What is an ETF? Definition
ETFs are very popular and useful investment vehicles that offer affordable diversification and professional portfolio management. An ETF is a basket of securities that is designed to ‘mimic’ the performance of an index, sector, or category of securities. For example, the ETF with ticker SPY is designed to track the performance of the S&P 500, and the company that creates the ETF (in this case Barclays iShares) builds the ETF simply by purchasing the 500 stocks in the S&P 500. Investors can purchase shares of the ETF as a means of gaining instant access to all 500 stocks in the S&P 500, thus tracking its performance. Continue reading...
What is a Stock?
Buying a stock means taking an ownership position in a publicly traded company. Once you purchase a stock, you become a shareholder. A company has two ways of acquiring capital needed for growth: borrowing it (often in the form of issuing bonds), or selling shares of their company's equity, which is known as stock. In other words, when you buy shares of a company’s stock, you are buying a claim to the company's profit margin, because you are technically a part-owner in the company. Those who hold shares of Common Stock, the most typical form of stock, have voting rights in the election of the company’s board members. Continue reading...
What is a vertical spread?
A Vertical Spread involves the strategy of buying and selling an equal number of options on the same underlying security with the same expiration date, but different strike prices. Vertical Spreads can be both bullish and bearish, depending on your view of the underlying security. If you use calls, you are constructing a Vertical Bull Spread, and if you’re using puts, you’re constructing a Vertical Bear Spread. Continue reading...
What are the Withdrawal Rules From My 457 Plan?
457 plans are the only retirement plan that does not require you to wait until a certain age to avoid an IRS penalty on withdrawals. Unlike 401(k)s and 403(b)s, you are allowed to take money out of a 457 Plan before the age of 59½ without a 10% early withdrawal penalty, but only if you’ve separated from service. Separation from service can mean retiring or just leaving to take a job elsewhere. Roth IRAs allow you to withdraw your principal amount early without penalty, but you will incur taxes and penalties if the gains are withdrawn. 457 plans do not have such stipulations. All other retirement accounts require certain exception criteria to be met for the IRS not to penalize you for early withdrawals. Continue reading...
What is Operating Margin?
Operating margin is a ratio (expressed as a percentage) that indicates how much a company makes for each dollar of sales. It can be calculated by dividing a company’s operating income by net sales, and generally a company that has a high and consistently improving operating margin is thought to be healthy. Operating margin can be looked at in terms of the overall company, or in a more focused vacuum - such as analyzing the operating margin of a new clothing line or an experimental sales project. Continue reading...
What is Fiscal Policy?
Fiscal Policy refers to the tactics used by a central government to influence the nation’s economy, whether by setting tax and/or spending policies. Fiscal policy is related to monetary policy, in that they are both aimed to either boost an economy or temper growth to avoid overheating. A fiscal policy conducive to growth would aim to have low taxes and higher level of spending. When a government invokes “austerity” measures, it means they are trying to cut spending most likely to reel-in budget deficits or overall debt levels. Continue reading...
What is market risk?
Market risk is the chance that an investment will not maintain its value when it is dependent on the many factors that influence the health of the economy and the stock market. Investors must be aware that investing money in a stock or mutual fund is to tie the fate of that money to the fate of the company or companies that they have invested in. The other side of the coin, of course, is the potential for gains. The potential gains of an investment are the premium that is paid to an investor in exchange for allowing a company or mutual fund to take risks with the investor’s money. Continue reading...
What is commodity paper?
Commodity paper is the contract for a loan which is secured by collateral in the form of a commodity held in a warehouse or in transit. This is basically a form of warehouse financing, where the inventory in storage is verified and the changing level of inventory insures a larger or smaller line of credit from the lender. In this arrangement, however, there is one agreed-upon loan and collateral amount. Continue reading...
Is there any merit to the momentum theories?
The momentum theory has many fans for its useful and relatively simple nature. The momentum theory basically states that markets which are moving either up or down for some period of time cannot suddenly reverse their course. Utilizing these strategies means jumping on a freight train, riding it for a short period of time, and jumping off before it stops and reverses direction. It is hard to argue with the this one, but it may be hard to find momentum strong enough for an investor’s taste in certain market environments, which might mean spending too much time on the sidelines, and due to the frequent active trading involved, the investor will incur fees and be susceptible to emotions and media hype. Continue reading...
What is a Yield Curve?
A yield curve is an illustration of the current duration-to-yield relationship for bonds of the same credit rating but different durations. As a general rule, the longer the duration of the loan, the more risk you take on (since you don't know what might happen with that corporation in the future), and therefore, you demand a higher reward (i.e., higher coupon). The yield curve for any bond (not just the US Treasury Bonds) changes daily based on many economic and market factors. Continue reading...