertical spreads can be bullish or bearish, depending on the scattering of puts and calls. Bull vertical spreads profit when the price of the underlying security rises; bear vertical spreads profit when the security’s price falls. 

How a Bear Call Spread Works

A bear call spread is simply a vertical call spread that bets on poor price performance. It’s sometimes called a credit spread, because the trader receives a net credit when setting up the strategy. To facilitate it, the trader sells a call option, while simultaneously purchasing another one for the same security at a higher strike price. Both options have the same expiration date. 

In this strategy, the trader profits on the “short” call strike price and limits their losses on the “long” call strike price. Best case scenario? They reap the full ROI of the sold call while the purchased call expires out of the money. Worst case scenario? They lose on the sold call but limit their losses thanks to the purchased call. Here’s an example:

ABC Company currently trades for $55. Harold buys a call option with a strike price of $50 at a premium of $0.25 ($25). Then, he writes a call option with a strike price of $40 for $1.50 ($150). If ABC Company closes lower than $40, Harold will realize a maximum profit of $125—the difference of the two contracts. If it closes between $40 and $50, profit will reduce the closer it gets to $40. If it closes above $50, Harold will lose the difference between the two strike prices ($1000), less the sum of the contracts ($175): $825. 

As you can see, a bear call spread still embodies plenty of risk—any short position is inherently risky. The purpose of the bear call spread is to reduce the total amount of risk and potential loss associated with speculating on bearish outcomes. 

Bear Call Spreads vs. Bear Put Spreads

Another bearish vertical spread is the bear put spread. This strategy works similar to a bear call spread, only with put options. To execute one, an investor would purchase a put option, while writing another put option with a lower strike price on the same stock, with the same expiration date. The process simply reverses the strikes that a bearish investor buys and sells their options at. This strategy is also known as a debit spread because it results in a net outflow of money to set it up. 

When to Use a Bear Call Spread

A bear put spread is generally recognized as a “modestly bearish” options trading strategy. That means it’s best deployed when there’s market volatility that’s generally trending down. Downtrend over several trading periods and forward-looking negative sentiments open the door for bearish vertical options. 

Many traders will also use bear call spreads at the behest of technical trading patterns. Descending triangles, bearish flags, bearish pennants and other down-trending chart patterns are prime indicators that bearish sentiment will continue. Two black gapping, three black crows and other bearish candlestick patterns can also signal an opportunity to deploy a bear call spread. Traders can use technical analysis to set price targets, as well as entry and exit points in the future. This paves the way for choosing call options that fit within the parameters of the pattern. 

As a hedging tool, many traders also use bear call spreads to safeguard against volatility when buying or selling the underlying security. Bearish call spreads can help protect against price depreciation. If you own the security and the stock price falls, you hedge and profit from a well-timed bear call spread. 

Be Careful with Bearish Options

While not as risky as shorting stocks outright, bearish options are nevertheless risky. Vertical options stacking like a bear call spread can mitigate some of that risk, but you’re still betting on poor performance. The market can swiftly punish those who don’t safeguard themselves. Use bear call spreads in conjunction with smart trading practices and sound technical analysis to minimize losses and maximize profitability when buying and writing call options.

The post What is a Bear Call Spread? appeared first on Investment U.

Despite the questionable name, a backdoor Roth IRA isn’t illegal, though it is heavily scrutinized. There have actually been attempts to ban the practice in recent years. That said, it remains an open and viable solution to making Roth contributions to an Individual Retirement Account, even if you’re otherwise disqualified from doing so. 

Here’s a closer look at backdoor Roth IRAs: how they work, how to take advantage of them and some of the pitfalls and obstacles to setting one up. 

The Benefits of a Roth IRA

To understand why anyone would go through the trouble of setting up a backdoor Roth IRA, it’s important to remember the tremendous benefits associated with Roth contributions. No matter how much money you make each year, few investment vehicles compare to the benefits of a Roth account:

• Pre-tax funds grow tax-free for the life of the investment
• Easier to access early withdrawals without incurring penalties
• No required minimum distributions (RMDs) for original account holders
• Inherited funds from a Roth IRA are tax free

Thanks to the power of compounding interest, Roth IRA contributions have exponential potential to grow your wealth over the years. It’s an extremely valuable investing strategy for anyone.

