Category Archives: business ideas

as an entrepreneur, manager and sales professional, I share some ideas to help my readers

STOCK MARKET BASICS FOR NEWBIES – 7

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What are mutual funds and how do they work? A mutual fund is an investment vehicle created from a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are managed by professionals who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is built and maintained to match the investment objectives stated in its prospectus. A prospectus is a document that is used to define the objectives and parameters of any investment vehicle.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder or unit holder, therefore, takes part proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is measured by the change in the total value of the fund.

There are thousands of different mutual funds available from many companies. They each have their own individual characteristics and objectives. A mutual fund will often mimic parts of the larger stock market like energy, mining, technology or financial sectors. Some will concentrate their assets on creating growth, while others will attempt to maximize the income/yield for its holders. Some will attempt to do both.

It is important to understand that a mutual fund holds stock or bonds in dozens or possibly hundreds of different companies, so the holder of its shares or units has a very diversified portfolio, thus reducing the risk factors of having one company’s value drop. If this happens, the overall effect on the mutual fund is minimal. Most investors could not duplicate the holdings of a mutual fund because of the sheer amount of money required to do so. A mutual fund will have invested the combined holdings of its unit holders that total millions upon millions of dollars, allowing for diversification that the individual investor may not attain.

A mutual fund will appeal to investors who are reluctant to research and decide about investing themselves and prefer to trust the professional managers to make those decisions. This comes at a cost for the investor. Someone has to pay for the professional managers, sales commissions and administration costs and that someone is the investor. Before it splits any income among the unitholders, the company managing the fund assesses a fee that they charge against the overall value of the fund. The fees vary and are decided by the management company, but run in the 3 to 3.5% range. What this means is that the value of the mutual fund is reduced by 3% each year and any growth or income beyond that belongs to the unit holders. Hopefully, the money managers can create enough added value to the mutual fund to cover their fees and provide added value to the holders. It will depend on how the stocks or bonds held in the fund do on the market. In reality, the value follows the ups and downs of the stock or bond market itself.

Most investment advisors or mutual fund salespeople will assist their clients to create additional diversity by recommending a variety of funds. They will seek to build a portfolio that matches the investor’s goals for a combination of growth and income. Many large investment pools like pension funds hold large quantities of mutual funds to protect and grow their client’s capital. Mutual fund organizations will help their clients set up a regular investment program, which also helps the investor to increase their portion of savings.

This is a very general and brief rundown of mutual funds. If you are interested in more information, you can find it at Investopedia and also from your mutual fund company representative. Be sure to ask lots of questions about management fees and the purpose and goals of the funds you are interested in. They will show you historical changes in value and have an opinion about its future prospects. Keep in mind that the ultimate decision about how to manage your own money should reside with you.

In the next section, we will look at another investment vehicle that pools large amounts of money from its many holders and seeks to duplicate the movements in the overall market. They call these Exchange Traded Funds or ETF’s and there are many similarities with mutual funds but also some very interesting differences.

Just a heads up – I am working on something that will be available to my subscribers that will add value to this website by helping you save some money to invest in the market or just create more spending money. I should offer it in the next week or two, so stay tuned and add your name to the subscription list in the top right-hand corner if you haven’t done so.

CRYPTO-CURRENCY PROMISE

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CRYPTO-CURRENCY INTRO

I am breaking my promise. Last week I told you I would create a basic explanation of what crypto-currencies are, but I am not going to. At least, I am not going to this week. I have been very busy assembling and studying a great deal of research and realize that explaining crypto-currencies is a much bigger job, especially when I want to put it into a plain language that we can all understand..

Here is what I am doing: next week I will create a post on mutual funds, and then the following week, we will look at Exchange Traded Funds. After that, I will produce a review of digital or crypto-currencies. This includes some popular terms that you have read about like Bitcoin, Etherium, Dogecoin and so on. For your information, there are currently over 4,000 digital currencies in existence – that’s not a typo – 4,000!

Let me offer an opinion about the origins of digital currencies. I think it is a reaction to the overwhelming control forced upon you and I by the central banks and governments who decide our fate through the use of fiat currencies. Fiat currencies are the currency you and I are, or have been, forced to use like the U.S. dollar, the Euro and the Canadian dollar, etc. These currencies are tightly controlled by a tiny group of people and some would argue, not to the benefit of the average person.

So, putting on my tinfoil hat to ward off incoming conspiracy theories, they based Fiat currencies on the “gold standard.” That changed long ago – fiat currencies are no longer based on anything other than the whim of a government body (Federal Reserve Bank) and governments can print money at will. There is nothing to back up the value of our dollar. Currencies are simply a means of exchanging paper for something else of value. The value is artificially created and controlled, as long as people continue to accept it.

Bitcoin, the first and largest digital currency, was created in 2009 and its value, based on US dollars, has ridden a rollercoaster ever since. Some very smart people have warned us against buying or using digital currencies because of the volatility of its value and because it is based on nothing of value. Others would argue that this does not differ from any other currency, and the digital version of currency provides some other interesting advantages.

