Forex is the world’s largest financial market, with global turnover exceeding US $1 trillion per day and offers unmatched size and liquidity. Is forex trading an opportunity for you?
Forex refers to buying and selling currency pairs. Unless you are a professional participant such as a bank, these will be in standardised sizes, similar to futures market contracts. Typically forex traders work on margin, up to 200 times.
You can theoretically trade quite obscure currency pairs, but in practice, most traders stick to a small number of currency pairs, such as EUR/USD, USD/JPY, AUD/USD, NZD/USD, GBP/USD, EUR/JPY and USD/CHF. The most common currencies are the US dollar, the Japanese Yen, the European Union Euro, the Swiss Franc, the New Zealand Dollar, the Canadian Dollar and the Australian Dollar.
The forex market is different from other markets (futures, stock and options) in that it doesn’t have a central point. Instead, it is an interbank market, and deals are made between market participants.
This means that prices are not official, and vary based on where they are measured.
Most retail level participants in this market don’t have their orders loaded into the market, but instead the forex broker actually takes the other side of the deal. Generally most retail participants risk either $1 per $0.0001 or $10 per $0.0001 (that is, they win or lose that amount for each $0.0001 movement)
One characteristic of the forex market is that there are often very long term trends. However it is a news sensitive market, and reserve bank announcements such as official interest rate changes will have an immediate impact on currency prices.
2.9.09
Fx Trading Broker
FXClub is an online forex and futures broker, established in 1995, and one of the longest running online retail forex brokers. FXClub is different from your average online broker in some ways for good and bad, which we will look at in this review. What sets FXClubs apart from other brokers is mainly one thing: Zero Spreads. Most online brokers make their profits by adding a few pips on every price they charge the client. This way they make money of every trade being made. How much is being taken in spreads is different from broker to broker, but it is a known fact that brokers that charge spreads often raise them during hectic trading times, such as when there is a release of forex news. FXClub does not use spreads, but instead charges a fixed commission on all trades.
This is in my opinion a good thing. Why? Because the broker will then be interested in you being successful and profitable. After all they will make money whether you win or lose, so it is in their best interest to see you succeed. Brokers who take their commission in spreads are more likely to engage in practices such as stop-loss-hunting and manipulation to get their profits. Even if this is rare, it is a real risk when you are trading online with some brokers.
Well, FXClub does offer you the option to trade with spreads in a classic account, so it’s really up to you.
FXClub has other nice features for the beginning and advanced forex trader. You can open a mini account with only $10. While $10 is obviously never going to be enough to make any meaningful money it is still appreciated that you can open an account and start trading with no more than that.
Of course there is also the option to test your skills first with a demo account. Try your trades on real time data and a fully functioning platform before committing any real money. Always recommended for new traders.
A thing that I really liked about FXClub was the large educational library available to clients. FXClub has been around for a long time and I think it shows in all the comprehensive guides and tutorials they have had written over the years. They also offer very good instructional videos and interactive seminars.
Another practical advantage of forex club is the desktop and mobile software available, which makes trading forex trough FXClub very flexible.
I took the time to test their support and as I can tell, they are open 24 hours and generally friendly.
I have traded with FXClub for some time now. It was actually the first broker I started out with some years back with only a couple of hundred bucks and very green. As I learned and won (and lost), I never had any problems with them, withdrawing and deposing was fast. They are definitely a recommended broker for new and old traders.
This is in my opinion a good thing. Why? Because the broker will then be interested in you being successful and profitable. After all they will make money whether you win or lose, so it is in their best interest to see you succeed. Brokers who take their commission in spreads are more likely to engage in practices such as stop-loss-hunting and manipulation to get their profits. Even if this is rare, it is a real risk when you are trading online with some brokers.
Well, FXClub does offer you the option to trade with spreads in a classic account, so it’s really up to you.
FXClub has other nice features for the beginning and advanced forex trader. You can open a mini account with only $10. While $10 is obviously never going to be enough to make any meaningful money it is still appreciated that you can open an account and start trading with no more than that.
