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So, You Want to Invest in the Stock Market

This past weekend I was asked by someone who wanted to “invest in the stock market” what should they do.  Now, this is not an easy question to answer particularly in the context of a casual conversation or even a short blog post like this one.  But this what I said.

First, investing in stocks is not for the faint of heart.  It can be a risky proposition and as quickly as you can make money is as quickly as you can lose it (I am speaking from experience).  There is no quick and easy way to start investing in stocks.  It takes time and a lot of research to do it right.

What is a stock or what is it that you are buying?  It is an ownership interest in a company - typically a very small fraction of ownership but it’s still ownership.  With this stock or ownership comes certain rights.  In the case of “common stock”, it’s typically voting for board of directors and some other very important corporate governing decisions.  Some companies pay (typically paid quarterly) dividends on stocks.  Dividends are a portion of the companies earnings and a company is not required to pay dividends.

Just like any other investment, what is the plan and the strategy for achieving the objectives of the plan?  This where the time and research starts.  We have to understand what we are buying? Why are we buying it? 

This requires a lot of reading and time.  Again, investing in stocks is not easy.  However, losing money in stocks is very easy. 

Where to start:

Websites:
Yahoo! Finance
Motley Fool

Books:
Stock Investing For Dummies - a good start.

Alternatives to Stocks:

There are alternatives to stocks but even these require some research:

1) Exchange Traded Funds (ETFs) - these are similar to mutual funds in terms of investment mixes but very different in terms of how they are priced.  An ETF is traded on a stock exchange and price changes very similar to a common stock traded on stock exchange where as a mutual fund has what is called a net asset value (NAV) that is not determined until the close of business or markets close.

2) Mutual funds - particularly stock index mutual funds such as S&P 500 Index Fund. 

Bottomline:  there is no such thing as easy money when it comes to investing in stocks or even investing in general. 

Good luck.

They Keep Giving us Reasons to Move Our Money

They being financial conglomerates/big banks.  First, they crashed the economy and then needed a taxpayer bailout.  Then to recoup losses they jacked up service fees and created new ones.  Now, they continue to fight hard against any form of financial regulatory reform and search for loop holes to gouge customers. 

We are much to blame for allowing financial conglomerate/big banks to suck the money from our pockets.  There are alternatives - community banks and credit unions.  We really don’t need them.

Besides, continuing to do business with this vampires we also are to blame for allowing them to gouge us with overdraft fees.  Overdraft fees are a huge money maker for financial conglomerates/big banks.  With proper budgeting, monthly balancing of check book, and knowing where our money is going we should NOT be giving our money to these vampires in the form of overdraft fees.

Now, comes word that financial conglomerates/big banks, in there quest to maintain their ginormous, ‘too big to fail’, size they are pulling out the stops to defend their sucking of overdraft fees from us.  First, this from the New York Times:

As the government cracks down on the way banks charge fees for overspending on debit cards, the industry is mounting an aggressive campaign aimed at keeping billions of dollars in penalty income flowing into its coffers. Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on.

Starting this summer, banks must get consumers to agree, or “opt in,” to a service covering purchases on a debit card when there is not enough money in their account. The Federal Reserve has ordered the same restriction for banks that want to let people withdraw more than their balance at an automated teller machine. Many banks now automatically provide such coverage for fees of up to $35 or more.

This graph, from the above NYT article, give you an idea of what they are defending:

Then comes word of an even more insidious move by big banks: Banks May Use Payday-Style Loans to Replace Lost Overdraft Fees:

U.S. banks may expand their short- term lending at interest rates of 120 percent or more as they seek to replace more than $15 billion in lost revenue because of regulations limiting overdraft fees.

“The smarter banks are trying to resell overdraft protection to consumers as a different product,” said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Maynard, Massachusetts.

Guess what, they are not going to call them “payday loans” because of the “tarnished negative brand” of these predatory financial products.  “Payday loans” are not different than the a juice loan from a loan shark.  Interest rates anywhere from 120% to over 300% per annum. 

Every day these financial conglomerates/big banks give us a reason to move our money.  If Congress and the White House are too scared to take on the financial conglomerates/big banks then it is up to us to do by changing our banking relationships.  But, even if we do that there are things we still must do:

1) Monthly Budgets and stick to them; and

2) Balancing our check books.

Good luck.

New Credit Card Law Takes Effect

New credit card laws takes effect today.  WTH, almost a year later, giving credit card companies plenty of time to stick to its customers BEFORE it took effect.  Thank you very much Congress and President Obama.

The following Huffington Post article provides a good summary of what we should know about the new law:  New Credit Card Laws: What You Need About Rates and Fees.  The changes center on disclosure, rate changes, service fees, grace periods, treatment of credit card defaults and college students.  It’s a good read.  Please check it out.

For a good article about how the credit card industry is dodging reforms, check this one out by the Center for Responsible Lending:

Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate

Remember: DEBT IS EVIL

Good luck.

“Move Your Money” But Where?

A very interesting movement called "Move your Money"started online last month. This movement encourages people to move their banking business from a big financial conglomerates, who were at the center of the global financial crisis, to community banks or credit unions. The "Move your Money" website provides some valuable information regarding moving your banking business. I just wanted to use this opportunity to provide some information on the U.S. banking system.

