Exchange-traded funds (ETFs) can be a great investment vehicle for small and large investors alike. These popular funds, which are similar to mutual funds but trade like stocks, have become a popular choice. However, there are some disadvantages that investors need to be aware of before jumping into the world of ETFs. In this article, we will look at some of the disadvantages of ETFs. Good information is an investor's most important tool. Read on to find out what you need to know to make an informed decision.
Trading Fees
One of the biggest advantages to ETFs is that they trade like stocks. As a result, investors can buy and sell during market hours as well as put advanced orders on the purchase such as limits and stops. Conversely, a typical mutual fund purchase is made after the market closes, once the net asset value of the fund is calculated.
Every time you buy or sell a stock you pay a commission; this is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investment's performance. No-load mutual funds, on the other hand, are sold without a commission or sales charge, which makes them advantageous, in this regard, compared to ETFs. It is important to be aware of trading fees when comparing an investment in ETFs to a similar investment in a mutual fund.
If you are deciding between similar ETFs and mutual funds, be aware of the different fee structures of each, including the trading fees. And remember, actively trading ETFs like stocks can severely reduce your investment performance as commissions can quickly pile up.
Underlying Fluctuations
ETFs, like mutual funds, are often lauded for the diversification that they offer to investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it can't be affected by volatility.
The potential for large swings will mainly depend on the scope of the fund. An ETF that tracks a broad market index such as the S&P 500 is likely to be less volatile than an ETF that tracks a specific industry or sector such as an oil services ETF. Therefore, it is vital to be aware of the fund's focus and what types of investments it includes.
In the case of international or global ETFs, the fundamentals of the country that the ETF is following are important, as is the credit worthiness of the currency in that country. Economic and social instability will also play a huge role in determining the success of any ETF that invests in a particular country or region. These factors must be kept in mind when making decisions regarding the viability of an ETF.
The rule here is to know what the ETF is tracking and understand the underlying risks associated with it.
Liquidity
The biggest factor in any ETF or stock or anything that is traded publicly is liquidity. Liquidity means that when you buy something, there is enough trading interest that you will be able to get out of it relatively quickly without moving the price.
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position in relation to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and ask. With so many new ETFs coming to market, you need to make sure that the ETF is liquid. The best way to do this is to study the spreads and the market movements over a week or month.
The rule here is to make sure that the ETF you are interested in does not have large spreads between the bid and ask prices.
Capital Gains Distributions
In some cases, an ETF will distribute capital gains to shareholders. This is not always desirable for ETF holders, as shareholders are responsible to pay the capital gains tax. It is usually better that the fund retains the capital gains and invests them, rather than distributing them and creating a tax liability for the investor.
Investors will usually want to re-invest those capital gains distributions and, in order to do this, they will need to go back to their brokers to buy more shares, which creates new fees.
Lump Sum vs. Dollar Cost Averaging
Buying an ETF with a lump sum is simple. Say $10,000 is what you want to invest in a particular ETF. You calculate how many shares you can buy and what the cost of the commission will be and you get a certain number of shares for your money.
However, there is also the tried-and-true small investor's way of building a position. This way is called dollar-cost averaging. With this method, you take the same $10,000 and invest it in monthly increments of, say, $1,000. This is called dollar-cost averaging because some months you will buy fewer shares with that $1,000 because the price is higher. In other months, the share prices will be lower and you will be able to buy more shares.
Of course, the big problem with this strategy is that ETFs are traded like stocks; therefore, every time you want to purchase $1,000 worth of that particular ETF, you have to pay your broker a commission to do so. As a result, it can become more costly to build a position in an ETF with monthly investments. For this reason, trading an ETF favors the lump sum approach.
The rule here is to try to invest a lump sum at one time to cut down on brokerage fees.
The Bottom Line
Now that you know the risks that come with ETFs you can make better investment decisions. ETFs have seen spectacular growth in popularity and, in many cases, this popularity is well deserved. But, like all good things, ETFs also have their drawbacks. Making sound investment decisions requires knowing all of the facts about a particular investment vehicle - ETFs are no different. Knowing the disadvantages will help steer you away from potential pitfalls and, if all goes well, toward tidy profits.
View the original article here
Monday, June 20, 2011
Sunday, June 19, 2011
5 Must-Have Metrics For Value Investors
If you're a value investor, there's no "right way" to analyze a stock. Even so, any successful investor will tell you that focusing on certain fundamental metrics is the path to cashing in gains. That's why you need to keep your eye on the metrics that matter.
As a value investor, you already know that when it comes to a company's health, the fundamentals are king. Fundamentals, which include a company's financial and operational data, are preferred by some of the most successful investors in history, including the likes of George Soros and Warren Buffett. That's no surprise, as knowing the ins and outs of a company's financial numbers - like earnings per share and sales growth - can help an in-the-know investor weed out the stocks that are trading for less than they're worth.
But that doesn't mean that all metrics are created equal – some deserve more of your attention than others. Here's a look at the five must-have fundamentals for your value portfolio.
1. Price-to-Earnings Ratio
While the price-to-earnings ratio (also known as the P/E ratio or earnings multiple) is likely one of the best-known fundamental ratios, it's also one of the most valuable. The P/E ratio divides a stock's share price by its earnings per share to come up with a value that represents how much investors are willing to shell out for each dollar of a company's earnings.
The P/E ratio is important because it provides a measuring stick to compare valuations across companies. A stock with a lower P/E ratio costs less per share for the same level of financial performance than one with a higher P/E. What that essentially means is that low P/E is the way to go.
But one place where the P/E ratio isn't as valuable is when you're comparing companies across different industries. While it's completely reasonable to see a telecom stock with a P/E in the low teens, a P/E closer to 40 isn't out of the line for a high-tech stock. As long as you're comparing apples to apples, though, the P/E ratio can give you an excellent glimpse at a stock's valuation.
2. Price-to-Book Ratio
If the P/E ratio is a good indicator of what investors are paying for each dollar of a company's earnings, the price-to-book ratio (or P/B ratio) is an equally good indication of what investors are willing to shell out for each dollar of a company's assets. The P/B ratio divides a stock's share price by its net assets, less any intangibles such as goodwill.
Taking out intangibles is an important element of the price-to-book ratio. It means that the P/B ratio indicates what investors are paying for real-world tangible assets, not the harder-to-value intangibles. As such, the P/B is a relatively conservative metric.
That's not to say that the P/B ratio isn't without its limitations; for companies that have significant intangibles, the price-to-book ratio can be misleadingly high. For most stocks, however, shooting for a P/B of 1.5 or less is a good path to solid value.
3. Debt-Equity
Knowing how a company finances its assets is essential for any investor – especially if you're on the prowl for the next big value stock. That's where the debt/equity ratio comes in. As with the P/E ratio, this ratio, which indicates what proportion of financing a company has received from debt (like loans or bonds) and equity (like the issuance of shares of stock), can vary from industry to industry.
Beware of above-industry debt/equity numbers, especially when an industry is facing tough times – it could be one of your first signs that a company is getting over its head in debt.
4. Free Cash Flow
While many investors don't actually know it, a company's earnings almost never equal the amount of cash it brings in. That's because companies report their financials using GAAP or IFRS accounting principles, not the balance of the corporate checking account. So while a company could be reporting a huge profit for its latest quarter, the corporate coffers could be bare.
Free cash flow solves this problem. It tells an investor how much actual cash a company is left with after any capital investments. Generally speaking, it's a good idea to shoot for positive free cash flow. As with the debt-equity ratio, this metric is all the more significant when times are tough.
5. PEG Ratio
The price/earnings to growth ratio (or PEG Ratio), is a modified version of the P/E ratio that also takes earnings growth into account. Looking for stocks based on their PEG ratios can be a good way to find companies that are undervalued but growing, and could gain attention in upcoming quarters. Like the P/E ratio, this metric varies from industry to industry.
Going Beyond the Numbers
When it comes to investing, the numbers aren't everything. There are times when low valuations are justified, and there are qualitative metrics – like management quality – that also factor into a company's valuation. Just because a stock seems cheap doesn't mean that it deserves to increase in value.
Ultimately, the only way to improve your fundamental analysis skills is to put them into practice. With these five must-have fundamentals under your belt, you're well on your way to finding the most undervalued stocks on the market.
View the original article here
As a value investor, you already know that when it comes to a company's health, the fundamentals are king. Fundamentals, which include a company's financial and operational data, are preferred by some of the most successful investors in history, including the likes of George Soros and Warren Buffett. That's no surprise, as knowing the ins and outs of a company's financial numbers - like earnings per share and sales growth - can help an in-the-know investor weed out the stocks that are trading for less than they're worth.
But that doesn't mean that all metrics are created equal – some deserve more of your attention than others. Here's a look at the five must-have fundamentals for your value portfolio.
1. Price-to-Earnings Ratio
While the price-to-earnings ratio (also known as the P/E ratio or earnings multiple) is likely one of the best-known fundamental ratios, it's also one of the most valuable. The P/E ratio divides a stock's share price by its earnings per share to come up with a value that represents how much investors are willing to shell out for each dollar of a company's earnings.
The P/E ratio is important because it provides a measuring stick to compare valuations across companies. A stock with a lower P/E ratio costs less per share for the same level of financial performance than one with a higher P/E. What that essentially means is that low P/E is the way to go.
But one place where the P/E ratio isn't as valuable is when you're comparing companies across different industries. While it's completely reasonable to see a telecom stock with a P/E in the low teens, a P/E closer to 40 isn't out of the line for a high-tech stock. As long as you're comparing apples to apples, though, the P/E ratio can give you an excellent glimpse at a stock's valuation.
2. Price-to-Book Ratio
If the P/E ratio is a good indicator of what investors are paying for each dollar of a company's earnings, the price-to-book ratio (or P/B ratio) is an equally good indication of what investors are willing to shell out for each dollar of a company's assets. The P/B ratio divides a stock's share price by its net assets, less any intangibles such as goodwill.
Taking out intangibles is an important element of the price-to-book ratio. It means that the P/B ratio indicates what investors are paying for real-world tangible assets, not the harder-to-value intangibles. As such, the P/B is a relatively conservative metric.
That's not to say that the P/B ratio isn't without its limitations; for companies that have significant intangibles, the price-to-book ratio can be misleadingly high. For most stocks, however, shooting for a P/B of 1.5 or less is a good path to solid value.
3. Debt-Equity
Knowing how a company finances its assets is essential for any investor – especially if you're on the prowl for the next big value stock. That's where the debt/equity ratio comes in. As with the P/E ratio, this ratio, which indicates what proportion of financing a company has received from debt (like loans or bonds) and equity (like the issuance of shares of stock), can vary from industry to industry.
Beware of above-industry debt/equity numbers, especially when an industry is facing tough times – it could be one of your first signs that a company is getting over its head in debt.
4. Free Cash Flow
While many investors don't actually know it, a company's earnings almost never equal the amount of cash it brings in. That's because companies report their financials using GAAP or IFRS accounting principles, not the balance of the corporate checking account. So while a company could be reporting a huge profit for its latest quarter, the corporate coffers could be bare.
Free cash flow solves this problem. It tells an investor how much actual cash a company is left with after any capital investments. Generally speaking, it's a good idea to shoot for positive free cash flow. As with the debt-equity ratio, this metric is all the more significant when times are tough.
5. PEG Ratio
The price/earnings to growth ratio (or PEG Ratio), is a modified version of the P/E ratio that also takes earnings growth into account. Looking for stocks based on their PEG ratios can be a good way to find companies that are undervalued but growing, and could gain attention in upcoming quarters. Like the P/E ratio, this metric varies from industry to industry.
Going Beyond the Numbers
When it comes to investing, the numbers aren't everything. There are times when low valuations are justified, and there are qualitative metrics – like management quality – that also factor into a company's valuation. Just because a stock seems cheap doesn't mean that it deserves to increase in value.
Ultimately, the only way to improve your fundamental analysis skills is to put them into practice. With these five must-have fundamentals under your belt, you're well on your way to finding the most undervalued stocks on the market.
View the original article here
Saturday, June 18, 2011
Questions To Ask Before You Refinance
Refinancing your mortgage can be a great way to save money, but it's not a sure thing. Before you take the plunge, ask yourself these six questions to avoid making a major money mistake.
1. Do I have the time to spare?
This question is very basic, but you shouldn't overlook it. If you're already very busy with work or other major obligations, it may be in your best interests to wait until you have more time to deal with the details of the loan. If you are too busy or stressed out, you might make a mistake, missing something important in the fine print or falling prey to a bad loan. Refinancing should be done with the same extreme care you put into getting your original mortgage - it's just as big of a decision.
2. Will I break even or come out ahead?
Most people assume that refinancing will put them ahead, otherwise, they wouldn't do it. But how realistic is this assumption? Any number of situations could arise - from work relocation to family emergency – that could influence your financial situation and make your decision to refinance an unprofitable one. Unfortunately, it's not possible to predict with complete accuracy whether you will own the home long enough to come out ahead on a refinance, but you can make an educated guess. Since it is possible to lose money on a refinance, it's important to consider whether you can afford that risk.
