Saturday, November 21, 2009
SEC proposes new rules for credit rating agencies
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WASHINGTON - Regulators have proposed rules to stem conflicts of interest and provide more transparency for credit rating companies. They also proposed banning "flash orders," which give some traders a split-second edge in buying or selling stocks.
The changes, which are open to public comment for 60 days, could eventually be adopted by the agency, possibly with revisions.
The credit rating industry was widely faulted for its role in the subprime mortgage debacle and the financial crisis. The five members of the Securities and Exchange Commission voted at a public meeting Thursday to propose rules that could reshape an industry dominated by three firms: Standard & Poor's, Moody's Investors Service and Fitch Ratings. Their practices would be opened wider to public view and subject to some restraints.
Regulators say they also hope to spur more competition in the rating industry, with possibly new entrants - as well as the other seven existing agencies — challenging the dominant firms. One of the SEC's proposals is intended to bar companies from "shopping" for favorable ratings of their securities, by requiring companies to disclose whether they had received preliminary ratings from other agencies.
Meanwhile, flash orders have become a hot-button issue in recent weeks amid questions about transparency and fairness on Wall Street. A flash order refers to certain members of exchanges - often large institutions - buying and selling information about ongoing stock trades milliseconds before that information is made public.
Nasdaq OMX Group Inc., which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3 percent of stock trading. The New York Stock Exchange has never used them.
In July, Sen. Charles Schumer, D-N.Y., had called on the SEC to ban flash orders, threatening legislation if it failed to act. "This proposal will once and for all get rid of flash trading, which if left untouched, could seriously undermine the fairness and transparency of our markets," Schumer said in a statement Thursday.
The rating agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.
But the rating agencies have been criticized for failing to identify risks in securities backed by subprime mortgages. They had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and writedowns at big banks and investment firms.
In a rule that was formally adopted Thursday, the agencies will have to disclose the history of their ratings actions, which normally include reasons for them, back to mid-2007 — when the SEC gained authority to regulate the agencies by law.
Also, agencies that are paid by companies to rate complex securities - such as those underpinned by mortgages or student loans, as opposed to more traditional corporate or municipal bonds - must now notify the other agencies that it is in the process of determining the rating.
Under another proposed rule, the agencies would have to publicly disclose every entity that paid for a credit rating. They also would have to provide more information about income earned from companies they rate.
"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security," SEC Chairman Mary Schapiro said before the vote. "That reliance did not serve them well over the last several years, and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process."
In California, Attorney General Jerry Brown launched an investigation into the three big credit rating agencies to determine what role they might have played in the collapse of the financial markets. Brown said he had subpoenaed the three firms to determine whether they violated state law in "recklessly giving stellar ratings to shaky assets."
In July, the California Public Employees' Retirement System sued the agencies, saying they had lured the fund into bad investments. The nation's largest public pension fund blames them for more than $1 billion in investment losses.
The SEC commissioners took their action during a week when memories of the collapse of Lehman Brothers a year ago were fresh in Washington.
"There is general consensus that the rating agencies contributed significantly to the damage and the widespread loss of confidence," said Commissioner Luis Aguilar.
Spokesmen for Standard & Poor's had no immediate comment. Representatives of Fitch and Moody's couldn't immediately be reached for comment. The three firms have said they already have taken steps to increase transparency and will continue to make further enhancements in the future.
By MARCY GORDON, AP Business Writer
Labels: credit rating agencies, stock trading investing, trading stocks
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Saturday, April 11, 2009
The Difference Between Trading Stocks And Stock Options
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In the stock market industry, the trade for stocks and stock options are often interchanged and many may be confused between the concepts behind these types of trades. However, what you should know is that these two have very different characteristics from each other, and using them interchangeably can be very lethal if you want to engage in the stock trading game.
Knowing the difference between these two would not only save you on making serious trading mistakes, but perhaps, you can be guided on making a smart business decision on which particular trade you would actually want to make your investments.
Stocks Versus Stock Options
By definition, stocks are actually shares of a particular company that can be traded through the act of buying or selling by an investor. If you happen to own a particular stock from a company, you are entitled to certain rights, which may include a profit share from earnings. You may also have the liberty to sell your share of stock if you no longer desire it.
A stock option on the other hand, is not the stock or share of the company itself, but it is actually the rights for a certain stock. It actually allows you to buy and sell company stock at a set price in a certain time period. However, you do not gain the profits from the company itself.
Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.
Comparing The Benefits
In comparing the benefits of trading stocks and stock options, many experts would claim that stock options might be a promising gamble for companies and individuals, especially if you have adequate experience in the trading game and can substantially use very good strategies to survive. However, the same results might not be expected if you are only a beginner.
What makes a lot of experts prefer options trading is usually because in this particular trade, no matter what would happen to the underlying security, an option buyer cannot lose to more than that of the initial price paid for the rights. Therefore in trading options, there are fewer risks involved on the part of the buyer, especially when it comes to the possibility of losing a lot of money. And it may even give promises of profitable gains.
But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock option’s original price.
And so, if you are not well skilled and knowledgeable about how you can prevent severe losses, then the best way for you to play the stocks trading game is to stick with the more traditional trading of stocks as this can be easier.
However, if you do believe that you can manage then options trading may give you many promising positive results. Just make sure that you take the time to understand concepts and strategies behind stock options before you actually start trading.
Browse Stock Trading Investing
Knowing the difference between these two would not only save you on making serious trading mistakes, but perhaps, you can be guided on making a smart business decision on which particular trade you would actually want to make your investments.
Stocks Versus Stock Options
By definition, stocks are actually shares of a particular company that can be traded through the act of buying or selling by an investor. If you happen to own a particular stock from a company, you are entitled to certain rights, which may include a profit share from earnings. You may also have the liberty to sell your share of stock if you no longer desire it.
A stock option on the other hand, is not the stock or share of the company itself, but it is actually the rights for a certain stock. It actually allows you to buy and sell company stock at a set price in a certain time period. However, you do not gain the profits from the company itself.
Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.
Comparing The Benefits
In comparing the benefits of trading stocks and stock options, many experts would claim that stock options might be a promising gamble for companies and individuals, especially if you have adequate experience in the trading game and can substantially use very good strategies to survive. However, the same results might not be expected if you are only a beginner.
What makes a lot of experts prefer options trading is usually because in this particular trade, no matter what would happen to the underlying security, an option buyer cannot lose to more than that of the initial price paid for the rights. Therefore in trading options, there are fewer risks involved on the part of the buyer, especially when it comes to the possibility of losing a lot of money. And it may even give promises of profitable gains.
But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock option’s original price.
And so, if you are not well skilled and knowledgeable about how you can prevent severe losses, then the best way for you to play the stocks trading game is to stick with the more traditional trading of stocks as this can be easier.
However, if you do believe that you can manage then options trading may give you many promising positive results. Just make sure that you take the time to understand concepts and strategies behind stock options before you actually start trading.
Browse Stock Trading Investing
Labels: difference, stock options, stock trading investing, trading stocks
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