Of course there is also the option to test your skills first with a demo account. Try your trades on real time data and a fully functioning platform before committing any real money. Always recommended for new traders.
A thing that I really liked about FXClub was the large educational library available to clients. FXClub has been around for a long time and I think it shows in all the comprehensive guides and tutorials they have had written over the years. They also offer very good instructional videos and interactive seminars.
Another practical advantage of forex club is the desktop and mobile software available, which makes trading forex trough FXClub very flexible.
I took the time to test their support and as I can tell, they are open 24 hours and generally friendly.
I have traded with FXClub for some time now. It was actually the first broker I started out with some years back with only a couple of hundred bucks and very green. As I learned and won (and lost), I never had any problems with them, withdrawing and deposing was fast. They are definitely a recommended broker for new and old traders.
Different Financial Ratios
When it comes to investing, analyzing financial statement information (also known as quantitative analysis), is one of, if not the most important element in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, you will be able to work with these numbers in an organized fashion.
The objective of this tutorial is to provide you with a guide to sources of financial statement data, to highlight and define the most relevant ratios, to show you how to compute them and to explain their meaning as investment evaluators.
In this regard, we draw your attention to the complete set of financials for Zimmer Holdings, Inc. (ZMH), a publicly listed company on the NYSE that designs, manufactures and markets orthopedic and related surgical products, and fracture-management devices worldwide. We've provided these statements in order to be able to make specific reference to the account captions and numbers in Zimmer's financials in order to illustrate how to compute all the ratios.
Among the dozens of financial ratios available, we've chosen 30 measurements that are the most relevant to the investing process and organized them into six main categories as per the following list:
The objective of this tutorial is to provide you with a guide to sources of financial statement data, to highlight and define the most relevant ratios, to show you how to compute them and to explain their meaning as investment evaluators.
In this regard, we draw your attention to the complete set of financials for Zimmer Holdings, Inc. (ZMH), a publicly listed company on the NYSE that designs, manufactures and markets orthopedic and related surgical products, and fracture-management devices worldwide. We've provided these statements in order to be able to make specific reference to the account captions and numbers in Zimmer's financials in order to illustrate how to compute all the ratios.
Among the dozens of financial ratios available, we've chosen 30 measurements that are the most relevant to the investing process and organized them into six main categories as per the following list:
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Yield, Price And Other Confusion
Understanding the price fluctuation of bonds is probably the most confusing part of this lesson. In fact, many new investors are surprised to learn that a bond's price changes on a daily basis, just like that of any other publicly-traded security. Up to this point, we've talked about bonds as if every investor holds them to maturity. It's true that if you do this you're guaranteed to get your principal back; however, a bond does not have to be held to maturity. At any time, a bond can be sold in the open market, where the price can fluctuate - sometimes dramatically. We'll get to how price changes in a bit. First, we need to introduce the concept of yield.
Measuring Return With Yield
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.
Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).
Yield To Maturity
Of course, these matters are always more complicated in real life. When bond investors refer to yield, they are usually referring to yield to maturity (YTM). YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).
Knowing how to calculate YTM isn't important right now. In fact, the calculation is rather sophisticated and beyond the scope of this tutorial. The key point here is that YTM is more accurate and enables you to compare bonds with different maturities and coupons.
Putting It All Together: The Link Between Price And Yield
The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related.
Here's a commonly asked question: How can high yields and high prices both be good when they can't happen at the same time? The answer depends on your point of view. If you are a bond buyer, you want high yields. A buyer wants to pay $800 for the $1,000 bond, which gives the bond a high yield of 12.5%. On the other hand, if you already own a bond, you've locked in your interest rate, so you hope the price of the bond goes up. This way you can cash out by selling your bond in the future.
Price In The Market
So far we've discussed the factors of face value, coupon, maturity, issuers and yield. All of these characteristics of a bond play a role in its price. However, the factor that influences a bond more than any other is the level of prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons.
Measuring Return With Yield
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.
Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).
Yield To Maturity
Of course, these matters are always more complicated in real life. When bond investors refer to yield, they are usually referring to yield to maturity (YTM). YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).
