Investing School

Current Ratio

Investing School — Mon, 09 Nov 2009 05:28:29 +0000

A current ratio is a financial formula. It measures the ability of a company or corporation to pay back its debts over a 12 month cycle. It will calculate the ratio between a company’s current assets to its current liabilities.

This is how it works: a company’s current assets will be divided into its current liabilities. The outcome is the company’s current ratio. For example, if XYZ’s company had a current asset total of $100,000 and its current liabilities were $80,000 then its current ratio would be 1.25. More specifically, it means that for every dollar that the company has to pay back it has $1.25 available in its current assets.

A company’s current ratio is used as an indicator of its market liquidity. If it has a high current ratio then the company is able to easily meet creditor’s demands. Current ratios are different according to various industries. For example, if a company has a ratio below 1 then it may have difficulty meeting obligations. However, if the ratio is too high then this is an indicator that the company is not properly or efficiently using its current assets.

It is important to note that low values do not necessarily indicate problems. If a company has solid long-term projects then it may be able to borrow against some of these projects to meet some of its current obligations.

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House Rules

Investing School — Fri, 06 Nov 2009 05:11:23 +0000

House Rules can be rules governing activities in a club in regard to dress, proper conduct and how a game of pool is played. Investment firms, banking houses and other financial management groups also have House Rules.

In this instance, these rules are stringent measures put in place to ensure that proper trading and investment is conducted so that governmental rules and laws are not broken. Often House Rules go above and beyond what the law requires.

No one wants to serve jail time for insider trading or anything of the like. Firms want to insure that investors feel safe in the knowledge that their funds and accounts are being properly managed. The standards outlined in rules and guidelines maintained by a firm give it credibility and high standing in the investment community.

Trading professionals in the security industry stress compliance with outside regulatory agencies and advise perspective traders to seek out management teams that maintain a high industry standard.

House or internal rules regulate how accounts are opened and maintained. These rules usually vary from firm to firm, so an investor should seek out a management team with rules he feels comfortable with.

There are numerous sites online that outline company policies and help assist prospective investors make the right decision in regard to their investment needs.

Numerous testimonials and tutorials abound. Trading professionals are available 24 hours a day to lend advice. Many professionals maintain blogs and present EBooks that outline the House Rules of the leading firms.

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Silent Partner

Investing School — Tue, 03 Nov 2009 00:44:43 +0000

When an investor puts money into a company but remains in the background while the firm is managed by others within the organization, this investor is known as a silent partner.

The trick for the other participants is to keep this investor silent and not allow him/her to dominate board meetings and corporate decision making. If this silent investor owns controlling shares of the corporation, he/she cannot be bullied into submission all the time, but some control can be maintained if the other partners stand together in opposition to decisions they oppose.

The silent partner stands to gain or lose in expenditures and profits. They are also included in any liability suits. They have access to all company files, including daily cash sheets, profit and loss statements, etc.

A silent partner is a full partner except in the day to day operations of a company, although he or she may monitor these operations at a distance.

Usually, this arrangement occurs when someone with capital is not interested in being involved in daily operations. Often this individual will set a friend or family member up in business and pursue other interests. But if this investment proves burdensome or is mismanaged, a silent partner can become very “unsilent” quickly.

This arrangement is very attractive and is one of the best options for someone with business management skills but with little capital who wants to get started.

The old adage about not going into business with friends or family is applicable in seeking out a silent partner. So be cautious in picking your investors, silent or not.

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Investment Terms

Reverse Mortgage

Investing School — Fri, 30 Oct 2009 16:08:35 +0000

For individuals reaching retirement age, a reverse mortgage seems like a great way to supplement their fixed income.

If a home is debt free, has no inherent structural faults and contains any significant equity, mortgage companies are loaning seniors’ money based on the equity of their property. This money can be dispensed in multiple payments or in one payment for the full property value.

Since there is no monthly payment there is very little pressure on the individual signing on to this type of mortgage. Mortgage companies recoup their loans when the mortgage owner dies, enters an elderly care facility or the property is sold.

Cash strapped retirees are signing onto such mortgages at an alarming rate. Even though interest is added onto these loans and must be repaid when the mortgage company collects from the individual or their estate, no one seems to be paying any attention.

In the United States, an individual must be 62 years old or older in order to get a reverse mortgage. Financial counseling is a prerequisite to insure the individual and others involved in their estate fully understand what is entailed in a reverse mortgage. The financial counselor must be approved by the Department of Housing and Urban Development.

