Why Invest in Stocks? What is the Benefit of Investing in Mutual Funds?

by Punit Gupta

Investment Need?

Many youngsters and recent graduates wonder why they should invest their money now if they know they can make much more money in years to come. If you are among one of them, continue reading this article. If your thought process is not along those lines, it could still be a fun and interesting reading to see the other side of the world.

Ideal income scenario does not exist

In an ideal life scenario your salary would increase every year and hence you will keep earning more money than you can spend living the life you like. Hence you would not need money from any other source of income. However as they say, life is what happens to you when you are busy making other plans. This world is not an ideal place to live. It is a survival quest in which the fittest is going to win and lead a happy life. You never really know what future has in store for you. Many catastrophic events can happen during our lifetime like job loss, recession (pay cuts, bonus cuts) or divorce or anything else which affects income. So better be safe than sorry.

Unforeseen needs come up

There are also cases of unforeseen circumstances that require immediate access to money. These can range from health related problems, house / car repair needs or any other kind of rough circumstances which you did not plan for. Personal finance has to be planned taking into account such scenarios. Unfortunately just depending on direct income will not get you through such cases and you will see yourself begin sucked into debt in no time.

How to avoid such financial crisis

If you happen to run into any of those setback scenarios of life, for financial survival you will have to depend on new / alternate sources of income to pay bills. If you are lucky, you will get some money through unemployment or Social Security program. On the other hand at this time if you had a supplemental income generated through another source such as some sort of investment, you will be able to pull through the tough times easily.

People with different personality types handle situations differently. Some people are relatively stronger and are able to rebuild themselves as far as finance and self confidence goes. Many of us have a hard time dealing with such events. Again supplemental income comes handy to keep you debt free.

It is recommended that every person should invest at least 20% of his/her salary on average. Now there are different strategies for investing. This article describes different kinds of investments possible: Investment Types Definitions. Let me explain the very high level categorization of investment types that are must for your portfolio:

1. 
   

   Liquid Cash investments:

   
   
   Mostly in the form of savings accounts or money market accounts. Limited returns but can provide immediate help in any kind of emergencies such as health related.
   
   


2. 
   

   Long Term investments:

   
   

   These are considered investments in property or gold which have a tendency of appreciating over time. These investment are more to make your post retirement life secure. 401K investments take an important part in such investments.

   
   


3. 
   

   High risk high reward investments:

   
   

   Return is always proportional to the amount of risk you are willing to take. Stock market investments are usually considered high return. A portion of your savings should also go towards such investments. As you grow older these should move more towards balanced portfolios of mutual fund investments. You will need stock brokerage firm to be able to do any stock trading. This article describes how online brokerage firms operate: Stock Broker 101: Introduction

   
   

Your personal banker can give you solid advice on how to maximize return on number 1. Your property dealer can give a lot of guidance on No 2. For No. 3, you need to choose a brokerage firm with utmost care. Click Stock Broker Selection Guide. How to choose a stock Broker to learn more about brokerage firms & how to compare stock brokers.

Which Companies & Industries Would Come Out Strong After The Recession?

Every investor must be thinking right now "Once this unprecedented recession is over, which companies would come out strong and which will die". Given the market situation and legislation being passed, it appears cash rich companies will thrive.

After about 25 years we have had a recession which has been led by financial firms. The last such recession was in 1980’s. So what is so special about recessions that start due to financial services or banks? To understand this recession completely one needs to realize that the financial services sector is generally considered the back bone of any economy. If something goes wrong to the backbone, the entire economy rocks. Also the economy changes its position in different sectors completely after the recovery. The above point was proven again in this recession when the problem which just started by few people not paying their mortgages to banks rippled into worst recession for decades.
So now the question arises what new things will happen after this economy recovers. As everyone knows after every recession there are some clear winners who grow tremendously once the economy recovers. The biggest difference the current recession will bring is that companies would reduce their reliance on credit. Looking at the companies who are still top performers, it is evident they are the likes of Microsoft, Apple and Google. All are all time cash rich companies and have little to no reliance on credit. A company’s success would be measured also by how much capital a company has to survive a downturn.