Why Move your money?

First, it's a matter of principal and accountability. The big financial conglomerates acted irresponsibly by 1) relaxing loan underwriting standards in an insatiable quest for more mortgage loans to securitize; and 2) ignoring, in the quest for higher profits and higher returns, the concepts of risk management. Then policy makers in Washington fearing a complete economic collapse bail them out (essentially, reward them) with trillions of dollars with "NO STRINGS ATTACHED." And what do these financial conglomerates do? Do they do what is in the best interest of the country? No, they plow/leverage the taxpayer money into more risky trading schemes to earn them record profits. A good thing right? Not really, these "Too big to Fail" financial conglomerates get even bigger post-financial crisis and possibly even riskier with trading schemes. The right thing to do would have been to shed the toxic assets on their books as quickly as possible so that they can start lending again. But noooo.

Since policy makers are either fearful to oppose the financial conglomerates or are owned by them, it is up to us to send the message of accountability. One big way to hold financial conglomerates accountable is by moving our money - changing our banking relationship. Again, Move Your Money website provides very useful information, particularly a Checklist, on moving our money.

Second, move for a better experience. Small financial institutions can offer a much better customer experience than an impersonal financial conglomerates (they really don't need our money anyway). In the case of credit unions, and based on experience, they can offer much lower fees, better rates, and same services than a financial conglomerate.

Who are these financial conglomerates?

Well, these financial conglomerates are typically "Bank Holding Companies". A Bank Holding Company is a bank that is allowed to own more than one bank. As a result of de-regulation, starting with Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 with allowed Bank Holding Companies to own and operate banks in different states and Gramm-Leach-Bliley Act of 1999 which allowed Bank Holding Companies to own non-depository institutions such as investment banks, securities brokerages and insurance companies, "Too Big to Fail" institutions began to form.

The following are the Top 10 Bank Holding Companies based on total assets (as of 9/30/2009):

Financial Conglomerate	Total Assets
Bank of America Corp.	$2,252,813,550
JP Morgan Chase & Co.	$2,041,009,000
Citigroup, Inc.	$1,888,599,000
Wells Fargo & Co.	$1,228,625,000
Goldman Sachs Group, Inc.	$882,586,000
Morgan Stanley	$769,503,000
Metlife, Inc.	$535,192,209
HSBC North America Holdings, Inc.	$390,657,817
Barclays Group US, Inc.	$377,926,385
Taunus Corp.	$368,225,000

And how much taxpayer bailout money did these financial conglomerates receive (note - only 6 of 10 are listed - HSBC, Taunus & Barclays are foreign bank holding companies, Metlife didn't take any):

Financial Conglomerate	Bailout Money
Bank of America Corp.	$45,000,000,000
J.P Morgan Chase & Co.	$25,000,000,000
Citigroup, Inc.	$45,000,000,000
Wells Fargo & Co.	$25,000,000,000
Goldman Sachs Group, Inc.	$10,000,000,000
Morgan Stanley	$10,000,000,000

Source: Propublica: Eye on the Bailout

Cititgroup is the only one that has NOT paid back the bailout money. Also, there were other government programs in forms of bond guarantees and low interest rate loans that greatly benefited the financial conglomerates and are not reflected in the above numbers. This was a multi-TRILLION Dollar effort on the part of the federal government.

U.S. Banking System

Here are two videos I did a couple of years ago:

Where to move

This depends several factors. First, proximity or access to alternatives such as community banks or credit unions. Move your Money website has a directory INCLUDING a list of "most sound" community banks. Second, quality of services provided such as free online banking and ATM networks. Third, the fee structures - what are the various service charges. Shopping around and asking questions are absolutely important.

Moving your money could be a rewarding experience on two levels: 1) sending a message that financial conglomerates must be held accountable and 2) saving money on bank fees, particularly in the case of credit unions.

Good luck.

We Need More than Principal Reduction

The biggest problem with the housing market is “negative equity”.  This where people owe more on their mortgage than what the value of their home is worth.  Negative equity is a major reason for people to default on their mortgage and for people to simply “walk away” from a mortgage and home.

We need to address this issue directly instead of the current programs which only address the size of the mortgage payment by manipulating mortgage rates and term of mortgages.  Addressing the issue ‘negative equity’ more directly will require that the financial conglomerates and financial sector to share in the pain of a problem that it largely created.  The following are proposals to address the mortgage crisis:

1)  For those we have remained current on mortgage payments - mortgage principal reduction to eliminate ‘negative equity.’  The amount of principal reduction would be based on average price levels and mortgages according to census tracts or other geographic characteristic.

2)  Own to Rent as proposed by Dean Baker.  For those in process of foreclosure or at risk of foreclosure, the former homeowner should be given the option of staying in the home and pay a fair market rent.

3)  Create a much less complex home mortgage finance system similar to one in Denmark.

It is way past time to start providing support to the foundation of our economy - people and families.  The current policies only support the financial sector and financial conglomerates.  Our government, instead of helping the rest of the country and our economy, chooses to support the financial sector/conglomerates who choose to horde their welfare payments and welfare subsidies.

Good luck.

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