Roth IRA Annual Income Limits

While any individual is free to open and contribute to a Traditional IRA, there are restrictions on who can contribute to a Roth IRA to take advantage of its tax benefits. Specifically, there are income limits set by the IRS. Individuals need to stay below thresholds for their Modified Adjusted Gross Income (MAGI) to make Roth contributions:

• If you’re filing as a single individual, your MAGI must be under $144,000 (2022)
• If you’re married and filing jointly, your MAGI must be under $214,000 (2022)

Earners exceeding these limits can’t make Roth contributions outright. They can, however, explore two strategies for establishing a backdoor Roth IRA.

The Backdoor Roth IRA

A backdoor Roth IRA is effectively a strategy for making traditional IRA contributions, then converting them into Roth contributions. It’s a simple, straightforward strategy that many high-income earners use to capitalize on the benefits of tax-free investment growth. Here’s a look at the two approaches for backdoor Roth IRA creation.

I. The Conversion Strategy

This strategy is the most straightforward. It involves opening a traditional IRA and fully funding it. Then, individuals can convert this traditional IRA to a Roth IRA. It’s important that you don’t claim any deduction on your taxes for the contribution to the traditional IRA, since it will no longer exist when the time comes to file taxes. Only the Roth account will remain, which is subject to tax-free growth. 

II. The Two-Step Contribution Strategy

If you need to make incremental contributions, the two-step strategy is best for setting up a backdoor Roth IRA. In this process, an individual makes a non-deductible contribution to their IRA or 401(k) each month, then converts that contribution to Roth. This incremental approach is called “chunking” and helps earners make sure they fall into the right tax bracket based on their income and total deductions for the year. 

It’s important to note that both of these strategies involve a hands-on approach to monitoring contributions and making conversions. Many individuals choose to work with an accounting professional who understands backdoor Roth IRAs and the steps involved in creating them. 

Beware the IRS Aggregation Rule

If you’re dealing with a mixed IRA, one that includes rollover money and new non-deductible contributions, you’ll need to beware the IRS aggregation rule. Here’s a brief example of what we’re talking about:

If you have $94,000 in a pre-tax rollover IRA and add $6,000 in non-deductible contributions, you’ll have $100,000 total, in aggregate. If you convert that $6,000 to a Roth contribution, the IRS will treat it as though you just converted 6% of your total pre-tax IRA funds. The result? A massive tax bill!

To avoid triggering an unfair tax bill, make sure you move all funds over to your current IRA before making a backdoor contribution. This will nullify the IRA aggregation rule and protect all future backdoor contributions from triggering a taxable event. 

Beware the Step-Transaction Doctrine

It’s important to also consider the Step-Transaction Doctrine, which might lump contribution and conversion into a single step. If you’re barred from making Roth contributions outright due to income levels, Step-Transaction Doctrine will trigger a tax bill and IRS scrutiny. Therefore, many financial advisors recommend waiting between one and six months between the initial contribution and the Roth conversion. 

Backdoors are Legal, Yet Scrutinized

As mentioned, backdoor Roth IRAs are legal, and they’re a great way for high-income individuals to reap the same tax-advantaged benefits as lower-income earners. However, they fall into a grey area of personal finance: a loophole. As a result, it’s important to make sure you’re following each step of the backdoor process within the framework of IRS established guidelines. Forgetting to convert a contribution or exceeding contribution limits could trigger massive tax penalties.

It’s best to work with a personal finance expert when setting up a backdoor Roth IRA, namely someone who has experience with high-net-worth individuals or high-income strategies.

The post What is a Backdoor Roth IRA? appeared first on Investment U.

These funds exist at the intersection of risk and reward. They offer equal parts of both, usually catering to investors who want a hands-off solution to investing. And these funds are often market-beating and offer some variability in terms of portfolio composition. Yet, they’re unlikely to generate explosive growth like more aggressive portfolios might.

Let’s take a closer look at balanced funds: how they work, what defines them and what to expect if you invest in one.

