Most investors are familiar with the more traditional forms of investing, such as stocks and bonds. However, an increasing number of investors desire alternative assets with which to grow their money.

Most investors are familiar with the more traditional forms of investing, such as stocks and bonds. However, an increasing number of investors desire alternative assets with which to grow their money.

Whether they are a tool for direct investment, a means of speculating, or as part of a hedge fund, there are a number of appealing alternative investment options that growing numbers of investors are choosing to investigate. Real estate investment trusts, gold, venture capital opportunities, and many other forms of investment have long flown under many investors’ radars but are worthy of consideration.

Gold Investing

Gold investing is the purchase and sale of gold bullion (physical gold). Unlike trading in the commodity markets, where one does not take physical possession of the substance in question, direct gold investment involves buying and selling actual gold: often in the form of coins, bars, or jewelry.

This makes it a more accessible form of investing for investors confused by the terminology or practices of commodity trading. It also acts as a hedge against the failure of various banking systems because the investor actually has the gold in his or her possession.

Gold investing has been around for centuries and has been wildly popular in recent years. Once the province of the wealthy alone, investors of all income levels now enjoy the benefits of gold investing. Given the relative popularity of gold as a precious metal, it remains one of the most widely used forms of nontraditional asset investment today, a fact easily recognized by the ubiquity of “cash for gold” storefronts in nearly every major city in the US.

Investing in gold bullion is surprisingly easy for the average consumer in the form of jewelry, coins, and even gold bars.  The physical possession of the gold can be a hedge against economic, political, social, or currency related risks.  The metal, however, is heavy and takes up space.

For those who wish to invest in gold without taking physical possession, Exchange Traded Funds (ETFs) replicate the movements in value of gold, or gold futures and options can be traded in the commodities market.  Trading in ETFs and commodities typically produces only an electronic record or a few sheets of paper.

Venture Capital

An exciting manner of corporate investment, venture capital allows businesses with limited operational histories to obtain the funding they need in order to get off the ground. Investors give their money to a company with high growth potential, and thus, high potential return on investment. Of course, these investments also carry significant risk of loss, as many fledgling businesses fail to achieve profitability. Yet, for the savvy investor with the means to sustain some losses in order to achieve potentially enormous gains, venture capitalism can be a very exciting and rewarding method of investment.

Venture capitalism involves giving financing to fledgling businesses. While acting as a venture capitalist can be a solo project, a number of firms specializing in venture capital investing do exist. Venture capital firms are usually partnerships, where the partners function as managers, chief investors, and financial advisers to other investors that use the firm’s services.

There are enormous potential profits. Returns on investment tend to be quite high, largely as a reflection of the relative risk involved and as a means of offsetting the inevitable losses investors experience on other, unsuccessful projects.

It is a very risky investment. Many companies will fail, and that could mean losing all or a part of one’s investment.

Real Estate Investment Trust (REIT)

Corporations that invest in real estate may organize as a Real Estate Investment Trust (REIT) in order to reduce or eliminate corporate income taxes. REITs trade on exchanges or through private placements, just like the stock of any corporation. Public stock exchanges list publicly held REITs, and these corporations must file reports with the Securities and Exchange Commission (SEC). This allows investors to research the key statistics of Net Asset Value (NAV), Adjusted Funds from Operations (AFFO), and Cash at Disposal (CAD).

Types of REITs

* REITs categorize primarily based on the types of real estate assets in which they invest.

* Equity REITs invest in and own properties. This makes them responsible for the equity (or value) of their properties. They derive most of their income from rents collected from tenants of the properties they own.

* Mortgage REITs earn money from transactions in mortgages. They either make loans to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Most of their income derives from interest on the mortgage loans.

* Hybrid REITs combine the investment strategies of both equity and mortgage REITs. They do this by investing in both properties and mortgages.

Real Estate Investment Trusts offer many advantages to people who do not have adequate funds to invest in real estate on their own, but still desire to own a piece of property. A REIT can pay regular dividends both when the trust uses the investor’s money to buy real estate and when the share price of the company appreciates.

A REIT must doll out 90% of its taxable profit as dividend to its shareholders each year, thus, they are usually labeled as high yield instruments similar to a small cap stock generating returns from dividends and share price appreciation.

