What is a capital market?

The capital market is a market where securities that  that has a long-term maturity are traded. These include treasury notes, treasury bonds, normal and preferential stocks. Generally securities with a maturity of greater than 1 years are traded in it. As you can see all securities that are not traded in the money market are traded in the capital market. The name capital market also indicate that companies and government raise  capital in this market.

The capital market is divided into two different markets. Firstly the stock market also known as the equity market where normal and preferential stocks are traded. Secondly the bond  market also known as the debt market where notes and bonds are traded.

Hence we can see that when companies and government need short term financing they raise funds in the money market whereas if they want to raise fund over the long term they would do so in the capital market.

What are treasury bills?

Treasury bills is one type of instruments that is traded in the money market. 

A treasury bill is typically a bond that is issued by a central bank or by a government that has a maturity of less that one year. The treasury bill is sold without coupon payment. A coupon is a payment that is made every six month. It is paid as a percentage of the nominal price of the bond.Hence the treasury bill is sold at a discount and then the government will pay the face value at maturity.

These treasury bills are issued by governments in order to raise funds from the market. Because these bonds are issued by the government of a country it is therefore considered to be the safest asset and as a result would have the lowest return of all. Because of its safety it is used very often to calculate the bond spread of other bonds. The bond spread is simply the difference in return between the other bond and the return on a three month treasury bill. The greater the bond spread the riskier the bonds.

Treasury bills are also the most liquid and the most traded of all instruments. This is mainly because banks and other non-bank financial companies are required by law to hold them. For banks they may be used as collaterals in repo transactions with the central banks or in the interbank market to obtain funds. Because they are highly liquid these institutions hold them so that they can be readily converted to cash to settle obligations. Otherwise if they have excess funds they invest them in treasury bill in order to get a decent return. Short term insurers also hold a significant amount of treasury bills because they also need to have access to their fund on short notice.

These treasury bills are issued in two ways. They are either issued through auctions or over the counter. Banks and other institutions participate in weekly auctions. They state the price, the discount rate and the maturity that they want and the central banks will allocate the bills starting from the one offering the highest offered price. After they are issued in the primary market they can then be sold in the secondary market where you can buy them. However you can still buy them directly from the central bank.

As an investor you might obtain treasury bills at any institutions that have them in their portfolio and are prepared to sell them or over the counter at the central bank. But I would strongly advise investing in a money market fund if you want to gain exposure to the money market.

However since treasury bills are the safest of all investment it makes no sense investing a lot of money in them. At best you can invest 5 to 10 % in them in case you want to diversify your portfolio and decrease the riskiness of your portfolio. I would myself advise about 10% in a money market mutual fund, 10% in a bond mutual fund and the rest in other instruments such as gold, stocks, and so on.    

What is a penny stock?

As the name suggest a penny stock that is worth pennies or is quite cheap. The definition varies but any stocks that is very cheap compared to price of solid companies may be considered as a penny stock. That compared to stocks like Microsoft that may worth hundreds of dollars. Since a stock’s price is a reflection of the future earnings of the company then in theory a penny stock is the stock of a company whose earning’s prospect is quite tiny to be respectful.

So what is the fuss you may ask. The penny stocks is composed of two types:

1. The first group of stocks is made up of the stocks of companies that that are going out of business. Think of a company of  camera with reels, a magnetic tape company, or a company that makes floppy disks, etc. These companies may once have been mighty, but their products are now obsolete or their business model have failed and as a result they will certainly go out of business unless they reform or restructure. So any stocks of these companies is throwing money out of the window.

2. The second groups consist of tiny companies that have just started up but do not have the recognition of the bankers. So they are craving for you to give them the chance  that they need. Think of Microsoft or apple in the 70s.However you also know that 90% of small businesses will go out of business in the next 2 years. So it is still quite difficult to spot the company that will make it big.

Now that you have understood what penny stock is you can see that it is quite risky to invest in them but if you are able to spot the one then you can multiply you money by a lot.

 

Let us look at the factors that makes these stocks risky.

1. These stocks are generally not listed on an exchange. This may be because to list on an exchange a company have to abide to some strict conditions such as financial reporting guidelines, directors have to abide to some rules, etc. If these companies cannot abide to these rules that are there to protect shareholders or other stakeholders, then it is not a good idea to invest in them. Financial statements will enable you to analyse the company’s performance other several years and see if they are worthy of your money. The companies may be run by convicted directors. Companies run by convicted companies will not be allowed to list on exchanges and if they are not listed on exchanges they will not provide reports and as a result you will not know about the directors. As you can see there are a lot of risks.

2.If you have bought these stocks then someone out there may be thanking all the gods of the earth. You do not get an idiot everyday to buy a stocks that no one want. This is because penny stocks are illiquid that is they are difficult to sell. There are a lot of sellers but a few buyers. The only way people can sell their penny stocks is only if someone is foolish enough to buy it.