3. Am I disciplined enough to resist rolling other debt into my mortgage?
It might sound like a good idea to pay off some of your other debts by refinancing them into your mortgage. Why owe money to multiple people and make multiple debt payments every month, when you could have just one debt and just one major monthly payment, all at a low interest rate? Well, let's use an auto loan as an example. Auto loans often have higher rates than mortgage loans (depending on what market conditions were like when each loan was taken out, of course), but they also have fairly short terms. If you take that short-term loan and turn it into a 30-year loan, even at a lower interest rate, you're likely to end up paying more. You didn't think the bank was offering to consolidate your debt out of the kindness of its heart, did you? Banks are businesses. They're in it for the profit and if they can stretch out a loan for you, they're often happy to do it because it allows them to collect more interest.
4. Am I likely to qualify for the rate I want?
The current interest rates for a refinance quoted on major financial web sites and the evening news can only give you a general idea of what interest rate you might be able to get. The details of your specific situation, such as your credit score and the type of loan you want to refinance into, will affect the rates actually available to you. If you don't qualify for the lowest advertised rates, is it still worthwhile to refinance? Talk to a few lenders to see what kind of rate you can expect, but keep in mind that the unscrupulous ones will quote any rate to get your business. If you trust the person who did your first mortgage, that's a good place to start your research.
5. Can I meet today's tighter lending standards?
If you took out your last mortgage before the housing bubble, when no-doc loans were commonplace, you may be stunned by the borrower requirements and documentation requirements to refinance in today's market. Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.
6. Can I prevent going from a good loan to a bad loan?
If you're not savvy when it comes to money, contracts and salespeople (in this case, loan officers), or you just don't trust yourself to not make a mistake, refinancing might not be in your best interest. If you know you have a good loan, you may not want to roll the dice and see what you end up with when you refinance. And if you already have a bad loan, refinancing will be useless if you just end up in another bad loan. Also, there's always the risk of bait and switch - just like when you first bought your home, a lender may quote you one interest rate and set of fees on the day you decide to work with them and give you something entirely different when it's time to sign the paperwork.
The Bottom Line
Yes, refinancing can be a great way to save money. If you do it right, you can improve your short-term cash flow while also increasing your long-term net worth. But a bad refinance can put you in a situation where the only person benefiting is the loan officer. If your answer to any of the questions in this article is "no," you may be better off looking for simpler ways to decrease your expenses, such reviewing your insurance policies, cutting your grocery bill or looking for ways to lower other household bills.
View the original article here
1. Do I have the time to spare?
This question is very basic, but you shouldn't overlook it. If you're already very busy with work or other major obligations, it may be in your best interests to wait until you have more time to deal with the details of the loan. If you are too busy or stressed out, you might make a mistake, missing something important in the fine print or falling prey to a bad loan. Refinancing should be done with the same extreme care you put into getting your original mortgage - it's just as big of a decision.
2. Will I break even or come out ahead?
Most people assume that refinancing will put them ahead, otherwise, they wouldn't do it. But how realistic is this assumption? Any number of situations could arise - from work relocation to family emergency – that could influence your financial situation and make your decision to refinance an unprofitable one. Unfortunately, it's not possible to predict with complete accuracy whether you will own the home long enough to come out ahead on a refinance, but you can make an educated guess. Since it is possible to lose money on a refinance, it's important to consider whether you can afford that risk.
3. Am I disciplined enough to resist rolling other debt into my mortgage?
It might sound like a good idea to pay off some of your other debts by refinancing them into your mortgage. Why owe money to multiple people and make multiple debt payments every month, when you could have just one debt and just one major monthly payment, all at a low interest rate? Well, let's use an auto loan as an example. Auto loans often have higher rates than mortgage loans (depending on what market conditions were like when each loan was taken out, of course), but they also have fairly short terms. If you take that short-term loan and turn it into a 30-year loan, even at a lower interest rate, you're likely to end up paying more. You didn't think the bank was offering to consolidate your debt out of the kindness of its heart, did you? Banks are businesses. They're in it for the profit and if they can stretch out a loan for you, they're often happy to do it because it allows them to collect more interest.
4. Am I likely to qualify for the rate I want?
The current interest rates for a refinance quoted on major financial web sites and the evening news can only give you a general idea of what interest rate you might be able to get. The details of your specific situation, such as your credit score and the type of loan you want to refinance into, will affect the rates actually available to you. If you don't qualify for the lowest advertised rates, is it still worthwhile to refinance? Talk to a few lenders to see what kind of rate you can expect, but keep in mind that the unscrupulous ones will quote any rate to get your business. If you trust the person who did your first mortgage, that's a good place to start your research.
5. Can I meet today's tighter lending standards?
If you took out your last mortgage before the housing bubble, when no-doc loans were commonplace, you may be stunned by the borrower requirements and documentation requirements to refinance in today's market. Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.
6. Can I prevent going from a good loan to a bad loan?
If you're not savvy when it comes to money, contracts and salespeople (in this case, loan officers), or you just don't trust yourself to not make a mistake, refinancing might not be in your best interest. If you know you have a good loan, you may not want to roll the dice and see what you end up with when you refinance. And if you already have a bad loan, refinancing will be useless if you just end up in another bad loan. Also, there's always the risk of bait and switch - just like when you first bought your home, a lender may quote you one interest rate and set of fees on the day you decide to work with them and give you something entirely different when it's time to sign the paperwork.
The Bottom Line
Yes, refinancing can be a great way to save money. If you do it right, you can improve your short-term cash flow while also increasing your long-term net worth. But a bad refinance can put you in a situation where the only person benefiting is the loan officer. If your answer to any of the questions in this article is "no," you may be better off looking for simpler ways to decrease your expenses, such reviewing your insurance policies, cutting your grocery bill or looking for ways to lower other household bills.
View the original article here
Friday, June 17, 2011
Basics on Currency Swaps
Currency swaps are an essential financial instrument utilized by banks, multinational corporations and institutional investors. Although these type of swaps function in a similar fashion to interest rate swaps and equity swaps, there are some major fundamental qualities that make currency swaps unique and thus slightly more complicated.
A currency swap involves two parties that exchange a notional principal with one another in order to gain exposure to a desired currency. Following the initial notional exchange, periodic cash flows are exchanged in the appropriate currency.
Let's back up for a minute to fully illustrate the function of a currency swap.
Purpose of Currency Swaps
An American multinational company (Company A) may wish to expand its operations into Brazil. Simultaneously, a Brazilian company (Company B) is seeking entrance into the U.S. market. Financial problems that Company A will typically face stem from Brazilian banks' unwillingness to extend loans to international corporations. Therefore, in order to take out a loan in Brazil, Company A might be subject to a high interest rate of 10%. Likewise, Company B will not be able to attain a loan with a favorable interest rate in the U.S. market. The Brazilian Company may only be able to obtain credit at 9%.
While the cost of borrowing in the international market is unreasonably high, both of these companies have a competitive advantage for taking out loans from their domestic banks. Company A could hypothetically take out a loan from an American bank at 4% and Company B can borrow from its local institutions at 5%. The reason for this discrepancy in lending rates is due to the partnerships and ongoing relations that domestic companies usually have with their local lending authorities.
Setting Up the Currency Swap
Based on the companies' competitive advantages of borrowing in their domestic markets, Company A will borrow the funds that Company B needs from an American bank while Company B borrows the funds that Company A will need through a Brazilian Bank. Both companies have effectively taken out a loan for the other company. The loans are then swapped. Assuming that the exchange rate between Brazil (BRL) and the U.S (USD) is 1.60BRL/1.00 USD and that both Companys require the same equivalent amount of funding, the Brazilian company receives $100 million from its American counterpart in exchange for 160 million real; these notional amounts are swapped.
Company A now holds the funds it required in real while Company B is in possession of USD. However, both companies have to pay interest on the loans to their respective domestic banks in the original borrowed currency. Basically, although Company B swapped BRL for USD, it still must satisfy its obligation to the Brazilian bank in real. Company A faces a similar situation with its domestic bank. As a result, both companies will incur interest payments equivalent to the other party's cost of borrowing. This last point forms the basis of the advantages that a currency swap provides.
Advantages of the Currency Swap
Rather than borrowing real at 10% Company A will have to satisfy the 5% interest rate payments incurred by Company B under its agreement with the Brazilian banks. Company A has effectively managed to replace a 10% loan with a 5% loan. Similarly, Company B no longer has to borrow funds from American institutions at 9%, but realizes the 4% borrowing cost incurred by its swap counterparty. Under this scenario, Company B actually managed to reduce its cost of debt by more than half. Instead of borrowing from international banks, both companies borrow domestically and lend to one another at the lower rate. Figure 1: Characteristics of a
Currency Swap Basics
There are a few basic considerations that differentiate plain vanilla currency swaps from other types of swaps. In contrast to plain vanilla interest rate swaps and return based swaps, currency based instruments include an immediate and terminal exchange of notional principal. In the above example, the US$100 million and 160 million reals are exchanged at initiation of the contract. At termination, the notional principals are returned to the appropriate party. Company A would have to return the notional principal in reals back to Company B, and vice versa. The terminal exchange, however, exposes both companies to foreign exchange risk as the exchange rate will likely not remain stable at original 1.60BRL/1.00USD level.
Additionally, most swaps involve a net payment. In a total return swap, for example, the return on an index can be swapped for the return on a particular stock. Every settlement date, the return of one party is netted against the return of the other and only one payment is made. Contrastingly, because the periodic payments associated with currency swaps are not denominated in the same currency, payments are not netted. Every settlement period, both parties are obligated to make payments to the counterparty.
Bottom Line
Currency swaps are over-the-counter derivatives that serve two main purposes. First, as discussed in this article, they can be used to minimize foreign borrowing costs. Second, they could be used as tools to hedge exposure to exchange rate risk. Corporations with international exposure will often utilize these instruments for the former purpose while institutional investors will typically implement currency swaps as part of a comprehensive hedging strategy.
View the original article here
A currency swap involves two parties that exchange a notional principal with one another in order to gain exposure to a desired currency. Following the initial notional exchange, periodic cash flows are exchanged in the appropriate currency.
Let's back up for a minute to fully illustrate the function of a currency swap.
Purpose of Currency Swaps
An American multinational company (Company A) may wish to expand its operations into Brazil. Simultaneously, a Brazilian company (Company B) is seeking entrance into the U.S. market. Financial problems that Company A will typically face stem from Brazilian banks' unwillingness to extend loans to international corporations. Therefore, in order to take out a loan in Brazil, Company A might be subject to a high interest rate of 10%. Likewise, Company B will not be able to attain a loan with a favorable interest rate in the U.S. market. The Brazilian Company may only be able to obtain credit at 9%.
While the cost of borrowing in the international market is unreasonably high, both of these companies have a competitive advantage for taking out loans from their domestic banks. Company A could hypothetically take out a loan from an American bank at 4% and Company B can borrow from its local institutions at 5%. The reason for this discrepancy in lending rates is due to the partnerships and ongoing relations that domestic companies usually have with their local lending authorities.
Setting Up the Currency Swap
Based on the companies' competitive advantages of borrowing in their domestic markets, Company A will borrow the funds that Company B needs from an American bank while Company B borrows the funds that Company A will need through a Brazilian Bank. Both companies have effectively taken out a loan for the other company. The loans are then swapped. Assuming that the exchange rate between Brazil (BRL) and the U.S (USD) is 1.60BRL/1.00 USD and that both Companys require the same equivalent amount of funding, the Brazilian company receives $100 million from its American counterpart in exchange for 160 million real; these notional amounts are swapped.
Company A now holds the funds it required in real while Company B is in possession of USD. However, both companies have to pay interest on the loans to their respective domestic banks in the original borrowed currency. Basically, although Company B swapped BRL for USD, it still must satisfy its obligation to the Brazilian bank in real. Company A faces a similar situation with its domestic bank. As a result, both companies will incur interest payments equivalent to the other party's cost of borrowing. This last point forms the basis of the advantages that a currency swap provides.
Advantages of the Currency Swap
Rather than borrowing real at 10% Company A will have to satisfy the 5% interest rate payments incurred by Company B under its agreement with the Brazilian banks. Company A has effectively managed to replace a 10% loan with a 5% loan. Similarly, Company B no longer has to borrow funds from American institutions at 9%, but realizes the 4% borrowing cost incurred by its swap counterparty. Under this scenario, Company B actually managed to reduce its cost of debt by more than half. Instead of borrowing from international banks, both companies borrow domestically and lend to one another at the lower rate. Figure 1: Characteristics of a
Currency Swap Basics
There are a few basic considerations that differentiate plain vanilla currency swaps from other types of swaps. In contrast to plain vanilla interest rate swaps and return based swaps, currency based instruments include an immediate and terminal exchange of notional principal. In the above example, the US$100 million and 160 million reals are exchanged at initiation of the contract. At termination, the notional principals are returned to the appropriate party. Company A would have to return the notional principal in reals back to Company B, and vice versa. The terminal exchange, however, exposes both companies to foreign exchange risk as the exchange rate will likely not remain stable at original 1.60BRL/1.00USD level.
Additionally, most swaps involve a net payment. In a total return swap, for example, the return on an index can be swapped for the return on a particular stock. Every settlement date, the return of one party is netted against the return of the other and only one payment is made. Contrastingly, because the periodic payments associated with currency swaps are not denominated in the same currency, payments are not netted. Every settlement period, both parties are obligated to make payments to the counterparty.