The second change that would come is the big fishes would become even bigger and small businesses would find it hard to survive. With credit availability decreasing, banks would start to only lend out to very safe intuitions. Hence it will become hard to start and grow small businesses due to scarcity of loans. On the other hand since large business would have access to large sums of money at cheap rates they would try and consolidate by purchasing smaller players that are having hard time to survive.

So how does that affect common man by all this? Well to that point common man always gets affected; that is the in fact the prime problem with him. Fewer small businesses mean fewer jobs. It also means lower salaries as there would be less competition from employers. That would in turn mean less spending. Hence in totality although the economy would recover, it will probably not get back to levels we saw in late 2006 anytime soon.

Continue reading about Rise & fall of American dream at Rise & fall of American Dream

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Compare Online Stock Brokers aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

Chrysler: Who is right - Government or Hedge fund Managers?

Recently government tried to force Chrysler securitized debt holders to settle their loans to Chrysler at lower than market value. They were offered 33 cents per dollar of their debt. President Obama announced to media that due to their non compromising attitude Chrysler has failed. The entire media criticized the hedge funds because of that. Let’s take a step back and ask ourselves were they really wrong?

Chrysler problem explained in laymen terms:

Let’s break this problem into laymen terms for easy understanding. Suppose you are given an offer to invest in a company which is need of immediate cash. Company promises a 10% interest on your investment if it makes money. If the company happens to go in red and not make money, you are still guaranteed to get 66 cents for every dollar back, which is 66% of your total loan provided to the company. Your debt to the company is secured lawfully through bankruptcy and liquidating company’s assets such as selling the factories and other hard assets. Now the government intervenes and requests you to accept 33 cents per dollar for the debt that the company received because the company is not doing too great and the government is trying to rescue the company. Now answer the question “Will you accept the government offer?”

My Take on Chrysler problem

If you ask me, I will not accept this offer at all. That is exactly what the hedge fund managers did in Chrysler case. If they knew they could get a higher payoff even if company goes bankrupt, why should they be forced to take an offer which reduces their return to 50%. It is obviously not the hedge fund's fault that the Chrysler’s CEO did not perform well. They are also losing money here because the maximum return they are getting is 66% of the original money rendered to Chrysler in the form of loan. The hedge fund invested that money based on minimum 66% return guarantee.

Downside of government approach

Now let’s take a look at possible outcomes if hedge funds agreed to accept the 33% offer from the government. Had they agreed to take 33% of their debt to Chrysler, it would have meant a big blow to US credit rating as whole. It essentially meant that the US government can make any payments that are due as void on their will and not honor the agreement that was put in place lawfully between the two entities. This would have in turn increased the overall interest rate at which US can borrow money. Also the popular belief that US is a truly liberal economy would have been shattered.

This article is aimed to promote the campaign against making US socialist as the government is trying to do. That is totally against the principles that made America what it is now. If you think what the hedge fund managers did was right for the country, please be sure to indicate in the comments @
Govt or Hedge Funds Manager? Also be sure to spread the word around so that people are not led to believe the fabricated facts about Chrysler story.

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CompareBroker aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

Rise and Fall of American Dream

What has made America the land of dreams for the last 50 years? What has separated America from the rest of the world? These questions have intrigued me throughout my life. I read an interesting article in Wall Street Journal the other day which gave an interesting viewpoint. It said the biggest reasons for living the American dream especially after 1970's has been " credit “or " leverage ". Unfortunately these two words we, the Americans, have started to fear the most these days.

Secret behind American Economy
America has always been the land of innovators. However, for an innovation to come to life, it is imperative for such businesses to get access to cheap credit. This is where American banking system came to help America. Banking system helped start these businesses. Since these businesses got cheap loans, they grew. They grew and created ripple effect throughout the industry and life of middle class American population. It is a well known fact that about 70% of US population is employed by small industries. Therefore the jobs of around 70% of US population are because of American Financial system.

