The Debt Hawk » Investing

Investing in a Company Vs Investing in Art

Hawk — Wed, 28 Apr 2010 10:36:18 +0000

Yesterday, I was reading a great blog called Early Retirement Extreme. While not the premise of his article, Jacob equated investing in a fixed asset like a baseball card or art to investing in the stock market. You can read Jacob's full article where he warns savers to not invest in the stock market. While I left a comment on Jacob's site, I thought it might be fun to also respond to this issue here on my site.

I think that people too often don't understand what they are buying when they investing in company stock.

In Jacob's article he states that investing in stock is similar to buying a baseball card or art.

"This works on the same principle as baseball cards or art. They only have value as long as some greater fool is willing to buy them."

I would not characterize investing in stocks as the same thing as investing in a fixed asset, like a baseball card, art or even gold. In fact, I would never characterize buying a baseball card, art or gold an investment. Gold does not produce anything. A baseball card doesn't produce anything. Fixed assets don't make anything and therefore don't earn anything. Instead, their value is solely based on supply and demand.

When you buy company stock, you are buying a piece of a business that has the potential to EARN more money in the future. This is much different than hard assets like gold and art. A company makes money. Companies use labor, materials and ideas to create more money. This means that they make value even if some fool is not willing to buy them. Yes, the stock price might not reflect the value, but you as the part owner of the company own a percentage of the value created.

If you wanted to compare the value of a company to a hard asset like gold, you would be talking about the book value of the company. The book value of a company is the value all of the company's assets minus intangible assets and liabilities. Meaning if you were to liquidate the company right now and sell off all of its assets at auction, the book value would be the price you would receive for those assets. But, the price of company stock is rarely equal to the book value of its assets. If it is, that probably means that the market thinks that the company will not be able to generate profits and thus its value is to be derived solely from the value of its assets.

American Depository Receipt (ADR) Explained

Hawk — Tue, 27 Apr 2010 10:19:31 +0000

The American Depository Receipt (ADR) was first available to the US financial markets in 1927. This came about in response to the difficulty of investors to purchase a foreign company’s stock due to the difference in currency between the different nations of the world.

The ADR stocks are traded on the NYSE, AMEX, and the NASDAQ. These are not just individual stocks of foreign corporations but groups of stocks that are assembled by a US bank or brokerage firm that is the sponsor of the ADR. To adjust for the difference in currency and other factors, there is a ratio set up by the sponsor financial institution to make the monetary value of the stock that is traded in the US have the same value in the company’s host country. The ratio is simple and clearly stated. As an example, if there is a ratio of 3:1 given, then one share of the ADR is equivalent to three shares of stock in the host country of that particular company.

These ADR shares are traded just like any other stock on all three US markets. The reasons these investments are so attractive is because of the ease at which you can purchase an investment in a foreign market without having to incur the administrative costs that usually exists with such a transaction. The ADRs are also attractive to foreign companies by giving them exposure to the US investment market.

For the American investor, the depository securities give you a chance at capital appreciation and possibly a dividend payment in a foreign market. Many of these are in emerging markets like China, Eastern Europe, and India where growth potential is greatest.

Things to consider with an ADR are the political stability of the country, monetary value, and inflation. Venezuela is a good example of a country to avoid since the government has a tendency to nationalize private business. This would make your stock nearly worthless. An example of a country with monetary inflation problems is Zimbabwe. That country had an inflation rate of 98% a day in mid 2008. With prices doubling in 24.7 hours, a $100 investment was only worth $0.75 in just 7 days.

Before you make an investment in any ADR, do your research of the company. The main difficulty that is experienced with this is the language barrier and access to it.

For other great resources from this site please look at Time To Pay Down Home Equity Line of Credit.

Stock Splits Explained

Hawk — Mon, 19 Apr 2010 04:23:01 +0000

A stock split is taking one stock and creating two from it. This is like when a person needs change for a 20 dollar bill and the cashier gives them 2 ten dollar bills in exchange for the $20 bill. The mental premise behind this is like that of a small child at Christmas. They would rather have 20 $1 bills than just 1 $20. It appears to be more. By splitting a company's shares, the stock price falls, making the shares more affordable by more investors. Additionally, the company get more shares to spread around.

It is important to note that this process does not increase the value of the company. What it does is reduce the value of the stock while at the same time increase the number of outstanding shares that are on the market. The advantage for a company to undertake this process is to make it easier for investors to purchase stock.

