Posts Tagged ‘risk’

Money Market Advantages Amidst Volatility

Money Market Advantages Amidst Volatility

Foreign Exchange Market (FOREX) is the arena where a nation’s currency is exchanged for that of another at a mutually agreed rate. All currencies are traded in pairs, and each is assigned with an abbreviation. (E.g: USD = United States Dollar, GBP = Great British Pound). Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global economic situations. Profits and losses are dependent on the fluctuations in the exchange rate between the two currencies.

In today’s volatile money market environment the traditional forms of investing are rightfully inviting more scrutiny and caution. The New Year has brought with it an impending sense of tough times to come. The FTSE 100 dropped below 6000 points for the first time in almost two years, a performance that was mirrored by Dow Jones, Hang Seng and other major indices around the world. Now more than ever investors are focusing on alternative avenues to channel those hard earned funds.

FOREX is a serious game. Play it with the pros.

Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Advantages of Trading Forex

It may be difficult to imagine that there is market that is not only growing, but is also renowned for its flexibility and liquidity. Forex is flexible in the sense that it has no central trading location or exchange with traders, sellers and buyers in the traditional sense; most of the trading is conducted via a global ETS (electronic trading system) that operate 24hrs a day. Concurrently, liquidity is a powerful attraction to any investor as it suggests the freedom to enter or exit the market at anytime. These advantages subsequently enable investors to respond to any new adverse or positive information immediately. A luxury not afforded by the more traditional forms of risk.

Also, in forex trading, a small margin deposit can control a much larger total forex contract value. This obviously gives investors the ability to make extraordinary profits with relatively minimal risk. Unlike with other forms of risk where numerous factors affect the unit prices, (a good example of course is the recent sub-prime crisis in the US) the chief aim and focus of any good forex investor is to manage as best as possible the varying risks associated with fluctuations in worldwide currencies. With the current trepidation that characterises traditional forms of investments, it is no surprise that there has been a big growth in regulated firms that offer forex investment contracts to cunning individual investors.

It must be said however that a good understanding of the relationship between freely transferable currencies is required in order to dabble into this exciting arena. The concept really is quite simple. Currency exchange rates fluctuate, investors who trade in the forex market hope to profit from those fluctuations. Investors should always be aware though that as with any other form of investment, investors who consult with a financial adviser limit their exposure to excessive fluctuations. A general rule of all investment tools that carry a degree of risk is that investors should input funds that they can generally afford to lose without affecting their finances adversely. Risk capital should be seen as disposable income for any discerning investor.

Here’s to a profitable future for you all

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Diversifying Your Investment In The Money Market

Diversifying Your Investment In The Money Market

Determining the profitability of stocks is not as easy as it seems. Proper analysis is a must if you desire to sustain for long in the stock market and if you want that you gain more of profits rather than losses. Because investment involves risk and you cannot do away with this aspect. Moreover, the volatile nature of the market resulting in fluctuations further determines whether the shares you have bought will grow in terms of value or not. To buy stocks, you should take a glance at the most active stocks that get displayed live on any news portal in the finance section or online brokerage platform or at the stock exchanges’ corporate sites. Stay in touch with the live stock market via such platforms if you are serious to carve a niche.

It is not only stocks that are the part of the money market. There are other options for investment as well. Diversifying your investment plans will help you maintain a balance of profits and losses. You will then experience a secured financial health. Diversification can be planned by investing in stocks as well as money market funds like mutual funds and other investment options. In most cases, money market funds prove more profitable than stock investment in the long run. But you never know. It depends on the amount you invest. Invest in short-term, long term, and market funds equally. At times, bulk investment for the short-term enables one reap huge gains. As aforementioned, risk is always there and it is advisable that you study market trends well before investing so that your money doesn’t go into the drains.