Real estate taxes and home insurance must be kept up, if not, the loan could go into default. Interest and fees inherent in a reverse mortgage and added to the principal are usually far greater than those accompanying a conventional mortgage.

It is wise to do a little homework before signing on to any type of mortgage.

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Recession

Investing School — Mon, 26 Oct 2009 20:50:31 +0000

When the gross domestic product (GDP) falls for two consecutive quarters, all economists agree that we are in a recession. Despite the fact that unemployment may be high in many areas of the country and spending and manufacturing may have fallen off, technically, until the folks at the National Bureau of Economic Research state that we are indeed in a recession, politicians and economists can deny it, because the NBER says it is not so.

The NBER base their declaration on what is happening economically on a national scale. Two or more quarters of economic decline across the country prompts the NBER to declare that we are indeed in a recession.

Since the United States is recognized in the rest of the world as having the strongest economy, when we go into recession, it has an economic impact around the globe.

To pull any economy out of recession, governments attempt to revive economic growth by increasing the supply of money, cutting taxes and generating more spending.

Historically, a recession usually can last anywhere from 6 to 18 months. When it lasts for a longer period without some turnaround, an economic depression is declared. In any prolonged economic decline, stock prices fall, real estate prices tumble and unemployment rates rise.

A significant drop in the stock market can hasten a recession. The failure of significant investment management firms or banking houses can also put the economy on a downward spiral. Even natural disasters or the spread of disease in epidemic proportions can impact an economy.

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Profit and Loss Statement

Investing School — Thu, 22 Oct 2009 19:00:42 +0000

When a company tallies up the income for a quarter or a year, then deducts expenses and comes up with a net income, they have completed a profit and loss statement.

Every company keeps a balance sheet documenting transactions on a daily basis, but a profit and loss statement summarizes these daily transactions on a quarterly or yearly basis.

The statement is presented to investors and other interested parties to show the viability of a company, how much profit has been generated over the documented period and where the company is headed financially.

Once tax, operating and interest expenses, along with the costs of purchased goods, are deducted from the generated income, the net profit is arrived at.

To get a better idea of the health and growth of a company, a statement documenting cash flow is imperative.

Although cash flow documentation is important to creditors and investors, it is the profit and loss statement that is used to access past and possible future performance.

This statement presents all the tangibles, but personalities, discretion, persistence, integrity and other non-tangibles are often the tipping point in making investment decisions when a company’s net profits are minimal. With the right management team, a firm with energetic and respected employees can often turn a company around.

This statement is of utmost importance, but investors and creditors need to carefully consider all aspects of a company when making decisions about lines of credit or the buying of company stock.

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Investment Incentive

Investing School — Mon, 19 Oct 2009 01:28:56 +0000

In attempting to lure companies to invest in a particular location (via opening offices, plants there etc), governments or corporations provide subsidies to attract investors. This is known as an investment incentive. An example would be a municipality giving a real estate tax break in order to attract a manufacturing company. Some governments will provide free real estate or even guaranteed loans to companies willing to open operations in a particularly high unemployment area.

In order to expand their tax base and attract viable companies, some municipalities or governments are willing to build bridges or pay for rail lines. Often competition between municipalities to attract manufacturers or developers can be beneficial to companies as each municipality raises the bar.

When governments question whether so called investment incentives are truly incentives or just subsidies that allow companies a competitive edge in the global market, a trade war can develop, with sanctions and tariffs being imposed. Investment incentives are given to attract investment or manufacturing activity in a specified local and are not subsidies for productivity.

Transparency is an issue in regard to investment incentives. The line between subsidy and an incentive can sometimes be very thin. Industrial countries push the incentive envelops and draw investment away from developing countries.

Domestically, governments are concerned that incentives are pulling manufacturing from one area to another without taking into consideration what adverse economic affect this could have on the locality when jobs are lost and businesses lose their customer base.

Globally, there is very little regulation imposed on investment incentives. This lack of regulation directly affects investment in developing countries.

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Insider Trading

Investing School — Fri, 16 Oct 2009 17:44:26 +0000

Most people are not aware that insider trading is legal.

When securities are bought or sold by an individual who has information that the public is not privy to, an illegal transaction occurs. However, once that information is made public, trading by a company executive or other insiders is not an issue.

When the public is not informed about insider developments, such as lucrative mergers or takeovers that are to occur in the near future, any insider (including family members who are not even employed by a company) are not allowed use this information to profit. This includes buying or selling securities as well as passing the information onto others to do the same.