3. These stocks are easily manipulated by fraudsters. Since they are illiquid and hard to sell, some people buy them cheaply and then make a hype about the stock so that unsuspecting buyers will but them at a higher price.

As you can see it is quite risky to buy these types of stocks. Although you would make it big if you can buy in the next apple or the next Microsoft it is more likely that you will lose your money. So just like I advise investors to avoid derivatives, I would advise them to avoid penny stocks. Invest in healthy companies. Also if a listed companies is delisted or is about to delisted get out immediately.

Good luck to you all in your investing.

strategies of the successful investor part 2 :Time is your best friend

As I have written in an earlier post, time is the best friend of the investor. As we have seen in the first post you will have to draw up a plan. this plan will contain information about for objectives, risk tolerance, risk tolerance and asset allocation.

However the time that you have will impact on these four aspects on you investment life.

I am going to take the examples of a person saving for sending his child to university and for retirement and talk about how the time aspect would affect the achievement of these objectives.  

Suppose that a person who is 20 years old want to retire at the age of 60 years old and also to save money for a child who has just been born. Such a person has 40 years to grow his portfolio for his retirement and 20 to send his child to university. Such a person has time on side.

This person can afford to be risk averse and conservative and invest in a greater amount of safe assets. This person can also invest a smaller amount  of money every month because he has the advantage of compounding. Compounding will ensure that his money will grow with time even with small monthly investment. Such a person would be able to achieve his objectives with no problems.

On the other hand if a person is 35 years old and want to retire at 60 years old and want to send his child to university in 10 years then this person will not have time on his side. This person will have to invest more aggressively and cannot afford to be risk averse and must choose assets with greater riskiness but with greater return. Such a person will not also have the advantage of compounding and as a result will have to invest more every month. This person may have no choice but to delay retirement or the time set to attain the objectives.

The lesson that we can learn today is that if you have time on your side then you are a lucky guy. But if you do not have time on your side then it would be harder.

How to buy and sell stocks using a broker?

In my two previous post here and here I wrote about what a broker is and how to go about to have a brokerage account.

If you have a full-service broker chances are that you will not need to know these information as the broker will do every thing for you. However it is wise to learn so that you can become more knowledgeable about investing.

If you are have a discount broker then you need to tell him what you want him to do. To be able to do this properly you need to know certain terms so that he will do what you want. You will then communicate this to him by phone or by any previously agreed means in your agreement or brokerage contract.


Here is how things goes. On the market there are people who want to sell stocks and other securities and those who want to buy.

Let say that three people want to sell stock of company x at the following prices. These are the sell prices or the ask prices.


Person A $50
Person B $51
Person C $52

Now three people want to buy the same stock at the following prices. These are the bid prices.

Person D $48
Person E $47
Person F $46

Note that those that are selling are always offering a higher price than those who are buying. The difference between the two is called the ask-bid spread.

In our example the ask-bid spread is $2. This information means that the buyer will have to raise his bid price by two dollars to be able to buy his security or the seller has to lower his ask price by two dollars to be able to sell his security.

What is important is that the person who is ask the lowest price will be given priority and his stocks will be sold first. The same is for those who want to buy stocks, the person who bid the highest will be given stocks in priority.

However if there is a deadlock and that no stock is changing hands, the the seller can suggest the highest bidding price and his stocks will be sold. Using the example above if person A decreases his ask price to $48 then his stocks will be sold to person D. The opposite is also true. Person D can increase his bid price to $ 5o dollars as a result he will be able to get the stocks that person A is selling.

Now what orders are you going to give the broker?

1. Market Order: The broker will buy the stocks at the best available price. In this case if you are person D you will be giving the broker the instruction to buy shares at $50. This order will be executed immediately.

Limit Order: This will be for the broker to buy only when stocks are available at a given price or to sell only when there are buyers that are prepare to buy stocks at the price that you want.

Stop Order: This would mean that you are giving your instruction to stop buying once stocks are exceeding a level and are being too expensive to buy. This is called a stop-limit. You can also give a broker an instruction to sell your stocks once the value of the stock fall below a certain level. This may be because the stock has been bought at a higher price and that the lower it falls the more loss you are going to make on it. That is why such an order is called a stop-loss.

All or None (AON): This means only to buy stocks if all your order can be fulfilled. Sometime if you want to buy 500 stocks of company x at $50 and that there is a seller of 400 stocks at $50, normally the broker will buy the 400 stocks for you. In the All or none the order will be executed only if there is a seller of 500 stocks.

Day Order: This order will be only for the day. That is because some order can continue until the condition for the order is satisfied.

Good Till Canceled (GTC): This order will remain valid unless it is executed by the broker or cancel by the person.

Fill-Or-Kill: If this order is not executed immediately then it is to be canceled.