Evaluating the behavior of a particular stock would require you to carry out intensive research. It is a blend of effort, time, and patience that will help you invest in potential stocks. Once you take a glance at the most active stocks, make a chart and note down ten of the most potential stocks based on the research you conduct. Filter out further and reduce the number to five. Finally, select one company that has a track record of maintaining growth for the last several years. This way your investment will be secured. Watch the performance of the live stock market regularly to draw effective conclusions. Beginners may face losses initially but with time all investors learn and pick up speed!

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What Are Money Market Funds?

What Are Money Market Funds?

Ever wondered what money market funds are and how they can help you make the most out of your money?

Well, money market funds are fixed, short term investments in low risk holdings or securities. By law money market funds must invest in low risk mutual funds making them a good way for existing investors to diversify their interests or for newcomers to launch themselves into the marketplace.

Choosing a Money Market Fund
Money market funds can generate returns in a relatively short time span in accordance with interest rates, and can be redeemed at any time, which is why they are an ideal low risk option for people wanting to preserve their money in a volatile market.

These money market funds are essentially part of a mutual fund which invests in such things as government securities and low risk stocks and bonds. However, because money market funds are part of mutual funds they are not secured investments and are therefore not insured to cover losses.

Losses in the money market are rare as money market shares are able to consistently maintain a net asset value of .00 per share. The net asset value of a share is usually determined at the end of a trading day and it is only when investments perform very poorly that the value will drop below .00.

Investing In Money Market Funds
Some money market mutual funds can offer tax exemptions by investing in short term debts. However, before investing make sure you work out your final tax obligations.

In order to find the best mutual funds you need to consider how the investment can work for you. For example, money market funds all have a ranking in the marketplace so be sure to do your research and find out where they sit.

The next step is to work out how much money you have to invest as this will determine the best mutual funds to help you establish the portfolio you are after. There are money market directories that can be used to compare different funds and calculate expected risks.

You also need to be aware of the rates and charges that come with money market funds. Although these will differ between funds, most incur an initial sales fee, ongoing management fees and transaction fees. To be competitive money market funds will offer different packages for different classes of investors. Some packages may include a flat rate advisory fee while others will incur a fee that decreases as your portfolio value increases. Fees can also be allocated according to the value of a group of funds instead of a single fund.

Finding the Best Mutual Fund
Money market funds require compulsory professional management, undertaken by third party mutual fund managers. This means control of your fund is put into the hands of your fund manager, another reason to ensure you are choosing the right money market fund.

Mutual fund managers research different investment options and have the power to buy, sell and trade your funds on the market. A skilled fund manager will have the ability to forecast the financial viability of a certain asset or investment and make adjustments in accordance with the fund’s set financial principals.

Another major role of mutual fund managers is to predict the financial situation of the fund itself. This means managers need to calculate how much money will be entering and exiting the fund through investors in order to plan for future investments.

Like any investments, money market funds can have both positive and negative returns, but at all costs are the most low risk way of investing your money into the marketplace.

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On Stocks and Money Market Funds

On Stocks and Money Market Funds

There are obvious reasons why you, as an investor, put your money in the stock market. High return on investment is the answer. But are you sure that your invested money will reap as much profits as you have surmised? Well, it can be the other side of the story too, i.e., you may incur losses getting your expectation levels doused. Therefore, it is necessary that you know what is happening in the live stock market. You should be sensible enough to choose potential stocks from the chart of the most active stocks displayed in the live stock market.

It is not only stocks but also money market funds that have emerged as popular investment products. Risk is no doubt there in every investment product, but in this segment there is less risk. Just choose the right company and go into the details where your mutual fund money is going to be utilized. If it is an emerging sector such as infrastructure, real estate, etc., gaining is certain. Investing in money market funds involves a certain time period, say for few months to several years. Once your agreed period is over, you will get the returns and utilize the amount further.

Ever since the stock trading phenomenon started in India there has been a continuous tug of war between investors and the market. This is because of the lack of balance in reaping profits. There are lakhs who have made money to their satisfaction with more than the same number facing losses and bearing the brunt of financial crunch. Why is this imbalance? Well, it is expertise that matters. Even expertise fails at times. If you just blindly involve in trading in the stock market without taking into consideration the factors that govern it, you are bound to face losses. To win, you need to take cautious decisions in selecting stocks keeping market fluctuations in mind. If you visit any financial/business news portal or a stock broking platform, you can view the live stock market besides having a glance at the most active stocks and various stock related information and thus take the right decision.