Knowing how to calculate YTM isn't important right now. In fact, the calculation is rather sophisticated and beyond the scope of this tutorial. The key point here is that YTM is more accurate and enables you to compare bonds with different maturities and coupons.
Putting It All Together: The Link Between Price And Yield
The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related.
Here's a commonly asked question: How can high yields and high prices both be good when they can't happen at the same time? The answer depends on your point of view. If you are a bond buyer, you want high yields. A buyer wants to pay $800 for the $1,000 bond, which gives the bond a high yield of 12.5%. On the other hand, if you already own a bond, you've locked in your interest rate, so you hope the price of the bond goes up. This way you can cash out by selling your bond in the future.
Price In The Market
So far we've discussed the factors of face value, coupon, maturity, issuers and yield. All of these characteristics of a bond play a role in its price. However, the factor that influences a bond more than any other is the level of prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons.
Buying And Owning Real Estate
we presented the investment selection matrix, which outlines your alternatives when choosing the kind of real estate investment to make. You can choose to invest in the following types: public equity, private equity, public debt and private debt. In this chapter, we will expand on these structures with a particular focus on equity real estate investments.
Public Equity
Public equity is made up of real estate securities such as standard equity REITs or publicly traded real estate operating companies. Because investments are traded on a stock exchange, they tend to exhibit return patterns that are similar to equities, even though the underlying assets are real estate.
At any point in time, these public securities will be trading at a discount or a premium to their net asset values (NAVs), meaning that the value of the company is different than the sum of the underlying real estate values. This occurs as a result of the stock market valuation of these securities, which incorporates things like investor sentiment and psychology. It is important to be aware of this characteristic when making an investment in a real estate security because such investments can perform very differently than the underlying real estate that these public companies own.
One of the benefits of buying a security is the relative ease of acquisition. You buy it in the same manner as you would buy a stock - phone your broker, make the order and pay the relevant commission. You also achieve good liquidity with these investments, because they can be sold on short notice into the market with none of the usual delays that take place in the private market.
Private Equity
Private equity real estate investing is the traditional ownership method. If you own a home, you've participated in this market.
There are a number of things to keep in mind when looking for deals, here are a few tips to follow:
It is also worthwhile to complete a thorough due diligence on your prospective investment. This process can include having reports completed on the physical and environmental condition of the property, and having an appraisal performed. Your lawyer will be able to obtain a variety of search results and will assist in examining the title. Depending on the complexity of the purchase, there are many other tasks that may be required.
There are many costs related to due diligence and the purchasing process, so be sure these costs become part of your financial analysis. Some typical costs include lawyer's fees, financing fees, appraisal costs and other administrative fees.
Don't think that your job is done after your purchase; here are some things you need to consider after purchasing your piece of real estate:
A common example of public debt is a commercial mortgage-backed security (CMBS). A CMBS is a pool of mortgage loans that are assembled by a lender, and then sold in tranches to the public market. As borrowers make their regular mortgage payments, the proceeds are pooled together and then are paid to the owners of the debt securities in a priority dictated by the rating of the security.
The security's rating is determined by a third party rating service such as Moody's, Fitch, Standard & Poor's and Dominion Bond Rating Service. The rating process involves the agency reviewing the pool of mortgage loans, including an examination of the underlying collateral assets, to determine the quality of cash flow that is likely to be derived from those loans.
If the loans are of a very high credit quality, a larger proportion of the mortgage pool will be assigned an AAA rating. The rating categories are consistent with bond rating categories, so for instance the A tranche is subordinate to the AAA tranche, and the buyer of the B-piece will be subordinate to all of the more senior tranches. Usually, all the holders of the more senior securities must receive their principal and interest payments before the subordinate pieces receive theirs. As such, tranches with lower credit quality are riskier, but have higher return potential.
Because each tranche of the loan pool has a different set of risks, maturity, sensitivity to changes in interest rates and return, your investment decision should be based on the type of exposure you require for your portfolio. It should also incorporate your assessment of the interest rate environment and any likely changes. CMBS securities can be purchased from a broker of such securities. It is recommended that you consult with an advisor prior to purchasing such securities because they can behave differently depending on the interest rate environment.
