Insider trading is a serious issue in our financial markets. It is hard to say how often it happens or how much money is involved, and it comes in many different flavors. The easiest example is that of the corporate executive who buys (sells) her own company's stock before the public release of good (bad) news. She then profits on her early access to information that can affect the stock price.
I heard this piece on Marketplace a while back:
Lawmaker's Inside Advantage to Trading September 17, 2009
This story brings to light a form of insider trading that is currently legal. Congresspeople can make stock trades using information from their private committee meetings. For example, if Barney Frank (Chairman of the House Financial Services Committee) was informed by the Consumer Credit sub-committee that they were going to recommend legislation that would potentially lower MasterCard's profits, he could sell his holdings in MasterCard (or sell short) before this news was publicly released. He, just like the executive in the example above, would profit from his early access to information that can affect the price of a stock.
Louise M. Slaughter (D-NY-28) and Brian Baird (D-WA-3) have introduced legislation that would create rules for congresspeople similar to those that exist already for corporate executives. They call it the STOCK Act, and you can read about it here and here.
Monday, March 22, 2010
Saturday, March 20, 2010
Back on the Horse
I've been neglecting the blog for the past nine months, and it's time to attempt to revive it. It's amazing how busy unemployment can be. I've had some friendly encouragement lately, along with some advice from a marketing expert friend about how to post in a sustainable way. So, I'm going to attempt to post more often, but the posts will likely be shorter and involve more use of outside sources to get conversations started.
Today, I'll refocus the mission. I can't remember where I heard the theory about the three types of education needed to succeed, perhaps it was from Rich Dad Poor Dad (which I haven't read) or Why Smart People Make Big Money Mistakes & ... (which I have read and found to be good). Anyway, the general idea is that a person needs three types of knowledge to succeed in life:
You don't need to be intimate with the orange futures market to succeed in life, true. You do need to understand how the prices of goods and services (e.g. gas, milk, housing, education) are set. You do need to know why a bank pays you 1% on your savings account, and charges 6% on your mortgage. You do need to understand what steps to take to successfully retire at age 65 and still have a place to live at age 105. You do need to understand how an investment in education affects you and your society in the long-run.
I hope Grokking Finance will help you learn about these things (and others) and build your Finance Smarts.
Today, I'll refocus the mission. I can't remember where I heard the theory about the three types of education needed to succeed, perhaps it was from Rich Dad Poor Dad (which I haven't read) or Why Smart People Make Big Money Mistakes & ... (which I have read and found to be good). Anyway, the general idea is that a person needs three types of knowledge to succeed in life:
- Book Smarts: factual knowledge, an employable skill, literacy, the ability to write a memo and do algebra, etc.
- Street Smarts: how to make friends, code switching language style based on audience, how to flirt, etc.
- Finance Smarts: understanding how your markets work, the ability to manage your money and other resources, etc.
You don't need to be intimate with the orange futures market to succeed in life, true. You do need to understand how the prices of goods and services (e.g. gas, milk, housing, education) are set. You do need to know why a bank pays you 1% on your savings account, and charges 6% on your mortgage. You do need to understand what steps to take to successfully retire at age 65 and still have a place to live at age 105. You do need to understand how an investment in education affects you and your society in the long-run.
I hope Grokking Finance will help you learn about these things (and others) and build your Finance Smarts.
Wednesday, July 29, 2009
Saving for College, Part I
As requested by Luba, we will now delve into the complicated world of college savings. She asked about 529 plans, and is probably interested in an analysis of the different available tax shelters and investment products. We'll get into that, but first we need to discuss when you should be thinking about saving for you child's college education.
The sooner you can start putting money aside to help your children get a higher education, the better; for your children, that is. Certainly, if you plan to pay for the while bill anyway, then it probably also benefits you, but chances are you aren't planning on paying the whole bill by yourself. You also have other future expenses to think about: medical expenses as you get older, retirement, etc.
Here's where I might get a bit controversial: if you can't afford to save as I outlined in Saving and ALSO max out the amount you can put into a retirement tax shelter every year (IRA, 401k), then you have no business saving for your child's college education. Here's why:
-Your kid might not go to college. You will retire (or die, and then the account goes to your next of kin).
-Your child can get scholarships, subsidized loans, and other cheap financing for college. Let me know when you can get that sort of stuff for your expenses when you're 75.