Where American Financial System went wrong
Some of these advantages were poorly exploited by some corrupt CEOs and their subordinates. When the system was designed, it didn’t imply that banks / loan providers should issue loans sizing to the range of few hundred thousand dollars to individuals making 20-30 thousand dollars per year or the people who have no or very low credit history. Now since such companies have collapsed, they are blaming it on the system itself. People are blaming the entire financial system for their problems and question each and every tax payer dollar going to companies which became victim of the poor policies that were put in place by their heads. To make matters worse the US government as part of populist measures in completely targeted on putting complete regulations on system. Just last week The House of representative passed the Malooney bill with 17 amendments. The bill according to many industry insiders is going to kill the entire revenue streams of a credit card industry. Last quarter BAC (Bank of America) made 1.7 B dollars loss in their Credit card division and Chase (JPM) lost around $540 million. In such environments if the government attacks the primary revenue streams, it is essentially killing the whole industry. Industry insiders are predicting that if this becomes a law soon, getting a credit card would become a luxury for people with good credit history only. This would make people switch back to buying with cash and debit cards. This would in turn adversely affect the sales of electronic stores like Best Buy, furniture stores like Pottery Barn. Government is also putting limits on the NSF fees charged on checking accounts. Isn’t that a little bit too regulatory? Rather than educating people on doing the right thing, government is rather choosing to change the parameters of the game itself, especially when these parameters helped reach the country reach the position it enjoys currently on the world financial map.

If all these regulations go through American finance industry would again go back to 363 models of 1950's. Meaning get a deposit at 3% give it to a huge industrialist at 6% and go back to play golf at 3 pm :) Al though it sounds awesome on paper, it is a curse for growth that we have experienced in our entire life time. There would no longer be small businesses as banks would not be able to provide loans to such industries. Hence there will be decline to innovation and American dream will start to deteriorate.

Effect of recent development on Stock Market
Due to above reasons DJI might drop drastically over next 6 months. Investing money in options is probably the best right now. To buy options we recommend using Options Xpress as your proffered online stock broker.

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CompareBroker aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

What Stocks to buy in a typical recession?

When going gets tough , the tough get going. During every recession there are many investors who have squandered away large amounts of wealth in the share market. Many of them run away since they cannot handle the stress any more. Some remain but are confused which stocks to buy.

There are many analyst who claim that this recession is not like previous recessions and rather it is like the Great depression of 1920's. The most common reason given is this recession is caused by huge amounts of debt the US and other economies have accumulated over the years. However in both cases the recovery process is going to be same.

If you look at past data you would be inclined to believe that investing in small cap companies is always advisable in recession.

Example 1 :
The July 1981-November 1982 recession lasted 16 months. In the three subsequent years from the midpoint, the DJ Wilshire U.S. Small-Cap Index soared a cumulative 101%. The small-cap value index jumped 126% and the growth index advanced 78%. Midcap stocks turned in the second-best performance with a gain of 88%, and value topped growth. The same value-growth dynamic held for large-caps, which gained 82% but still lagged the DJ Wilshire 5000's 85% rise.

Example 2 :
In the three years following the 1990-91 recession's midpoint, small stocks added 105%, with value (up 114%) again outstripping growth (96% higher). Midcaps advanced 88%, but large-caps mustered just a 57% gain.

Example 3 :
The small caps rose about 25% from the eight-month 2001 recession. Midcaps increased by 18%, while large-caps actually retreated by 3%.

Now many people would seek to know why should the small-value phenomenon happen in a recession's recovery?

Genral hypothesis says there are two main reasons for it :

1. Small stocks are more speculative than larger ones. They tend to shine when investors realize a recovery is unmistakably under way -- those three years following a recession's midpoint. During economic expansions these companies can grow revenues and profits faster -- in percentage terms -- than larger ones, drawing investor attention.
2. Value stocks' prices are, by definition, cheap. That is why they have higher dividend yields and lower ratios of price to the per- share worth of investors' holdings (a.k.a. "book value") -- the two classic indicators of "value" stocks. Read our article on http://www.comparebroker.com/should_i_invest_now.php to understand these in more detail. When investor money pours into small stocks, those in the value category are poised to rise the most
-- again in percentage terms -- because they are rebounding from a lower level than are "growth" stocks.

First attempt you should also change it a little and then we would be good.

Wondering how much money to invest? Continue reading 100$ vs 5000$
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CompareBroker aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

Should I invest now?

The thing there is no right or wrong time to invest in market. Your investment decision should depend on the price of stock and strength of the stock. There is no exact definition for right stock. . Investing in companies whose stock prices are currently undervalued but the company has good growth potential in future would be called as investing in undervalued stocks and generally advisable.