Private debt is not so much purchased as it is issued. That is, if you would like to invest in private debt, you should provide mortgage financing to an owner of real estate. In return for your mortgage loan, you will receive a fixed or floating interest rate, and a priority claim on the real estate assets in the event of default on the loan. A common example of investing in private debt is a vendor take-back mortgage (VTB). If you own a commercial property and sell it to a purchaser, you could choose to accept all or part of the payment over time. Just like a conventional mortgage received from a financial institution, the purchaser would pay interest on the borrowed funds over the length of the term, and you would register your claim to receive the payments on the title to the property.
Another alternative is to make a contribution into a private mortgage pool, which is a pool of capital that is invested in a variety of mortgages. Such an investment would require diligence to determine its risk, because there is no third party rating agency to depend upon. A benefit of a mortgage pool versus a VTB is that a default of one mortgage will have less of an impact on your investment if it is combined with other mortgages to balance the risk. To purchase units in a private mortgage pool, you should contact an investment manager who assembles such pools, or a broker involved in the private mortgage market.
Public Equity
Public equity is made up of real estate securities such as standard equity REITs or publicly traded real estate operating companies. Because investments are traded on a stock exchange, they tend to exhibit return patterns that are similar to equities, even though the underlying assets are real estate.
At any point in time, these public securities will be trading at a discount or a premium to their net asset values (NAVs), meaning that the value of the company is different than the sum of the underlying real estate values. This occurs as a result of the stock market valuation of these securities, which incorporates things like investor sentiment and psychology. It is important to be aware of this characteristic when making an investment in a real estate security because such investments can perform very differently than the underlying real estate that these public companies own.
One of the benefits of buying a security is the relative ease of acquisition. You buy it in the same manner as you would buy a stock - phone your broker, make the order and pay the relevant commission. You also achieve good liquidity with these investments, because they can be sold on short notice into the market with none of the usual delays that take place in the private market.
Private Equity
Private equity real estate investing is the traditional ownership method. If you own a home, you've participated in this market.
There are a number of things to keep in mind when looking for deals, here are a few tips to follow:
- The key to locating investment opportunities is to be in touch with the various deal sources. You should get to know various real estate brokers and dealers. It also helps to have a network of other real estate owners, so you can keep up with an ever-changing market. You can find deals in unexpected places, such as your banker, lawyer, mortgage broker or through foreclosure records.
- Over time, your reputation becomes very important in maintaining a reliable flow of investment opportunities. If you are a person that people want to deal with, opportunities will come to you easier.
- Take your time to find the investment that meets your desired characteristics. You'll be better off waiting for the right investment than rushing into a questionable one.
- Look for positive fundamentals in all of your investments. Always ask yourself what drives tenants to want to be in the building you're considering, and what could happen in the future to affect the desirability of the property. Consider things such as quality of tenants, building configuration, location, condition and ability to finance.
It is also worthwhile to complete a thorough due diligence on your prospective investment. This process can include having reports completed on the physical and environmental condition of the property, and having an appraisal performed. Your lawyer will be able to obtain a variety of search results and will assist in examining the title. Depending on the complexity of the purchase, there are many other tasks that may be required.
There are many costs related to due diligence and the purchasing process, so be sure these costs become part of your financial analysis. Some typical costs include lawyer's fees, financing fees, appraisal costs and other administrative fees.
Don't think that your job is done after your purchase; here are some things you need to consider after purchasing your piece of real estate:
- You should determine how you are going to manage the investment. Will you do it yourself or hire a manager? Remember that cost accounting will be required.
- Tenant relationships are critical, so always respect their requirements and maintain a working business relationship with them.
- Remember that if you hire a property manager, they are not managing the long-term strategy of the property, unless it is specifically agreed upon that they will handle that role. It is up to you to ensure the long-term viability of the investment and to instruct the property manager with respect to strategy, such as redeveloping or selling the property.
- The decision to sell is as important as the decision to buy, but remember that there will be trading costs associated with completing a sale.