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Tying Fortunes to Broader Global Equities

Tying Fortunes to Broader Global Equities

Which single asset class are you most bullish (or bearish) about in the coming year? What ETF position would you choose to best capture that?

If I could own just one stock or ETF, then it would have to be Vanguard’s Total World Stock Index ETF (VT). Perhaps I’m taking the question a little too literally or perhaps I just lack the necessary convictions in my (or anyone’s) market predictions to choose anything more focused. VT is the most diversified ETF capturing the largest percentage of the world stock market capitalization.

I don’t know why I would accept anything less, unless I could tell the future – which I can’t do, no matter how hard I try! Therefore I’ll go with the ETF that gives me the highest probability of achieving a fair return: VT.

How does this ETF fit into your overall investment approach?

Investor Solutions has some straightforward investing biases. First, we believe that capital markets and capitalism work. Therefore ownership should produce a fair return for assuming ownership (equity) risk.

Secondly, we believe that capital markets are efficient. Efficient doesn’t mean perfect or 100% correct. Efficient simply means that market prices are the best estimates of value and that future stock prices are unpredictable. Therefore it makes little sense to try and outguess the market. You can try, but the data show that you will probably fail and the act of “trying” will cost you in fees, taxes and underperformance. These two points lead me to select a broad equity ETF. It is best to accept market risk for market returns and to reduce risk by removing as much systematic risk as possible.

Next, Investor Solutions believes that the market should be described as the most diversified global portfolio using public securities. In our firm, we usually target 15 different investment areas using various institutional mutual funds and ETFs to capture the world market capitalization, tilting the portfolio to capture more value and small-cap risk premium. VT is the closest option though it is heavily weighted to large/mega caps, and has no value tilt. Still, VT is the closest option available with 46% in North America, 15% emerging markets and 34% in developed foreign.

Finally, VT offers this global diversification in one simple ETF at the lovely low price of 0.3%, and tax-friendly to boot. So, 100% equity, the most globally diversified, lowest cost, tax-efficient ETF is the clear winner. Many investors would be well advised to give up their sector plays and just build a portfolio solely of VT.

Some readers will be expecting a sector pick in Just One ETF, but as you note, it’s about matching return with risk. So my question is: Why settle for market returns? Do you consider yourself highly risk-averse?

I’m certainly not risk-averse nor should anyone mistake VT as a low-risk investment for the risk-averse. After all, VT was down about 40% at the worst of it. So I’m absolutely a risk-taker, though an important distinction should be made as to which risk. I see no reason to take uncompensated risk or unsystematic risk. Sure, you can get lucky with sector bets, but if I can only own one ETF, I don’t see that as a good strategy for real money.

As far as why you should just settle for market returns, I’d say why shouldn’t you? There is this idea that investors should “try” to do something: Try to beat the market. Try to get out before a crash. Try to jump in before a rally. Try to do better. Try if you will, but the empirical data all show that “trying” just increases costs and taxes as well as leading to drastic underperformance compared to the markets.

So if the market returns are acceptable, then why not just accept them? You actually are increasing your risk and decreasing your expected return by not just accepting market returns. Sometimes it doesn’t pay to get complicated and “try.” Let’s use the analogy of driving in heavy traffic on the interstate.

Some drivers sit in their lane staring only at the car directly in front of them, blind to everything else. This makes no sense. But neither does the strategy of darting in and out, constantly changing lanes, honking, trying to guess which lane is best. This strategy only increases the chances of getting into an accident, decreases mpg and increases the aggravation of getting to where you want to be.

Most experienced drivers reach the point where they realize that the best strategy is to stay in one lane unless there is a clear reason to change. On the freeway, this is usually the left lane, so let’s consider this lane equity. The right is usually the slowest, so this will be a mix of stocks and bonds. Then finally we have the exit, which is all bonds.

