Carry-over Trade Financing
Investing is a game of patience. Nevertheless, the mistake investors normally make in a bull run is to chase after stocks. As stocks start rising after a prolonged downtrend, most investors tend to feel that they will miss out on all the opportunities and thus go on an indiscriminate buying spree. A false notion that they have missed out on the first rally makes investors run and buy stocks on impulse, rather than rationale.
The present state of the stock market is such that it would be wise to remain levelheaded and not indulge in the euphoria of buying faster than your neighbours. Though it may seem that everybody is making large amounts of money, at the end of it all, only very few people will end up making money. Easy come, easy go is an adage that applies very well to the equities market. In such insane times, it is better to stick to the tried and proven formula of investing only in the best of stocks, rather than trying to bag every bargain.
Such euphoric times also open up other better and safer opportunities to earn above-average returns. Investors who have liquid cash can invest the same in Carry Over Trade (COT) financing and earn high rates of interest on their money. COT financing represents investment of funds towards financing of carry forward trades on the Stock Exchange. COT trading is done on Lahore Stock Exchange (G) Ltd. on daily basis. The COT rates are fixed during screen based COT session and are dependant on demand supply position of stocks i.e. shares and also on availability of funds in the market.
The attractive features of COT financing are:
Safety: The funds invested are backed by Securities/Shares in which the investment is made and these shares are kept in investor's sub-accounts maintained by the members with CDC (Central Depositary Company of Pakistan). The risk of the Investor is equal to investment in that share.
Yield: COT financing gives an average compounded returns in case investors do not withdraw the interest and reinvest the same.
Liquidity: There is no fixed/minimum period for which the funds are required to be invested. The investors can withdraw/reduce/increase the amount on daily basis.
Shift from COT to stocks: Additionally, it is very easy to shift funds from COT financing to stocks. With funds invested in COT, there is no time-lag between shifting funds from COT financing to stocks. Until such time as a bargain buying opportunity presents itself, your liquid funds keep on earning interest for you.
Tax aspect: The profits derived from COT financing are considered as a business profit (and not as short term capital gains) under the income Tax Act, thus enabling the investors to also claim deduction of expenses against the income earned.
Trade Guarantee: Any one who does COT financing is covered by the rules & regulations of the Lahore Stock Exchange (G) Ltd. and SECP (Securities Exchange Commission of Pakistan). The COT System is the time-tested instrument in the Pakistani Stock Exchanges.
RISK: There is no guarantee of any minimum fixed returns. In case of default the risk of principal is equal to the price risk of the share in which the COT is done.