Because of the way in which REITs trade, demand for other high-yield assets can negatively affect the share value of REITs. REITs also have additional tax considerations that other investment types do not. Specifically, REITs must pay property taxes, which can negatively affect investor payouts. Furthermore, high-yield REIT dividends have ordinary income tax consequences.

Private Equity

Akin to both traditional stock investing and venture capital, private equity investing deals with the equity securities of operating businesses that do not trade publicly on stock exchanges. Private equity investments in business ventures makes it easier for business organizations to focus on developing new products and services, often prior to taking a company public. Private equity also facilitates businesses exploring new business strategies. Private equity investments make it possible for companies to obtain needed funding even under unfavorable market conditions.

The most common form of private equity investment is direct lending of money by the investor to the interested company. Unfortunately, this often requires massive amounts of money on hand for the investor, as well as a long-term commitment to the company in question.

Fortunately, a number of investment firms focus exclusively on acquiring and managing private equity investments. These entities, known as “business development companies,” sell pieces of their private equity investments in the form of publicly traded stock in their firms. This gives average investors the opportunity to participate in private equity without having millions of dollars usually required to participate.

Successfully investing in private equity funds relies almost entirely on how well the business venture is functioning. As with any investment, big rewards usually are the result of big risks.

Options

Option trading involves understanding market conditions and using predictions to make investments. When an investor believes that an asset will appreciate in the future, the investor buys an asset at a premium value.

The instrument then gives the option holder the right to buy the underlying asset is known as a “call” option. While the investor has the right to buy, it is not an obligation. On the other hand, the seller of the option is obligated to sell when the option holder exercises the call.

A “put” option, on the other hand, gives the option holder the right to sell an asset before a predetermined date. The investor exercises this option if he or she believes that the price of the asset will fall before the expiration of the call options.

Options are quite flexible as an investing tool, so there are many variations available to investors. These might include short-term options of less than a year, long-term options that could last for several years, or “exotic” options that may actually be other types of investments with an option attached or with certain kinds of “optionality” built into them.

Options may also appeal to investors for the purposes of speculation and hedging. As a tool of speculation, option buyers make educated guesses (or “speculate”) on the extent of price movement in a financial instrument over a specific period. As a hedge fund, the investor uses the option to protect against (or “hedge”) against a possible downside in investments.

Options sometimes lack liquidity and they can be very complicated, especially for beginners.  Further, the lack of liquidity and complexity can bring higher commissions.

Futures

A form of derivative investment, investors buy and sell futures on exchange. Contracts to buy or sell a particular commodity at a specified price on a certain date in the future, futures are a means of speculating on commodities, energy, currencies, government bonds or other financial instruments. Futures differ from options in that the expiration date and amount to be paid are determined at the time of purchase rather than remaining open as in an option.

One of the main advantages of futures trading is that they are structured and traded on exchanges through clearing houses.  This can safeguard an investor from the counterparty not being able to live up to their end of the deal.

Forwards

Forwards are very similar to futures in that they are contracts to buy or sell an asset at a specified price, on a future date. Unlike standard futures contracts, however, a forward contract is between two parties and is a private agreement. This allows for a significant amount of customization to the type of commodity, the amount, and the delivery date.

Forward contracts do not trade in an exchange, making them over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward contracts are not usually available to retail investors.

The post Other Asset Classes appeared first on Economy Watch.

Two often-overlooked (by individual investors) forms of investing are commodities and currencies. They tend to be more affordable forms of trading, but may also carry some inherent instability. What are commodities? How do commodities and currencies trade? What are the benefits and risks?

Commodities

Investopedia defines a commodity as:

Two often-overlooked (by individual investors) forms of investing are commodities and currencies. They tend to be more affordable forms of trading, but may also carry some inherent instability. What are commodities? How do commodities and currencies trade? What are the benefits and risks?

Commodities

Investopedia defines a commodity as:

A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they trade on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

In other words, a commodity is an article of commerce or trade that is relatively uniform among various suppliers. Generally, commodities encompass things like raw materials and unprocessed food products.

They usually fall into one of two categories: soft and hard. Soft commodities include most raw food products, like tea, coffee, sugar, corn, soy, and pork bellies. Hard commodities include metals, like gold, silver, aluminum, and copper.

How Do Commodities Trade?