This now end the three part series on the broker and the service that they offer.

Do you have any question or you want to talk about you experience on using a broker? Leave a comment below.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
What is a stock?
Stocks have higher return than bonds
How to be rich buying stocks!!
Should i sell my stock and hold cash?
Introduction to diversification
How and when dividends are paid?
what is a stock exchange?
How to choose a broker - part 2?

How to choose a broker - part 2?

In the first post that you can read here, I talked about the different types of broker and what type of broker would be appropriate for your situation.

Today I will tell you about how to go about creating a brokerage account.

At this point you have analyzed your situation according to the first post and have decided whether you want a discount broker or a full service broker. You have most probably chosen a broker according to the factors mentioned in part one.

How to set up the account?

When setting a new brokerage account it is important to follow the following steps.

1. The broker should understand clearly what your objectives are. You may simply want him to execute your orders as you will do all the thinking or research. However you may want him to do more than that. You may have some long term objectives such as retirement, your children studies, etc. These objectives should be clear to him as he will devise an investment plan for you that will enable you to attain these objectives.

2. The broker should understand what is the level of risk that you can bear. That is your risk tolerance. Read this post to understand and determine your risk tolerance. The broker should know this so that he can recommend the type of securities that fit the level of risk that you can bear.

3. The broker should know your complete financial situation.He should know your income so that he and you can determine the amount of money that you can invest monthly so that you can reach your objectives. However this may help him determine whether investing is appropriate for you. Remember if you have any debt, investing may be inappropriate for you. Read this post on the subject.

4. The power of the broker. If you are unable to make proper assessment of securities, then it is appropriate to let the broker assess the securities and then take the decisions for you. But this right should be in written form, and any decision should be such that it goes toward reaching your goals. A decision by the broker should never be such that it is against your interest or towards reaching your aim.

5. Every time you buy and a security it must be in the prescribed form that is recommended in the contract. If the contract states that orders to be in writing then only written orders will be accepted to buy or sell securities. Also every time a securities is bought or sold you must have written confirmation of it.

If trading is done electronically then you will not have a certificate but simply a notice. If trading is not electronically then the broker can send you the certificate or keep it at the brokerage firm if that is in your contract or agreement.

6. Make sure that everything that we have talked above is in writing and that you have a copy of the contract. You should keep a copy of this for future reference. Everything that the broker can do should be according to this contract.

Now that you have a broker learn how to buy stocks here.

Do you have any questions on choosing a broker? Do you want to share your experience with us?Please leave a comment.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
What is a stock?
How to be rich buying stocks!!
How and when dividends are paid?
what is a stock exchange?

What is a bond ladder?

A bond ladder is an investing strategy that try to maximize and create a regular revenue stream with bonds. Read my post on bonds here. As you know bonds are debt instruments that pay a coupon or interest on a regular basis in fact twice a year if you are buying the regular one. This is particularly important for people who are retired or who depend on a regular income from their investment.

The bond ladder has another advantages. It is like dollar-cost averaging. As you will be buying bonds on a regular basis you will avoid buying at times of too low interest rate. Imagine buying all your bonds in a recession. You will be locking low returns on your fortune for a long time to come.

A bond ladder has the following characteristics:

1. Bonds with different maturity period. This would mean that the different bonds would mature at different times and that in case you have an emergency you would have access to funds. For example you might have bonds that have a maturity period ranging from one year to twenty years. The key is to have a bond that matures in the next year so that you are able to be able to redeem your capital and use it in case you have an emergency or buy another one to replace the recently matured bond.

2. Bonds that matured at different months of the year. The key here is to have bonds that mature at different months of the year and as a result pay coupons or interests at different months of the year. If you are a retired person, then you would have regular income.

How to build a bond ladder?

Now suppose you have 1 million dollars in you retirement account and you want to build a bond ladder. The ladder will have the following characteristics.

1. The number of rungs. This would be the number of lots that you want to divide your $1million. If you divide the money into ten lots then you will have will have 10 rungs. If you divide the money into more lots then you will increase the number of different types of bonds that you can invest in. See this post on diversification. However the more lots you have, the more would be your cost when you will have to reinvest a matured bonds. The less you divide your money into lots, this would decrease your reinvestment cost. However this would increase the chance of losing a large percentage of your portfolio in case one of the bond issuer default on your bond.


2. The length of the ladder. This would be the longest maturity length that you want one of your bond to have. You might want to have your bonds to have twenty years maximum maturity. The longer the length of the ladder the more return you will have because remember you will have to be compensated for the increased uncertainty. However keep in mind that twenty years is a long time and it increases the chance that you will lose your capital because of default. But keep in mind that too short a maturity will means that you will have to do will low return. That is also not good.The conservative investor might choose twenty years while the aggressive investor might choose twenty years.


