Posts filed under 'Investing'
I am thrilled to announce I will be on the radio discussing my new book. Please check my website (www.somanyshoes.net) for updated dates and times.
In the meantime, let’s discuss investing. Why should you think about investing your money? Why not just put it into a checking or savings account and let it sit there? Because investments offer a way for you to increase the money you invest by paying you a return.
One way to describe how fast your money is growing (or the increase in the value of your money), is through a concept called return on investment (ROI), a measurement of how efficiently your money is working for you. It is usually expressed as a percentage. It is an important concept to understand because ROI tells you how much your money will grow. Here is the formula for calculating your return on your investment: The gain from the investment minus the cost of the investment, divided by the cost of the investment
Note that while it is a math formula, it only uses subtraction and division. Let’s look at two examples.
Example one: you put 1,000 dollars into your savings account at the beginning of a year. The bank paid you interest on your money. Let’s assume you left the 1,000 dollars in there for the entire year and, at the end of the year, you check your savings account balance and see that you have 1,020 dollars. What was your return on investment? Your return on investment was 2%:
1,020 dollars minus 1,000 dollars equals twenty dollars.
Twenty dollars divided by 1,000 dollars equals 2%.
Example two: let’s assume you put 2,500 dollars into your savings account at the beginning of a year. You leave the 2,500 dollars in there for the entire year and, at the end of the year, you check your savings account balance and see that you now have 2,600 dollars. What was your return on investment? Your return on investment was 4%:
600 dollars minus 2,500 dollars equals 100 dollars.
One hundred dollars divided by 2,500 dollars equals 4%.
As you can see, in both cases you earned money, but the amount of money you earned was small. Your money earned money, but it could have earned more than it did. You work hard for your money and your money can work harder for you.
In a checking or savings account, your return on investment comes solely from the interest the bank pays you which are typically, fairly low amounts. However, in addition to checking and savings accounts, banks offer other kinds of accounts which pay higher interest.
One type of investment account that banks offer is called a certificate of deposit (CD for short). A CD is a special type of savings account and is a great place for a beginning investor to start investing their money. A CD differs from both a savings account and checking accounts because your money goes into a CD for a specific, fixed period of time (often three months, six months, or one to five years). During the period of time that you sign up for, you really don’t have access to your money. (In a regular checking or savings account, you can withdraw your money at any time you need to.) In a CD, if you pull your money out early, there’s a penalty fee. However, in return for leaving your money in the bank for so long, the bank pays you a higher interest rate than they pay on a checking or savings account. Once the period of time that you selected ends, you get back all of your money plus the interest your money earned for you. Then you can decide if you want to re-invest your money in another CD, selecting perhaps a different time period, or put it back into your checking or savings account.
Why is a CD a great place for a beginning investor to start? Because a CD pays a higher rate of interest than a checking or savings account and so you receive a higher rate of return (ROI) on your money. But because you can’t take your money out early without incurring penalties, you learn whether you have the tolerance to keep money tied up for some period of time. A CD is a way to check if you will miss having access to your money, without the risk of losing any of it. A CD is federally insured against losses, and allows you to begin to understand your personal risk tolerance.
More about personal risk tolerance and other kinds in investments in posts to follow.
June 24th, 2009
You’ve seen the commercials: “Gold prices are high so send us your gold jewelry and we’ll send cash.” You think to yourself, “I like my old jewelry but I like cash better. I can use the cash to buy new jewelry or something else equally shiny and pretty – I’ll do it!” But, is it a good idea? Is now the right time? And, more importantly, do you understand the underlying principals behind the price of gold.
Gold has many identities: commodity (jewelers and some manufacturers view it as raw material), currency (bankers and others actually use it instead of cash to buy things) and treasure (pirates and others just like to own it because it is shinny and pretty).
Gold is usually measured by weight in “troy” ounces and all of those ounces are uniform in their purity. Just like diamonds have different levels of quality, so does gold. Gold’s quality is measured in a few different ways: “parts fine,” “% gold”, and “karats”. Pure gold is 24 karats. The percentage of gold in a piece of jewelry is the number of karats divided by 24. 24 karat gold is 100% gold, no impurities. 14 karat gold is only 58.3% gold.
Gold is bought and sold in large amounts on commodity exchanges. Commodity exchanges are like stock and bond exchanges (remember exchange = market), but instead of stocks and bonds “real goods” are bought and sold. Other examples of “real” things bought and sold on commodity exchanges include coffee, steel, frozen orange juice, and pork bellies. You can invest in gold without actually having to buy the physical metal. You can invest in the stock of a gold producing company and the price will rise in fall (in most part) based on the price of the metal itself. You can buy a mutual find that invests in gold stocks. Or, if you are adventurous, you can buy a contract to take physical delivery of the metal itself and sell that contract to some one else before the delivery date. (Don’t forget to sell – which is called closing out your contract – or the delivery man will be bringing a very heavy albeit shiny package for you to sign for.)
