Category Archives: Money

STOCK MARKET BASICS FOR NEWBIES – 8

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EXCHANGE TRADED FUNDS

What is an ETF? ETF stands for Exchange Traded Fund, and what are they and how do they work? Are they something a newbie should look at as a legitimate possibility to invest their money? As we mentioned in the previous section, there are some similarities between mutual funds and ETF’s. One of the important similarities is that they both represent a basket of similar securities that could be equities (stocks) or bonds or both. When we mention similar securities, we are referring to sectors of the economy. So, most ETF’s will reflect a particular business area like the mining, energy, financial or technology sections. These are only examples, as we divide the economy into dozens of different areas.

One of the bigger differences between mutual funds and ETF’s is that mutual funds are actively managed by professional money market people and ETF’s are not. What does this mean? As we learned previously, the active management of mutual funds adds to the cost of owning mutual funds and we, as investors, pay for that in yearly fees charged to the funds we own. What that means in dollars and cents is that if we purchase $10,000.00 worth of mutual funds, then every year they will charge the value of our investment approximately 3% or $300.00 for the management services, administration and marketing. We have to rely on the professional managers to earn over that amount in order to increase the value of our investment.

ETF’s mimic existing investment groups such as the Standard and Poors 500, the various sub-indices of the stock market like the mining, technology and other categories that make up the overall market. Let’s try to put this in plain language. If you are reading this information, then you are probably also more aware of some business news that is provided by the various news outlets. You may be familiar with the terms Dow Jones Index and Toronto Stock Exchange Index. The newscaster will solemnly inform us that the “Index” has gone up or down by a certain number of points today. This is just a snapshot of what the investing world did in a general sense during the day. If the index reading is down, that only represents the specific stocks that are part of the index, it does not mean that every company trading on the exchange was down.

We have various stock market indices, which are then broken down into many sub-indices that are composed of specific companies in that sector. Specifically, if we were looking at the mining sector sub index, then it comprises the major mining companies in the country. The stock market would track the price of those major companies, and the index would reflect the combined prices and report them daily. Not every mining company is included in this index, and the stock exchange changes them from time to time. They are only the senior well-known companies. The company that creates an ETF would buy shares in each of those companies represented in the same ratio that the stock exchange used to create their index. If the stock exchange removes or adds another company, the ETF does the same. They require no management or research to do this. It is simply adjusting to reflect the stock market index itself. The upside of this for the investor in ETF’s is that the management fees are significantly lower than for mutual funds. They are often below 1% as compared to the 3% range for mutual funds.

There are hundreds of choices in ETF’s that reflect many investment niches. You can buy an ETF that follows commodity prices like gold or foreign stock markets, niches like bonds, utility stocks, energy stocks and so many more. The downside for the investor, and the opportunity to keep more of their money by lower fees, is that the investor has to take some responsibility for finding appropriate ETF’s. Through their own reading and thinking, they will want to determine what parts of the economy they feel comfortable investing in. We should emphasize that an ETF is a basket of companies, so it mollifies the risk. If one company goes down substantially, its effect on the overall value of the ETF is not as significant. Conversely, if a company goes up significantly, it also does not affect the overall value substantially either. In this case, there is safety in numbers for the investor while they enjoy the benefits of participating in a market segment that they have some knowledge of because of their own investigation.

In summary, mutual funds and Exchange Traded Funds are excellent investment opportunities for the new investor who wants to take part but also wants to keep their risks low. We should mention that not only “new” investors use these investment vehicles, but many very large funds like pension plans use them as well. Sometimes the number of choices can overwhelm, but if you consider your personal investment goals and knowledge and use these as a starting point, you will do well. A quick point about investment goals: consider these four points, safety, income, growth and risk. As you think about these four principles of investing, assign a percentage to each area that you are comfortable with. Naturally, the four percentages should add up to 100. We will talk more about this later on, but you could use this personal information as a guideline to your comfort in buying stocks or any kind of investment.

ETF’s and mutual funds are an excellent method for people to gradually increase their savings over time as they periodically invest money every month or so.

We will take a very shallow dive into the cryptocurrency market next to give you an idea about what they are and how they work.

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.