So a driver can try jumping across lanes or they can pick the appropriate lane for their needs and objectives. Usually that’s the farthest left lane (accumulation phase) until they get close to their exit (death) at which time they move to the right lane (distribution phase) and then finally exiting (to the great unknown). Few rational prudent drivers stay to the far left lane and then quickly swerve to the exit. This type of jumping back and forth only increases the chances of a wreck in driving as well as investing.

What about fixed income? Do you expect record-low yields for bonds to have any effect on the global equities that you’re counting on for a steady return?

I never said anything about a steady return. Quite the opposite, I think you should count on unsteady returns from global equities moving forward just as there has always been. There is a real misconception today that markets used to be stable, which is completely ridiculous. Secondly, record-low yields are not the same as record-real yields. But I’m guessing your question is geared to the idea that low bond yields are an incentive for investors to take more risk in stocks.

Obviously, there is some effect here but we could see low yields for a long time. But remember, low yields in the U.S. is different from low global yields. VT is a global investment. The developed markets have low real yields, but VT has about 15% in emerging markets which still have relatively high yields. Trying to use a yield ratio to time equity is a mistake. Better to own the appropriate amount of bonds according to your desire, need and capability to handle investment risk.

Tell us more about global equities, and what makes that asset class your top pick.

Investing in VT is the lowest risk to my future, meaning the lowest risk of not achieving my return objective. The lowest risk of missing the market returns. The highest probability of success.   Let’s say you decide to place all your capital in a commodity producer ETF or a Gold ETF – what happens if this very narrow slice of the market does nothing? What if it isn’t its time to shine?

I hate to use a gambling analogy, but let’s take roulette. Picking one gold stock is like placing all your chips on the number 13. Picking one gold ETF is like picking 4 numbers. Picking an S&P 500 ETF is like picking red. Some people think VT is essentially placing your chips on all the roulette options, but it isn’t, not even close.

Buying the total global stock market, VT in our example, and not trying to jump in and out, is like owning the roulette table. The casino might not win every time, but over time, the casino is the only winner in Vegas. And that is what we are trying to accomplish in the capital markets. We are trying to extract a premium over the risk-free rate on our investment by accepting ownership risk.

Are there alternative ETFs that could be used to capture the same theme? What makes VT your first choice?

The only other global ETF is iShares MSCI ACWI Index Fund (ACWI). If I couldn’t choose VT, I’d be happy with ACWI. For all practical purposes the difference is marginal and both would achieve my goal if utilized prudently. With that said, VT has a lower fee and a slightly more diversified index, and Vanguard is well known as a master at managing index funds.

How does your view differ from the consensus sentiment?

Investors today have too much data- er, I mean noise. One day the experts are predicting the second depression while simultaneously other experts are predicting deflation or inflation or something catastrophic. Most people don’t understand that the media is in the ad business. Extreme sells. Polarization of opinions gets air time, not level-headed common sense strategies.

So what is the sentiment in the industry about VT? VT is boring. It is hard for anyone in the investment industry to make a living talking about VT. It is easier to talk about some sexy sector selling the hopes of something new and improved. A vote for VT is a vote for common sense.

If you could only have one investment, a lot of people in the financial services industry would pick VT, but they wouldn’t tell you. Their salary is often dependent on creating an aura of mystique, of being an expert, of knowing something no one else does. Essentially what they promote at work isn’t necessarily the same thing they do with their own investment portfolios.

Do you still believe in the efficient market and modern portfolio theory?  Some say that both failed in 2008?

How did the efficient market hypothesis (EMH) fail in 2008? EMH basically states that current market values are the best estimates and that future market price are unpredictable. EMH does not state that the market prices are correct.

I’m not sure why some people feel EMH or modern portfolio theory (MPT) failed in 2008. No one should infer that the validity or application of EMH & MPT will insure positive returns. Rather, the application increases the probability of a positive return. There is a difference between possibilities and probabilities. EMH and MPT help increase the desired probability but cannot remove the possibility of a negative outcome.