Interests in commodities trade in exchanges much like stocks. Buyers and sellers exchange interests in the commodities through standardized contracts. Commodities markets operate much like stock exchanges, and the government oversees them in much the same fashion. However, commodities are not as popular with individuals as other types of investment, and the exchanges and servicing companies that deal in commodities are not generally set up for the typical retail investor.

Why Invest in Commodities?

Commodities present a great opportunity to diversify one’s portfolio. They can earn high returns on investment for a savvy investor who knows how to carefully ride the rapid price fluctuations of these products. However, in order to avoid losses, one must conduct significant research on the market for a particular commodity before investing. Still, losses are possible, even for the best of researchers, because there is always a level of unpredictability in commodity trading.

Nevertheless, for investors with a high tolerance for loss, commodity investments may be worth the risk. Those investors interested in a high potential return (in exchange for a bit of additional risk) may like investing in commodities to round out their investment portfolios.

Currency

Currency trading is the process of exchanging money from different countries. The purpose of this process is to take advantage of fluctuating rates of trade. Various currencies are worth more or less when compared to other currencies, and that relative value adjusts quite frequently. Those who invest in currency exchanges purchase the money of another country while it is relatively low and then trade again when that money increases in value compared to the currency of another country.

Because the currency trade involves exchanging money from foreign countries, it is more commonly referred to as forex trading (short for “foreign exchange”). Some also call these “money markets,” but they should not be confused with the tool for short-term investing of the same name.

How Does Foreign Exchange (Forex) Work?

Forex accounts for over $4.9 trillion in trading a year, making forex the largest financial trading model in the world. However, unlike other financial markets (such as stock exchanges, commodity exchanges, etc.); forex does not rely on a central marketplace. Instead, currency trading occur electronically over-the-counter (OTC). All transactions occur via computer networks between traders around the world. As a result, forex trading can be extremely active virtually any time of day, and prices change fluidly throughout the day.

Forex trades happen in pairs, in which one buys a currency and sells another.  When taken as a pair, these two currencies make the “exchange rate.” The most commonly traded currency pairs are ‘Majors’. The four most commonly traded Majors (EUR/USD, GBP/USD, USD/CHF, and USD/JPY) account for nearly 70 percent of the world’s total daily trade in the forex market.

Different Forex Markets

While there is no central marketplace for forex trading, currencies trade in four different markets: spot, futures, options, and derivatives. In this case, the term “market” refers more to the method of transfer as opposed to the location in which such trades occur.

Spot trading involves purchasing one currency with another for immediate delivery. Most forex spot transactions settle within two days (banks take around 48 hours to transfer the funds). Anyone who has changed money before a vacation has engaged in spot trading.

Futures trading, in terms of forex, are the exchange of contracts to buy or sell a certain amount of a given currency. The trading price of the currency is set according to the price of the money on a set date. Forex futures allow investors to hedge against the exchange-rate risk and as speculation in order to earn extra profit from currency rate fluctuations.

Options trading involve the exchange of contracts whereby the buyer has the right to buy (call) or sell (put) currency at a predefined rate during a specified period. While the buyer has the right to buy or sell during a set period, there is no obligation to do so. This allows one to wait and see if conditions will occur that allow the buyer to make a profit. If they do, the buyer can exercise the option. If not, they do not have to. As a result, this is a relatively small market for forex.

Derivatives are financial instruments with a value derived from the price of some other asset, index, value, or condition. Thus, derivatives trading often require at least a basic understanding of commodities markets. Most forex trading occurs in the derivatives market. Investors use derivatives to speculate and earn profit if the value of the underlying assets moves in the correct direction.

Advantages of Forex Trading

Forex trading is appealing to some investors because of its relative speed and simplicity. Transactions can settle almost instantly and the concepts involved are easy for any investor to understand. Moreover, it is a transaction that many experience without even realizing it, like whenever they travel internationally, making it seem much more approachable than other types of investments. Still, much like commodities investing, some basic understanding of financial markets, investment strategy, and methods of exchange can prevent unnecessary losses and maximize profits.

The post Commodities and Currencies appeared first on Economy Watch.

Funds, in terms of investing, are supplies of capital that belong to multiple investors. This capital collectively purchases securities. Each investor in a fund retains ownership and control of his or her own shares. Funds grant investors a broader selection of investment opportunities than they would normally enjoy on their own, as well as the benefit of professional management of the investment. The fees associated with trading the securities procured by an investment fund also tend to be much lower than individual investors would generally be able to obtain investing on their own.

