STOCK MARKET BASICS FOR NEWBIES – 9

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AN INTRODUCTION TO CRYPTOCURRENCY

Cryptocurrency, Bitcoin, Elon Musk, digital currencies, Etherium, Mark Cuban, fiat currency, NFT’s and the list goes on. Following the world of investing is a challenge today, with everyone being obsessed with these new and confusing terms and concepts. You are forgiven if you have thrown your hands in the air and said, “I have no idea what is going on so I will simply bury my head in the sand and hope it all goes away!” Understanding cryptocurrencies may be difficult for newbies but that has not eliminated the world of opinions being expressed by famous and infamous voices alike. On the one hand, the world is being brought to an end with digital currencies and we will all return to the stone age while others tell us this is the dawning of a new age. Yes, I have my opinion but that is not the point of this session. We are here to understand this world and let you form YOUR own opinion.

We promised a shallow dive into this world and consequently; we leave a lot of the more detailed information for further research. We will include several links for those of you who are interested in more information. According to Investopedia, these are the keys to understanding cryptocurrencies:

“KEY TAKEAWAYS

  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law. 
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.”

What does that mean in plain language? Let’s use Bitcoin as the leading cryptocurrency for explanation purposes. In an excellent article in MoneyWeek, March 1, 2021 Dominic Frisby wrote, “Bitcoin is a new system of money designed for the internet. Let’s shorten that to: bitcoin is money for the internet. The internet is, essentially, a borderless medium. I’m in the UK. I can communicate with someone in the US, Australia, South America, Asia or Africa as instantly as though they were in my own country. I can send them messages, photos, videos, any kind of content, and they receive it instantly. Yet, until bitcoin, I couldn’t send them money with the same ease. I would have to go through Paypal, or a bank or a credit card company. There would be foreign exchange costs, money transfer costs, regulatory processes.

With bitcoin I can send money across the net, direct from person A to person B, just as I send messages. It might be tiny sums, but it could also be billions. (For example, only recently, I saw that somebody had transferred 14,892 bitcoins. That’s over half a billion dollars in value. I know that that value was transacted – the transaction was broadcast on the blockchain. But I have no idea who sent the money, or to which location it was sent. I rather suspect it was Elon Musk – but who knows? I also know that the cost of the transfer was a few dollars, and that the transfer was almost instantaneous).”

Another point that is important to understand about digital currencies and Bitcoin in particular is that there is a finite number of Bitcoins available, which is why we see the value fluctuating so much. With conventional currencies, there is no finite number. Central banks and governments simply crank up the printing presses and increase the number of dollars, euros, etc. with no restraints or controls. We have seen this happen during the pandemic as countries around the world tried to prop up businesses and individuals by simply passing out more money to help them survive. While it may not be polite to ask, you might wonder where the money came from?

Let’s look at this in everyday terms. Suppose you have 10 apples and there are no other apples in the entire world. The value of your apples is determined by the demand of the market. In other words, the more people who want to have an apple, the higher the value of the 10 apples you hold. Now suppose that someone else comes along and they have also got 10 apples. What happens to the value of your 10 apples now that there are twice as many? It would make sense that the value of your apples will drop in half. In simplistic terms, the same happens with money. If you double the money supply (the number of dollars in existence), what is the real value of the money you currently hold?

Simply put, crypto, or digital currencies, are an alternative to existing currencies, like dollars and euros. The biggest difference is that governments or central banks do not control digital currencies and for those institutions, this represents an enormous challenge and risk to their control over our financial lives.

Many articles and opinion pieces talk much about the technology that creates digital currency and we will look at that in the next section. We will also look at some investing possibilities if you are interested in how you can take part in this new world. In the meantime, I encourage you to take a look at the links provided above to become more familiar with something that does not seem to go away – no matter how much some people wish it would.

MANAGING MONEY

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crop man getting dollars from wallet
Photo by Karolina Grabowska on Pexels.com

Do you manage your money or does your money manage you? Some of you will joke and say, “But I have no money so there’s nothing to manage.” Oh, how wrong you are. And that is the thinking that keeps most people in debt and keeps them from creating an investment program. A couple of things just seeped out of my memory: I can distinctly remember a phrase that my mother used to say constantly, “Money is the root of all evil.” And I remember a time when my father was reading the local newspaper and discovered that the head of the local school board received a raise to $10,000.00 a year. His comment was, “Nobody is worth a salary of $10,000.00.” If that kind of thing doesn’t taint your subconscious understanding of money, I don’t know what does. However, I spent many years working in the investment industry and now help people with income tax issues, funny, eh? But I digress.

For loyal followers of this corner of the digital universe, you may remember that a couple of weeks ago I promised to offer you something to help you save some money so you could create or add to your investment program. I am happy to say that it is now live and helping people to do just that. I have created a new website called Coupon Corral and as the name implies; it is chock full of coupons that you can use to reduce the price of things you buy online. Let me be absolutely clear about something, I one hundred percent support buying locally. We do that but long before the pandemic struck; the world had made a move to buying online. My new website has hundreds of online discount coupons available for everything from snow blowers to scarfs, makeup, health products, clothing and lots more. I am adding more companies every day and the companies are updating their discounts constantly. I have already started promoting it through some Facebook/Instagram advertising and the results are very encouraging.

To get the most benefit out of the Coupon Corral, I encourage you to sign up for the automatic updates from the site and check for discounts when you buy online. Second, take the money, whether pennies or dollars, that you save and put it into a separate savings account intending to invest it as soon as possible. You were willing to spend the full price originally. It is time to manage your money rather than letting it manage you!

Beeple NFT image sold for $69,000,000.00
NFT image sold March 2021 for $69,000,000.00

Something else caught my eye this week, and probably yours too. There was a news item that told us how someone had sold a piece of digital art for $69,000,000.00!!! They referred to an NFT and that is somehow related to digital currency. Once again, as followers of this blog know, I am currently researching digital or cryptocurrency in order to add a section that will explain it in simple terms. I couldn’t help myself, I had to know what an NFT is and how it connects to digital currency and better yet, how could I perhaps sell some sort of doodle for $69,000,000.00? I bumped into some information from a man named James Renouf who has a very comfortable and understandable way of explaining NFT’s and how they work. In addition, he explains how we might use these in the course of our own life. If it has aroused your curiosity as mine was, go look at his information and stay up to date on how our world continues to change and amaze. Who knows, maybe you can grab one of your kid’s drawings off the front of the fridge and sell it for big bucks – investment program solved!

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.