In considering the feasibility and legitimacy of crypto-currencies, we should wonder why organizations like Visa and Paypal along with many banks and countries are spending so much time and effort considering how they can create and use digital currencies. All of that being said, I have assembled an enormous amount of research and will share it with you keeners. If you are a subscriber to this blog, send me a contact form with your request and an email address that I can send my “cheat sheet” to. If you are not a subscriber – why the heck not? By the way, most of this information will find its way into a book soon that I will happily provide in exchange for your hard-earned dollars or bitcoins.

STOCK MARKET BASICS FOR NEWBIES – 6

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BONDS

“The name’s Bond… James Bond.” Sorry, but I just couldn’t resist. This installment is about bonds that trade on the stock market. A bond is a way for a company or government to raise funds by promising to repay those people who buy them on a set date in the future and in the meantime, pay them a fixed rate of interest. It is an instrument of debt, unlike James Bond, who is an instrument of death, sorry again. Please don’t unfriend me.

We consider bonds one of the safest and most stable forms of investment and financial planners often recommend that up to 60% of your investment portfolio should be in bonds. Let’s look at some aspects of bonds that will be of interest to you (pun intended).

The principal amount of a bond offering is normally in the millions of dollars. Individuals can usually purchase bonds in multiples of a thousand dollars. Institutional investors like pension funds, insurance companies, mutual funds, banks and others will buy large blocks of bonds however, the smaller investor can do the same in smaller quantities if they want. When a bond is first issued, it will carry a competitive interest rate based on the prevailing rates and the safety of the organization issuing the bond. Governments use this form of raising capital frequently and depending on the country, state, province, or municipality that is doing it, the interest rate reflects the ability of the issuer to repay the principal amount and maintain the interest payments. The stronger the institution offering the bonds for sale, the lower the interest rate needs to be.

Government bonds are safe because their ability to pay is almost 100%. A government can raise taxes on their citizens and companies in an unlimited fashion, so there is almost no chance they will renege on their financial responsibilities. Keep in mind, that is not true of every country in the world, and that kind of approach may lead to many other consequences that are beyond our scope in this article.

CRYPTOCURENCY OR DIGITAL CURRENCY ARE TOPICS THAT ARE GETTING INCREDIBLE TRACTION IN THE FINANCIAL WORLD AND IN EVERYDAY NEWS REPORTS RIGHT NOW. IF THERE IS ENOUGH INTEREST, I WILL DEVOTE THE NEXT SEGMENT OF THIS SERIES TO EXPLAINING DIGITAL CURRENCY. I HAD NOT PLANNED TO DO THIS BUT THERE IS INCREDIBLE INTEREST BECAUSE THERE ARE OVER 1500 DIFFERENT DIGITAL CURRENCIES AND PEOPLE ARE WONDERING – IS IT TOO LATE? CAN OR SHOULD I GET INVOLVED? HOW? ARE THE RISKS AS BIG AS I HAVE HEARD? SARCASM ALERT: DON’T TELL YOUR BANKER OR MUTUAL FUND REP THAT YOU ARE GOING TO LEARN ABOUT DIGITAL CURRENCY, THEY WILL TELL YOU THAT JUST LEARNING ABOUT IT WILL CAUSE YOU TO LOSE YOUR HOUSE ALONG WITH YOUR MIND!

You recall that we talked about “yield” when we discussed common and preferred shares, and that becomes a very important part of any explanation of bonds. We have learned that yield is simply the percentage that you, the investor, will receive from the organization that you have invested your money in. However, it is important to understand that risk must be considered. The higher the risk, the higher the initial interest rate or yield. If the market judges one investment to be riskier than another, then the investor will demand a higher rate of return or higher yield. This is clear in the interest offered by a federal government compared to the interest rate that is demanded from a municipality who is also offering a bond for sale. The municipal rate is higher because the risk is greater. The municipality has a much smaller tax base to cover their bond obligations.

Let’s suppose that our fictional company, Orange, plans to build a new manufacturing plant and wants to offer a $1,000,000 bond for sale to potential buyers. How would they become an attractive investment for you and I? We would need to do some comparisons with other opportunities like putting our money into a savings account or buying a federal government bond instead. If we could safely invest our money at 2% elsewhere but Orange wants to attract some of that money, they will need to make the yield or interest rate more attractive because the risk is higher for a small company.

One other thing we will cover regarding bonds since they, like stocks, trade on the stock market. Let’s pretend that we bought $1,000 bond from Orange and they are paying an interest rate of 3%. We have decided that we want to sell it, but interest rates have gone up and a similar bond would need to offer a yield or interest rate of 6% in order to be successful in raising the capital. What happens? Why would someone pay $1,000 for a bond and only get a return of 3% when they could get double that return on a different one? In order to sell our bond, we will need to compensate the buyer by lowering the $1,000 bond price so that they will get a 6% return. Just like common stock, all investment opportunities become a function of risk and reward. The opposite is also true, if interest rates drop then we would expect the price of the bond would increase.

This is a very rudimentary explanation of how bonds work and like everything else in the investment world, you will want to do more research on your opportunities before plunging in. Another source of investment industry knowledge is an online site called Investopedia and gaining knowledge before taking action will help you avoid being “shaken, not stirred”. I know – enough!

We will continue to explore the world of investing and the stock market and the many options that are available for the person who wants to grow their financial nest egg in the next segment. You can receive this information directly to your inbox by subscribing to this blog. Of course, we welcome your comments and we would never share your information with anyone else.