It’s true, right now gold is selling for high prices. This is because in an uncertain economy – like we have here and around the world – gold is seen as a standard valued by everyone. Many people believe that because gold is a physical thing it will retain its value even if stocks, bonds and dollars lose their value.
So, should you run out and sell your jewelry? It is true, gold prices are high right now. However the firms you see on Television do not pay top dollar for your jewelry. They like to buy low and sell high. They buy your gold for less than they can sell it to someone else. Selling to these folks is no different than going to a pawn shop and selling your old jewelry for cash. If you need to pawn your jewelry, as with everything else, you need to do your homework. Jewelers may give you more money because they can resell your pieces and there are websites which can offer you additional tips on the best ways to deal with cash for gold offers. Also why are you selling it? If you are going to use the money you make to pay down high interest debt, receiving a little less than the jewelry is worth might pay off. If, however, you want the money to buy some newer shinier prettier object then you might want to hold out for a better offer.
March 23rd, 2009
Kitty tried to slam down the phone receiver. Damm her lack of opposable thumbs and damm Barbie. They had been vying for sexiest toy title for years. Kitty thought she had Barbie beat when she went for the big time bling. But now the diva was topping her with a runway show on Feb. 14 in Bryant Park, complete with designer inspired Barbie clothes. What was the world coming to? Then Kitty sat back and purred – she still had her line at Neiman Marcus and a higher net worth (see November 17, 2008 post for more on net worth). And, wasn’t Barbie turning 50?
http://www.nytimes.com/2009/02/05/fashion/05ROW.html?_r=1&ref=todayspaper
http://www.neimanmarcus.com/search.jhtml?N=0&Ntt=heloo+kitty&_requestid=15797″
February 5th, 2009
There are as many different investing philosophies as there are fashions trends (According to Vogue.com Spring ’09 promises us: Nudes, metals, sky high stilettos, tribal, harem pants, and God forbid, jumpsuits.) The investing beginner should ignore this and choose with an eye towards the future, not just what is in style today. Day-to-day, stocks and stock markets, mutual and index funds will go up and down, sometimes a lot. If you did your homework before investing and kept current on your investments, you shouldn’t get overly excited either way.
There is a school of thought in investing that following crowd behavior – trends – creates opportunities. For example, if everyone believes denim jackets are back this season (Jcrew.com) and you spot the trend ahead of other people – you realize denim is going to be so this season before everyone else – you can profit by buying ahead of the crowd. You make money as denim prices increase.
However, there is also an investing school of thought who believes in eschewing trends: If denim is in, they ignore it and invest something else – such as leather. They believe that since everyone will be buying denim, and no one will be buying leather, denim will be over-priced and leather will be under-priced. When leather comes back into style, you profit because you bought leather when it was cheap and out of fashion.
Who is right? Both. However, unless you are a seasoned investor, remember, “Fashions fade, style is eternal.” Yves Saint Laurent
January 13th, 2009
Buying stock is buying ownership in an individual company; how much ownership depends on how much stock you buy. When you buy a share of stock, you are buying a small piece of everything the company owns and owes. So, for example, if a stock is selling for 110 dollars per share and you ask your stockbroker to purchase one hundred and 10 dollars worth, you now own one share of the company. If the company has one hundred thousand shares total shares outstanding, you just bought .00001 percent of the company.
Stocks are traded on a stock market. You buy stocks with the help of a stockbroker who is sort of like a personal shopper for stocks. There are well over 2,500 different companies whose stocks are traded on the New York Stock Exchange (NYSE) alone. Companies earn money and lose money. As their fortunes go, so does their stock. By owning their stock, you can make or lose money right along with them. Examples of the different kinds of familiar retail stocks you could own are: Abercrombie & Fitch, Saks, Nike, Polo and Ralph Lauren. Not only can you own a piece of these companies but you can show your brand loyalty by wearing them.
Think of a stock market as resembling a department store where you can buy all sorts of designer clothes, cosmetics, shoes and bags in one place. In the stock market, you can buy stocks and bonds and other financial instruments instead. In the United States, there are two main markets: The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Internationally, there are lots of others, like the London Stock Exchange and the Hong Kong Stock Exchange. You can shop at these markets just like you can at any other market, as long as you use your broker or have an investment account which will let you purchase directly.
Each market (or exchange) lists all of the stocks and other financial instruments it sells. You can browse all the offerings, narrow down your selections and hone in on your purchases. You can even try on, before you buy, by selecting a stock to watch. Don’t spend any money until after you have watched it for a while and also learned something about the company. See how much it fluctuates, the price of stocks constantly changes and you have to be sure that the stock you are watching is a value at the price at which you decide to buy it at. If the shoes were a steal at 125 dollars, would you still think they were worth buying at 200 dollars?
I do not recommend owning individual stocks unless you really know what you are doing and can afford to lose some money. The stock market, particularly now, can be a raucous place. When you are starting out, it is much better to own a professionally managed mutual fund or, even better, an exchange traded fund, which uses a different kind of shopping approach than that of buying stocks.
January 12th, 2009
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