Category Archives: Inspire

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.

STOCK MARKET BASICS FOR NEWBIES – 5

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PREFERRED SHARES

Common shares are only one kind of investment opportunity available on the stock market, and common shares are not the only vehicle that a company has to raise capital. As a company grows and becomes more successful, they may still need to raise more cash in order to finance that growth or acquire new technology or perhaps acquire another company. There are many reasons a company continually needs to reassess their financial situation and look to the stock market for help. Another form of common share called a preferred share may provide an excellent vehicle for both the company and the investor.

A preferred share has a few differences from the other share we have talked about – the common share. A preferred share is still a unit of ownership in the company. But the added benefit includes a fixed dividend on each share. The company promises to pay an established dividend to the shareholder regularly before it pays any dividends out to the common shareholder we talked about earlier. The benefit for the investor is a fixed income or yield. In addition, in the event of any business wind-up, they will pay a preferred shareholder their portion of assets before a common shareholder. There are some accounting advantages for the company to have equity or owners instead of debtors on their books if they borrowed this money instead of creating and selling preferred shares.

Preferred shares may not be the most exciting investment in the world, since their trading price is governed more by what is available in terms of average yield rates than the usual ups and downs of a common share. However, for the investor looking for both safety and yield, they provide a very nice possibility to take part in both areas. We find that preferred shares are most often available for only senior and successful business enterprises. Share prices for preferreds can fluctuate based on the success of the company but most often, by changes in interest rates available to investors.

We will not delve into financial planning, but if your country has any special tax treatments for capital gains or dividend income, you want to be aware of these as they can influence your investment decisions. Find a link to your taxation department and investigate – it could be very advantageous because countries like to promote investment in their local economies.

WHY STOCK PRICES CHANGE

This might be the right place to discuss how and why share prices change. If we return to our initial installment, we talked about the stock market being like an auction. There are buyers and sellers, and they determine the stock price at any given moment. To put it simplistically, buyers think the stock price will go up and sellers usually think the opposite. To put it simply, share prices often anticipate the future financial well-being or hardships of the company. Remember from our previous installments that a company is required to report to its shareholders regularly. The report will review results from the prior quarter or year but also look into the future and project (almost always positive) developments they expect.

Journalists, analysts and others are always looking into the projected health of public companies and expressing an opinion about what they will or will not accomplish. These opinions often fuel the rise or fall in the stock price. When you decide to investigate or buy a company’s stock, you discover that Mr. Google and Facebook, among others, have already learned that about you and begin feeding you all kinds of information. So, why didn’t we both buy Google or Facebook or Microsoft when they were being created in some weird geek’s dorm room? Anyway, as we get more involved in all things “stock market,” we will begin to research and form our own opinions about whether a company represents an excellent investment opportunity. Just remember, you can’t believe everything you read, so be cautious about the source of the information. The price of a common stock usually represents what other investors think will happen in the future. Yes, there are both negative (I want to sell) and positive (I want to buy) sentiments out there – that’s what makes it an auction. Your job is to decide which side of the fence you sit on. If there was only one correct answer, this whole investing thing would be a piece of cake.

There are no guarantees in the stock market, so doing your own research or looking to a trusted source of research is absolutely vital to your success as an investor.

There are a number of other investment vehicles available and we will look into these in future installments. If this is your first exposure to this series, you will want to review our previous articles and don’t be afraid to comment or send this to friends. You can also contact me if you have questions with this one proviso, I am not offering specific investment advice but hope that you can benefit from having some basic knowledge about how the stock market works.