3. The length between the rung. You have the chance to make the time between two bonds attaining maturity long or short. If it is too short then it means you are dividing your money into too many lots or have only short term bond maturity. Either way it is not good. The best way is to have the time between maturing bonds of about 1 year. Hence if you have emergency you would be able to survive on the coupon payments until you are able to redeem the materials.

4. The bond ladder should be composed various types of bonds ranging from government, state, municipal and corporate bonds. This is to avoid placing all your money in a single type of bonds. Please read here and here on the importance of diversification.
b
However, I would strongly discourage against anyone having only a bond ladder. This investment will need to be supplemented with other types of securities to meet true diversification even though you have a bond ladder that is well diversified. You never know what could happen.

Do you have a bond ladder? Please share your experience with us or ask a question by leaving a comment.

How to choose a broker?

The broker is the second most important person in your investing life. The first one is you of course. So what is the broker? He can be described as an intermediate between you and the market. You will use him to buy the different instruments on the market. Even though you can buy some instruments on your own, it is time consuming and you might not have access to a wide range of investment instruments as you would if you have a broker. so for all practical purpose i will advise anyone to invest through a broker.

What are the different type of brokers?

There are mainly three types of brokers:

1. Full-service broker

A full-service brokerage as the name suggest will provide all the services that one can need. The broker will provide you with a wide range of securities, they would provide recommendations and advices on the securities that you can buy. The broker can also tailor-make a portfolio for you that is appropriate for your situation. This type of broker is ideal for if you are new to investing because it will reduce the risk that you can commit a costly mistake. This type of broker is generally costly but it is worthwhile for you until you are able to invest on your own. You will pay the broker a fee for advices and a commission as a percentage of transactions.

2. Discount broker
The discount broker will give you access to investments instruments but will not give you advices or give you information, He will only take your instruction on what to buy and what to sell. Your instructions will be through fax, email or telephone. You will have to use your own experience, researches and knowledge on what instruments to buy and to sell. Normally an investor will start with a full-service broker and the later on move to a discount broker. This type of broker is usually advised for experienced investors. This type of broker take a small commission and as a result is better for those that want to increase return.

However if you want to be a couch potato investor and invest in bond fund, index funds, etc it is better to use a discount broker.

3. Online broker
The advent of the internet has come blurred the distinction between the two types of brokers. Now both traditional discount broker and full-service broker are offering online services to cater for the investors that want do things for themselves and who want to have access to real-time information. However it is increasingly common for discount broker to offer online research reducing further the difference between an online broker and a full-service broker. The online broker is the cheapest of all and as a result it is advisable for someone who can manage his investment by himself and who need access to the latest information.

Factors in choosing a broker

1. Make sure that the broker is a registered broker. It must have a good reputation. You can do this by talking around with friends, colleagues and making your own research. The broker must also have a good reputation in the financial world. Only after this has been done that you can go forward. I choose the brokerage arm of my bank.


2. Your financial goals, If you have goals such as retiring, sending your children to school, etc then it is better to choose someone that can give you advice. He will advise you on the portfolio composition, what instruments to buy and sell and what investment strategies to adopt. Then a full-service broker is advised.


3. Your risk tolerance. If you have a low risk tolerance then you will be scared to make mistakes and lose your investment. Then a discount broker is not for you. It would be better if someone else do all the work and take the important decisions for you. Read this post on risk and risk tolerance.


4. The fees and commissions charged by the broker. Remember on the long run fees and commissions reduce your return, so it is important to choose a broker that offer the lowest rate. Discount broker generally offer the smallest rate.
Read this post on fees and commissions on your portfolio.

The brokerage account:

There are two types of brokerage account

1.The cash account

The cash account is like a regular account. You deposit money in it. when you give the broker an instruction to buy a security, the broker will use the money in the account. You can buy securities worth not more than the amount of money in the account. Note also that the dividends that you receive from companies will be deposited in the account.

2. The margin account

The margin account is like a credit account that the brokerage give you to buy securities. When you buy a security you will have to pay the money back with interest. This type of brokerage account is recommended only for the experienced investor. Those involved in option trading or similar risky transactions. I would strongly advised the average investor to invest using a cash brokerage account.

3. Option account

This type of account is for those who want to trade in options. Remember that option trading is very risky. Please read this article to understand risk. I would recommend this type of trading for the experienced investors only.

Please read the second part of this post here.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
What is a stock?
How to be rich buying stocks!!
what is a stock exchange?
What is market capitalisation?

What is a stock exchange?

A stock exchange is a company that make it possible for people who want to sell stocks and other investment instruments to be connected to a buyer. We can thus say that it facilitate the selling and buying process of stocks.

It is not possible for a buyer to meet a seller directly. Each investor must have a broker and when you want to sell or buy a stock the broker will place your order in the exchange computer. When you get a seller or a buyer the exchange will tell your broker and finally you will be informed by him. You cannot deal directly with the exchange yourself. Nor can you meet the person that is buying your stock.