A common example of public debt is a commercial mortgage-backed security (CMBS). A CMBS is a pool of mortgage loans that are assembled by a lender, and then sold in tranches to the public market. As borrowers make their regular mortgage payments, the proceeds are pooled together and then are paid to the owners of the debt securities in a priority dictated by the rating of the security.
The security's rating is determined by a third party rating service such as Moody's, Fitch, Standard & Poor's and Dominion Bond Rating Service. The rating process involves the agency reviewing the pool of mortgage loans, including an examination of the underlying collateral assets, to determine the quality of cash flow that is likely to be derived from those loans.
If the loans are of a very high credit quality, a larger proportion of the mortgage pool will be assigned an AAA rating. The rating categories are consistent with bond rating categories, so for instance the A tranche is subordinate to the AAA tranche, and the buyer of the B-piece will be subordinate to all of the more senior tranches. Usually, all the holders of the more senior securities must receive their principal and interest payments before the subordinate pieces receive theirs. As such, tranches with lower credit quality are riskier, but have higher return potential.
Because each tranche of the loan pool has a different set of risks, maturity, sensitivity to changes in interest rates and return, your investment decision should be based on the type of exposure you require for your portfolio. It should also incorporate your assessment of the interest rate environment and any likely changes. CMBS securities can be purchased from a broker of such securities. It is recommended that you consult with an advisor prior to purchasing such securities because they can behave differently depending on the interest rate environment.
Private debt is not so much purchased as it is issued. That is, if you would like to invest in private debt, you should provide mortgage financing to an owner of real estate. In return for your mortgage loan, you will receive a fixed or floating interest rate, and a priority claim on the real estate assets in the event of default on the loan. A common example of investing in private debt is a vendor take-back mortgage (VTB). If you own a commercial property and sell it to a purchaser, you could choose to accept all or part of the payment over time. Just like a conventional mortgage received from a financial institution, the purchaser would pay interest on the borrowed funds over the length of the term, and you would register your claim to receive the payments on the title to the property.
Another alternative is to make a contribution into a private mortgage pool, which is a pool of capital that is invested in a variety of mortgages. Such an investment would require diligence to determine its risk, because there is no third party rating agency to depend upon. A benefit of a mortgage pool versus a VTB is that a default of one mortgage will have less of an impact on your investment if it is combined with other mortgages to balance the risk. To purchase units in a private mortgage pool, you should contact an investment manager who assembles such pools, or a broker involved in the private mortgage market.
Characteristics Of Real Estate Investments
One of the beneficial features of real estate is that it produces relatively consistent total returns that are a hybrid of income and capital growth. In that sense, real estate has a coupon-paying bond-like component in that it pays a regular, steady income stream, and it has a stock-like component in that its value has a propensity to fluctuate. And, like all securities that you have a long position in, you would prefer the value to go up more often than it goes down!
The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. So, you can understand how important it is to keep your property as full as possible. If you lose too many tenants, you won't have sufficient rents being paid by the other tenants to cover the building operating costs. Your ability to keep the building full depends on the strength of the leasing market - that is, the supply and demand for space similar to the space you are trying to lease. In weaker markets with oversupply of vacancies or poor demand, you would have to charge less rent to keep your building full than in a strong leasing market. And unfortunately, if your rents are lower, your income returns are lower.
Capital appreciation of a property is determined by having the property appraised. (We discuss the appraisal process further in, but for now you should just know that an appraiser uses actual sale transactions that have occurred and other pieces of market data to estimate what your property would be worth if it were to be sold.) If the appraiser thinks your property would sell for more than you bought it for, then you've achieved a positive capital return. Because the appraiser uses past transactions in judging values, capital returns are directly linked to the performance of the investment sales market. The investment sales market is affected largely by the supply and demand of investment product.
The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable, and capital returns fluctuate more. The volatility of total returns falls somewhere in between.
Other Characteristics
Some of the other characteristics that make real estate unique as compared to other investment alternatives are as follows:
The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. So, you can understand how important it is to keep your property as full as possible. If you lose too many tenants, you won't have sufficient rents being paid by the other tenants to cover the building operating costs. Your ability to keep the building full depends on the strength of the leasing market - that is, the supply and demand for space similar to the space you are trying to lease. In weaker markets with oversupply of vacancies or poor demand, you would have to charge less rent to keep your building full than in a strong leasing market. And unfortunately, if your rents are lower, your income returns are lower.