Funds, in terms of investing, are supplies of capital that belong to multiple investors. This capital collectively purchases securities. Each investor in a fund retains ownership and control of his or her own shares. Funds grant investors a broader selection of investment opportunities than they would normally enjoy on their own, as well as the benefit of professional management of the investment. The fees associated with trading the securities procured by an investment fund also tend to be much lower than individual investors would generally be able to obtain investing on their own. Some of the most common types of investment funds include exchanged traded funds, mutual funds, and closed-end funds.

In an investment fund setting, the individual investors do not control the investment of the fund’s assets. Rather, a fund manager uses the pool of capital provided by the investors to purchase a select asset or group of assets according to a particular set of rules established by the fund and agreed upon by the investors. Those rules are the fund’s “mandate,” and there are hundreds of different mandates for the thousands of funds in existence. Each mandate has its own goal, whether it is increasing the value of the assets in the fund, keeping the value of the assets steady, or protecting the assets from loss.

Mutual Funds

Mutual funds are open-end funds that raise money by selling shares like CEFs, but they can sell more shares in the future and use that money to buy more assets. Unlike investors in a corporation, new investors in a mutual fund do not dilute the ownership of existing shareholders because mutual funds always trade at the net asset value of the fund. In other words, when you pay $10 to a mutual fund, you are buying $10 worth of mutual fund holdings. Mutual funds remain quite popular with investors, and are the largest asset class in fund investing. Mutual funds come in both active and passive forms, and employ a wide array of investing strategies. Unfortunately, mutual fund shares are only available for purchase or sale at the end of the trading day.  Moreover, many actively managed mutual funds have underperformed the indexes they track in recent years.

Exchange-Traded Funds

Exhange-Traded Funds (ETFs) are open-end funds that can receive new capital similarly to mutual funds. However, unlike mutual funds, ETFs can also trade at a discount or premium and can see share splits and reverse-splits. Investors can also buy and sell ETFs during the trading day, making them popular for their extra liquidity. The largest and most popular ETFs are those that passively track an index fund and offer very low fees. These have swelled in popularity over the last decade. In fact, the underperformance of many mutual funds is partly responsible for the popularity of exchange-traded funds some say they may soon overtake mutual funds as the most popular form of fund investment.

Closed-End Funds

Closed-End Funds are funds in which a set amount of shares sell for a set price; an amount that will never change. After the fund has sold those shares and received its proceeds, it then uses that money to buy and sell assets according to the CEFs mandate. For instance, a municipal bond CEF will sell a certain amount of shares, buy municipal bonds with the proceeds, and then never raise more money from investors again. CEFs can sell their holdings and buy other holdings, or they can use a somewhat risky strategy called “leverage” to buy more in the future. The relatively high fees of closed-end funds, as well as the potential risks, limit their appeal to a small group of investors.

Pension Funds

Pension funds invest its assets to match the liabilities of the fund that are retired workers’ benefits.  To achieve this liability matching, they strive for a steady rate of return from their investments. If the pension fund cannot get that rate of return, its assets will diminish and it will be unable to meet its obligations to its beneficiaries.

The benefit of pension funds for pensioners is simplicity.  The fund is there to make payments to the pensioner as required and the pensioner does not have to think about the fund’s investment selection or performance (that is the pension managers’ job).   Of course, the downside of this arrangement is the potential for mismanagement of the fund or poor investments that leave the fund unable to meet its obligations.

Pensions are the largest form of institutional investor in the market. They manage tremendous amounts of money, carry enormous influence in the financial world because of the enormous size of their investments, and are the biggest clients of investment banks like Goldman Sachs.

Hedge Funds

Another influential institutional investor class is the hedge fund.  Hedge funds are famous, notorious, and shrouded in mystery (and glamour) for many, but the reality is much more mundane.

Hedge funds come in several flavors.  Some invest in only stocks, some in stocks and bonds, and many in derivatives and alternative investments.  For example, a market-neutral stock hedge fund buys stocks they think are undervalued and sells stocks they think are overvalued.  The return comes from making the correct bets on the future direction of those stocks.  Since the hedge funds sell as well as buy stocks, they can theoretically make money (or at least, not lose money) when the market moves in any direction.