The ability to move or liquidate the stock is another reason a stock split may occur. Each stock on the exchange has 2 prices. There is the bid and the asking prices. The larger the stock price, the larger the spread between these two is. By keeping the value of the stock relatively low, the company can better control the bid and asking price, and making it easier for the stock to be exchanged on the open market without losing any significant revenue because of the price difference between the two.

For investors, many believe it is best to purchase a stock before it splits. This is because the cost savings on the commissions for the purchase is now divided in two. This is only relevant if your broker charges per trade and not a flat fee for their services.

In all truth, a stock split has no additional value to the stock holders. It does make the stock easier to liquidate because of the lower price, but there is no added value in monetary terms.

For another great resource from this site please look at Money Tips.

Charles Schwab ETFs

Hawk — Tue, 03 Nov 2009 18:03:38 +0000

Charles Schwab just announced commission free Charles Schwab ETFs. I am just amazed at how online discount brokers keep making it cheaper and cheaper for people to trade securities online.

Exchange Traded Funds

For those of you unfamiliar with ETFs, ETF stands for an exchange trade fund. ETFs are investment funds that track a market index (like an index mutual fund) that also can be traded like stocks.

Schwab ETFs

The Schwab ETFs can be traded commission free and they have very low operating expenses which make them a great way for investors to invest in various indexes. Here is a comparison of the commissions charged by Schwab, Fidelity, E-Trade, and Ameritrade:

Schwab ETF commission per trade - $0

Fidelity ETF commission per trade - $19.95

ETrade ETF commission per trade - $12.99

Ameritrade ETF commission per trade - $9.99

It will be interesting to see whether Fidelity, Etrade and Ameritrade lower their trading commissions to match Schwab. Competition is great for us consumers.

Schwab currently has 8 ETFs to choose from. Here is the list of Charles Schwab ETFs -

Schwab U.S. Broad Market ETF (SCHB)

Schwab U.S. Large-Cap ETF (SCHX)

Schwab U.S. Large-Cap Growth ETF (SCHG)

Schwab U.S. Large-Cap Value ETF (SCHV)

Schwab U.S. Small-Cap ETF (SCHA)

Schwab International Equity ETF (SCHF)

Schwab International Small-Cap Equity ETF (SCHC)

Schwab Emerging Markets Equity ETF (SCHE)

For people looking to build a diversified portfolio, exchange traded funds offer a great way to invest. The expense ratios are very low and now with the Charles Schwab ETFs you can trade them for free.

ING Direct Value Added Certificate of Deposit (CD)

Hawk — Wed, 07 Oct 2009 20:40:44 +0000

Today ING Direct announced its new ING Direct Value Added Certificate of Deposit. ING Direct is using this new Value Added CD to get customers to increase their deposits with ING Direct.

At first I did not understand what ING meant by a Value Added CD. But, after some research it turns out that all that "Value Added" means is that if buy this CD with money that is not already deposited with ING Direct, the bank will give you .15% more in interest over the 12 month CD term.

The current CD rates on an ING Direct 12 month CD are 2.10%. But, if you use new money to purchase a 12 month CD, you can buy a Value Added CD and increase your 12 month CD rate to 2.25%.

2.25% interest for a 12 month CD is not a bad rate. In fact, at 2.25% the ING Direct 12 month CD has the best 12 month CD rates in the United States. Metlife Bank CD rates are also at 2.25% for a 12 month CD, but Metlife Bank requires a $25,000 minimum deposit.

If you are looking to buy a CD, you might want to check out the ING Direct CDs.

Investing In Index Funds

Hawk — Wed, 16 Sep 2009 10:59:03 +0000

Investing in index funds is a great way to invest your long term savings. There is always a lot of debate among investors about whether you should invest in individual stocks, no-load mutual funds, closed mutual funds or index funds. Me personally, I love investing in index funds.

Index funds offer a lot of advantages for investors. My favorite things about index funds are their,

low management fees
ability to diversify my investments by investing in only one mutual fund
good mutual fund performance averages versus other types of mutual funds

All things considered, I think they are a great way to invest in mutual funds.

Mike from The Oblivious Investor today released a free ebook titled Investing Made Simple: Investing in Index Funds in 100 Pages Or Less. I immediately downloaded it and took a skim through it. I looks like Mike has written a great primer for anyone wanting to learn how to simplify their investments. Mike goes over the basics of investing as well as the basics of investing in index funds. I definitely recommend that you check out Mike's free ebook on investing.