Capital appreciation of a property is determined by having the property appraised. (We discuss the appraisal process further in, but for now you should just know that an appraiser uses actual sale transactions that have occurred and other pieces of market data to estimate what your property would be worth if it were to be sold.) If the appraiser thinks your property would sell for more than you bought it for, then you've achieved a positive capital return. Because the appraiser uses past transactions in judging values, capital returns are directly linked to the performance of the investment sales market. The investment sales market is affected largely by the supply and demand of investment product.
The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable, and capital returns fluctuate more. The volatility of total returns falls somewhere in between.
Other Characteristics
Some of the other characteristics that make real estate unique as compared to other investment alternatives are as follows:
- No fixed maturity
Unlike a bond which has a fixed maturity date, an equity real estate investment does not normally mature. In
- Tangible
Real estate is, well, real! You can visit your investment, speak with your tenants, and show it off to your family and friends. You can see it and touch it. A result of this attribute is that you have a certain degree of physical control over the investment - if something is wrong with it, you can try fixing it. You can't do that with a stock or bond.
- Requires Management
Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant complaints must be addressed. Landscaping must be handled. And, when the building starts to age, it needs to be renovated.
- Inefficient Markets
An inefficient market is not necessarily a bad thing. It just means that information asymmetry exists among participants in the market, allowing greater profits to be made by those with special information, expertise or resources. In contrast, public stock markets are much more efficient - information is efficiently disseminated among market participants, and those with material non-public information are not permitted to trade upon the information. In the real estate markets, information is king, and can allow an investor to see profit opportunities that might otherwise not have presented themselves.
- High Transaction Costs
Private market real estate has high purchase costs and sale costs. On purchases, there are real-estate-agent-related commissions, lawyers' fees, engineers' fees and many other costs that can raise the effective purchase price well beyond the price the seller will actually receive. On sales, a substantial brokerage fee is usually required for the property to be properly exposed to the market. Because of the high costs of “trading” real estate, longer holding periods are common and speculative trading is rarer than for stocks.
- Lower Liquidity
With the exception of real estate securities, no public exchange exists for the trading of real estate. This makes real estate more difficult to sell because deals must be privately brokered. There can be a substantial lag between the time you decide to sell a property and when it actually is sold - usually a couple months at least.
- Underlying Tenant Quality
When assessing an income-producing property, an important consideration is the quality of the underlying tenancy. This is important because when you purchase the property, you're buying two things: the physical real estate, and the income stream from the tenants. If the tenants are likely to default on their monthly obligation, the risk of the investment is greater.
- Variability among Regions
While it sounds cliché, location is one of the important aspects of real estate investments; a piece of real estate can perform very differently among countries, regions, cities and even within the same city. These regional differences need to be considered when making an investment, because your selection of which market to invest in has as large an impact on your eventual returns as your choice of property within the market.
Types Of Real Estate
n the previous chapter, we discussed the various categories of available real estate investments, including direct property ownership, mortgages, and debt or equity securities. What these real estate investments have in common is that there are one or more tangible real estate properties underlying each investment. That means when you make an investment, it is important to consider the characteristics of the underlying real estate because the performance of those properties will impact the performance of your investment.
When you're looking at the underlying real estate, one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. Each type of real estate has a different set of drivers influencing its performance. You can't simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can't assume one type of property will continue to be a good investment simply because it has performed well in the past.
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office Property
Offices are the "flagship" investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.
At its most fundamental level, the demand for office space is tied to companies' requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these "white-collar" jobs grow, there is greater demand for office spaces.
Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents.
Retail Property
There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Center format is in favor, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways.
Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail center has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU).
The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.
Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
Industrial Property
Industrials are often considered the "staple" of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts.
There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs.
Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential Property
Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.