Following are couple of ratios to find undervalued stocks but to take decisions for investment further analysis is important and these ratios don't provide all information.
Low Price to Earnings (PE) ratio -

PE ratio is one of the most important ratio on which most of the traders and investors keep watch. The PE ratio tells you whether the stock's price is high or low relative to its earnings. The high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. but, the P/E ratio doesn't tell us the whole story of the company. It's more useful to compare the P/E ratios of one company to other companies in the same sector/industry and not in different sectors. PE ratio of less then 10 is generally considered as undervalued provided it has future growth potential. And in some scenarios PE of 10 to 15 can also be considered provided the company has high growth performance in past and expecting same in future. Generally stocks bought below 10 and kept invested for long term given more great returns.

Low Price to Book Value (PB)-

Basically PB ratio is mostly utilized by value investors to find real wealth when the stocks are at their lower prices. So investing in stocks having low PB ratio is to identify potential candidates for future growth. A lower P/B ratio could mean that the stock is undervalued. Book value - It is the total value of the company's assets that share holders would receive if a company closed down. Like the PE, the lower the PB, the better the value of the stock for future growth. Some of the investors become quite wealthy by holding stocks for the long term of such companies whose growth is based on their businesses instead of market. If the stock's price to book value is below 1 then it is considered as undervalued.

Earning Per share

EPS shows how the company is profitable and growing. EPS of a company should keep increasing year after year. So the conclusion is to have a look for the past 4 to 5 years EPS and check the consistent incremental growth in the ratio.

Above three are most widely used ratios but decision based on only above is not advisable.

Experts also suggest opening multiple accounts because different accounts offer different kinds of specials. For example TradeMonster rates for Options Trading is exceptional, on the other hand TradeKing offers one of the cheapest rates for Stocks trading. Incidentally both of them have specials going on currently for new accounts. For more details on how to select a brokerage firm for your needs, check out http://www.comparebroker.com - "Finding Best Online Discount Stock Brokers". You will find the special offers going on from major online stock brokerage firms.

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CompareBroker aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

Finding Best Online Discount Stock Brokers

How Much Money Should A First Time Investor Start With ?

http://www.prlog.org/10223552-how-much-money-should-first-time-investor-start-with.html

First of all the investor has to make sure that they are being honest with themselves. How much money you are "saving" over having to pay the expense ratio of an index fund or low cost actively-managed value fund. If you are still coming out ahead, then great! You are doing very well! If not, that's okay too, but at least you know this and you then need to ask yourself if all this effort and time you are putting in is worth it to trail the market.


Big thing to keep in mind is expenses. If you buy in increments of $100 at a time and it costs $9.99 both to buy and sell the stock, you then have to make a 25% return just to break even on your commission costs ($100 principal - $10.00 to buy - $10.00 to sell = $80, $100/$80 = 1.25. Usually it is recommended that expenses don't take up more than 2% of your principal, which would put individual trades (on average) somewhere more around the $1,000 mark. So going by that $1000 is more practical. But yes, $5000 is probably ideal for beginners as it gives a little bit of room to absorb the initial losses if you happen to occur any.

Most big brand name brokers might be reluctant to tolerate that small an account such as 100$. Alternatives to that would be dividend reinvestment programs or Share Builder programs that accommodate small amounts. You can find more about these types of brokerage firms in our Fractional stocks tab.

That said, you don't want to be betting large amounts relative to your net worth "just to get some action going." If $1,000 is a significant amount of your net worth then you might be better advised putting it in an index fund or a low cost value fund like DODGX until you have larger amounts of principal to invest meaningful, but not excessive, percentages of your net worth on individual stocks. Always remeber never put all your savings in stock market. Always keep atleast 20% in cash format either in savings or money market account. This you would need during emergencies.

Another alternatives for small first time investors might be to try out some "fake" money investment tools like Yahoo finance. That will make you familiar with the process so you don’t end up with playing with your real money while you are still picking up the basics.

The bottom line is that it’s definitely encouraged to keep tabs on your investing expenses. Look at your commissions, Wall Street Journal, Morningstar, Value Line, Motley Fool, etc. subscriptions and add all that up to come up with your math to see if it is for you.

For further information on finding cheap online discount stock brokers please visit www.comparebroker.com

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CompareBroker aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.