Apart from facilitating the buy-sell process the stock exchange offer several advantages.

1. You do not have to go around looking for people to buy shares. Also even though some companies sell stocks over the counter this is a daunting task and this can be done using a stock exchange in minutes.

2. The stock exchange protect the investors in that you are certain to get a share when you buy and to get your money when you sell. You also have consumer protection institutions that can initiate actions if your rights have been infringed.

3. Companies that are listed on the exchange have to abide to some rules. They need to have a certain market capitalisation, they need to follow accounting standards, they need to issue financial reports every quarter among others, their shares have to be above a certain value, etc. As you can see, if you are investing in a company listed on an exchange you are sure that the company is secure.

4. Companies must get shareholders agreement before going ahead with some plans such as raising the number of shares, mergers and acquisitions, etc.

5. Companies listed on a stock exchange must a board of directors that are independent and capable of doing their jobs. At least in theory.


As you can see trading on the stock exchange offer some advantages. Even though when trading you have to pay some fees, i sincerely believe that the advantages far outweigh the disadvantages. In fact if you are buying for the long term the gain on the long term will be far greater than the fee.

So guys be safe and trade on an exchange.

Good investing.

How and when is a dividend paid?

ave you ever wonder when and how dividends are paid but found the process too complex to understand. I have been there so here is a detailed but simple explanation about how these things are done.

So you have bought some stocks and as a result you now have the right to receive dividends from the companies. A dividend is just a share of the profit that the company will give you. Not all companies pay a dividend but it is better for an investor to invest in a company that pays dividend. Hence the paying of a dividend will be an indication of the company good health and by monitoring the dividend payments you will have an idea about the health of the company.

Dividends can paid either cash or . The company will pay a certain amount of money for every share that an investor is holding on the due date or the company might issue to each investor an additional number of shares. A dividend is usually paid in term of shares only if the company has a temporary problem of cash flow. You should be careful as dividend payment in term of shares is not necessarily a sign of a bad company. A good company that has strong fundamentals may have problems of cash flow in a recession and as a result will not be able to pay cash dividends.

So how and when are dividends paid?

It is the board of directors that take the decision to pay a dividend. There are four important dates and they are as follows :

(i) The declaration date - It is the date on which the company declares that it will pay a dividend

(ii) The ex- dividend date - A stock that is bought on this date and after will not receive the dividend. If you want to sell a stock you can sell on this date and still receive the dividend.

(iii) The date of record - This is the date where the company will check the record and will send the dividend to every person and company on the list. This date is usually one day before the ex-dividend date.

(iv) The date of payment - This date is usually after the date of record. It is the date at which the check is issued to you. You need not worry that it is some time after the date of record. You will definitely receive your check but it might take some time.

I hope that you have understood that well. By the way if you have some questions for me place a comment and tick the receive comment by email and you will receive the answer in a short time.

Good luck guys

Introduction to diversification

Diversification is by far the most important strategy that an investor must learn. It is similar to the old saying "do not put all your eggs in the same basket". It is so obvious that if someone will tell that to you you would offended.

What is Diversification?
Diversification is when you invest in a range of investment instruments that are different from each other. Diversification is done because each instruments have different risk, volatility and liquidity associated with them. Hence by investing in instruments have have different risk, your portfolio is more resilient to shocks in the economy. If the value in some investments decline, the fall might be balanced by rises in others or at least the value of the other investment might not fall as much and as a result the value of your portfolio will not fall as much.

Lets say that you invested in one stock, then in a recession the value of your portfolio will fall with the stock market. However if you buy two stocks, then one of them might fall less and reduce the fall. Consider further that you have used a third of the money to buy bonds. In a recession the value of the bond will be the same. Hence your portfolio will be further able to resist the fall of the stock market. hence as you can see it is a usual practice to have in your portfolio a mix of bonds, stocks and cash. The cash is used to meet emergency expenses so that you don't have to sell bonds and stocks. It is never a wise move to sell stocks of bonds to meet unexpected expenses. Hence a typical portfolio will have a mixture of bonds, stocks and cash. The more aggressive investors will have a larger percentage of stocks while the safe investor will have a larger percentage of bonds.When creating a portfolio that contains both stocks and bonds, aggressive investors may lean toward a mix of 80% stocks and 20% bonds while conservative investors may prefer a 20% stocks to 80% bonds mix.

You should also keep in mind that stocks come in different flavors. There are blue chip companies, medium and small size companies and start-ups that offers varying degree of risk and return. Investors can buy stocks from different sectors of the economy. Remember that different sectors of the economy are not affected in the same way during recessions. some may even be counter cyclical and rise during a recession. It is thus important to include in your portfolio stocks that are from various sectors and from companies of different sizes.
Bonds are also of various types. Bonds may be from governments, companies and municipalities. These bonds have different risks and hence have different returns. They also have different maturity dates so that if you are building a bond ladder with a bonds of maturity dates then you will have bonds that mature every year. It is therefore a good practice to have different types of bonds that have different returns and different maturity dates.