Bottom Line
Currency swaps are over-the-counter derivatives that serve two main purposes. First, as discussed in this article, they can be used to minimize foreign borrowing costs. Second, they could be used as tools to hedge exposure to exchange rate risk. Corporations with international exposure will often utilize these instruments for the former purpose while institutional investors will typically implement currency swaps as part of a comprehensive hedging strategy.
View the original article here
Thursday, June 16, 2011
Mutual Fund Or ETF?
Exchange-traded funds (ETFs) were once described as the new kids on the investment block, but today they are giving traditional mutual funds a run for their money. Both ETFs and mutual funds are viable choices for investors. But, with many mutual funds and ETFs available on the market, it's important for investors to familiarize themselves with the differences between products to ensure they are making appropriate investment decisions. While mutual funds and ETFs share similar traits, there are differences between the two that investors must consider when deciding which to use. Read on to find out more.
Legal Structure of Funds
Both mutual funds and ETFs can vary in terms of their legal structure. Mutual funds can typically be broken down into two types.
Open-Ended Funds These funds dominate the mutual fund marketplace in terms of volume and assets under management. With open-ended funds, purchases and sales of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue; as more investors buy into the fund, more shares are issued. Federal regulations require a daily valuation process, called marking to market, which subsequently adjusts the fund's per-share price to reflect changes in portfolio (asset) value. The value of the individual's shares is not affected by the number of shares outstanding.
Closed-End Funds These funds issue only a specific number of shares and do not issue new shares as investor demand grows. Prices are not determined by the net asset value (NAV) of the fund, but are driven by investor demand. Purchases of shares are often made at a premium or discount to NAV.
Legal Structure of ETFs
An ETF will have one of three structures: Exchange-Traded Open-End Index Mutual Fund
This fund is registered under the SEC's Investment Company Act of 1940, whereby dividends are reinvested on the day of receipt and paid to shareholders in cash every quarter. Securities lending is allowed and derivatives may be used in the fund.
Exchange-Traded Unit Investment Trust (UIT) Exchange-traded UITs are also governed by the Investment Company Act of 1940, but must attempt to fully replicate their specific indexes, limit investments in a single issue to 25% or less, and set additional weighting limits for diversified and non-diversified funds. UITs do not automatically reinvest dividends, but pay cash dividends quarterly. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA).
Exchange-Traded Grantor Trust This type of ETF bears a strong resemblance to a closed-ended fund but, unlike ETFs and closed-end mutual funds, an investor owns the underlying shares in the companies that the ETF is invested in, including the voting rights associated with being a shareholder. The composition of the fund does not change; dividends are not reinvested but instead are paid directly to shareholders. Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) are one example of this type of ETF.
Trading Process
ETFs offer greater flexibility than mutual funds when it comes to trading. Purchases and sales take place directly between investors and the fund. The price of the fund is not determined until end of business day, when net asset value (NAV) is determined. An ETF, by comparison, is created or redeemed in large lots by institutional investors and the shares trade throughout the day between investors like a stock.
Like a stock, ETFs can be sold short. Those provisions are important to traders and speculators, but of little interest to long-term investors. But, because ETFs are priced continuously by the market, there is the potential for trading to take place at a price other than the true NAV, which may introduce the opportunity for arbitrage.
Expenses
Due to the passive nature of indexed strategies, the internal expenses of most ETFs are considerably lower than those of many mutual funds. Of the more than 900 available ETFs listed on Morningstar in 2010, those with the lowest expense ratios charged about .10%, while those with the highest expenses ran about 1.25%. By comparison, the lowest fund fees range from .01% to more than 10% per year for other funds.
Another expense that should be considered is the product acquisition costs, if any. Mutual funds can often be purchased at NAV, or stripped of any loads, but many (they are often sold by an intermediary) have commissions and loads associated with them, some of which run as high as 8.5%. ETF purchases are free of broker loads.
In both cases, additional transaction fees are usually assessed, but pricing will largely depend on the size of your account, the size of the purchase and the pricing schedule associated with each brokerage firm. Clients of advisors who hold institutional accounts for their clients tend to benefit from lower trading costs, often as low as $9.95 per ETF purchase or $20 for mutual funds. Additional cost considerations should be given if you plan to use dollar-cost averaging to buy into the funds or ETFs, because frequent trading of ETFs could significantly increase commissions, offsetting the benefits resulting from lower fees.
Tax Advantages and Disadvantages
ETFs offer tax advantages to investors. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ETFs are more tax efficient than mutual funds because of the way they are created and redeemed. For example, suppose that an investor redeems $50,000 from a traditional Standard & Poor's 500 Index (S&P 500) fund. To pay that to the investor, the fund must sell $50,000 worth of stock. If appreciated stocks are sold to free up the cash for the investor, then the fund captures that capital gain, which is distributed to shareholders before year-end. As a result, shareholders pay the taxes for the turnover within the fund. If an ETF shareholder wishes to redeem $50,000, the ETF doesn't sell any stock in the portfolio. Instead it offers shareholders "in-kind redemptions", which limit the possibility of paying capital gains.
Liquidity
Liquidity is usually measured by the daily trade volume, which is generally expressed as the number of shares traded per day. Thinly traded securities are illiquid and have higher spreads and volatility. When there is little interest and low trading volumes, the spread increases, causing the buyer to pay a price premium and forcing the seller into a price discount in order to get the security sold. ETFs, for the most part, are immune to this. ETF liquidity is not related to its daily trading volume, but rather to the liquidity of the stocks included in the index.
Broad-based index ETFs with significant assets and trading volume have liquidity. For narrow ETF categories, or even country-specific products that have relatively small amounts of assets and are thinly traded, ETF liquidity could dry up in severe market conditions, so you may wish to steer clear of ETFs that track thinly traded markets or have very few underlying securities or small market caps in the respective index.
ETF Survivability
A consideration before investing in ETFs is the potential that fund companies will go bust. As more product providers enter the marketplace, the financial health and longevity of the sponsor companies will play a greater role. Investors should not invest in ETFs of a company that is likely to disappear, thereby forcing an unplanned liquidation of the funds. The results for investors who hold such funds in their taxable accounts could be an unwelcome taxable event. Unfortunately, it is next to impossible to gauge the financial viability of a startup ETF company, as many are privately held. As such, you should limit your ETF investments to firmly established providers or market dominators to play it safe.
The Bottom Line
As products are rolled out, investors tend to benefit from increased choices and better variations of product and price competition among providers. It's important to note the differences between ETFs and mutual funds, and how those differences may impact your bottom line and investment processes.
View the original article here
Legal Structure of Funds
Both mutual funds and ETFs can vary in terms of their legal structure. Mutual funds can typically be broken down into two types.
Open-Ended Funds These funds dominate the mutual fund marketplace in terms of volume and assets under management. With open-ended funds, purchases and sales of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue; as more investors buy into the fund, more shares are issued. Federal regulations require a daily valuation process, called marking to market, which subsequently adjusts the fund's per-share price to reflect changes in portfolio (asset) value. The value of the individual's shares is not affected by the number of shares outstanding.
Closed-End Funds These funds issue only a specific number of shares and do not issue new shares as investor demand grows. Prices are not determined by the net asset value (NAV) of the fund, but are driven by investor demand. Purchases of shares are often made at a premium or discount to NAV.
Legal Structure of ETFs
An ETF will have one of three structures: Exchange-Traded Open-End Index Mutual Fund
This fund is registered under the SEC's Investment Company Act of 1940, whereby dividends are reinvested on the day of receipt and paid to shareholders in cash every quarter. Securities lending is allowed and derivatives may be used in the fund.
Exchange-Traded Unit Investment Trust (UIT) Exchange-traded UITs are also governed by the Investment Company Act of 1940, but must attempt to fully replicate their specific indexes, limit investments in a single issue to 25% or less, and set additional weighting limits for diversified and non-diversified funds. UITs do not automatically reinvest dividends, but pay cash dividends quarterly. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA).
Exchange-Traded Grantor Trust This type of ETF bears a strong resemblance to a closed-ended fund but, unlike ETFs and closed-end mutual funds, an investor owns the underlying shares in the companies that the ETF is invested in, including the voting rights associated with being a shareholder. The composition of the fund does not change; dividends are not reinvested but instead are paid directly to shareholders. Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) are one example of this type of ETF.
Trading Process
ETFs offer greater flexibility than mutual funds when it comes to trading. Purchases and sales take place directly between investors and the fund. The price of the fund is not determined until end of business day, when net asset value (NAV) is determined. An ETF, by comparison, is created or redeemed in large lots by institutional investors and the shares trade throughout the day between investors like a stock.
Like a stock, ETFs can be sold short. Those provisions are important to traders and speculators, but of little interest to long-term investors. But, because ETFs are priced continuously by the market, there is the potential for trading to take place at a price other than the true NAV, which may introduce the opportunity for arbitrage.
Expenses
Due to the passive nature of indexed strategies, the internal expenses of most ETFs are considerably lower than those of many mutual funds. Of the more than 900 available ETFs listed on Morningstar in 2010, those with the lowest expense ratios charged about .10%, while those with the highest expenses ran about 1.25%. By comparison, the lowest fund fees range from .01% to more than 10% per year for other funds.
Another expense that should be considered is the product acquisition costs, if any. Mutual funds can often be purchased at NAV, or stripped of any loads, but many (they are often sold by an intermediary) have commissions and loads associated with them, some of which run as high as 8.5%. ETF purchases are free of broker loads.
In both cases, additional transaction fees are usually assessed, but pricing will largely depend on the size of your account, the size of the purchase and the pricing schedule associated with each brokerage firm. Clients of advisors who hold institutional accounts for their clients tend to benefit from lower trading costs, often as low as $9.95 per ETF purchase or $20 for mutual funds. Additional cost considerations should be given if you plan to use dollar-cost averaging to buy into the funds or ETFs, because frequent trading of ETFs could significantly increase commissions, offsetting the benefits resulting from lower fees.
Tax Advantages and Disadvantages
ETFs offer tax advantages to investors. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ETFs are more tax efficient than mutual funds because of the way they are created and redeemed. For example, suppose that an investor redeems $50,000 from a traditional Standard & Poor's 500 Index (S&P 500) fund. To pay that to the investor, the fund must sell $50,000 worth of stock. If appreciated stocks are sold to free up the cash for the investor, then the fund captures that capital gain, which is distributed to shareholders before year-end. As a result, shareholders pay the taxes for the turnover within the fund. If an ETF shareholder wishes to redeem $50,000, the ETF doesn't sell any stock in the portfolio. Instead it offers shareholders "in-kind redemptions", which limit the possibility of paying capital gains.
Liquidity
Liquidity is usually measured by the daily trade volume, which is generally expressed as the number of shares traded per day. Thinly traded securities are illiquid and have higher spreads and volatility. When there is little interest and low trading volumes, the spread increases, causing the buyer to pay a price premium and forcing the seller into a price discount in order to get the security sold. ETFs, for the most part, are immune to this. ETF liquidity is not related to its daily trading volume, but rather to the liquidity of the stocks included in the index.
Broad-based index ETFs with significant assets and trading volume have liquidity. For narrow ETF categories, or even country-specific products that have relatively small amounts of assets and are thinly traded, ETF liquidity could dry up in severe market conditions, so you may wish to steer clear of ETFs that track thinly traded markets or have very few underlying securities or small market caps in the respective index.
ETF Survivability
A consideration before investing in ETFs is the potential that fund companies will go bust. As more product providers enter the marketplace, the financial health and longevity of the sponsor companies will play a greater role. Investors should not invest in ETFs of a company that is likely to disappear, thereby forcing an unplanned liquidation of the funds. The results for investors who hold such funds in their taxable accounts could be an unwelcome taxable event. Unfortunately, it is next to impossible to gauge the financial viability of a startup ETF company, as many are privately held. As such, you should limit your ETF investments to firmly established providers or market dominators to play it safe.
The Bottom Line
As products are rolled out, investors tend to benefit from increased choices and better variations of product and price competition among providers. It's important to note the differences between ETFs and mutual funds, and how those differences may impact your bottom line and investment processes.
View the original article here
Wednesday, June 15, 2011
Forex Or Stocks?
Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chips and industrials, to the fast-paced futures and forex markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice.
The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders, including swing, day and scalp traders, may prefer markets where price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying into blue chip stocks, indexes and industrials.
Forex Vs. Blue Chips
The foreign exchange market is the world's largest financial market, accounting for more than $4 trillion in average traded value each day as of 2011. Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants.
Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions, and have a history of paying dividends. Blue chips are generally considered to be less volatile than many other investments, and are often used to provide steady growth potential to investors' portfolios.
Volatility Volatility is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.
Leverage Leverage is another consideration. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily. While it certainly provides the springboard to build equity with a very small investment - forex accounts can be opened with as little as $100 - leverage can just as easily destroy a trading account.
Trading Hours Another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30am to 4pm Eastern Standard Time, Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5pm EST Sunday, through 5pm EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U.S. Asian and European markets, with good liquidity virtually any time of day, is an added bonus to traders whose schedules would otherwise limit their trading activity.
Forex Vs. Indexes
Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market. In the U.S. financial markets, major indexes include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500) and the Russell 2000. The indexes provide traders and investors with an important method of gauging the movement of the overall market.