The Securities and Exchange Commission requires that all insiders submit a report on all their transactions. Although most governments have rules against insider trading, the United States has a reputation of having the strictest guidelines.

Illegal insider trading includes the misappropriation or stealing of information from any company employee and using this information to trade or sell any stock. The laws governing this illegal trade are so stringent that if an executive or any other company employee slips up and reveals any privileged information, even to just one individual, this privileged information must be announced to the public.

Despite all these rules and regulations in regard to insider trading, investors keep a close watch on which stocks a viable company or individuals inside the company trade, hoping that their investment decisions are an indication as to where the market is going.

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General Fund

Investing School — Tue, 13 Oct 2009 21:53:01 +0000

A government, government agency or nonprofit group, such as a historical society, museum or university, maintains a general fund to cover all financial activities. Monies from this fund can be placed into designated funds for specific spending. These designated funds channel monies from the general fund to places where it is needed. Once these designated funds are used up, more funds are allocated from the general fund to replenish these funds.

The general fund pays for all operating costs and other administrative expenditures.

It is this fund that must be balanced when a balanced budget is the topic of discussion by government officials, administrators or economic forecasters.

This glorified checking account of governments, and like groups, must maintain a balance in order to pay the daily expenses of their operations. When this balance is not maintained, funds are borrowed from funds designated for social security or other funds.

If these designated funds become too depleted to safely borrow from, governments or nonprofit groups find other funding solutions. For governments, these solutions may entail borrowing from other countries such as China or petroleum-rich countries in the Mid-East.

Without a proper balance, daily operations are curtailed and appropriations are held up. Projects are put on hold and layoffs occur. For nonprofit entities such as universities, these layoffs can affect the local economy, and unless some solution is arrived at, bankruptcy could be the next step.

Maintaining the general fund is a priority for all governments and government agencies as well as nonprofit entities.

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OptionsXpress vs Scottrade – Online Broker Comparison

Investing School — Sat, 10 Oct 2009 12:00:47 +0000

Do you use OptionsXpress or Scottrade and wonder which one is better for your needs? If you are an investor, the best online broker is a topic that you are very interested in, yet there are so little information out there. Today, let’s try to uncover the cloud surrounding which broker is better in our featured post: OptionsXpress vs Scottrade.

Basic Fees Comparison

Stock Trades

OptionsXpress – $14.95 per trade, $9.95 for 9 trades or more
Scottrade – $7 per trade

Option Trades

OptionsXpress – $15 per 10 contracts
Scottrade – $7 + $1.25 per contract (10 contracts would cost $19.25)

Mutual Funds

OptionsXpress – $14.95
Scottrade – $17

Futures

OptionsXpress – $2.99 per contract
Scottrade – Unavailable

People who strictly invests in stocks are better served (at least cost wise) to go with Scottrade since it offers a flat $7 a trade for unlimited shares. OptionsXpress on the other hand has a tiered system, so for traders who at least trade 3 times a month, the cost difference seems minimal at $2.95 more a trade.

Once you step into more advanced trading vehicles though, and OptionsXpress starts to shine a bit more. Options and mutual funds both tip in the favor of OX, and it is the only way to trade futures (in case you ever want to get into that market).

Beyond the Basics

While almost impossible to prove, OptionsXpress is known for its incredibly efficient fill rate and trade execution. In fact, the company calls it XpressRouter, which guarantees its customers the best execution at the best price. The broker also claims that it saved its customer more than $1.3 million just in the last quarter alone, so short term traders should look beyond the per trade price and consider this broker.

Scottrade on the other hand is widely known for its awesome customer support. They also offer the most physical branches out of any discount brokers just in case anyone needs to see a representative face to face.

Another good benefit is their $27 broker assisted trades. With this, Scottrade will help you make a trade just in case you’d rather do it over the phone, or even in person.

Online Broker Comparison Conclusion

For beginners or people who just want to make simple stock trades, Scottrade seems to be a great option since their top notched customer service rep will help answer any questions you may have.

Click Here to Open a Free Scottrade Account

However, the more sophisticated investor who is after the absolutely best fill rate, easy to use options trading platform, and great pricing on more advanced trading vehicles, OptionsXpress seems to edge out in this comparison.

Click Here to Open a Free OptionsXpress Account

$0 Cost Transfers

Both Scottrade and OptionsXpress will reimburse the nasty transfer out fees that most brokers charge you for. In fact, both brokers set the dollar amount at $100, meaning that they will give you, up to $100, of the account transfer fee once you have your assets transferred over.

Resources:

OptionsXpress – Official Site
Scottrade – Official Site

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