If however you do not want to go to the expense of buying all sorts of stocks and bonds you could buy a mutual fund. Mutual funds are a selection of bonds and/or stocks have have been bought by a company and you got to buy a share of them. You thus invest in the mutual fund and you get the advantages of buying stocks and bonds. Mutual funds comes in all types of flavors. you can have all stocks, different mix of stocks, all bonds, different types of bonds and different mix of bonds. The choice is all yours. You can also have index funds that buy mostly everything so that you benefit from the general trend. The choice is yours. Mutual funds are ideal for those that are starting in the investment world or don't have time to do research. However for the expert investor mutual funds is not advisable for with time the fees eat the profit.


While stocks and bonds represent the traditional investment instruments, a lot of alternative investments can be used for diversification. Real estate investment trusts, hedge funds, art and other investments provide the opportunity to invest in vehicles that do not necessarily move in tandem with the traditional financial markets. I do not however recommend them for they require a lot of professional knowledge.

A word of caution is required here. While diversification is good for the investor, there is also what is called overdiversification. At this point fees increases to such an extent that it decreases the return. Tracking the inverstments is time consuming. So you should not diversify into too many investment instruments.

Conclusion
Your personal time frame, risk tolerance, investment goals, financial means and level of investment experience will play a large role in choosing your diversification strategy. Start by making a financial plan and choose the appropriate mix.

Good luck.

Stocks have higher return than bonds

Two of the most common investment instruments are stocks and bonds. On average stocks have yielded greater return compared to stocks. So for a long term investor it makes sense to invest in stocks instead of bonds. However the higher return come at a price. Stocks are more volatile and risky while bonds are more secure and their values change less.

Bonds are debt instruments that are repaid at a fixed interest rate. They are issued by companies, governments, municipalities and so on. You are guaranteed to recover your principal together with some interest. The interest cannot change a lot. Unless you sell the bond before its maturity so that you can get a profit greater that the interest rate you initially bought the bond with. However the profit is only a tiny amount greater than the amount you would have obtained had you hold the bond to maturity.

Stocks are however partial ownership in a company and this give you a right to the profit of the company. Hence you get you return either by dividend which is a part of the profit of the company and partly from increase in the value of the shares. As a result if your company is successful the value of the shares and the dividends will increase with time. Hence on the long run the return of stocks has always been greater than the return of bonds.

However on the downside when investing in stocks you are taking a greater risk since the profit of companies cannot be predicted. The company can be highly profitable at a time and make a loss at other times. With this greater risk come the possibility of greater return. However the long term trend of the economy is up and as a result the total profit of the companies will always be up even though a few companies here and there might go bust. Combine this greater return possibility with a good diversification plan and you will see that on the long run stocks will definitely outperform bonds even if you make a loss in one or two stocks.

Stocks are also better able to keep up their values in inflationary time. The value of stocks can increase with time while the principal +interest of bonds can have some difficulties to keep up with inflation.

Conclusion
Bonds are generally associated with certainty and less risk as a result the return is certain and as a result it would be less than that of stocks since they are riskier and more uncertain. They should therefore have greater return. Thus depending on your strategy, risk tolerance, age and plan you could invest in bond alone, in bonds and stocks or in stock alone.

How to start investing with a small amount of money?

If you have a small amount of money and want to start investing then there are a few things that you need to know. Do not jump in and start buying.

What do you need to know?

1. Most brokerage firm require that you open an account and deposit a certain sum of money in it. You will have to make some research about what that minimum amount is. Most brokerage firm would not have a very high minimum amount but if you have a very small amount then perhaps you will have to wait until you have the required amount or make some more research until you find that broker that will allow you to open an account. I would advise against using any broker. The brokerage firm will need to have a reputation and be a secure company.

2. After you have open your brokerage account, you will have to choose the type of account. You have two types of accounts.

(a) The discount account. A simple account where you do all the research and then phone the broker and give him the instructions. He would not give you any advise but simply follow your instruction and send you the share certificate later. You will have to pay a fee for each transaction. This fee can vary from firm to firm. So you will have to make some research on that as well. Because with time fees can reduce your overall return.

(b)Full-service account. This account allow the broker to advise you on the stock market. But the fees are high and as a result it would not be possible for you to have a full-service broker.

(c) The online brokerage account. This broker allow you to trade online. However you will be faced with many restrictions and high fees.

So what investment are available to you?

1. Over the counter shares. Some companies allow you to buy shares directly from them over the counter or by mail. But i think that it difficult and time consuming. However in doing this you will not be paying fees to the broker.