A range of products provide traders and investors broad market exposure through stock market indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as S&P Depository Receipts (SPY) and the Nasdaq-100 (QQQQ), are widely traded. Stock index futures and e-mini index futures are other popular instruments based on the underlying indexes. The e-minis boast strong liquidity and have become favorites among short-term traders because of favorable average daily price ranges. In addition, the contract size is much more affordable than the full-sized stock index futures contracts. The e-minis, including the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000 and the mini-sized Dow Futures are traded around the clock on all-electronic, transparent networks.
Volatility The volatility and liquidity of the e-mini contracts is enjoyed by the many short-term traders who participate in stock market indexes. The major equity index futures trade at an average daily notional value of $145 billion, exceeding the combined traded dollar volume of the underlying 500 stocks. The average daily range in price movement of the e-mini contracts affords great opportunity for profiting from short-term market moves.
While the average daily traded value pales in comparison to that of the forex markets, the e-minis provide many of the same perks that are available to forex traders, including reliable liquidity, daily average price movement quotes that are conducive to short-term profits, and trading outside of regular U.S. market hours.
Leverage Futures traders can use large amounts of leverage similar to that available to forex traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be used by a broker to cover account losses. Minimum margin requirements are set by the exchanges where the contracts are traded, and can be as little as 5% of the contract's value. Brokers may choose to require higher margin amounts. Like forex, then, futures traders have the ability to trade in large position sizes with a small investment, creating the opportunity to enjoy huge gains - or suffer devastating losses.
Trading hours While trading does exist nearly around the clock for the electronically traded e-minis (trading ceases for about an hour a day to enable institutional investors to value their positions), the volume may be lower than the forex market, and liquidity during off-market hours could be a concern depending on the particular contract and time of day.
Tax Treatment
While outside the scope of this article, it should be noted that various trading instruments are treated differently at tax time. Short-term gains on futures contracts, for example, may be eligible for lower tax rates than short-term gains on stocks. In addition, active traders may be eligible to choose the mark-to-market (MTM) status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. In order to claim MTM status, the IRS expects trading to be the individual's primary business; IRS Publication 550 and Revenue Procedure 99-17 cover the basic guidelines on how to properly qualify as a trader for tax purposes. It is strongly recommended that traders and investors seek the advice and expertise of a qualified accountant or other tax specialist to most favorably manage investment activities and related tax liabilities.
The Bottom Line
The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice. Regardless of which instrument(s) a trader or investor selects, the decision should be based on which is the best fit.
View the original article here
The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders, including swing, day and scalp traders, may prefer markets where price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying into blue chip stocks, indexes and industrials.
Forex Vs. Blue Chips
The foreign exchange market is the world's largest financial market, accounting for more than $4 trillion in average traded value each day as of 2011. Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants.
Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions, and have a history of paying dividends. Blue chips are generally considered to be less volatile than many other investments, and are often used to provide steady growth potential to investors' portfolios.
Volatility Volatility is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.
Leverage Leverage is another consideration. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily. While it certainly provides the springboard to build equity with a very small investment - forex accounts can be opened with as little as $100 - leverage can just as easily destroy a trading account.
Trading Hours Another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30am to 4pm Eastern Standard Time, Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5pm EST Sunday, through 5pm EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U.S. Asian and European markets, with good liquidity virtually any time of day, is an added bonus to traders whose schedules would otherwise limit their trading activity.
Forex Vs. Indexes
Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market. In the U.S. financial markets, major indexes include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500) and the Russell 2000. The indexes provide traders and investors with an important method of gauging the movement of the overall market.
A range of products provide traders and investors broad market exposure through stock market indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as S&P Depository Receipts (SPY) and the Nasdaq-100 (QQQQ), are widely traded. Stock index futures and e-mini index futures are other popular instruments based on the underlying indexes. The e-minis boast strong liquidity and have become favorites among short-term traders because of favorable average daily price ranges. In addition, the contract size is much more affordable than the full-sized stock index futures contracts. The e-minis, including the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000 and the mini-sized Dow Futures are traded around the clock on all-electronic, transparent networks.
Volatility The volatility and liquidity of the e-mini contracts is enjoyed by the many short-term traders who participate in stock market indexes. The major equity index futures trade at an average daily notional value of $145 billion, exceeding the combined traded dollar volume of the underlying 500 stocks. The average daily range in price movement of the e-mini contracts affords great opportunity for profiting from short-term market moves.
While the average daily traded value pales in comparison to that of the forex markets, the e-minis provide many of the same perks that are available to forex traders, including reliable liquidity, daily average price movement quotes that are conducive to short-term profits, and trading outside of regular U.S. market hours.
Leverage Futures traders can use large amounts of leverage similar to that available to forex traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be used by a broker to cover account losses. Minimum margin requirements are set by the exchanges where the contracts are traded, and can be as little as 5% of the contract's value. Brokers may choose to require higher margin amounts. Like forex, then, futures traders have the ability to trade in large position sizes with a small investment, creating the opportunity to enjoy huge gains - or suffer devastating losses.
Trading hours While trading does exist nearly around the clock for the electronically traded e-minis (trading ceases for about an hour a day to enable institutional investors to value their positions), the volume may be lower than the forex market, and liquidity during off-market hours could be a concern depending on the particular contract and time of day.
Tax Treatment
While outside the scope of this article, it should be noted that various trading instruments are treated differently at tax time. Short-term gains on futures contracts, for example, may be eligible for lower tax rates than short-term gains on stocks. In addition, active traders may be eligible to choose the mark-to-market (MTM) status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. In order to claim MTM status, the IRS expects trading to be the individual's primary business; IRS Publication 550 and Revenue Procedure 99-17 cover the basic guidelines on how to properly qualify as a trader for tax purposes. It is strongly recommended that traders and investors seek the advice and expertise of a qualified accountant or other tax specialist to most favorably manage investment activities and related tax liabilities.
The Bottom Line
The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice. Regardless of which instrument(s) a trader or investor selects, the decision should be based on which is the best fit.
View the original article here
The Pros And Cons Of Trading Forex In An Overseas Account
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed on July 15, 2010, and introduced some changes to the way retail investors participate in the foreign exchange market. The majority of these changes went into effect in October 2010. However, as with all sweeping legislation, there are many gray areas within the act that require some interpretation by forex market participants. The way the market interprets the act will impact whether it is beneficial to open a forex account overseas. Here we'll examine what forex traders now need to consider when looking to trade forex from overseas accounts.
Before the introduction of the internet, retail investors had difficulty participating in the forex market, primarily because foreign currency is not traded on a central exchange like the stock market. Forex trading occurs over the counter in decentralized worldwide markets; as a result, only large institutions were able to participate, because they had the resources to keep traders on-site. However, now that forex is traded electronically via the internet, even the smallest individual is able to trade forex. Despite the access to the market, forex trading carries with it many risks, but it is popular because individuals can also reap quick and pronounced profits.
One of the benefits of trading foreign currencies is that there is constant movement of prices in this 24-hour market, allowing active traders to move in and out of positions swiftly. As a result, funds need not be tied up for long periods of time. However, these constant price fluctuations also lead to a highly volatile market, where sudden losses can be experienced at any time. And since most traders leverage their trades, margin risk is extremely high. Traders benefit from the forex market in other ways as well. Trading currencies is tax-deferred and gains are taxed when withdrawn under the capital gains tax rate.
There are low transaction costs as many brokers offer no-commissions trading, but because this is a decentralized market, the specialist dealer sets the execution price. So, while the dealer may offer no-commission trading, he is not offering a pro-bono service! The dealer sets the execution price such that he makes a spread on the exchange. As such, the pricing offered by forex dealers can vary tremendously. Dealers also encourage traders to use high leverage so that their spread income is magnified.
New Regulations the Under Dodd-Frank Act of 2010
The Commodity Futures Trading Commission (CFTC) is the governing body authorized to regulate futures "look alike" contracts, which are traded over the counter but are settled based on the settlement price of similar, exchange traded contracts. The CFTC established new rules that regulate the forex market in August 2010. One of the main purposes of these new rules was to provide some much-needed investor protection, specifically as it relates to broker/dealers. In the U.S., broker/dealers must register with the CFTC and are subject to certain operational requirements, including recordkeeping and reporting guidelines. These requirements are similar to the requirements placed on the regulated traditional commodity contract dealers.
Secondly, intermediaries of the transactions will need to register and are subject to net capital requirements of $20 million, along with other risk disclosures. In addition, brokers that accept orders need to maintain a net capital requirement or enter guarantee agreements with the broker/dealers and can only have one guarantee agreement at one time. The CFTC has established anti-fraud regulations over all futures "look alike" contracts. Finally, the CFTC imposed leverage restrictions of 50:1 for major currencies and 20:1 for all other currencies.
Does Opening a Forex Account Overseas Make Sense?
There are two main benefits to opening a forex account overseas. Circumventing the new regulations, in particular the leverage restrictions, can be accomplished this way, although it is unclear whether foreign entities will go against the U.S. government and allow higher leverage.
Another benefit to having a foreign account is the potential tax benefit. Although forex trading is tax deferred, gains are taxed at the capital rate when funds are withdrawn. A foreign account essentially removes any tax requirements, although the IRS may require that U.S. citizens repatriate funds at some point.
Overseas Account Risks
The risks of opening a forex account overseas are several. Counterparty risk may increase as the broker/dealer used by these foreign intermediaries may not be of the highest standards. Detecting and preventing fraud by the dealer may be difficult and scams may be more common. Also, competition may not exist in foreign entities, so getting the best pricing may be to the advantage of the dealer and not the trader. In the same vein, the loss of protections established by the new CFTC regulations is perhaps the greatest risk. The CFTC's new regulatory role over the dealers, intermediaries and brokers participating in the forex market was established to provide the retail investor with protection from the prevalent scams and fraudulent practices common in this decentralized market. These protections are only extended to those that engage with and trade with registered entities.
The Bottom Line
Opening a forex account overseas allows retail investors to trade like other foreign market participants - unrestricted by leverage and other requirements. However, in many cases, the risks may outweigh the benefits. A trader needs to determine whether the potential for higher leverage is worth the risks of forgoing the protections established by the CFTC.
View the original article here
Before the introduction of the internet, retail investors had difficulty participating in the forex market, primarily because foreign currency is not traded on a central exchange like the stock market. Forex trading occurs over the counter in decentralized worldwide markets; as a result, only large institutions were able to participate, because they had the resources to keep traders on-site. However, now that forex is traded electronically via the internet, even the smallest individual is able to trade forex. Despite the access to the market, forex trading carries with it many risks, but it is popular because individuals can also reap quick and pronounced profits.
One of the benefits of trading foreign currencies is that there is constant movement of prices in this 24-hour market, allowing active traders to move in and out of positions swiftly. As a result, funds need not be tied up for long periods of time. However, these constant price fluctuations also lead to a highly volatile market, where sudden losses can be experienced at any time. And since most traders leverage their trades, margin risk is extremely high. Traders benefit from the forex market in other ways as well. Trading currencies is tax-deferred and gains are taxed when withdrawn under the capital gains tax rate.
There are low transaction costs as many brokers offer no-commissions trading, but because this is a decentralized market, the specialist dealer sets the execution price. So, while the dealer may offer no-commission trading, he is not offering a pro-bono service! The dealer sets the execution price such that he makes a spread on the exchange. As such, the pricing offered by forex dealers can vary tremendously. Dealers also encourage traders to use high leverage so that their spread income is magnified.
New Regulations the Under Dodd-Frank Act of 2010
The Commodity Futures Trading Commission (CFTC) is the governing body authorized to regulate futures "look alike" contracts, which are traded over the counter but are settled based on the settlement price of similar, exchange traded contracts. The CFTC established new rules that regulate the forex market in August 2010. One of the main purposes of these new rules was to provide some much-needed investor protection, specifically as it relates to broker/dealers. In the U.S., broker/dealers must register with the CFTC and are subject to certain operational requirements, including recordkeeping and reporting guidelines. These requirements are similar to the requirements placed on the regulated traditional commodity contract dealers.
Secondly, intermediaries of the transactions will need to register and are subject to net capital requirements of $20 million, along with other risk disclosures. In addition, brokers that accept orders need to maintain a net capital requirement or enter guarantee agreements with the broker/dealers and can only have one guarantee agreement at one time. The CFTC has established anti-fraud regulations over all futures "look alike" contracts. Finally, the CFTC imposed leverage restrictions of 50:1 for major currencies and 20:1 for all other currencies.
Does Opening a Forex Account Overseas Make Sense?
There are two main benefits to opening a forex account overseas. Circumventing the new regulations, in particular the leverage restrictions, can be accomplished this way, although it is unclear whether foreign entities will go against the U.S. government and allow higher leverage.
Another benefit to having a foreign account is the potential tax benefit. Although forex trading is tax deferred, gains are taxed at the capital rate when funds are withdrawn. A foreign account essentially removes any tax requirements, although the IRS may require that U.S. citizens repatriate funds at some point.