Balanced Fund Explained

Balanced funds have this title because, unlike more aggressive portfolios, they have both equity and bond components. Typically, this type of fund will hold about 50% to 70% of its assets in stocks and the remaining 30% to 50% in bonds. The heavier this ratio skews in favor of investment grade bonds, the more conservative the portfolio is.

These funds thrive because they have both growth potential and risk mitigation safeguards. Both sides of the equation are important. Here’s how they work together:

The Equity Component

Stock investments in a balanced fund serve two important functions. First, they preserve the purchasing power of the portfolio. That is to say, they grow at a more rapid pace than inflation. Second, stocks power the accumulation potential of the portfolio, to grow the vested balance at a targeted rate. 

The Bond Component

The bond allocation within a balanced portfolio also serves two purposes. First, it generates income through the coupon payments from AAA corporate bonds. Second, to safeguard the portfolio against volatility that might impact equity focused portfolios to a more significant degree. 

It’s important to note that while all balanced funds will include equity and bond components, there’s broad variability in how both allocations look. For example, an aggressive fund may have 70% equities invested in emerging markets, backed by 30% high-coupon callable bonds. Meanwhile, a conservative fund may focus on Dividend Aristocrat holdings and treasuries in a 50/50 allocation. 

Target Date Funds

What’s the difference between balanced funds and target date funds? The answer is not a lot. Target date funds are a type of balanced fund, with portfolios specifically designed to generate growth over a predetermined time period. These funds then rebalance every few years to become more and more conservative the closer they get to the target date. 

The Benefits

Balanced funds are extremely easy for many people to invest in because there’s very little downside in a strictly balanced approach. Here’s a look at some of the reasons these funds are among the most common investment vehicles for passive investors:

• There’s very little trading action within funds, which keeps them predictable
• Hands-off management means low-to-no expense ratio
• Diversification mitigates risk, while optimizing wealth accumulation
• Balanced funds allow investors to withdraw, without upselling asset allocation
• Historically safe performance even in bear markets and during corrections
• Wide spread across sectors and securities mitigates volatility

In short, balanced funds make it easy for those with little-to-no investing experience to feel good about putting their money into a single investment vehicle. As a result, these funds tend to attract everyone from new investors to those investing through retirement accounts. 

The Drawbacks

Despite their ability to intrinsically balance risk and reward, there are still some drawbacks to balanced funds. Here’s a look at why balanced funds aren’t right for everyone, and where they can fall short in comparison to other investments:

• Fixed allocations mean that the fund won’t rebalance to capitalize on market forces
• These funds tend to generate a healthy amount of income, which is taxable
• Most balanced funds tie themselves to large companies that simply mirror major indices
• While the returns of a balanced fund are safe, they’re often limited by risk aversion

The key takeaway about these funds is that they’re not well-suited for exponential accumulation. Instead, they’re typically best for set-it-and-forget-it investors and those later into their investing time horizon. Younger investors can afford to be more aggressive. 

Balanced Fund Examples

Interested in looking at a few of these funds, to see what you can expect from one? There are a broad number of high-performing funds out there, including these popular favorites:

• Vanguard Balanced Index Fund Admiral Shares (VBIAX)
• Fidelity Balanced Fund (FBALX)
• Schwab Balanced Fund (SWOBX)
• T. Rowe Price Personal Strategies Income (PRSIX)
• John Hancock Balanced Fund (SVBIX)

Again, there are a broad range of balanced products out there, each slightly different than the last. As you seek to balance risk and reward, explore funds that skew more aggressive or conservative within the confines of a 50/50 or 70/30 allocation. 

Risk Control is the Name of the Game

Ultimately, balanced funds play on an investor’s desire to mitigate risk. While more aggressive investors will chase high returns with growth funds, balanced investors choose to safeguard themselves against volatility for a more predictable return. 

If you’re the type of investor who wants to play it safe, a balanced allocation is the way to go. Your risk and returns will stick closer to the median, which will likely provide you with better peace of mind. And there are lots of great opportunities to diversify…

The post What is a Balanced Fund? appeared first on Investment U.