2. Government bonds. These can be bought directly from the government and by using the broker. However if you buy it yourself you will not pay any fee.

3. Shares. You can buy shares yourself and built your portfolio. But you will see that if you buy shares each transaction will incur a fee and if you trade ten times then you might pay a lot of money. So the best way to invest if you have a small amount of money is through mutual funds. You will pay a small fee initially but the fees will not be as much as if you were buying the share yourself. Later on when you will have more money and more experience you will be able to buy shares yourself. Have a look at my post on index fund here.

So good luck.

What is a stock ?

A stock or a share is a simple investment instrument. In fact it is the most common and easiest to buy. When you hold stocks in a company it simply means that you are part owner of the company. You also have all the rights and responsibilities that come with owning a company.

When you own stocks in a company you have a say in how the company operates - though if the company has issued millions or even billions of shares, your 10 or 100 shares might not make you the most influential shareholder. You also have a right to part of te profit in term of dividend. You get to participate in annual general meetings and vote on different issues related to the company like who sit on the board of directors, what percentage of profit is given as dividend, when to issue more shares, etc. The list of issues where you can vote is endless.

A companies issues stocks so that it can raise capital to run its business, to expand, to pay debt, etc. A company issues stocks on an initial public offering(IPO) where it offers stocks to the public and institutional investors. Later on any offering of share will require approval at an annual general meeting. You may want to be on the look out for IPOs of companies.

A company can issue two types of stocks, namely common or preferred stocks.

Common stock represents a simple share of ownership; if the company were to go bankrupt, it would have no liability to common shareholders, so you would lose your investment.

Preferred shares, on the other hand, get some special advantages, which might include higher dividends, fixed return every year or a larger vote in running the company.

In order to start trading and buying you will have to open an account with a brokerage firm. You will give them orders and they would buy th shares for you. There would be a registry where it will be recorded what stocks you own and it what amount. The dividend will be deposited in that account at the brokerage firm.

Shares are traded on the stock exchange. People that own stocks place them for sale. You will not actually know who will sell the shares to you but you will be the new owner of the shares.

Shares are among the investments instrument that has the most return but they are also the most risky. So be careful when buying shares.

Good luck to all of you new investors.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
Stocks have higher return than bonds
How to be rich buying stocks!!
Should i sell my stock and hold cash?
How and when dividends are paid?
what is a stock exchange?
How to choose a broker - part 2?

Should i sell my stocks and hold cash?

Should I invest and stay in the stock market or sell everything and keep the cash when the market is falling? Sadly for most investors the answer is yes. As a result many of them are selling their investment to hoard cash. Is cash really a safe haven and better that other investment? I would say no, so lets have a look at the arguments against holding Cash.

Advantages of holding cash

If a stock is falling like a knife, selling the stock and holing cash will help to stop your losses.
Also some people have a low tolerance to falling stock market so having cash is a good thing.
While your portfolio can fall and rise, cash in bank and safe retain their nominal value. In some countries cash in account is guarantied so that their is little danger of it losing its value.
Its face value at least.

Disadvantages of holding cash

While holding cash might feel good in the short term it is an unwise move over the long term. Stock market go up and down but it usually in the long run. So even if it is going down now it will go up again and recover the loss value. It is only a temporary loss ,a paper loss. If you sell now you will make the loss permanent. When stocks are falling the only chance to regain their value is to hold on to them until their value rise again. On the contrary when the stock market is down, you should buy more stocks at bargain prices.

The second problem with holding cash is inflation. Cash loses value with time and gradually the value will decrease. You will have no such problem with stocks. The return on stocks is usually greater than that on cash and also greater than inflation. The stock market has always outperform cash. While adjusted for inflation a stock portfolio will increase with time, a cash portfolio will fall with time.

If you sell your stocks now, you will have to get in again. You will thus have to time your entry. This is very difficult to do as you will be trying to time the bottom. Chances are that you will miss it, and as I have written in a previous post, missing the bottom is like running after a train it is very difficult to catch. So your best chance of regaining the value of your portfolio is to remain invested and be patient.

So guys stay invested and wait for the bull market. The rise will be quick and brutal. When it start i will be on the train. Will you be on it or running after it trying to catch it?

The choice is yours.

How to be a successful investor

Many people have been searching for the secrets to be a successful investor. However many of them would refuse to listen to sound advice but would fall prey to charlatan and people like bernard madoff. The reason is that most people want to be rich quickly and people like madoff tell them that they can. While some can get rich quickly many would lose everything they have.

So what are the secrets of investing?

To most people the stock market is a strange world where they hear stories of people losing money and companies go bankrupt. However there are opportunities to make it in the stock market, provided that you adhere to some sound principles.