Overseas Account Risks
The risks of opening a forex account overseas are several. Counterparty risk may increase as the broker/dealer used by these foreign intermediaries may not be of the highest standards. Detecting and preventing fraud by the dealer may be difficult and scams may be more common. Also, competition may not exist in foreign entities, so getting the best pricing may be to the advantage of the dealer and not the trader. In the same vein, the loss of protections established by the new CFTC regulations is perhaps the greatest risk. The CFTC's new regulatory role over the dealers, intermediaries and brokers participating in the forex market was established to provide the retail investor with protection from the prevalent scams and fraudulent practices common in this decentralized market. These protections are only extended to those that engage with and trade with registered entities.
The Bottom Line
Opening a forex account overseas allows retail investors to trade like other foreign market participants - unrestricted by leverage and other requirements. However, in many cases, the risks may outweigh the benefits. A trader needs to determine whether the potential for higher leverage is worth the risks of forgoing the protections established by the CFTC.
View the original article here
Tuesday, June 14, 2011
What Is Warren Buffett's Investing Style?
If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, "I'm 85% Benjamin Graham." Graham is the godfather of value investing and introduced the idea of intrinsic value - the underlying fair value of a stock based on its future earnings power. But there are a few things worth noting about Buffett's interpretation of value investing that may surprise you. (For more on Warren Buffett and his current holdings, check out Coattail Investor.)
First, like many successful formulas, Buffett's looks simple. But simple does not mean easy. To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below). Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute. For example, one tenet asks if management is candid with shareholders. This is simple to ask and simple to understand, but it is not easy to answer. Conversely, there are interesting examples of the reverse: concepts that appear complex yet are easy to execute, such as economic value added (EVA). The full calculation of EVA is not easy to comprehend, and the explanation of EVA tends to be complex. But once you understand that EVA is a laundry list of adjustments - and once armed with the formula - it is fairly easy to calculate EVA for any company.
Second, the Buffett “way” can be viewed as a core, traditional style of investing that is open to adaptation. Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid. One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success. If it were a religion, it would not be dogmatic but instead self-reflective and adaptive to the times. This is a good thing. Day traders may require rigid discipline and adherence to a formula (for example, as a means of controlling emotions), but it can be argued that successful investors ought to be willing to adapt their mental models to current environments.
Business
Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? Buffett's business tenets each support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.
Management
Buffett's three management tenets help evaluate management quality. This is perhaps the most difficult analytical task for an investor. Buffett asks, "Is management rational?" Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends? This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value. Another tenet examines management's honesty with shareholders. That is, does it admit mistakes? Lastly, does management resist the institutional imperative? This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics. It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).
Financial Measures
Buffett focuses on return on equity (ROE) rather than on earnings per share. Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric. Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business. Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. He also looks for high profit margins.
His final two financial tenets share a theoretical foundation with EVA. First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE). Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. In summary, net income + D&A - CAPX - (change in W/C). Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders. Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.
Buffett also has a "one-dollar premise," which is based on the question: What is the market value of a dollar assigned to each dollar of retained earnings? This measure bears a strong resemblance to market value added (MVA), the ratio of market value to invested capital.
Value
Here, Buffett seeks to estimate a company's intrinsic value. A colleague summarized this well-regarded process as "bond math." Buffett projects the future owner's earnings, then discounts them back to the present. Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.
Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat." The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition." In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.
The Bottom Line
In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward. It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult. (If you appreciate the fundamentals of value investing, you'll want to study this: The Value Investor's Handbook.)
View the original article here
First, like many successful formulas, Buffett's looks simple. But simple does not mean easy. To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below). Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute. For example, one tenet asks if management is candid with shareholders. This is simple to ask and simple to understand, but it is not easy to answer. Conversely, there are interesting examples of the reverse: concepts that appear complex yet are easy to execute, such as economic value added (EVA). The full calculation of EVA is not easy to comprehend, and the explanation of EVA tends to be complex. But once you understand that EVA is a laundry list of adjustments - and once armed with the formula - it is fairly easy to calculate EVA for any company.
Second, the Buffett “way” can be viewed as a core, traditional style of investing that is open to adaptation. Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid. One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success. If it were a religion, it would not be dogmatic but instead self-reflective and adaptive to the times. This is a good thing. Day traders may require rigid discipline and adherence to a formula (for example, as a means of controlling emotions), but it can be argued that successful investors ought to be willing to adapt their mental models to current environments.
Business
Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? Buffett's business tenets each support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.
Management
Buffett's three management tenets help evaluate management quality. This is perhaps the most difficult analytical task for an investor. Buffett asks, "Is management rational?" Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends? This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value. Another tenet examines management's honesty with shareholders. That is, does it admit mistakes? Lastly, does management resist the institutional imperative? This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics. It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).
Financial Measures
Buffett focuses on return on equity (ROE) rather than on earnings per share. Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric. Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business. Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. He also looks for high profit margins.
His final two financial tenets share a theoretical foundation with EVA. First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE). Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. In summary, net income + D&A - CAPX - (change in W/C). Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders. Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.
Buffett also has a "one-dollar premise," which is based on the question: What is the market value of a dollar assigned to each dollar of retained earnings? This measure bears a strong resemblance to market value added (MVA), the ratio of market value to invested capital.
Value
Here, Buffett seeks to estimate a company's intrinsic value. A colleague summarized this well-regarded process as "bond math." Buffett projects the future owner's earnings, then discounts them back to the present. Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.
Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat." The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition." In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.
The Bottom Line
In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward. It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult. (If you appreciate the fundamentals of value investing, you'll want to study this: The Value Investor's Handbook.)
View the original article here
Monday, June 13, 2011
401k or IRA: Which Should You Fund First?
One of the questions that many people have as they plan for retirement is whether they should fund a 401k or an IRA first. And, of course, the answer depends on what you are trying to accomplish with your retirement fund.
IRAs and 401ks have some different advantages and disadvantages, and it is up to you to determine what is most likely to be the best course of action for you. As you try to figure out what to do with your retirement money, here are some things to consider:
Your employer match is one of the most important considerations when deciding which type of account to fund first. If you have a 401k and an IRA, you might want to consider funding the 401k first if there is an employer match. You don’t have to max out the 401k, but you don’t want to leave money on the table, either. If your employer offers a 50% match up to 5% of your income, you can get a pretty good chunk of free money.
If you make $45,000 a year, 5% of your income is $2,250. If you put that $2,250 in, your employer match will be $1,125. That’s not too shabby, considering it’s free money. That boosts your annual contribution up to $3,375.
Once you’ve got your employer match covered, you can decide whether it’s worth it to put unmatched money in your company’s 401k. If your plan has high fees, or if your plan has options you aren’t happy with, you can put the some of the money in an IRA that you create yourself, using low-cost investments that you like. After you max the IRA out, if you have some money left over for retirement investing, you can reconsider whether you want the unmatched funds in your company’s 401k.
Often, you have more flexibility with investment options when you use an IRA. With a 401k, you are limited to what the employer offers, although you can always ask to have certain investments added to the plan. And, because you can open an IRA for a non-working spouse, it’s possible to double what you save as a couple for a year, since you can max out your IRA and your spouse’s IRA. However, even doubling up, you won’t be able to contribute as much to your IRAs as you could to one 401k each year.
You should also consider the flexibility of withdrawal options. With a 401k, you can borrow against your account, but if you don’t repay the loan, things can get really pricey really fast. Additionally, you have to pay tax penalties. With a Roth IRA, you can withdraw your contributions (but not the earnings) when you want. A traditional IRA also has some flexibility when you withdraw for some expenses. The 401k, on the other hand, has an interesting option that allows you to withdraw money if you retire after 55 — no penalty (but the money is still taxable).
Naturally, you will need to consider the tax situation. In the past, if you wanted to withdraw money tax free in retirement, you concentrated mostly on the Roth IRA, paying taxes on your income now. However, if your employer offers the relatively new Roth 401k, you may not have to make that choice.
If you would rather have the tax benefits now, in the form of a deduction, you can contribute more to a traditional IRA or a traditional 401k.
Ideally, you would be able to max out a 401k and an IRA in a year. However, most of us won’t be maxing out all of our retirement accounts; we have to choose between them. With a little thought and planning, you can divide up your retirement contributions in the way that will benefit you the most.
View the original article here
IRAs and 401ks have some different advantages and disadvantages, and it is up to you to determine what is most likely to be the best course of action for you. As you try to figure out what to do with your retirement money, here are some things to consider:
Your employer match is one of the most important considerations when deciding which type of account to fund first. If you have a 401k and an IRA, you might want to consider funding the 401k first if there is an employer match. You don’t have to max out the 401k, but you don’t want to leave money on the table, either. If your employer offers a 50% match up to 5% of your income, you can get a pretty good chunk of free money.
If you make $45,000 a year, 5% of your income is $2,250. If you put that $2,250 in, your employer match will be $1,125. That’s not too shabby, considering it’s free money. That boosts your annual contribution up to $3,375.
Once you’ve got your employer match covered, you can decide whether it’s worth it to put unmatched money in your company’s 401k. If your plan has high fees, or if your plan has options you aren’t happy with, you can put the some of the money in an IRA that you create yourself, using low-cost investments that you like. After you max the IRA out, if you have some money left over for retirement investing, you can reconsider whether you want the unmatched funds in your company’s 401k.
Often, you have more flexibility with investment options when you use an IRA. With a 401k, you are limited to what the employer offers, although you can always ask to have certain investments added to the plan. And, because you can open an IRA for a non-working spouse, it’s possible to double what you save as a couple for a year, since you can max out your IRA and your spouse’s IRA. However, even doubling up, you won’t be able to contribute as much to your IRAs as you could to one 401k each year.
You should also consider the flexibility of withdrawal options. With a 401k, you can borrow against your account, but if you don’t repay the loan, things can get really pricey really fast. Additionally, you have to pay tax penalties. With a Roth IRA, you can withdraw your contributions (but not the earnings) when you want. A traditional IRA also has some flexibility when you withdraw for some expenses. The 401k, on the other hand, has an interesting option that allows you to withdraw money if you retire after 55 — no penalty (but the money is still taxable).
Naturally, you will need to consider the tax situation. In the past, if you wanted to withdraw money tax free in retirement, you concentrated mostly on the Roth IRA, paying taxes on your income now. However, if your employer offers the relatively new Roth 401k, you may not have to make that choice.
If you would rather have the tax benefits now, in the form of a deduction, you can contribute more to a traditional IRA or a traditional 401k.
Ideally, you would be able to max out a 401k and an IRA in a year. However, most of us won’t be maxing out all of our retirement accounts; we have to choose between them. With a little thought and planning, you can divide up your retirement contributions in the way that will benefit you the most.
Saturday, June 11, 2011
Finances in 55 Seconds: Needs vs. Wants
One of the fundamental concepts of personal finance is understanding the difference between needs and wants. Being able to make this distinction is key to financial success. You should be able to identify needs and wants, and then make decisions about your finances based on what is truly needed, and what is merely wanted.
Before you can find financial success, it is vital that you take control of your money, rather than letting it control you. The first step toward doing that is learning the difference between needs and wants. If you have 55 seconds, you can figure out what constitutes needs and what constitutes wants.
List your expenses: Create a list of your expenses. Either write them out, or use your personal finance software to create a list for you. (23 seconds to write them down, 5 seconds to have the personal finance software list them)
Honestly evaluate the list: Skim over the list, and honestly evaluate which expenses are needs, and which are wants. As you go over the list, keep in mind that needs include food, shelter, clothing and transportation to a job. Everything else is basically a want. (32 seconds; if you used computer finance software, you are done in much less than 55 seconds)
Of course, now that you have identified which items in your list are needs, and which are wants, some harder, more time consuming work is warranted. Look at your needs. Even though you need clothing, do you need expensive clothing? Or so much of it? Consider your grocery bill. Can you cut back? Are you spending part of your budget on junk food? Keep in mind, too, that even though eating out constitutes food, you don’t need to spend money eating food from restaurants.
Once you have identified your wants, you can work on cutting back on those items to make a little more breathing room in your budget. You can better get an idea of which items to cut from your budget by prioritizing your list. Take care of your true needs first, and then take care of items of great importance to you. If you want to save for retirement, that should be taken care of before going to the movies. Consider what you value, from providing music lessons for your kids, to donating to charity, to building up your emergency fund, to saving for a vacation.
The exercise of identifying needs and wants should get you thinking about what’s really important to you, and what you really want to use your money on. After prioritizing your list according to needs and wants, and then deciding which wants are most important, you can begin to change your spending habits to reflect your priorities. List expenses in order from most important (starting with needs) to least important. Then, when you need to make a spending decision, cutting back during the month means forgoing the items on the bottom of your list, and working your way up.
What do you think? How do you decide which expenses to cut back on when the budget is tight?
View the original article here
Before you can find financial success, it is vital that you take control of your money, rather than letting it control you. The first step toward doing that is learning the difference between needs and wants. If you have 55 seconds, you can figure out what constitutes needs and what constitutes wants.
List your expenses: Create a list of your expenses. Either write them out, or use your personal finance software to create a list for you. (23 seconds to write them down, 5 seconds to have the personal finance software list them)
Honestly evaluate the list: Skim over the list, and honestly evaluate which expenses are needs, and which are wants. As you go over the list, keep in mind that needs include food, shelter, clothing and transportation to a job. Everything else is basically a want. (32 seconds; if you used computer finance software, you are done in much less than 55 seconds)
Of course, now that you have identified which items in your list are needs, and which are wants, some harder, more time consuming work is warranted. Look at your needs. Even though you need clothing, do you need expensive clothing? Or so much of it? Consider your grocery bill. Can you cut back? Are you spending part of your budget on junk food? Keep in mind, too, that even though eating out constitutes food, you don’t need to spend money eating food from restaurants.