Fund of Funds

Finally, there is one group of meta-funds: the fund of funds. Fund of Funds invest in several different funds at the same time.  A hedge fund of funds, for instance, will invest money in many different hedge funds simultaneously.  Fund of funds have good diversification benefits.  The downside is that they have double layer fee structures that can quickly eat into any potential profits.

Management Strategy: Active and Passive Funds

The mandate and organizational structure characterizes funds.  They are also identifiable by their strategy. Each fund has a management team that charges the investors in the fund a set fee for managing their money. The structures of these fees can vary, but they are usually a percentage of the total assets under management (AUM). Typically, fund fees range from 0.1% to about 2%, with most funds somewhere between 0.5% and 1.5%.

Funds that require more effort from management usually charge more fees. Thus, funds with complex investing strategies and extremely good track-records often charge the biggest fees. These are “active funds” because the management actively chooses how to allocate the fund’s assets.

On the other hand, some funds exist to mimic or track a particular index or type of asset. These index-tracking funds are “passive funds,” and are extremely popular with retail investors due to their relatively low cost.

While active funds charge higher fees due to the amount of effort involved, passive funds have very low overhead (usually computers will automatically buy and sell assets for these funds based on algorithms). Thus, managers spend very little time and energy allocating assets because they only have to mimic an index or style. For example, stock index funds that track the Standard and Poor’s (S&P) 500 index only need to know what stocks make up the S&P 500, buy those stocks, and rebalance to ensure the fund has the right amount of each stock relative to their increase or decrease in value.

Funds Can Be an Excellent Investment Tool

In short, investment funds are capital, collected from a group of investors, for the purpose of generating a return by diversifying over many assets or by using a particular investment style.  While there are many types of funds, they mainly benefit investors by distributing risk (and revenues) among the fund’s contributors. Choosing the right type of fund is a matter of assessing one’s own investment goals, risk aversion, and the objectives and management structure of the particular fund in question.

The post Funds appeared first on Economy Watch.

What are Bonds and why are They Important?

Bonds are one of the most important but misunderstood parts of the financial industry, partly because there are so many different types that serve different purposes. Bonds have received extra attention since the Financial Crisis in 2007 and 2008.  Bonds are loans issued primarily by governments and corporations.

What are Bonds and why are They Important?

Bonds are one of the most important but misunderstood parts of the financial industry, partly because there are so many different types that serve different purposes. Bonds have received extra attention since the Financial Crisis in 2007 and 2008.  Bonds are loans issued primarily by governments and corporations.

New bond issues occur in the primary market.  The bonds are purchased in an auction environment.  After the initial purchase of a bond, the bondholder can resell it in the secondary bond market.  The secondary bond market acts, in some ways, like the stock market.  People buy and sell bonds based on their expectations that they will go up or down in value. Also like stocks, bond values fluctuate relative to changes in market confidence and investor beliefs regarding several main variables including the likelihood of repayment on the bond by the issuer.

Bond Features: Yield, Coupon, Duration, Embedded Options

Bonds share some key features and common terminology including yield, coupon, duration, and embedded option.

Yield, expressed as in interest rate, varies inversely to a bond’s price.  It comes in several forms. Nominal yield is most a common measure.  This is calculate by dividing the interest received by the face value.  Yield to maturity is the return a bondholder can expect when holding a bond until its maturity date.

Coupon, also expressed as an interest rate, is a periodic payment of how much a bond returns to its holders in exchange for holding the bond.  Coupons are most often semi-annual, but can be annual or quarterly.

The U.S. Federal Reserve’s asset-purchasing program (quantitative easing) pushed interest rates to near zero.  Bond issues came with lower and lower interest rates.  Zero interest was a theoretical lower bound until some countries in Europe began issuing bonds with negative yields.  In effect, you are paying someone for the right to hold their debt.  Further, you will receive back less than you paid.

Duration

Duration is the bond’s price sensitivity to a change in interest rates.  This measure has a specific set of assumptions that need to hold for it to be a valid measure.  In the real world, violations of these assumptions are normal.

Embedded Options

Callable and putable bonds have a feature that allows a bond to be retired early.  A call option in a bond allows an issuer to have the bond returned to them so that they may reissue a bond with more favorable terms.  A putable bond has a feature that allows in investor to return the bond to the issuer so they are not committed to holding the bond until it matures or until they can sell it in the secondary market.