The alternative would be market timing and there simply is no empirical data that supports market timing. Are there successful money managers timing the market? And, will these same money managers successfully time the markets moving forward? All the data would lead any rational, prudent investor to abandon market timing

What catalysts, near-term or long-term, could move the sector significantly?

I’m sorry, but it seems like a futile exercise and detrimental to investor performance to try and guess. A simple question: Do you believe in a return on equity ownership and are you willing to accept the risk of equity ownership? If yes to both, just buy the appropriate amount of the global markets, in this case using VT. If you can’t answer yes to both, then don’t get involved.

What could go wrong with your pick?

By wrong, I’m guessing you mean a negative return. But that’s a mistake. The real thing that could go wrong in my mind would be that VT produces a significant tracking error to the FTSE All-World Index. Given the breadth and liquidity of the index, as well as Vanguard’s management experience, I’m not worried.

Fair enough, but another global stock pullback would be considered “wrong” for those who would rather be taking even low bond yields (and of course, that kind of “going wrong” is “going right” for those on the other trade, shorting the broader equity market). What do you think the odds are of a big macro event hurting global equities, like the eurozone debt crisis?

Of course we would rather be in low-yielding bonds or short stocks right before another global stock pullback and then move long global stocks right before another global stock rally, but the chances of getting both right are pretty slim to none. Even being more or less “right” in your timing still wouldn’t mean a better return than just sticking to your investment plan.

When we consider what can go wrong, investors essentially should be trying to gauge how much downside they can handle. You ask about the odds of another big macro event hurting global equities and I’d say you should expect it to happen. The questions are really when and how bad, and the answer to both are just guesses and speculation. As an investor, you should expect there will be years with negative returns and you should not expect anyone to be able to successfully get you out right before. Try as they might, the net result is usually worse than just staying the course.

Also, let’s put this in perspective. You reference the eurozone debt crisis. I’d like to point out that last year everyone loved Europe and the euro. The broader European stock markets were up about 35% in 2009, compared to about 25% for the broader American stock markets. So how did investors in VT do? They enjoyed a return of about 30%. Now in 2010, the eurozone debt crisis has punished the euro and European markets. Yet for all of the concern, the VT is about flat for the year after being down at worst 10% in June. For most investors, the investing experience generates a far worse mental account than the actual return.

This is exactly why I would pick VT if I could only own one security. You can expect big macro events, both positive and negative, to occur at some time, yet still be confident that you will be OK. If you aren’t comfortable with that, you should either hold less VT or just be happy with cash or low bond yields.

Thanks, Jason, for sharing your choice with us.

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Vanguard Intermediate-Term Corporate Bonds Etf — Vcit

Vanguard Intermediate-Term Corporate Bonds Etf — Vcit

Bonds can be set to mature in a wide range of time, from a few months to one hundred years.

Bonds that last under one year are short-term bonds. They are safest but, because of that, have the lowest coupon rates.

Bonds that mature in longer than ten years are long-term. They pay the highest interest rates but have the greatest risks. Sometime over the next decade, interest rates can go much higher, bringing the bond’s value down. And of course in over ten years there’s a greater risk a company may go from financially successful to bankruptcy.

Therefore intermediate-term bonds that mature in one to ten years are generally considered the best possible trade-off between yield and risk.

Because corporations have no authority to tax people, corporate bonds are considered riskier than federal and municipal bonds. Therefore they must pay higher interest rates than governments.

Historically, however, companies with investment grade credit ratings have low rates of default. (Below investment-grade, or “junk,” bonds are a different story.)

Therefore intermediate-term corporate bonds issued by companies with investment-grade credit ratings are the best available balance between yield and risk.

However, it’s not easy for ordinary small investors to buy such bonds. The bond market is not liquid or transparent as the stock market is. Bond brokers are set up to deal with institutions with millions of dollars to invest. They charge ordinary people exorbitant commissions.