Once you have identified your wants, you can work on cutting back on those items to make a little more breathing room in your budget. You can better get an idea of which items to cut from your budget by prioritizing your list. Take care of your true needs first, and then take care of items of great importance to you. If you want to save for retirement, that should be taken care of before going to the movies. Consider what you value, from providing music lessons for your kids, to donating to charity, to building up your emergency fund, to saving for a vacation.
The exercise of identifying needs and wants should get you thinking about what’s really important to you, and what you really want to use your money on. After prioritizing your list according to needs and wants, and then deciding which wants are most important, you can begin to change your spending habits to reflect your priorities. List expenses in order from most important (starting with needs) to least important. Then, when you need to make a spending decision, cutting back during the month means forgoing the items on the bottom of your list, and working your way up.
What do you think? How do you decide which expenses to cut back on when the budget is tight?
View the original article here
Friday, June 10, 2011
IRS Sends Tax Letters to Five Big Political Donors
Political donations are not tax deductible. If I were to contribute money to a political campaign, I can’t then claim a deduction for that contribution on my Form 1040. It’s not really “charitable,” is it? In fact, one big issue in the last Presidential election was the growing role of churches in politics and how churches could risk their non-profit status if they become too involved. Politics and charity are to be separate, with political donations being non-deductible and charitable donations being deductible.
Here’s where it starts to get tricky, as everything taxes seems to be. There are plenty of organizations that are political in nature whose “primary purpose” is political. The rub is that if you were to contribute funds to one of these obviously political organizations (wink wink not it’s primary purpose nudge nudge), you can get a tax deduction. I think anyone can support any organization they want, but if it’s political then you shouldn’t get a tax deduction from it!
The reason why this is bigger news is because the IRS recently sent letters to five donors because they were donating vast sums. Large enough that they fell under gift tax laws, which doesn’t kick in for this type of thing until you reach pretty large sums.
View the original article here
Here’s where it starts to get tricky, as everything taxes seems to be. There are plenty of organizations that are political in nature whose “primary purpose” is political. The rub is that if you were to contribute funds to one of these obviously political organizations (wink wink not it’s primary purpose nudge nudge), you can get a tax deduction. I think anyone can support any organization they want, but if it’s political then you shouldn’t get a tax deduction from it!
The reason why this is bigger news is because the IRS recently sent letters to five donors because they were donating vast sums. Large enough that they fell under gift tax laws, which doesn’t kick in for this type of thing until you reach pretty large sums.
View the original article here
NY Times Buy vs. Rent Calculator
The New York Times has one of the slickest looking buy or rent calculators (one of the hottest Devil’s Advocate subjects on Bargaineering is rent vs. buy) I’ve seen in quite some time. It can be as complicated (using advanced settings) or as simple (fill out five fields – monthly rent, home price, down payment, mortgage rate, and property taxes) as you want and it gives you an answer in an easy to see graph.
I decided it would be fun to put in our information from when we bought our home six years ago. We paid $295,000, put 20% down, and faced monthly rent somewhere in the neighborhood of $1,500 for a 2-bedroom apartment. We know our mortgage interest rate was 5.25% and property taxes at around 1% (due to a homestead tax cap, our actual rate is 3% but the effective rate is only around 1%).
For the most part, we assume rent increases with historical inflation (~4%) and if we have a home price change of 0% (which is close to reality, our home is worth no more and really no less than it did six years ago), the calculator says we would break even at 12 years. We’re halfway there. A change of just 1% in appreciation, which is lower than the historical appreciation of homes (but more than the actual appreciation over the last six years) reduces that breakeven point by 3 years. 2% appreciation (annually each year) means we would’ve broken even in six years.
Back when I did the rent vs. buy analysis, I assumed home prices would increase with inflation. 4% appreciation with 4% inflation meant I’d break even after 3 years, a near no-brainer given my situation. Even at 3% appreciation, 3% inflation, breakeven was after 5 years.
The fun part about the calculator is the graph. It responds instantly to all the fields and tickers you play with. The wealth of information at the bottom (which you reveal when you click on a year in the graph) is also pretty handy too, especially if you like to play with numbers.
View the original article here
I decided it would be fun to put in our information from when we bought our home six years ago. We paid $295,000, put 20% down, and faced monthly rent somewhere in the neighborhood of $1,500 for a 2-bedroom apartment. We know our mortgage interest rate was 5.25% and property taxes at around 1% (due to a homestead tax cap, our actual rate is 3% but the effective rate is only around 1%).
For the most part, we assume rent increases with historical inflation (~4%) and if we have a home price change of 0% (which is close to reality, our home is worth no more and really no less than it did six years ago), the calculator says we would break even at 12 years. We’re halfway there. A change of just 1% in appreciation, which is lower than the historical appreciation of homes (but more than the actual appreciation over the last six years) reduces that breakeven point by 3 years. 2% appreciation (annually each year) means we would’ve broken even in six years.
Back when I did the rent vs. buy analysis, I assumed home prices would increase with inflation. 4% appreciation with 4% inflation meant I’d break even after 3 years, a near no-brainer given my situation. Even at 3% appreciation, 3% inflation, breakeven was after 5 years.
The fun part about the calculator is the graph. It responds instantly to all the fields and tickers you play with. The wealth of information at the bottom (which you reveal when you click on a year in the graph) is also pretty handy too, especially if you like to play with numbers.
View the original article here
Wednesday, June 8, 2011
Do Tax Shelters, Dodges, and Rolls Anger You?
I’m a big fan of Bloomberg Businessweek, especially their iPad app where you can download your subscription and take it anywhere, and recently they had a really interesting special report called How to Pay No Taxes – very good reading. It held a lot of insights into how the wealthy are able to avoid taxes in entirely legal, and very clever, ways. They’re all strategies that make sense when you’re moving millions of dollars around because the costs of paying accountants, lawyers, and the like are likely in the tens and hundreds of thousands of dollars. It makes less sense if you’re just moving several thousand around.
As I read the article, I was about to get annoyed at all the sheltering and dodging until I realized it’s just part of the game. Our tax structure has gotten so complicated, it’s basically a game. Consider this – the United States has one of the highest corporate income tax rates at 35%. Yet, after all the loopholes and credits and other tax breaks, corporations, in aggregate, pay about average. The difference is that certain industries pay a lot less and others pay more.
It’s like playing a game and finding out that one of the other players has discovered the optimal strategy before you do. They’re beating your pants off because they’re smarter than you. Can you really get that upset because they figured it out? I suppose you can get upset at anything but the reality is that you have to change the rules… right?
View the original article here
As I read the article, I was about to get annoyed at all the sheltering and dodging until I realized it’s just part of the game. Our tax structure has gotten so complicated, it’s basically a game. Consider this – the United States has one of the highest corporate income tax rates at 35%. Yet, after all the loopholes and credits and other tax breaks, corporations, in aggregate, pay about average. The difference is that certain industries pay a lot less and others pay more.
It’s like playing a game and finding out that one of the other players has discovered the optimal strategy before you do. They’re beating your pants off because they’re smarter than you. Can you really get that upset because they figured it out? I suppose you can get upset at anything but the reality is that you have to change the rules… right?
View the original article here
Tuesday, June 7, 2011
Would You Consider Wedding Insurance?
I’ve heard of a lot of wacky types of insurance but here’s one that surprised me – wedding insurance. It’s the subject of Cameron Huddleston’s latest Kip Tips column, which, (not) coincidentally, was published after to the wedding of Prince William and Catherine Middleton. Wedding insurance is “special event insurance that provides reimbursement for nonrefundable deposits if the wedding needs to be canceled or postponed due to a natural disaster, death, illness, serious injury or other catastrophe listed in the policy.”
When we were married, the thought of wedding insurance never crossed our mind. Our event was held indoors but it was also held in February, which risked Mother Nature’s snowy wrath in Maryland. While everything went off without a hitch, I’m not entirely sure insurance would’ve been something we seriously considered had we even known about it. The biggest worry is that a service provider (caterer, photographer, florist, DJ, etc.) doesn’t show up, but in those cases you have legal means to get your deposit back, and in those cases it pays to do your homework on the vendor.
As we ramp up wedding season, does wedding insurance seem like a good idea? I’m inclined to say no.
View the original article here
When we were married, the thought of wedding insurance never crossed our mind. Our event was held indoors but it was also held in February, which risked Mother Nature’s snowy wrath in Maryland. While everything went off without a hitch, I’m not entirely sure insurance would’ve been something we seriously considered had we even known about it. The biggest worry is that a service provider (caterer, photographer, florist, DJ, etc.) doesn’t show up, but in those cases you have legal means to get your deposit back, and in those cases it pays to do your homework on the vendor.
As we ramp up wedding season, does wedding insurance seem like a good idea? I’m inclined to say no.
View the original article here
Monday, June 6, 2011
Causes of Falling in Debts
There are a variety of reasons why a person often falls under the burden of overwhelming debts. Out of all, these are the most important causes of falling in debts.
View the original article here
- One important reason for you to go in debt is when you don’t take care of your daily expenses, the more you spend the little is left for savings and the income decreases because of your expenses.
- A Monthly spending plan is essential. This will help you to learn where you are spending the money, you should always write down your expanses which will help you to tally with your income. Many a times we spend money unnecessarily writing down will cut down your expenses and help you from any kind of debt. This will also make you feel powerful because you would know where to spend and where not to.
- Getting married more than once is also one big reason to go in debt, because with new spouse there is always a party, shopping, and honeymoon these are the most expensive things which comes with new wedding which can be breathtaking for your debt cause.
- Gambling is one of America’s newly born entertainment. Either way you exchange money from home to casino that can also be an addiction which can lead you to your greatest downfall. People at times go to extreme end where they are intoxicated and ready to mortgage their house which can be ridiculous for the family.
- Well there are other reason like gaps in coverage, lapsed policies this all adds to the debt that you may be in. One of the reasons is also the medical expenses with lapsed policies that means more debt for you. Now days every doctor takes credit card is it convenient? Please think.
- The simplest way to save you from debt is having savings, Savings of six to seven months of living will always give you a cushion of joy, like in emergency of a job lay off, divorce or illness is not going to cause you an immediate financial strain and increase debt.
- Shifting jobs from one place to another could be a pain, if you think down the road if you increase your income due to more hours, a second job, or a better job, then is the time to start adding in some of the previous spending before you became underemployed.
- Always discuss your financial goals with your spouse. If you are married to a spender and you are the saver then it becomes very important to strategies the budget and you should always be aware of yours spouses account, many times you find out that your spouse has used thousands of dollar in credit card which you are not aware of, it can also lead to debt.
- Never ever spend the money until and unless your check is cleared. Spending tomorrow’s money today is very tempting. This is called banking on a windfall. The things that you may believe will come your way might be very hurting when it does not come your way. The simple philosophy is don’t spend the money until the check clears.
- Get financially educated because financial mistakes are very expensive and complicated to resolve. This can also be a biggest reason for you to get in a debt.
View the original article here
Sunday, June 5, 2011
Value Investing For Beginners
If you are a beginner and you wish to invest in the stock market, it seems like an impossible task. When there are thousands of companies to choose from, how will you figure out the best one suitable as per your needs and that will incur minimum potential loss. Many people who are in this investment industry believe that the best way to beat the stock market is to follow the trend that is called value investing.
Value investing has been existing since 1920s when two professors began teaching it at Columbia business school. The main purpose of value investing is to look for the stocks what are selling below the company’s actual value. They are also called public stocks that offer high dividend yields and have low price to earnings multiples or low price to book ratios. This type of investing goes against purchasing the hottest stock at any particular time and instead trusts that the price will reflect the company’s true nature in the coming years.
When you do value investing, you have to necessarily follow several basic steps. The first thing that you need to do is to look for a very good company. It cannot be just good company, but it has to be a great one. This company can be the one that you work for or you purchase products from or it can be environmentally conscious or one that you really like. If you want to invest in a company, you must really see a great potential in it or else you might face a potential loss in the near future.
Another way to follow value investing strategies is to know that the company on which you are going to invest has been in the business for how many years. Companies in business for less than two years have a very little track record and you might feel confused whether you want to put your investment on it or not. On the other hand, companies that have been in the business for more than ten years have a proven record for investment and find excellent candidates for value investing.
When you are investing in a company, check the reliability of that company and figure out if it will stay in business for the next ten or twenty years. When you are looking for ways to make money in the stock market, you just don’t do buying and selling, but rather long term investing. If the company is not going to survive in the coming years, then there is no point in investing in it.
The final advice in value investing is to make sure that the company that you are considering investing in offers something unique. The company on which you are going to invest should have the capability to offer something unique that no other company can offer. Make sure that the company has patents or copyrights. This can be worth a lot of money and keep others from copying what they do therefore flooding the market.
Investing money in the stock market is not as easy as throwing dart at a board, but if you do a little research in the market, you will be able to find the undervalued stocks that could pay large dividends down the road.
