Tag Archives: investing

STOCK MARKET BASICS FOR NEWBIES – 10

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CRYPTOCURRENCY – AND ANOTHER THING

Why is understanding cryptocurrency so complicated? A simple search of the word “cryptocurrency” or “digital currency” brings up a plethora of information, articles and opinion pieces from every corner of the universe. Most of the articles dwell on the technology that is behind this unfolding world of currency. Truth be told, most of us simply do not grasp technology well enough to understand as it relates to Bitcoin, Etherium, etc. In order to put this into context, let’s look at how we are surrounded by technology that we don’t understand but use it anyway.

You walk into your garage in the morning, push a button on the wall and watch the door open, step into your car, pat your pocket to confirm that your key fob is there, step on the brake pedal and push a button on the dashboard. If all of that technology worked, your car starts and you slide the gearshift into reverse and back out onto the street, making sure you watch the screen that shows the backup camera so you don’t drive over your kid’s bike. What if one of those steps doesn’t work? What do you do? Lift the hood and fix it? How many of us even know where to start? If you are like me, you now grab your cellphone, call the auto association or the dealership (or your much smarter brother-in-law) and ask for help. By the way, what is the technology behind that cell phone again? How does that work? We are inundated, if not overwhelmed, by technology everywhere.

We could go on, do you actually know how email works, how about that GPS, wifi, the internet itself, changing the clock on your microwave, hell – the microwave? The point is that we use technology all day long in every facet of our lives without knowing all the intricacies of how it works. The nerds of this world have created digital currency, just like they created GPS, the internet, etc. They are being asked to explain how it works and can do so only in their own language – a language we mere mortals have no hope of understanding. Should that prevent us from enjoying the benefits of using what they have created? Five years from now we won’t give a second thought to paying for something using whatever currency we choose and won’t turn down a payment for something in the same way. We certainly won’t be thinking about how that currency works, or gets created, or controlled, or accounted for. So, that’s our pitch for crypto currency but this series is about investing and how does the average person do that?

Digital currencies have now advanced to the point where there are several simple ways to invest through the stock exchange. It is no harder to buy some of the major currencies than it is to buy a stock. Do you remember our chapter on ETFs? Most of the major stock exchanges now offer multiple ETF’s for both Bitcoin and Etherium with more coming on stream all the time. We no longer need to understand or involve ourselves in crypto wallets, blockchains, or long and tedious passwords that might allow someone to steal our money. Search on your favorite stock exchange for an ETF that offers to mimic the price of the underlying cryptocurrency and you are ready to invest. There is a safety factor involved in using an ETF to invest because the company backing and managing it has to be certified by the exchange itself. The usual cautions need to be exercised since this is a very volatile market, especially in its infancy. You will also find common shares offered by many of the companies that provide various services to the cryptocurrency market.

The story about digital currencies is just beginning, but for the purposes of this writing, we will end with a couple of situations that we need to bring to your attention: I am sure that virtually everyone reading this has used, or at least, heard of PayPal. Recently, the Los Angeles Times interviewed its CEO, Dan Schulman, about the changes occurring in the financial markets. It is definitely worth reading.

If you are a subscriber to this site, you may remember that a few weeks ago I added an item about my friend James Renouf and an excellent offering about NFTs. You remember NFTs. They garnered so much publicity when someone sold one for $69,000,000. Well, James has created another masterpiece and this time it is about creating crypto for yourself. He is not talking about buying crypto or investing like mentioned earlier. He shows you how to earn crypto without investing any money. It is definitely worth a look.

Coming next will be a few nuggets of wisdom gleaned from many years as an investor, investment consultant and tax advisor to offer some advice on how to enter the stock market and we will include some words from a few legendary voices to keep us on track.

STOCK MARKET BASICS FOR NEWBIES – 4

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WHY SHOULD I INVEST IN THE STOCK MARKET?

Why would someone invest in the stock market? This is an excellent question, and the answer is to get your money working for you. There are a couple of very important ways that you make money with owning common shares. First is the potential for a capital gain if the shares go up and you sell them for a profit. Second, is the possibility that the company will pay out a dividend to its shareholders. Companies can share their profits with their owners, and many senior companies do that every quarter or sometimes monthly. They announce the amount and payment date of their dividend payout in advance, which brings us to the topic of “yield.”

Yield is the amount of money you earn each year by owning the stock of a company. We always express a dividend in terms of dollars and cents per share. You can easily calculate your “yield” as a percentage using the dividend amount and the price you paid for the stock. Please remember that a company can raise or lower the dividend amount as financial conditions change for them. Your yield is determined by the price you paid, not what the stock is currently trading for on the market. Let’s look at our company Orange and see how this works. We assume you bought the stock initially for 10.00 per share and let’s pretend that the company announces a dividend of .50 per share annually. It doesn’t take a lot of math to figure out that the “yield or earning” on your shares is 5%. If someone else bought the stock on the market for a higher price, then naturally their yield would be less.

Let’s return to the opening line of this article- “why would someone invest in the stock market?” We will introduce something here that may be of interest–the Rule of 72. Many people do not want to take the time and effort to learn a few basic investment procedures and tell others it is too complicated or too risky, etc. Let’s add some reality to that argument. Suppose that someone has $10,000.00 available to put away for retirement and they are only comfortable putting it into a savings account at their financial institution. What is the current rate for savings accounts? At the time of writing, it is around 1%. The Rule of 72 states that if you divide 72 by the rate of return (in this case, 1%) the result is the number of years it will take to double your initial investment. SARCASM ALERT: For the safety conscious non-risker takers, add 72 to your current age and you will have turned your $10,000.00 into $20,000.00. Fantastic! You have doubled your money. By the way, we have not considered the ravages of inflation or taxes, but in only 72 years you will have twice as much money assuming you withdraw nothing during that time.

Let’s go back to our example of Orange in which we determined that if you bought the stock at 10.00 and receive a .50 dividend each year for a return of 5% how would we fare with the Rule of 72? We divide 72 by 5 and learn that if we do not withdraw any of the earnings, our money will double in 14.4 years. You can do the calculations yourself for different scenarios. That alone is reason to give serious consideration to investing in stocks. This process also works if you only consider the growth in the stock market itself if you own the right investments. We will cover some of those types of investments later but consider this: The 25-year average annualized return for the S&P 500 from 1994 through 2018 was 8.52%. If you had invested in an index fund that tracks the S&P 500 in 1994 and you never withdrew the money, you would have average returns of 8.52% per year. At that rate, expect to double your money about every 8.45 years. For those people who already follow the market a bit–this includes the fact that it had many swings in value both up and down during that period.

OK, enough math for today–your head hurts and this was precisely the stuff you wanted to avoid – right? Common stocks are not the only investment available on the market, and we have already alluded to at least one other. We will move on to some of these possibilities next time.

If this is your first exposure to this series, you might find it helpful to start at the beginning with our bite-sized lessons about investing and the stock market. You can also share this with friends and on any social media platforms if you want to.