In capital markets, a bear hug refers to a passive-aggressive acquisition strategy one company can use to acquire another. While it comes at a significant premium, executed correctly, a bear hug can circumvent more hostile forms of takeover. 

Here’s a closer look at bear hugs as an M&A technique. Moreover, how companies use them as a form of coercion to make target corporations more amenable to acquisition, even if they’re not looking to get acquired. 

Breaking Down the Bear Hug

The concept of a bear hug is simple. It involves offering to buy a company’s shares at a significant acquisition premium, well-above the current market price. For example, if a company’s stock price is $16, a bear hug might involve buying outstanding shares for $24: a 50% premium. It’s an offer that’s quite literally too good to pass up. 

Often, it’s completely unsolicited. There are two reasons behind a seemingly out-of-the-blue bear hug: 

• First, the acquiring company doesn’t want to give its target any time to gain leverage. If a company feels prospected for acquisition, it might undertake maneuvers to temporarily inflate its share price, thus driving up the cost of acquisition. 
• Second, the offer itself suggests that the target company wouldn’t be amenable to acquisition. Offering to buy shares at an undeniable premium means forgoing acquisition negotiations—something an acquirer willingly does if they don’t anticipate them to be fruitful.

As mentioned, this is a very passive-aggressive acquisition strategy. In fact, it forgoes any negotiations and simply forces the target company to make a choice. Accept the offer and accept acquisition, or deny an extremely lucrative offer?

A Duty to Return Value to Shareholders

What happens if you refuse an offer that’s too good to pass up? If you’re a public company, it could result in a lawsuit from shareholders. That’s the devious nature of the bear hug! The board of directors at a public company is legally obligated to act in the best interest of shareholders. Turning away an offer to buy shares at a significant premium could be construed as the opposite of that duty, and may upset shareholders. 

Bear hugs put the board of directors in a very precarious situation. Unless they can prove that the offer to buy share at a premium is in some way detrimental to the future success of the company, they risk losing shareholder confidence. Yet, if they accept the offer, it effectively means signing an acquisition agreement. In most cases, the company delivering the bear hug gets what it wants. 

A Passive-Aggressive Takeover

In the world of mergers and acquisitions, there are hostile and amicable takeovers. Bear hugs exist somewhere in-between. The pervasive tactic of a bear hug puts it firmly in the territory of a hostile action; yet, it results in significant benefit for the target company and its shareholders. Moreover, the unsolicited nature of bear hugs can make them feel either hostile or amicable. For example, a struggling company may see it as a lifeline, while an up-and-coming company might see it as an underhanded ploy. 

Bear hugs don’t happen all too often in the public markets—largely because they tend to be an expensive endeavor. Moreover, many companies don’t want the reputation that comes with passive-aggressive takeovers. Most acquiring companies strive to create synergy before, during and after an acquisition: a prospect that’s difficult when there’s a bear hug involved. 

Candidates for a Bear Hug

Bear hugs usually involve large companies acquiring smaller ones. The expense associated with this type of acquisition strategy means the acquirer needs to have significant financial leverage over the target company. For example, a large cap company valued at $80 billion might use a bear hug to acquire a small startup with proprietary technology that’s only valued at $250 million. 

Speaking of startups, small up-and-coming companies are commonly prospected by large and mega cap companies. These startups can often fend off M&A activity by small- and mid-cap companies, but succumb to larger companies that seek to acquire them for their technology or human capital. 

How to Fight a Bear Hug

Bear hugs can seem like a no-win situation for the target company, but there are ways to thwart them. For one, if the offer per share isn’t significant enough, the company can reject it without fear of upsetting shareholders. Or, if the board of directors can convince shareholders of malintent by the acquiring company, they can avoid a lawsuit. Finally, if the company can inflate its share value ahead of the impending offer, it could become too expensive for the acquiring company to target with a bear hug. 

Acquisition is a Game of Strategy

In the public markets, corporations will do everything they can to strengthen their position. For example, this includes making aggressive plays for companies they wish to acquire. If they don’t think a target will respond receptively, there are tactics they can use to coerce an acquisition. The bear hug is one such tactic. And while it’s expensive and sometimes viewed as underhanded, it’s nonetheless effective, in a Marlon Brando Godfather sort of way. You just need to “make them an offer they can’t refuse.”