View the original article here
Value investing has been existing since 1920s when two professors began teaching it at Columbia business school. The main purpose of value investing is to look for the stocks what are selling below the company’s actual value. They are also called public stocks that offer high dividend yields and have low price to earnings multiples or low price to book ratios. This type of investing goes against purchasing the hottest stock at any particular time and instead trusts that the price will reflect the company’s true nature in the coming years.
When you do value investing, you have to necessarily follow several basic steps. The first thing that you need to do is to look for a very good company. It cannot be just good company, but it has to be a great one. This company can be the one that you work for or you purchase products from or it can be environmentally conscious or one that you really like. If you want to invest in a company, you must really see a great potential in it or else you might face a potential loss in the near future.
Another way to follow value investing strategies is to know that the company on which you are going to invest has been in the business for how many years. Companies in business for less than two years have a very little track record and you might feel confused whether you want to put your investment on it or not. On the other hand, companies that have been in the business for more than ten years have a proven record for investment and find excellent candidates for value investing.
When you are investing in a company, check the reliability of that company and figure out if it will stay in business for the next ten or twenty years. When you are looking for ways to make money in the stock market, you just don’t do buying and selling, but rather long term investing. If the company is not going to survive in the coming years, then there is no point in investing in it.
The final advice in value investing is to make sure that the company that you are considering investing in offers something unique. The company on which you are going to invest should have the capability to offer something unique that no other company can offer. Make sure that the company has patents or copyrights. This can be worth a lot of money and keep others from copying what they do therefore flooding the market.
Investing money in the stock market is not as easy as throwing dart at a board, but if you do a little research in the market, you will be able to find the undervalued stocks that could pay large dividends down the road.
View the original article here
Bad Credit Home Loans Interrelated Info
You see, we should be very thankful that we are born in this modern generation because of the existence of the Internet. With the Internet, every information (whether about Bad Credit Credit Card or any other such as college credit cards, credit card merchant, car loans for people with bad credit or even bad credit business loans) can be found with ease on the Internet, with great articles like this.
A very congruent utilization of bad credit home equity loans is for initiating a retirement plan. Retirement is to be realized some day. A lot it depends on how you are planning your retirement that will reflect on your financial independence in the future.
Interest rate for bad credit personal loans also depend on some factor like whether you are a homeowner or not. A bad credit personal loan which does not place collateral will attract higher interest rate. Comparative secured personal loans with bad credit will have lower interest rate. With a Bad credit personal loan you can borrow from £5,000 to £75,000 and up to 125% of your property value in some cases.
Alright, you got approved for your bad credit business loan. You are high on the cloud, but did you read the fine print? You are nodding your head in the negative. Fine prints may carry at times hidden charges, including annual fees, bank charges, closing costs, commissions and balloon payments.
I know that as informative as this article is, it might not adequately cover your Bad Credit Credit Card quest. If this is so, don't forget that the search engines like Dogpile dot com exist for looking up more information about Bad Credit Credit Card.
If your motives are to reduce your monthly payments then shop for a bad credit remortgage that offers lower interest rates than your current mortgage. Look for any redemption charges on your current mortgage.
A home or real estate makes the best collateral for bad credit personal loans. You can't slip with secured bad credit personal loans. It is absolutely advised against. For you can lose your property in such a deal. The loan lender providing bad credit personal loans will also be looking at things like your job profile. If you have a stable job which you have been continuing for some years ' your bad credit personal loan application will not be passed unheard.
Rendezvous with bad credit has become fairly easy these days. There is something called a credit score which sensibly includes all the credit information available about your credit conduct.
It might interest you to know that lots of folks searching for Bad Credit Credit Card also got information related to other instant loans for bad credit, fix bad credit, and even loan for people with bad credit here with ease.
View the original article here
A very congruent utilization of bad credit home equity loans is for initiating a retirement plan. Retirement is to be realized some day. A lot it depends on how you are planning your retirement that will reflect on your financial independence in the future.
Interest rate for bad credit personal loans also depend on some factor like whether you are a homeowner or not. A bad credit personal loan which does not place collateral will attract higher interest rate. Comparative secured personal loans with bad credit will have lower interest rate. With a Bad credit personal loan you can borrow from £5,000 to £75,000 and up to 125% of your property value in some cases.
Alright, you got approved for your bad credit business loan. You are high on the cloud, but did you read the fine print? You are nodding your head in the negative. Fine prints may carry at times hidden charges, including annual fees, bank charges, closing costs, commissions and balloon payments.
I know that as informative as this article is, it might not adequately cover your Bad Credit Credit Card quest. If this is so, don't forget that the search engines like Dogpile dot com exist for looking up more information about Bad Credit Credit Card.
If your motives are to reduce your monthly payments then shop for a bad credit remortgage that offers lower interest rates than your current mortgage. Look for any redemption charges on your current mortgage.
A home or real estate makes the best collateral for bad credit personal loans. You can't slip with secured bad credit personal loans. It is absolutely advised against. For you can lose your property in such a deal. The loan lender providing bad credit personal loans will also be looking at things like your job profile. If you have a stable job which you have been continuing for some years ' your bad credit personal loan application will not be passed unheard.
Rendezvous with bad credit has become fairly easy these days. There is something called a credit score which sensibly includes all the credit information available about your credit conduct.
It might interest you to know that lots of folks searching for Bad Credit Credit Card also got information related to other instant loans for bad credit, fix bad credit, and even loan for people with bad credit here with ease.
View the original article here
Saturday, June 4, 2011
3 Simple Tips To Make Saving For Retirement Easier
When you're managing day-to-day expenses and balancing multiple financial goals—like chipping away at college loans, paying a mortgage, and investing for your child's education—it can be tough to save money for retirement. But the adage "where there's a will, there's a way" is true.
Here are 3 simple tips to make saving for retirement easier:
Even if retirement is decades away, it's never too early to start saving. In fact, time is valuable to the overall growth of your investments. If you start saving even a small amount when you're a younger investor, you'll have more time to put the power of compounding to work.
Compounding is the gradual accumulation of earnings that happens when you reinvest your gains. So the sooner you begin putting money aside, the more time you'll have for your savings to grow. Whether you choose to save in an IRA, in a traditional savings account, or through an employer-sponsored plan—such as a 401(k)—it pays to get started any way you can.
To help put some muscle behind the power of compounding, you'll want to add to your savings regularly. A convenient and disciplined way to do this is to set up an automatic investing plan. If you have an employer-sponsored retirement plan, take advantage of the opportunity to make regular contributions through payroll deduction. And check to see if your plan offers an option to automatically increase your contribution percentage each year.
If you're not saving through a plan at work, you can set up an automatic investment plan that lets you schedule regular money transfers from your bank account to an investment account on a consistent basis.
Remember, even a modest amount of money invested consistently can make a big difference over time. And if you make your savings automatic, you may not even notice the impact on your bank account or take-home pay. What you will notice is that every dollar you save is helping to build your retirement nest egg.
While it's important to be balanced and diversified, you don't need a complex portfolio with dozens of stocks and bonds to invest successfully for retirement.
If you want to keep it simple, consider an all-in-one fund. Each of these broadly diversified funds has an asset mix that may be appropriate for someone planning to retire in the target year. Over time, each fund gradually invests more conservatively as its target year approaches.
With these three simple tips—starting early, saving consistently, and keeping it simple—you'll be well on your way to achieving your retirement savings goals.
View the original article here
Here are 3 simple tips to make saving for retirement easier:
Even if retirement is decades away, it's never too early to start saving. In fact, time is valuable to the overall growth of your investments. If you start saving even a small amount when you're a younger investor, you'll have more time to put the power of compounding to work.
Compounding is the gradual accumulation of earnings that happens when you reinvest your gains. So the sooner you begin putting money aside, the more time you'll have for your savings to grow. Whether you choose to save in an IRA, in a traditional savings account, or through an employer-sponsored plan—such as a 401(k)—it pays to get started any way you can.
To help put some muscle behind the power of compounding, you'll want to add to your savings regularly. A convenient and disciplined way to do this is to set up an automatic investing plan. If you have an employer-sponsored retirement plan, take advantage of the opportunity to make regular contributions through payroll deduction. And check to see if your plan offers an option to automatically increase your contribution percentage each year.
If you're not saving through a plan at work, you can set up an automatic investment plan that lets you schedule regular money transfers from your bank account to an investment account on a consistent basis.
Remember, even a modest amount of money invested consistently can make a big difference over time. And if you make your savings automatic, you may not even notice the impact on your bank account or take-home pay. What you will notice is that every dollar you save is helping to build your retirement nest egg.
While it's important to be balanced and diversified, you don't need a complex portfolio with dozens of stocks and bonds to invest successfully for retirement.
If you want to keep it simple, consider an all-in-one fund. Each of these broadly diversified funds has an asset mix that may be appropriate for someone planning to retire in the target year. Over time, each fund gradually invests more conservatively as its target year approaches.
With these three simple tips—starting early, saving consistently, and keeping it simple—you'll be well on your way to achieving your retirement savings goals.
View the original article here
Beware the Pitfalls When Looking For Cheap Mortgages
Mortgages can be expensive and exhausting financial commitments. It is understandable if you find a great deal to want to take it straight away, but when is what looks like a cheap mortgage really a good offer? There are often hidden charges and restrictive terms and conditions hiding behind a low interest rate, so look out for the following before you sign on the dotted line.
Watch out for cheap mortgage traps
When taking out a mortgage, you put down a deposit on the amount you are borrowing. The loan-to-value (LTV) percentage is key here. The LTV is basically the amount of money you borrow against the property value, expressed as a percentage of the property value. So, a high LTV mortgage means that mortgage lenders need more insurance against the borrower defaulting on payments. This insurance takes the form of Higher Lending Charges (HLCs), which is the first thing to look out for when searching for a cheap mortgage. The higher the LTV, the more likely you are to be subjected HLCs and the more the HLC will be. HLCs are calculated as a percentage of the portion of the loan above 75% of the property value, which can add up to thousands. It is important to consider whether or not you will have to pay HLCs when comparing mortgage products.
The next potential hidden charge that could blight your cheap mortgage deal is the Early Repayment Charge (ERC). ERCs are imposed by a mortgage lender if you decide to repay your mortgage early, to cover the interest they will lose, or if you decide to switch to another mortgage product or another lender. ERCs are calculated as a percentage of your original loan, a percentage of the outstanding balance, a percentage of the sum repaid, or a set number of months' interest, so it is important to know which method is used to work out how much you would have to pay. If you think that you will want to repay your mortgage early, or switch mortgages, you should work out if the ERCs would prevent you from saving any money.
The final payment you can fall prey to is Mortgage Payment Protection Insurance (MPPI). It is always advisable to take out MPPI, as with a policy like this your mortgage payments are covered for a specified period of time if you become ill, injured or unemployed. A common mistake many people make, however, is to rely too heavily on their MPPI, or not know the circumstances under which their MPPI does not apply. For example, most MPPI policies do not cover payments of more that £1,500 per month and many do not allow you to claim cover before 60 days have passed since you took out the policy. Periods of unemployment that could have been predicted, such as those due to pre-existing medical conditions, are also not often catered for. So, when searching for a cheap mortgage, it makes sense to search for cheap but effective MPPI as well, and always read the small print.
View the original article here
Watch out for cheap mortgage traps
When taking out a mortgage, you put down a deposit on the amount you are borrowing. The loan-to-value (LTV) percentage is key here. The LTV is basically the amount of money you borrow against the property value, expressed as a percentage of the property value. So, a high LTV mortgage means that mortgage lenders need more insurance against the borrower defaulting on payments. This insurance takes the form of Higher Lending Charges (HLCs), which is the first thing to look out for when searching for a cheap mortgage. The higher the LTV, the more likely you are to be subjected HLCs and the more the HLC will be. HLCs are calculated as a percentage of the portion of the loan above 75% of the property value, which can add up to thousands. It is important to consider whether or not you will have to pay HLCs when comparing mortgage products.
The next potential hidden charge that could blight your cheap mortgage deal is the Early Repayment Charge (ERC). ERCs are imposed by a mortgage lender if you decide to repay your mortgage early, to cover the interest they will lose, or if you decide to switch to another mortgage product or another lender. ERCs are calculated as a percentage of your original loan, a percentage of the outstanding balance, a percentage of the sum repaid, or a set number of months' interest, so it is important to know which method is used to work out how much you would have to pay. If you think that you will want to repay your mortgage early, or switch mortgages, you should work out if the ERCs would prevent you from saving any money.
The final payment you can fall prey to is Mortgage Payment Protection Insurance (MPPI). It is always advisable to take out MPPI, as with a policy like this your mortgage payments are covered for a specified period of time if you become ill, injured or unemployed. A common mistake many people make, however, is to rely too heavily on their MPPI, or not know the circumstances under which their MPPI does not apply. For example, most MPPI policies do not cover payments of more that £1,500 per month and many do not allow you to claim cover before 60 days have passed since you took out the policy. Periods of unemployment that could have been predicted, such as those due to pre-existing medical conditions, are also not often catered for. So, when searching for a cheap mortgage, it makes sense to search for cheap but effective MPPI as well, and always read the small print.