However, everyone can now buy shares of the Vanguard Intermediate-Term Corporate Bonds exchange traded fund VCIT.

Most ETFs track an index. Because there is no index that singles out these kinds of bonds (there’re thousands outstanding), VCIT buys a representative sample. It uses sampling techniques to balance key risk factors and other characteristics of the underlying bonds, including duration, cash flow, and quality. It also limits exposure to sector and sub-sector risk.

VCIT also attempts to balance bonds for what’s termed “callability.” This is the right of bond issuing companies to “call in” bonds. They often choose to do when market interest rates go down lower than the bond’s coupon rate. Bond investors don’t like this feature, because the companies save money by issuing new bonds at the new, lower market rates of interest.

As with all Vanguard ETFs and mutual funds, the expense ratio is kept low. Just 0.15%.

VCIT just started November 19, 2009. Before that, the only intermediate-term bond ETFs available bought government bonds as well as corporate bonds. VCIT is for those investors seeking only the higher yields of corporate bonds.

Its number of bond holdings is 189. The average yield to maturity is 5.2%, and the average coupon rate is 6.4%. Average maturity is 7.8 years. All holdings mature in from five to ten years.

Credit quality of the bonds ranges from Aaa to Baa. The average is A2/A3.

The dividend distribution schedule is monthly.

The industries included are: Financial (38.8%), Industrial (50.2%), and Utilities (11.3%).

VCIT is managed by Gregory Davis and Joshua C. Barrickman. It trades on the NASDAQ exchange.   

Therefore VCIT offers investors the opportunity to conveniently, safely, and inexpensively profit from corporate bond yields that are higher than those available from government bond issuers.

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The Difference Between a Money Market Account and a Money Market Fund

The Difference Between a Money Market Account and a Money Market Fund

Many investors do not realize that there are differences between a money market account and a money market fund. While the differences are subtle, they both have faintly distinct levels of risk. Due to this variance in risk, there is also a small difference in the money market rates offered between the two financial products. Investors should have an understanding of what these financial products are. Knowing how banks use these funds will help investors make the most informed decisions about how to allocate their investment capital based on the amount of risk they want to assume.

A money market account is very similar to a savings account at a bank. Most money market deposit accounts typically can have a minimum opening deposit and can provide customers with the ability to write checks against the account. A money market deposit account is virtually a risk free investment because the bank uses Certificates of deposit can provide an investor with a higher rate of return on his or her cash instead of having that asset simply languish in a bank accounthese deposits for cash equivalent investments used in their banking operations. The money market account deposits help the bank offer loans to its customers for homes, cars, and other purchases while providing investors good money market rates of return.

Money market funds carry with it a slightly higher risk profile because of the underlying investments purchased with the deposits in order to earn a higher rate of return. While with money market funds, capital is placed in low risk investments such as Treasuries and short-term debt instruments, these funds are still considered a very safe financial product for investors to own. Most money market funds have a set share price of which does not change. Capital appreciation or dividends earned are either disbursed to investors or invested as new shares of the money market fund.

Money market deposit accounts and money market funds are very similar in design and the type of protection they offer investors. Depending on the amount of risk an investor wants to assume, money market accounts and money market funds offer excellent options for short-term investments with little risk to their principal.

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Best Place To Invest Money

Best Place To Invest Money

The best place to invest money really depends on the individual doing the investing. To determine which place to park your funds depends on how much risk you can handle and what type of time frame you are working with. This article will describe a few low risk options for investing funds along with a few high risk options for investing.

If someone asked me what the best place to invest money was, I would present them with a few different investment strategies and explain the expected return and the risk of each of those investments.

For someone who is very risk averse (one who avoids risk), I would recommend a fixed income security or a money market account. A money market account is similar to a normal bank account except it pays a higher interest rate. ING Direct offers money market accounts and sometimes offers a sign-up bonus. The interest rate from these types of accounts are normally around the rate of inflation.