This is like when you're flying and learning about using those oxygen masks: put your mask on first before assisting others. Like many finance decisions, it pays to think about the long-term.
Look for Saving for College Part II later...
The sooner you can start putting money aside to help your children get a higher education, the better; for your children, that is. Certainly, if you plan to pay for the while bill anyway, then it probably also benefits you, but chances are you aren't planning on paying the whole bill by yourself. You also have other future expenses to think about: medical expenses as you get older, retirement, etc.
Here's where I might get a bit controversial: if you can't afford to save as I outlined in Saving and ALSO max out the amount you can put into a retirement tax shelter every year (IRA, 401k), then you have no business saving for your child's college education. Here's why:
-Your kid might not go to college. You will retire (or die, and then the account goes to your next of kin).
-Your child can get scholarships, subsidized loans, and other cheap financing for college. Let me know when you can get that sort of stuff for your expenses when you're 75.
This is like when you're flying and learning about using those oxygen masks: put your mask on first before assisting others. Like many finance decisions, it pays to think about the long-term.
Look for Saving for College Part II later...
Monday, July 6, 2009
Points are for Sports, Pay Attention to Percentage in Finance
The next time you are watching, listening, or reading the financial news, pay attention to how the stock market numbers are reported. Chances are, Carl Kasell will say something like "The Dow was up 80 points today to 7,752; the S&P 500 was up 17 points today to 835."
All right, Quiz Time! You have three seconds to answer the following questions (no calculators).
Which index did better today?
By how much?
Let's find the answer together. Imagine you had a little over $15,000 that you could invest in these two indexes. You invest about half in the Dow and the rest in the S&P 500. You bought one share of the Dow yesterday for $7672 and have $7,752 in that investment today; an $80 increase. You bought nine shares of the S&P 500 yesterday for $7362 ($818 each) and have $7515 today; a $153 increase. You invested less money in the S&P 500, but made almost twice as much! Answer the quiz question again.
The important measure for change in the value of an index (or any other security) is the percentage change, not the dollar or point change. A lower priced security going up 10% is better than a higher priced security going up 5%. You can just buy more shares of the lower priced security to gain the same numbers of dollars invested.
Understandably, a news anchor only has so many seconds to report on the markets. They should use this little amount of time to report the current price and the percentage change, but they could drop the point change. Someday I hope you will hear Carl say something like, "The Dow is currently at 8246, down 0.42%." Isn't that information more clear, and less sensational, than 35 points?
All right, Quiz Time! You have three seconds to answer the following questions (no calculators).
Which index did better today?
By how much?
Let's find the answer together. Imagine you had a little over $15,000 that you could invest in these two indexes. You invest about half in the Dow and the rest in the S&P 500. You bought one share of the Dow yesterday for $7672 and have $7,752 in that investment today; an $80 increase. You bought nine shares of the S&P 500 yesterday for $7362 ($818 each) and have $7515 today; a $153 increase. You invested less money in the S&P 500, but made almost twice as much! Answer the quiz question again.
The important measure for change in the value of an index (or any other security) is the percentage change, not the dollar or point change. A lower priced security going up 10% is better than a higher priced security going up 5%. You can just buy more shares of the lower priced security to gain the same numbers of dollars invested.
Understandably, a news anchor only has so many seconds to report on the markets. They should use this little amount of time to report the current price and the percentage change, but they could drop the point change. Someday I hope you will hear Carl say something like, "The Dow is currently at 8246, down 0.42%." Isn't that information more clear, and less sensational, than 35 points?
Saturday, April 4, 2009
What is stock?
When I don't get questions from my readers, I write posts like this one. I'll describe a financial/economic theory, instrument, or idea. Many of you might already know this stuff, but I'm sure someone out there has no idea.
Today, I'll explain what stock is and how it is created. I'll try to follow up another day with how it is traded and changes in value.
Simply, a share of stock represents ownership of part of a company and the profits that company produces. I'll explain the details with an example.
As many of you know, before I started graduate school in Finance, I was working at a school running the Technology Department. I've continued to do some technology consulting at a couple different places to help pay the bills while I'm in school. For tax purposes, I created a business to do this work. Most of my income is earned actively doing consulting, but I also run a server at home that provides off-site data backup for clients.
