Personal Finance

I'm unsure about how to go about investing in a certain stock

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  • Oct 29th, 2010 10:29 pm
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Newbie
Aug 28, 2009
3 posts
1 upvote
Toronto

I'm unsure about how to go about investing in a certain stock

Hi everyone.

I know some of the basic theory behind investing, but I'm not sure about how it actually happens.

Eg BMO's stock has a dividend date 25-NOV-10, and I create a TFSA with iTrade tomorrow to buy BMO stock, then how does the dividend come to me? Is it just deposited in my iTrade account (so if I contribute the $5000 max and get $100 in dividends I'd have $5100 in my TFSA to invest with)?

Also, lets say I purchase 2 put options of company A for a strike price of $10 using the TFSA and a month later they are in the money because the stock is at $8, at any time before its expiry I can exercise the option and my gain would be (10-8)X200-premium price?

Thanks!
6 replies
Banned
User avatar
Feb 15, 2008
26318 posts
3242 upvotes
Calgary
classclo wrote: Hi
Eg BMO's stock has a dividend date 25-NOV-10, and I create a TFSA with iTrade tomorrow to buy BMO stock, then how does the dividend come to me? Is it just deposited in my iTrade account (so if I contribute the $5000 max and get $100 in dividends I'd have $5100 in my TFSA to invest with)?
BMO shares are CAD$59.25 today. So you could buy 84 of them, which, after commissions, would leave you with ~$10 in your account.

When the BMO stock pays the dividend, you will still have 84 shares, plus you will have the dividend from 84 shares + ~$10 in your account as cash.

Also, lets say I purchase 2 put options of company A for a strike price of $10 using the TFSA and a month later they are in the money because the stock is at $8, at any time before its expiry I can exercise the option and my gain would be (10-8)X200-premium price?
Exercising the option would require you to have the shares in such an account, since it is a put option. You would need to sell the option on the market, or acquire 200 shares and then initiate an option exercise.

Your calculation is roughly correct, but you need to either dispose of the put options on the open market, incurring bid/ask spreads and commissions, or exercise the options, in which case, a 'naked' position would require you to own shares prior to exercise (you cannot be short in a TFSA!), exposing yourself to bid/ask spreads and commissions on the purchase of the stock, and potentially a commission or fee for exercising the option.
Deal Addict
Oct 25, 2008
2321 posts
393 upvotes
North York
I think the above post really sums it up well +1
Deal Addict
User avatar
Aug 1, 2007
1498 posts
266 upvotes
Also, unless you're actually using the option to delay a transaction, you're usually better off selling the option instead of exercising.
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
classclo wrote: Hi everyone.

I know some of the basic theory behind investing, but I'm not sure about how it actually happens.

Eg BMO's stock has a dividend date 25-NOV-10, and I create a TFSA with iTrade tomorrow to buy BMO stock, then how does the dividend come to me? Is it just deposited in my iTrade account (so if I contribute the $5000 max and get $100 in dividends I'd have $5100 in my TFSA to invest with)?
...

This is like a trick question. you don't have $5100 in your TFSA to invest with.
assuming the stock price doesn't change your value still won't be 5100.
Sr. Member
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Dec 12, 2005
960 posts
117 upvotes
GTA
If you're just about 'knowing the basics' of investing, stay away from options!!!
Banned
User avatar
Feb 15, 2008
26318 posts
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Calgary
Shojin wrote: If you're just about 'knowing the basics' of investing, stay away from options!!!

Yeah, what's with the shorting (by way of a derivative)? Are people that pessimistic?

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