For someone who can accept a moderate amount of risk, they should consider an index mutual fund. An example of this would be the Vanguard 500 mutual fund. This fund has extremely low fees and is a basic copy of the S&P 500. The reason this carries moderate risk is because it is a diverse mix of fairly conservative stocks. This specific fund has an average annual yield since inception of 10 percent.

For someone who can accept a high risk, they should consider trading individual stocks. This option takes a great deal of research and a strong heart. Stocks can jump or crash 20 percent or more on a single day. If you are not careful it can turn into a form of gambling. There are many online stock trading brokers to choose from (Etrade, Charles Schwab, Trade King, Sharebuilder.com). The key to success in stock trading is research, have a strategy and don’t emotionally invested in a certain company.

If risk doesn’t matter at all, there is also the Forex market. This is the foreign currency exchange. In this type of trading, you can open an account with a broker who will provide you a margin of up to 200 times your original investment. Small swings in currency rates can lead to huge profits, but it can also wipe out your entire investment in a matter of seconds. For a comprehensive guide to investing in the Forex markets see www.babypips.com. It should be noted that most traders recommend using a practice account for at least six months before deciding if the forex market is right for you. To sign up for a practice account see www.forex.com.

The most important thing to think about before you begin trading is what you can afford to lose. If you are working with funds that your family will need in the near future, stick to something safe. It will not provide the return of stocks, but it will also not wipe out your family’s quality of life.

Current Market Conditions Call for Specialized Consumer Vocabulary, This Article Will Help You Understand the Phrases You are Hearing in the Media

Current Market Conditions Call for Specialized Consumer Vocabulary, This Article Will Help You Understand the Phrases You are Hearing in the Media

This is one in a series of articles addressing current market conditions.

Market conditions in recent days have turned many arcane financial terms into familiar vocabulary. Words and phrases such as breaking the buck, securitization, counterparty risk and short selling are being used frequently in the media. But many of these terms are not easily understood by the average consumer who don’t deal with them every day.

Given recent news headlines, definitions of a few terms and phrases may be useful as you read daily coverage about the current economic environment:

Auction Rate Securities: Short-term instruments designed to preserve capital while generally realizing higher rates of return than traditional money market investments (for example, municipal auction rate securities, municipal preferreds and action preferred stock). Interest rates or dividends reset frequently, usually every seven to 49 days, via Dutch auction. The interest or dividends received can be 70% to 100% exempt from federal taxes. Issuers include states, municipalities, corporations, utilities, hospitals, housing finance agencies, student loan finance authorities and universities. 

Break the buck: When a money market mutual fund’s net asset value drops below per share. Money market funds aren’t federally insured like bank deposits; therefore, fund assets have an implied promise to preserve capital at all costs and preserve the floor on share prices. These funds are regulated by the Securities and Exchange Commission; rules restrict what they can invest in based on credit quality and maturities with the hope of ensuring principal stability. 

Collateralized Debt Obligation (CDO): An investment-grade security (one with a high bond rating such as BBB) backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as “tranches” or “slices.” Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.

Commercial Bank: A full-service institution that offers customers deposit, payment and credit services, in addition to other financial services.

Counterparty risk: The risk to each party of a contract that the counterparty will not live up to its contractual obligations. A counterparty is the other party that participates in a financial transaction. Every transaction must have a counterparty for the transaction to go through. More specifically, every buyer of an asset must be paired with a seller that is willing to sell and vice versa.

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Credit Default Swap (CDS): A swap* designed to transfer the credit exposure of fixed income products (securities that pay specific interest rates, such as a bond, money market instrument or preferred stock) between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.

*Note: a swap traditionally means the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds) or because investment objectives have changed.

Deleverage: A process undertaken by a company in an attempt to reduce its financial leverage, or the degree to which the company is using borrowed money. Financial leverage can be beneficial for a company, but if it becomes too risky or harmful, the company may need to deleverage itself by paying off the amount of debt that it owes.

Derivative: In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. 

Investment bank: An individual or institution that acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals.