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Barrier options are a group of exotic stock options. They’re governed by different rules than standard options, and have more variables to consider. If you’re a math-oriented trader, barrier options also present more of a challenge in calculating payoff—you’ll need to get familiar with binomial trees!

If you’re an experienced trader looking to dabble in more complex options, here’s what you should know about barrier options. 

A Closer Look at Barrier Options

Traders refer to barrier options by the type of option they’re buying and the expected performance that will land them in the money. These are “knock in” and “knock out” options:

Knock-In Options

These options come into existence once a stock price passes the barrier threshold. It remains in existence so long as the option remains open. For example, if a trader buys a $55 knock-in option for ABC Company with a strike price of $50, the trader can’t exercise that option until the price breaks the $55 threshold. Knock-in options are bullish options. 

Knock-Out Options

These options start out real, but cease to exist of the stock price of a security crosses the barrier threshold. It remains in existence so long as it doesn’t cross the price. For example, if a trader buys a $55 knock-out option for ABC Company with a strike price of $50, that option is exercisable until the price breaks the $55 threshold. Knock-out options are bearish.

There are also KIKO options, which include both knock-in and knock-out barriers. 

As you might imagine, knock-out options tend to be less expensive than knock-in options, since they’re a known quantity at the point they’re issued. Conversely, knock-in options can be more lucrative, since they cease to exist until the stock price crosses the barrier. 

Outcomes Associated with Barrier Options

There are four outcomes for barrier options, which depend on the nature of the option. Again, this relies on whether you’ve purchased a knock-in or knock-out option. Here’s how to land in the money.  

• Up and out. Bearish traders make money on a knock-out option that stays below the barrier price. If the price exceeds the threshold set on a knock-out option, it becomes “up and out” of the money, ceasing to exist. 
• Up and in. If the stock price increases above the level of a knock-in option, that option becomes real. The trader is “up and in” the money, so long as the price remains above the barrier at the time of expiration (exercise). 
• Down and out. Bullish traders make money on a knock-out option that stays above the barrier price. If the price falls below the threshold set on a knock-out option, it becomes “down and out” of the money, ceasing to exist.
• Down and in. If the stock price decreases below the level of a knock-in option, that option becomes real. The trader is “down and in” the money, so long as the price remains below the barrier at the time of expiration (exercise).

The key in each of these outcomes is the barrier. Where traditional call and put options are price-dependent, barrier options are range-dependent. The barrier marks the validity of the option, while the stock price represents its potential ROI. As such, these options carry more risk and complexity when compared to American and European options. 

Provisions to Consider

There are additional provisions that can change the behavior of a barrier option, making them even more complicated. Here’s a look at some of the ways traders can both hedge risk and increase reward using barrier option provisions:

• Rebates. Some barrier options come with rebates to make them more enticing to investors. These are options that either cost more or carry more risk, but are offset with a rebate to protect traders. Rebates are a percentage of the option’s premium that’s paid to the buyer even if the option expires worthless. 
• Parisians. This provision specifies an amount of time that the underlying stock price needs to remain beyond the barrier for the option to become valid. For example, the barrier for a knock-in option might be $55, with a Parisian provision of two days. For the option to become valid, the stock price needs to stay above $55 for two days. 
• Turbo warrants. Popular in Hong Kong, turbo warrants are a specific type of down-and-out provision The strike price is the same as the barrier. Turbo warrants are highly leveraged, yet benefit from capped risk due to the correlated strike and barrier prices.  

Provisions tend to add to the already complex nature of barrier options. As a result, they’re usually reserved for highly speculative investors and those with a deep understanding of derivatives. 

Complex, But Lucrative Options

All the complexity and risk of barrier options boils down to tremendous ROI opportunity for investors. Those who can factor in barriers and provisions successfully stand to benefit tremendously from accurate predictions of security price behaviors. Moreover, they’re also a good way to hedge risk in a portfolio filled with aggressive securities. 