View the original article here
Friday, June 3, 2011
Consider Refinancing With Lower Refinance Interest Rates to Avoid Foreclosure
If you are stressed and trying hard to pay your mortgage, despite the present low Canadian mortgage rates, you might be wondering how foreclosure will have an effect on your life, and what options are out there. Foreclosure has a severe and lasting result on your credit record that you have to be aware of earlier than it takes place.
Foreclosure is one of the most harmful things you can have on your credit score, save for a bankruptcy, and it will remain on your record for a minimum seven years. This denotes that the results of foreclosure are going to bother you for an extended time, possibly even after you overcome your difficulties. The precise amount that your credit score will fall after a foreclosure is going to differ from case to case. If you have very excellent credit earlier than you face foreclosure, it might not have as destructive of an impact on your score as it would if you have less than ideal score earlier than foreclosure takes place.
As soon as a foreclosure is on your credit record, you will need to make a start to get rid of it. It cannot be eradicated for a minimum seven years. Nevertheless, later than seven years, you can have it eliminated, although you will have to request. Write to all three credit reporting bureaus and request them to take away the mark. After that, ask for a copy of your credit score to confirm that it has been eliminated.
If you have on no account had a low credit score, you might be wondering how it will have an effect on you after foreclosure. As soon as you have lost your home in the foreclosure procedure, you will want someplace to live. If you would like to acquire a new home, you will have a tough time getting a Canada mortgage due to the foreclosure on your record. If your situation has changed, like in case if you had been without a job however, are now engaged in a secure job, you might be able to obtain a loan. Nevertheless, you will find that the Toronto mortgage rates you are provided are a great deal more than the standard rate, given that you will be considered a high-risk customer. A low credit score will as well have an effect on your ability to get a loan for a car, a credit card, or any other kind of debt.
Since the effects of foreclosure on your credit score are so destructive, it is best to prevent foreclosure preferably. Although, foreclosure does not damage your credit forever, and it is not the end of your financial future, if you can prevent it, you should. One alternative is to see if you can refinance at a lower rate or for a longer tenure. Toronto refinance rates are low; accordingly you may be able to bring down your monthly payment by refinancing, if your credit has not by now been spoiled. One more choice is to approach your lender. Lenders would not like to have a home go into foreclosure; for that reason they might work with you to bring down your payment for a few months even as you work through the problems you are facing. In spite of Canada mortgage rates being extremely low, lenders still make profit from active loans; therefore they would like to keep the loan active preferably. Nevertheless, make the effort earlier than your loan goes into default, for the reason that lenders are usually reluctant to work with borrowers who have by now stopped paying. Be proactive, and you might be able to prevent foreclosure at all.
View the original article here
Foreclosure is one of the most harmful things you can have on your credit score, save for a bankruptcy, and it will remain on your record for a minimum seven years. This denotes that the results of foreclosure are going to bother you for an extended time, possibly even after you overcome your difficulties. The precise amount that your credit score will fall after a foreclosure is going to differ from case to case. If you have very excellent credit earlier than you face foreclosure, it might not have as destructive of an impact on your score as it would if you have less than ideal score earlier than foreclosure takes place.
As soon as a foreclosure is on your credit record, you will need to make a start to get rid of it. It cannot be eradicated for a minimum seven years. Nevertheless, later than seven years, you can have it eliminated, although you will have to request. Write to all three credit reporting bureaus and request them to take away the mark. After that, ask for a copy of your credit score to confirm that it has been eliminated.
If you have on no account had a low credit score, you might be wondering how it will have an effect on you after foreclosure. As soon as you have lost your home in the foreclosure procedure, you will want someplace to live. If you would like to acquire a new home, you will have a tough time getting a Canada mortgage due to the foreclosure on your record. If your situation has changed, like in case if you had been without a job however, are now engaged in a secure job, you might be able to obtain a loan. Nevertheless, you will find that the Toronto mortgage rates you are provided are a great deal more than the standard rate, given that you will be considered a high-risk customer. A low credit score will as well have an effect on your ability to get a loan for a car, a credit card, or any other kind of debt.
Since the effects of foreclosure on your credit score are so destructive, it is best to prevent foreclosure preferably. Although, foreclosure does not damage your credit forever, and it is not the end of your financial future, if you can prevent it, you should. One alternative is to see if you can refinance at a lower rate or for a longer tenure. Toronto refinance rates are low; accordingly you may be able to bring down your monthly payment by refinancing, if your credit has not by now been spoiled. One more choice is to approach your lender. Lenders would not like to have a home go into foreclosure; for that reason they might work with you to bring down your payment for a few months even as you work through the problems you are facing. In spite of Canada mortgage rates being extremely low, lenders still make profit from active loans; therefore they would like to keep the loan active preferably. Nevertheless, make the effort earlier than your loan goes into default, for the reason that lenders are usually reluctant to work with borrowers who have by now stopped paying. Be proactive, and you might be able to prevent foreclosure at all.
View the original article here
Thursday, June 2, 2011
Explore Options In Taking Commercial Vehicle Finance
You require a vehicle for its commercial use so that you business prospects brighten. However as there is huge money involved in buying commercial vehicle, you should be very careful in deciding over spending your funds on the vehicle purchase. So first of all you should decide on whether you require the vehicle permanently or for a limited period. This is very important and crucial because you have many options in taking commercial vehicle finance as per your requirements of the vehicle.
There are many options for availing Commercial vechicle finance is finance lease. Under financial lease provision you can hire a vehicle but you can not own the vehicle later. The advantages are that you have better cash flow because of fixed monthly repayments or rental. Obviously finance lease allows you to use the commercial vehicle without having larger capital outlay.
If you want to be free of any running costs and vehicle disposal problems, then you can opt for commercial contract hire which allows flexibility in terms of deposit and repayment periods
Hire purchase is yet another popular option for commercial vehicle finance. You are allowed to choose your deposit amount and the duration for hiring the vehicle. Then the monthly payment amount is arrived at. The main advantage of hire purchase is that you own the vehicle at the end of the hire purchase contact. Also you can opt for fixed or varied interest rates.
Make sure that you have assessed your requirements from a commercial vehicle so that you can select the suitable option for commercial vehicle finance. Also, while applying to particular commercial vehicle finance provide, study its terms-conditions care fully before making a deal.
View the original article here
There are many options for availing Commercial vechicle finance is finance lease. Under financial lease provision you can hire a vehicle but you can not own the vehicle later. The advantages are that you have better cash flow because of fixed monthly repayments or rental. Obviously finance lease allows you to use the commercial vehicle without having larger capital outlay.
If you want to be free of any running costs and vehicle disposal problems, then you can opt for commercial contract hire which allows flexibility in terms of deposit and repayment periods
Hire purchase is yet another popular option for commercial vehicle finance. You are allowed to choose your deposit amount and the duration for hiring the vehicle. Then the monthly payment amount is arrived at. The main advantage of hire purchase is that you own the vehicle at the end of the hire purchase contact. Also you can opt for fixed or varied interest rates.
Make sure that you have assessed your requirements from a commercial vehicle so that you can select the suitable option for commercial vehicle finance. Also, while applying to particular commercial vehicle finance provide, study its terms-conditions care fully before making a deal.
View the original article here
Lancaster PA Home Sales Investing In A Home
When it comes to looking for homes in Lancaster, PA, the first thing you will want to know is that you have chosen a wonderful place to live. If you are moving to Lancaster because of a job, you will not be disappointed with your new location. If you are moving to Lancaster because you want to live here, then you already know about this county's many charms. Not only is this the most beautiful region in Pennsylvania, but it is also the home of Pennsylvania Dutch county. Many people travel here to have a unique Amish experience. The presence of the Susquehanna River makes for some great fishing and wonderful scenery. If you are searching for Lancaster PA home sales, however, then it is possible that you need a little help. Without a doubt, looking for Lancaster PA real estate for sale can be a little overwhelming.
Lancaster PA home sales can be a little difficult because this county contains a number of different environments for different people. For example, some people really like to be out in the middle of nowhere. They enjoy the peace and quiet and they like to know that they are in not of danger of being bothered. There is plenty of Lancaster PA real estate for sale that can meet these needs. Likewise, there are plenty of homes that are right in the city of Lancaster where all of the action happens. Without a good agent, however, this process can be time consuming, expensive, and a giant hassle all around.
You should be wondering now what makes a good agent. To begin with, you agent will listen to your needs and wants, this way he or she will only show you Lancaster PA home sales that you might find even the least bit appealing. In other words, if you are terrified by the feeling of being out in the country by yourself, your agent will not keep showing you Lancaster PA real estate for sale that is in the middle of nowhere. This may seem like not a lot to ask, but many agents are only interested in pushing sales on the clients.
The truth is that you will want to sit down with your agent and talk. Before you even start learning about Lancaster PA home sales, you should have a discussion with your agent about the kind of home you can see yourself in. A house is a real investment, so you need to be sure that you can commit yourself to the Lancaster PA real estate for sale that you are considering.
View the original article here
Lancaster PA home sales can be a little difficult because this county contains a number of different environments for different people. For example, some people really like to be out in the middle of nowhere. They enjoy the peace and quiet and they like to know that they are in not of danger of being bothered. There is plenty of Lancaster PA real estate for sale that can meet these needs. Likewise, there are plenty of homes that are right in the city of Lancaster where all of the action happens. Without a good agent, however, this process can be time consuming, expensive, and a giant hassle all around.
You should be wondering now what makes a good agent. To begin with, you agent will listen to your needs and wants, this way he or she will only show you Lancaster PA home sales that you might find even the least bit appealing. In other words, if you are terrified by the feeling of being out in the country by yourself, your agent will not keep showing you Lancaster PA real estate for sale that is in the middle of nowhere. This may seem like not a lot to ask, but many agents are only interested in pushing sales on the clients.
The truth is that you will want to sit down with your agent and talk. Before you even start learning about Lancaster PA home sales, you should have a discussion with your agent about the kind of home you can see yourself in. A house is a real investment, so you need to be sure that you can commit yourself to the Lancaster PA real estate for sale that you are considering.
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Wednesday, June 1, 2011
Meet All Your Needs With Low Interest Rates!
There are many borrowers who are in need of money urgently but cannot afford to pay hefty rates of interest. Such borrowers can make use of loans with low interest rates. These kinds of finances are available to all kinds of borrowers. Anyone can make use of them.
Have you been looking for loans:
With lowest interest rates?
That come with reduced monthly payments?
That match your needs and financial constraints?
For tenants or homeowners?
If your answer is yes to any of these questions, you can find help in the form of these kinds of finances. You can still avail funds with credit problems. It does not matter whether you had credit problems, you can still avail funds. You can avail finance at a cheaper rate of interest.
By doing a little research, you can avail the required amount of funds. If you are finding it difficult to avail funds, you can seek help from financial experts. They can help you get the required amount of money in a short period of time. The financial experts will provide you finance that match your circumstances the best.
With low cost loan, you can look forward to avail funds at a lower rat of interest. You can get the most competitive interest rates which will help you take decisions quickly! The finance application process has been streamlined to a great extent enabling the borrower to sit back and relax while a finance expert scans the loan market for a low cost loan!
If you are credit challenged, you can still avail funds. It does not matter if you have a bad credit score. You need not pay exorbitant interest rates anymore! The independent financial advisors will offer you sound financial advice that will ensure you secure a cheap funds sooner than you had imagined.
You can enjoy the following advantages with these kinds of finances:
Lowest interest rates ever
Borrow greater amounts
Immediate decision in principle
Quick approval and fast payout
Special plans for bad credit, CCJ's, self employed
Borrow up to 125% of your property value
Fast and efficient service
No obligation quotes
No upfront fees
Simple and secure online application
Whatever be your requirement, you can avail such finances. You can have all your doubts clarified from these experts. You can reach out to online financial experts. This is the easiest way to avail finances.
View the original article here
Have you been looking for loans:
With lowest interest rates?
That come with reduced monthly payments?
That match your needs and financial constraints?
For tenants or homeowners?
If your answer is yes to any of these questions, you can find help in the form of these kinds of finances. You can still avail funds with credit problems. It does not matter whether you had credit problems, you can still avail funds. You can avail finance at a cheaper rate of interest.
By doing a little research, you can avail the required amount of funds. If you are finding it difficult to avail funds, you can seek help from financial experts. They can help you get the required amount of money in a short period of time. The financial experts will provide you finance that match your circumstances the best.
With low cost loan, you can look forward to avail funds at a lower rat of interest. You can get the most competitive interest rates which will help you take decisions quickly! The finance application process has been streamlined to a great extent enabling the borrower to sit back and relax while a finance expert scans the loan market for a low cost loan!
If you are credit challenged, you can still avail funds. It does not matter if you have a bad credit score. You need not pay exorbitant interest rates anymore! The independent financial advisors will offer you sound financial advice that will ensure you secure a cheap funds sooner than you had imagined.
You can enjoy the following advantages with these kinds of finances:
Lowest interest rates ever
Borrow greater amounts
Immediate decision in principle
Quick approval and fast payout
Special plans for bad credit, CCJ's, self employed
Borrow up to 125% of your property value
Fast and efficient service
No obligation quotes
No upfront fees
Simple and secure online application
Whatever be your requirement, you can avail such finances. You can have all your doubts clarified from these experts. You can reach out to online financial experts. This is the easiest way to avail finances.
View the original article here
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