Corporate, Municipal, and Government Bonds

Of the several type of bonds commonly traded, the most common are corporate bonds, municipal bonds, and government bonds. Most large companies and government entities in the world use bonds as a way of raising necessary funds for business expansion, government projects, and more.

Corporations use the bond market instead of taking a loan out from a bank for a few reasons. Most importantly, many of these companies are larger than any one bank, so there is simply nowhere to go to get such a large loan. With bonds, a large company can borrow from many different creditors at once, who benefit from the spreading of risk. Thus, if a company wants to borrow $10 billion, it can borrow $1,000 from one million investors, limiting each investor’s relative risk in the event of a default.

Municipalities borrow money using bonds for very much the same reason, but creditors get an additional benefit from municipal bonds in that in many jurisdictions, they are tax exempt. This is an especially important part of the U.S. bond markets, since many retirees use municipal bonds as a low-risk income stream. Tax free returns on those investments mean more money in the investor’s pocket.  To offset the tax exemption, often these bonds offer a lower return than a taxable equivalent.

Finally, government bonds are a third, but extremely important category. They are also the largest market, by far. Almost every sovereign state in history has used some form of financing to support itself, and this has become routine and systematic through government bond markets. Creditors buy government bonds because they consider them the safest investments in the world (especially in the case of developed countries). As a result, demand for bonds issued by the United States, Germany, and Switzerland has peaked in the last few years, causing something called “negative yields,” in which demand for bonds actually pushes bond prices in excess of their potential yield.

Nevertheless, institutional investors favor the corporate, municipal, and government bonds because they fill the niche for a source of low-risk income as part of a large and diverse portfolio. Retirement funds, in particular, use these three bond types to provide low-risk, reliable income that they can use to pay to vested retirees. Other types of funds often use these bonds to receive a less volatile and more reliable steam of income than many stocks can provide.

Savings and TIPS

Retail investors more commonly gravitate towards other kinds of bonds known as savings bonds or Treasury Inflation-Protected Securities, or “TIPS”. The market sees both of these bonds as extremely low-risk ways of saving money for a fixed period of time. Like all bonds, they have a period in which they become due and in which the debtor pays back the principal in full. However, because of their relative safety, the rate of return for these types of bonds tends to be much lower than other, higher-risk bonds.

In most cases, savings, TIPS, and other government bonds represent the lowest risk form of bond investing, while municipal bonds will have slightly higher risks (and rates of return). Corporate bonds tend to be riskier still, but usually have the highest rate of return.

Target Rates, Growth, and Inflation

For the economist or other finance professional, government bonds have begun to serve an important, but incredibly complex function in financial and economic models. Government bonds tend to reflect inflation rates and help economists better understand the broader market’s expectation for future economic growth. Government bonds also tend to reflect expected future inflation. By looking at the yield of a government bond, economists can often predict how much economic growth and inflation the market expects by taking cues from investor behavior in the bond market.

In recent years, this caused an unusual phenomenon that was long thought impossible: negative yields on some bonds. As noted, a negative yield means that the bondholder (the creditor) is literally paying money to the bond issuer (the debtor). In other words, the creditor is paying the debtor for the privilege of lending money to it.

This is counterintuitive and difficult to understand from a common sense perspective. Yet, from a wealth management perspective it makes much more sense. As the “Great Recession” proved, banks can fail. While the federal government insures funds on deposit with banks, the amount protected is capped at $250,000. Wealthy investors may need to store larger sums than that, but want to protect it in the event of a bank failure. Thus, a bond may be an attractive alternative.

However, if a lot of large investors need to find low-risk instruments to store their wealth, they might create a lot of demand for that government’s debts. The result is an increase in bond prices, which causes yields to fall. With enough demand, those yields go negative. This has recently happened to short-term and medium-term bonds in Germany and Switzerland, and some analysts predict it could come to the United States.

Bonds Will Remain a Staple of Investor Portfolios

Bonds are an excellent, low-risk form of investing. Like any other form of investing, greater security often comes at the cost of higher returns, but the benefits of bond investing (steady, secure income, and low to moderate risk) make it a perpetual favorite of the financially savvy. Though plagued in recent years by reports of negative yields, bonds remain one of the safest ways to invest, making it a favorite of well-diversified investment funds, wealthy investors concerned about protecting their money from bank failures, and fixed-income retirees.

The post Bonds appeared first on Economy Watch.