So, right now, I own my company, all its assets (the server and other equipment, the cash in the checking account, the name, the license with my town, etc.), and future earnings the company may produce. Let's imagine, though, that the off-site backup services of my business grow significantly. Let's also assume that this is all the company does now; no more consulting. This would require buying more equipment to provide more space and faster service. If I (the company) have enough cash to make this investment without help, I'll just buy the equipment myself, but what do I do if I need to buy $20,000 of stuff and I only have $5,000. Well, I have a couple feasible options to get the extra $15,000 I need.
My first choice would be to go to my bank and get a loan, but let's say they turn me down because they think my expansion plan is too risky. My next option would be to look for an investor. I would ask someone, let's say my friend George (he's a technology guy too), to give me cash in exchange for ownership in the company. This would be a permanent relationship, as opposed to a bank loan where I pay it back eventually. George would own a part (or a share) of the company.
Let's say the non-cash assets of the company before this deal are worth $10,000. I'm also bringing $5,000 cash. George brings another $15,000 cash. So we each bring $15,000 to a deal that creates a business worth $30,000, meaning that we each own half the company. We could incorporate the business, create two shares of stock, and each of us get one share. No matter what happens to the total value of the company in the future, each of us owns half of it. We share good times and bad equally.
Now there is work to be done to keep this business going, and I'm the one who knows how it all works, so I'll probably still be doing that work. The company will need to pay me a salary for that work. After all the costs of running the business, including my salary, there will hopefully be profits. These profits will be shared equally between George and me, because we each own half the stock in the company. When these profits are paid out to us, they are called dividends. Also, decisions that involve spending these profits on the business (say, for future expansion) will need to be approved by both of us.
Again, this arrangement is permanent. There are ways for one or both of us to sell our ownership of the company, but an explanation of this process will be the topic of another post.
Notice how much I've used the word "share" in this post. Shares of stock are named as such for a reason.
Today, I'll explain what stock is and how it is created. I'll try to follow up another day with how it is traded and changes in value.
Simply, a share of stock represents ownership of part of a company and the profits that company produces. I'll explain the details with an example.
As many of you know, before I started graduate school in Finance, I was working at a school running the Technology Department. I've continued to do some technology consulting at a couple different places to help pay the bills while I'm in school. For tax purposes, I created a business to do this work. Most of my income is earned actively doing consulting, but I also run a server at home that provides off-site data backup for clients.
So, right now, I own my company, all its assets (the server and other equipment, the cash in the checking account, the name, the license with my town, etc.), and future earnings the company may produce. Let's imagine, though, that the off-site backup services of my business grow significantly. Let's also assume that this is all the company does now; no more consulting. This would require buying more equipment to provide more space and faster service. If I (the company) have enough cash to make this investment without help, I'll just buy the equipment myself, but what do I do if I need to buy $20,000 of stuff and I only have $5,000. Well, I have a couple feasible options to get the extra $15,000 I need.
My first choice would be to go to my bank and get a loan, but let's say they turn me down because they think my expansion plan is too risky. My next option would be to look for an investor. I would ask someone, let's say my friend George (he's a technology guy too), to give me cash in exchange for ownership in the company. This would be a permanent relationship, as opposed to a bank loan where I pay it back eventually. George would own a part (or a share) of the company.
Let's say the non-cash assets of the company before this deal are worth $10,000. I'm also bringing $5,000 cash. George brings another $15,000 cash. So we each bring $15,000 to a deal that creates a business worth $30,000, meaning that we each own half the company. We could incorporate the business, create two shares of stock, and each of us get one share. No matter what happens to the total value of the company in the future, each of us owns half of it. We share good times and bad equally.
Now there is work to be done to keep this business going, and I'm the one who knows how it all works, so I'll probably still be doing that work. The company will need to pay me a salary for that work. After all the costs of running the business, including my salary, there will hopefully be profits. These profits will be shared equally between George and me, because we each own half the stock in the company. When these profits are paid out to us, they are called dividends. Also, decisions that involve spending these profits on the business (say, for future expansion) will need to be approved by both of us.
Again, this arrangement is permanent. There are ways for one or both of us to sell our ownership of the company, but an explanation of this process will be the topic of another post.
Notice how much I've used the word "share" in this post. Shares of stock are named as such for a reason.
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