Money market deposit account: A type of savings account offered by banks and credit unions just like regular savings accounts. However, they usually pay higher interest, have higher minimum balance requirements and limit the number of withdrawals per month. As with bank accounts, the money in a money market account is generally insured by the Federal Deposit Insurance Corporation (FDIC) subject to certain limitations. The recent announcement from the U.S. Treasury regarding money market mutual funds does not affect money market deposit accounts or impact FDIC insurance of such deposit accounts.

Money market mutual fund: A fund that invests in a pool of high-quality, short-term, interest-bearing securities. A money market mutual fund is not a bank deposit and is not insured or guaranteed by Bank of America, the FDIC or any other government agency.

Resolution Trust Company (RTC): A U.S. government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s. In 1995, its duties were transferred to the Savings Association Insurance Fund of the FDIC. Between 1989 and mid 1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of 4 billion.

Securitization (or securitized assets): The process of distributing risk by aggregating debt instruments (for example, mortgage loans) in a pool, then issuing securities that are backed by the pool and available for purchase by investors in the secondary mortgage market.

Subprime mortgages: A type of mortgage that is sometimes offered to borrowers with a greater-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage (often referred to as “prime”) to compensate themselves for carrying more risk.

Short sale: A transaction in which an investor sells borrowed stock, betting the stock will decline with the intention of buying it back at a lower price to realize a profit.

Warrant: Certificate given to its stockholders or bondholders by an issuer that allows the holder to purchase a specific amount of its securities at a set price. A warrant can be sold to another investor if the holder chooses not to exercise the warrant.

You should be aware that http://104inc.com is always a useful resource for terms and acronyms. You can help keep 104inc stay current by submitting updates and ideas for features you would like added to the site through their feedback button.

Sources for the definitions in this article include the Enterprise Glossary, Investopedia, Investor Words and Wikipedia.

Money Market Investing

Money Market Investing

About Money Market Investing – Is It For You

Money market investing is depositing money with a bank or financial institution that keeps its cash in financial obligations that span a short term. This is done to provide low risk money market investing that yields modest returns. Money market investing is not for the individual who wants to get rich quick. The short-term debt strategies held in money market investing are usually made in highly rated companies and government agencies.

Money market investing yields an average of 2% to %5 per year. You can, theoretically, lose money in a money market investment, but it is highly unlikely. The FDIC does not insure money market investments. You can lose all of your investment if the company holding it goes bankrupt.

Money market investing is beneficial because of its low risk. Many investors hold their money in a money market account when they are not investing in a more aggressive strategy. This gives the money a place to rest where it can still earn moderately, at low risk. Because of this procedure, money market investing represents one of the most widely held securities in finance.

Investors often deposit profits from bonds, stocks, and mutual funds into money market accounts. Dividend and interest proceeds from more aggressive investments are generally deposited directly into money market accounts.

Initially, you must deposit higher sums of money into money market investments than into bank accounts. Money market investing generally requires deposits of at least 0 to 00 at the onset. The per share price of money market investments is usually one dollar. Proceeds from money market investing are paid in shares. Check writing services are provided as a part of most money market investing.

Money market investing is not one-size-fits all. Money market investing firms put their money in dissimilar securities. Because of this, they pay different interest rates. You can deposit your money into a money market savings account that will yield a low interest rate, but is somewhat higher in interest than a standard bank account, or you can do your money market investing in a mutual fund.

A mutual fund pools the resources of many money market investors. The mutual fund’s manager buys money market securities for the mutual fund.

Money market investing is generally open-ended, which means that the investors can deposit or withdraw monies at any time without risking penalties. Most money market accounts and funds require that a minimum balance be maintained.

Interest rates from money market accounts are usually based on risk. The money market accounts and mutual funds paying the highest interest are, thereby, likely to run the highest financial risk. This is where the money market investor needs to weigh the security of their monies against the promise of return.

Different money market accounts make varying demands on the investor. Some will maintain a higher minimum balance, while others will limit the number of allowable withdrawals, some might do both.

It is important to be aware of the restrictions and obligations placed upon your money market investing before you decide where and how to make your investments.