When you're looking at the underlying real estate, one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. Each type of real estate has a different set of drivers influencing its performance. You can't simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can't assume one type of property will continue to be a good investment simply because it has performed well in the past.
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office Property
Offices are the "flagship" investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.
At its most fundamental level, the demand for office space is tied to companies' requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these "white-collar" jobs grow, there is greater demand for office spaces.
Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents.
Retail Property
There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Center format is in favor, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways.
Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail center has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU).
The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.
Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
Industrial Property
Industrials are often considered the "staple" of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts.
There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs.
Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential Property
Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.
Brokers and Online Trading
Brokers share the undesirable reputation of lawyers, bankers and accountants. They earn a living by selectively sharing knowledge that the general public can't easily access. But, like it or not, they are the individual investor's direct link to Wall Street. Although technology and the internet have made it easier for individual investors to take control of their portfolios, the basic rule still applies: you need some kind of broker if you want to trade stocks and bonds.
In any profession, you will find people who take advantage of those who aren't in the know. Whenever you buy something, there is the possibility of being cheated. Furthermore, with a broker you purchase advice, which is hard to price. But not all brokers fit the swindler stereotype. In fact, there are many brokers who do a phenomenal job of guarding their clients' interests. There are also many discount brokerages that provide remarkable services for a reasonable price.
It's up to you to pick the broker that meets your needs. This tutorial will go over some important factors to consider when making the choice.
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In any profession, you will find people who take advantage of those who aren't in the know. Whenever you buy something, there is the possibility of being cheated. Furthermore, with a broker you purchase advice, which is hard to price. But not all brokers fit the swindler stereotype. In fact, there are many brokers who do a phenomenal job of guarding their clients' interests. There are also many discount brokerages that provide remarkable services for a reasonable price.
It's up to you to pick the broker that meets your needs. This tutorial will go over some important factors to consider when making the choice.
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Reading A Stock Table/Quote
Any financial paper has stock quotes that will look something like the image below:
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: http://finance.yahoo.com/l.
Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.
Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.
Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.
Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.
Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc.
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Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: http://finance.yahoo.com/l.
Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.
Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.
Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.
Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.
Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc.
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Stocks Trade
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers.
Before we go on, we should distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company.
The New York Stock Exchange
The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup, Coca-Cola, Gillette and Wal-mart, is the market of choice for the largest companies in America.
The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don't think that the NYSE is still in the stone age: computers play a huge role in the process.
The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE.
On the Nasdaq brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors.
Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.
There are many stock exchanges located in just about every country around the world. American markets are undoubtedly the largest, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky.
The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers.
Before we go on, we should distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company.
The New York Stock Exchange
The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup, Coca-Cola, Gillette and Wal-mart, is the market of choice for the largest companies in America.
| The trading floor of the NYSE |
The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE.
On the Nasdaq brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors.
Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.
There are many stock exchanges located in just about every country around the world. American markets are undoubtedly the largest, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky.
Different Types Of Stocks
There are two main types of stocks: common stock and preferred stock.
Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
Different Classes of Stock
Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.
When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".
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Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.
Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
Different Classes of Stock
Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.
When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".
What Are Stock
The Definition of a Stock
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.
Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!
The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.
Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).
It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.
Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.
Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-12%.
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
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| Example stock certificate |
A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.
Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!
The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.
Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).
It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.
Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.
Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-12%.
Stocks Basics
Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, watch your company grow, and collect the dividend checks as the money rolls in! This situation might sound like a pipe dream, but it's closer to reality than you might think.
As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market.
Over the last few decades, the average person's interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.
Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations around the water cooler with others who also don't know what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money.
It is for this reason that we've created this tutorial: to provide the foundation you need to make investment decisions yourself. We'll start by explaining what a stock is and the different types of stock, and then we'll talk about how they are traded, what causes prices to change, how you buy stocks and much more.
As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market.
Over the last few decades, the average person's interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.
Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations around the water cooler with others who also don't know what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money.
It is for this reason that we've created this tutorial: to provide the foundation you need to make investment decisions yourself. We'll start by explaining what a stock is and the different types of stock, and then we'll talk about how they are traded, what causes prices to change, how you buy stocks and much more.
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