Always remember that when it comes to barrier options, the barrier represents a criterion for execution. It doesn’t matter what your strike price is if the option doesn’t meet the criteria associated with a knock-in or knock-out barrier.

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This is a complex question. For starters, the stock market doesn’t return the same amount each year. Your return on investment also depends on what type of securities you invest in. There are also considerations for how long you’re invested. All told, every person’s return will be different. This is why it’s so important to have an average to benchmark against. 

Here’s a closer look at the historical return of the stock market, and what you can expect in terms of a true average return on stocks. 

Historical Return on Investment

The stock market as we know it today was established in 1792, but analysts have really only tracked market returns for the last 100 years or so. The aggregate average return over that time? A nice round 10%. 

What does a historical 10% actually mean? It means that if you invested in an S&P index fund, you could reasonably expect about 10% returns each year in a vacuum. Now, as we all know, the stock market doesn’t operate in a vacuum. So, what this 10% historical return actually represents is an expected return. Some years, the market may fall short. Other years, it’s likely to exceed a 10% return. Over a long enough time period, however, expect about 10% return on investment. 

Consider Incremental Return Over Time

The 10% stock market average is a figure accounted over roughly a century. However, if you look at a stock chart over the past 100 years, you’ll see a pattern of exponential growth. The market has, in fact, grown at a more rapid pace in recent years. This makes calculating average return on stocks a bit trickier. 

To get a feel for a true average in the current market, it’s best to look at historical return over specific increments of time. For example, looking backward from 2021:

• The year-to-date average return of the market is ~23%.
• Five-year average return on stocks is roughly ~15%.
• 10-year average return on stocks is about ~14%.

As you can see, the greater the time period, the closer to the mean the average return becomes. This has to do with the natural ebb and flow of the market over time. For example, the 100-year historical average factors in years like 1929, when the market lost roughly half its value. However, it also factors in years like 1995, when the market returned almost 37% to shareholders. 

By looking at incremental stretches of time and the average return over these years, investors can get a better example of how recent averages stack up against historical ones. 

Security Type Affects Total Return

Another important factor to remember about a 10% average is that it’s a broad market average. It accounts for total market return. This is an accurate benchmark if you invest in a broad-market index fund. However, if you invest in a specific sector or type of security, you’ll need a different benchmark.

For example, growth stocks tend to live up to their name, returning many multiples of growth over a few years. Take a company like Block (NYSE: SQ), which returned 1,091% to shareholders from 2017-2021. Stack that up against a defensive investment in a Dividend Aristocrat like 3M (NYSE: MMM), which has actually lost about 2% over the same time period. Both stocks are darlings on Wall Street, but for different reasons. And, their returns show up in very different ways. 

To understand how the type of security affects the return you can expect, you’ll need to calculate Total Return (TR), which factors in all forms of capital gains, including dividends. 

Track the Real Rate of Return

One of the best practices for any investor is to track their current rate of return against the market’s current performance. If you’re indexed, the numbers should be the same, indicating that you’re pacing the market. For those seeking to beat the market, consider a few indicators:

• Has your portfolio as a whole outgained the market, or is it just a few stocks?
• Have your gains outpaced the market or are they sporadic and recent?
• What is your TR vs. the market’s current rate of return?
• What percentage above the market’s return is your portfolio?

Often, investors simply stack up their portfolio’s unrealized gains vs. the market’s growth. This, unfortunately, doesn’t account for several important factors. To get a clear comparison, you need to account for Real Rate of Return, as well as TR. Factor in inflation, taxes, fees and any other costs that still need to come out of your unrealized gains. Then stack it up against the market. 

If the market averages 10% return and your portfolio holds steady at 12%, you might think you’re beating the market. But, if taxes and fees trim 4%, you’re actually lagging the average. Track the Real Rate of Return and the Total Rate of Return to see if you’re truly beating the average. 

Remember, the Market is Dynamic

10% is a nice round number that anyone can understand as they seek to pace or beat the average return on stocks. But it’s important to look at real numbers to get a sense of how well the market is actually performing. If the market is down 4% and you’re up 5%, you’re still beating the average, if only for that day, week or month. Monitor your portfolio’s performance against contextual averages to truly track its performance and your return on investment.

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