When a person thinks of investing, the stock market is likely the first type of investment that comes to mind. In the simplest of terms, a stock is a type of ownership interest in a corporation, and it represents a claim on part of the assets and earnings of that business.

When a person thinks of investing, the stock market is likely the first type of investment that comes to mind. In the simplest of terms, a stock is a type of ownership interest in a corporation, and it represents a claim on part of the assets and earnings of that business.

There are two primary types of stock: common and preferred. Common stocks usually entitle the owners to receive dividends and vote at shareholders’ meetings, while preferred stocks generally have higher priority claims on assets and earnings of the company (including those earnings paid as dividends) than common stock. In the event of a liquidation of the corporation’s assets, preferred stockholders receive payment from the liquidated assets of the corporation before common stockholders.

A share of a company represents ownership.  Thus, “shareholders” or “shareowners” are those who buy shares in a company.  The amount of ownership one holds in a company can be determined by looking at the total number of shares issued by a company versus how many that individual owns. For example, if a company has 1,000 shares of stock outstanding, and one person owns 500 of those shares, that person owns 50% of the company.

Stocks form the foundation of most investment portfolios. They can be relatively low risk and thus have relatively low returns, as shares in municipal utilities tend to be, or they can be more volatile which sometimes translate to higher returns like technology companies or companies that have just issued stock.  Historically, stock investing has outperformed most other types of investing, making them a staple of most portfolios.

Where Stocks Trade

Investors may buy or sell stocks in a variety of ways. The most common is through an investment broker that facilitates the purchase and sale of stocks in a market of publicly traded stocks called a stock market or stock exchange.

There are many stock markets around the world, including several in the United States. One of the most famous exchanges in America, the New York Stock Exchange (NYSE), also happens to be the largest such stock market in the world according to its Composite Index.

The world’s second largest is also an American exchange known as NASDAQ, which stands for National Association of Securities Dealers Automated Quotations. The NYSE Euronext acquired the third largest exchange in America, the American Stock Exchange (AMEX), in 2008 and it became the NYSE Amex Equities in 2009.

Famous stock markets outside of the United States include the London Stock Exchange Group, Japan Stock Exchange Group, and Euronext.

Stock Ratings

A wide array of stock rating systems is available to help investors and financial professionals make educated decisions on how to pick stocks.  Of course, stock ratings are only as reliable as those institutions that developed the ratings. Many different investment firms have developed their own ratings systems, and a few, such as Morningstar, have become internationally recognized.  Nevertheless, stock ratings often boil down to little more than predictions of future behavior based on analysis of past performance mixed with news, insight, and a bit of luck.

Stock ratings can be useful tools for investors, because they can simplify the complicated process of researching a company’s performance and chances for growth down to relatively short summaries—sometimes even one or two word recommendations like “buy” or “hold.” Unfortunately, this same brevity can rob an investor of the use of his or her own insight and leave that person unprepared for possible volatility not conveyed by the analyst’s short breakdown.

A stock rating is just one person’s opinion about a stock’s future based on his or her personal perspective and risk tolerance. That individual’s perspective may be different then another investor’s, thus the stock rating should serve as a suggestion, not a guide for investing. Those considering buying or selling stock should rely upon their own careful combination of research, analysis, and risk tolerance to decide on an appropriate stock investment strategy that is right for them.

Company Rankings

The Fortune 500 is an annual list compiled by Fortune magazine that ranks the top 500 US corporations based on revenue. The list includes publicly traded and closely held corporations and dates back to 1955.  It has made its way into the parlance of most people, whether investors or not. Saying that a company is in the Fortune 500 is short hand for saying it is one of the largest and most successful in the United States.

Another such list is the Forbes Global 2000 (sometimes referred to simply as the “Forbes 2000”). This list ranks the top 2000 companies in the world (not just the US) based on a mix of four values: sales, profits, assets, and market value. First published in 2003, the Forbes 2000 has become useful for determining the relative value of companies around the world, even if they are in different markets.

Stocks Will Remain a Staple of Investment Portfolios

Given the long-term performance of stocks versus any other types of investments, stocks will remain a staple of most investment portfolios.  Although many investors have moved toward managed investment options, like mutual funds, 401(K)’s, and pension plans, individual stocks are contained within those vehicles.

The post Stocks appeared first on Economy Watch.