Most of the investment gurus (John Templeton, Peter Lynch, Warren Buffett) have explain some pretty simple principles to which the beginner investor must adhere to.And if there’s one thing that they all agree on, it is the fact that the beginner investor must go for the long term and not aim at making large profits on the short term. In simple term, invest in the stock market not to make money today, but to make money in the long run. Successful investors that make alot of profits have invested for the long term and are not looking for the hot stock that would make them rich. The problem with this way of investing is that it is impossible to get to the hot stock before its price goes up.

Investing principles 1

Although it has been said time and again, it doesn’t seem to stick: when investing, time is on your side. The stock market always go up on the long run even if they go down in the short term. The longer an investment is held, the greater its chance to increase in value.As an investor, if you understand this, day-to-day market fluctuations will not drive you crazy and you will be able to concentrate on the one variable that you can (literally) bank on: TIME. Also buying and selling make your broker rich because each time you do a transaction you are paying a fee to him.

Investing principles 2

Start out small and build your confidence while taking small risks. Invest only $100 or $1,000 instead of your entire savings.There are a lot of things that you will never know unless you’re learning by doing.

Investing principles 3

Imitate the investment masters and read about successful investors. Talk to successful people you may know and ask them how they accomplished their goals. You could be surprised how open truly successful people are.

Investing principles 4

Don’t panic and sell if things go down. Actually you should even expect them to. If you buy good companies with sound fundamentals, drops in the market value of the stock will only be temporary and might even be good times for you to buy the stock when it’s “on sale”.

Here you go guys. Keep investing and stay put in this recession.

Good luck.

Asset Allocation - How to allocate your money in your portfolio

After a person has decided to invest, the most important decision a person has to make is asset allocation. i.e. How much money will be allocated to each asset class.

For recapitulation their are several asset classes that one can invest their money in. I would leave out the most difficult and complex which are not worthy to invest into.

1. Stocks
2. Bonds
3. cash
4. Fixed deposits or certificate of deposit
5. Precious metals

The first decision to take is how much risk you can tolerate. You can learn about risk and risk tolerance here. Because some of those assets can vary widely in value, can crash and be wiped out, then your tolerance such risks and changes in the value of your portfolio will determine how much you allocate in each class.

The following list the asset class from the most risky to the most safe.

stocks, precious metals, bonds, cash, certificate of deposits

However the riskier an asset class the more the return associated with it. So those that want to have high return will have to increase the percentage of risky assets in their portfolio.
Hence there are several ways to allocate assets in a portfolio based on the tolerance of risk and the return required.

High risk, high return
100 % stocks and high yield bonds

medium risk, medium return
50 % stocks, 25 % cds, 25 % bonds

low risk, low return
25 % stocks, 25 % cds, 50 % bonds

Inflation hedge
75 % gold and silver, 25 % bonds indexed with inflation

Hyperinflation portfolio
100 % gold and silver

I choose the medium risk and medium return portfolio. I think that it can cater for all types of catastrophe in the market.

The choice is yours guys.

stocks

Stocks are the investors instrument par excellence. They give high return but come with high risk. Not to be touch unless you are fully informed.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
What is a stock?
Stocks have higher return than bonds
How to be rich buying stocks!!

Should i sell my stock and hold cash?
Introduction to diversification
How and when dividends are paid?
what is a stock exchange?
What is market capitalisation?
How to choose a broker - part 2?
How to buy and sell stocks using a broker?

Certificate of deposits

Certificate of deposits are the safest investment possible. They are secure and insured in most countries. However they offer a low return.


Post in this category coming soon.

How to be rich buying stocks!!

Why would you need to buy stocks you would ask? If you have been reading on the internet, you would realize that the future is uncertain and, whether a deflation or an inflation,the future is bleak and you can easily lose all your money.

Holding money is quite dangerous at the moment and you could lose everything in the recession. So you should decide what asset to buy. I have chosen stocks and real estates as they are easier to buy for the lay person.

So with your firm decision to save yourself from financial collapse lets move to step 2.

You should start by putting order in your finance. Be low on debt, ideally only a car or mortgage. Reduce debt as far as possible. Built thee to six months worth of expense in a separate savings account.

Its time to chose your broker. It is the most important step. I have found that most major banks have a brokerage service. Do not choose a brokerage firm that you don't know. I have chosen the brokerage service of my bank. I have known them for a long time and they can be trusted.
This step is the most important. Most brokerage service offer several type of services. They can be mere basic services(cheap) or with advice and support(expensive). I chose the basic one for i have chosen to do my research myself. If you are unsure chose the one that offer advice.

You now have broker. You would decide what stock to buy and he would buy it for you. Choose your stocks carefully. I have chosen companies that have been battered by the credit crunch and hence have low P/E ratio. Their services and goods are required for everyday life. They are leading companies in their field. Diversify in different field. I have chosen to buy stocks in banks, retailers, food companies, hotels, energy companies and commodities.

Here you are. You can now start to buy and have a chance to have a better future after the recession. Good luck.