How to Protect yourself by Insuring your Shares :
The principle of Insuring your Shares is the same as Insuring your House or Car. And that principle is to protect your capital against loss.The process of Insuring your Shares however does not involve ringing an insurance company and buying a policy. It involves using other stock market instrument to give you protection, and because it involves other stock market instruments it is much more flexible.
The insurance we buy for our shares is essentially buying a promise; that's what all insurance is right. In the stock market the promise that we buy is the promise that we will definitely be able to sell our shares at a pre-agreed price regardless of what the market does,So if we insure our shares at 100, then even if the stock price falls to 2, we'll be able to sell our shares at the agreed insured price of 100.
We pay a premium for this insurance and the higher the insured price, the higher the premium. And, the longer the term of the insurance the higher the premium.
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So let's look at an example and then we can go into some of the detail- _________________________________________________________________
Let's say we buy 300 shares of XYZ @ 1000 i.e amounting Rs 3Lacs (1000x300). We could decide that we wanted to insure our shares at our buy price and this might cost 6-8K of the insurance premium approx. If we did this then no matter what happened to the share price as we could safeguard our shares @ 1000, even if the company collapsed and it's price went to zero we are at risk of only 6-8k premium that we paid to get it. If the stock price didn't collapse and hit the target levels then one can make a huge amount of profits.
So you can see that insurance in the stock market is much more flexible than house insurance or car insurance.Big investors treat the cost of insurance as a cost of owning shares. They simply won't buy shares without it. These guys often use this insurance to lock in profits for stocks that have risen in price i.e. they move their insurance price up, as the stock price rises.
If you find this article interesting and want to know more about the same then please let me know your priceless views in that regard so that further we post our article about "Educating how to insuring your Shares" as it's a valuable investing tool. But there's more to know before you start doing it.
The principle of Insuring your Shares is the same as Insuring your House or Car. And that principle is to protect your capital against loss.The process of Insuring your Shares however does not involve ringing an insurance company and buying a policy. It involves using other stock market instrument to give you protection, and because it involves other stock market instruments it is much more flexible.
The insurance we buy for our shares is essentially buying a promise; that's what all insurance is right. In the stock market the promise that we buy is the promise that we will definitely be able to sell our shares at a pre-agreed price regardless of what the market does,So if we insure our shares at 100, then even if the stock price falls to 2, we'll be able to sell our shares at the agreed insured price of 100.
We pay a premium for this insurance and the higher the insured price, the higher the premium. And, the longer the term of the insurance the higher the premium.
_________________________________________________________________.
So let's look at an example and then we can go into some of the detail- _________________________________________________________________
Let's say we buy 300 shares of XYZ @ 1000 i.e amounting Rs 3Lacs (1000x300). We could decide that we wanted to insure our shares at our buy price and this might cost 6-8K of the insurance premium approx. If we did this then no matter what happened to the share price as we could safeguard our shares @ 1000, even if the company collapsed and it's price went to zero we are at risk of only 6-8k premium that we paid to get it. If the stock price didn't collapse and hit the target levels then one can make a huge amount of profits.
So you can see that insurance in the stock market is much more flexible than house insurance or car insurance.Big investors treat the cost of insurance as a cost of owning shares. They simply won't buy shares without it. These guys often use this insurance to lock in profits for stocks that have risen in price i.e. they move their insurance price up, as the stock price rises.
If you find this article interesting and want to know more about the same then please let me know your priceless views in that regard so that further we post our article about "Educating how to insuring your Shares" as it's a valuable investing tool. But there's more to know before you start doing it.
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