Investment management is a broad term that refers to the buying and selling of investment. Though typically referring to the management of an investment portfolio and the trading of securities within that portfolio, its definition may also include banking, budgeting, and tax management duties. Any individual with an investment portfolio or professional may engage in investment management.

Investment management is a broad term that refers to the buying and selling of investment. Though typically referring to the management of an investment portfolio and the trading of securities within that portfolio, its definition may also include banking, budgeting, and tax management duties. Any individual with an investment portfolio or professional may engage in investment management. Examples of investment management styles are “passive,” “active,” “aggressive,” or “conservative.” Thus, “investment management” can mean many things in many different settings.

However, according to study performed by the Boston Consulting Group in 2013, the assets managed professionally for fees reached a high of $62.4 trillion in 2012.  The study projected that figure to grow in coming years. Therefore, investment management is an exceptionally important part of the American economy, and understanding what this term truly encompasses is even more important to the casual investor and professional alike.

Investment Managers Have the Time and Knowledge Individual Investors Often Lack

While many investors have done exceptionally well on their own, many do not have the time or expertise to effectively engage in the daily management of a portfolio of investments. For example, at some point in their lives many people will invest in a 401K account at work. This is a form of managed investment designed to remove virtually all effort for the investor while still securing a return. Another example is mutual fund investing, in which an investment manager runs a fund based on guidelines set forth at the time of buying into the fund but otherwise requiring little or no additional input from the investor. Indeed, behind any active mutual fund usually lurks a team of investment and support managers, picking stocks, following trends, and making money for the fund’s investors. Thus, investment management is an excellent way for one to grow one’s own money while not relying on one’s own limited time and knowledge to do so.

Investment Managers Can Balance Risk and Rewards for Their Customers

One of the biggest advantages to professionally managed portfolios over self-managed portfolios is risk balancing. Most investment managers have a variety of funds with multiple investors in each. This allows for a balance of aggressive growth investments alongside ones that are stable, but lower yielding. This practice allows for experimentation and investment optimization in ways that individual investors would likely be unable to do.

Sometimes called a “pre-cut portfolio,” these managed investments measure stock vs. bond funds against the investors age, willingness and ability to accept risk, then—using an agreed upon formula—an investment manager puts the customer’s money into investments matching that profile. The portfolio adjusts over time to match each stage of an investor’s life (more aggressive earlier in life and more conservative closer to retirement).

Taking this idea to an even higher level, many investment firms now offer so-called “set it and forget it” options, whereby customers select target dates for withdrawing their earnings from an investment (often at the time of retirement).

Investors must also consider the cost of a professional managing his or her portfolio.  Investment managers charge various fees. These often take the form of both management fees as well as commissions from trading assets. While the overall return on investment usually outstrips the money lost to these fees by many fold, some investors have stayed away from managed investments for this reason. Of course, these self-directed investors lose the benefits of the manager’s time, knowledge, and access to other investors by which to moderate his or her own gains and losses.

Types of Managed Investments

Several forms of managed investments are quite common and well known to most investors. For example, retirement funds or pension plans are an exceptionally common form of managed investment. Mutual funds are also quite common. Less common are individual wealth management programs tailor-made to an individual investor’s wants and needs. These usually appeal to wealthy individuals who wish to ensure their legacy for future generations while also providing a comfortable life for themselves.

The types of investments held by these options can vary widely, too. Some may invest more heavily in stocks and commodities, while others may trade primarily in currencies or bonds.

Bond investing is actually quite common in managed investments, thanks primarily to their relatively stable nature. While the bond markets host many different types of bonds, it is quite common to see a mix of corporate bonds, government bonds, municipal bonds, and savings bonds in managed investment portfolios.

Investment Management Means Many Different Things in Various Settings

Thus, the term “investment management” can refer to a very wide array of professional investment services. Of course, the primary meaning involves advising clients about the best options for their financial futures. It can also be a means of balancing risk and automating investments, but it can also be taking bigger bets that an individual investor might fear doing alone. It can also refer to building a portfolio of almost any kind of investment, like stocks, bonds, commodities, and much more.

The post Investment Management appeared first on Economy Watch.

One of the ten Global Industry Classification Standard (GICS) economic sectors, the utilities sector includes stocks for services such as gas and power. Typical companies in the utilities sector include electric, gas, and water utility providers. Although often referred to as utilities by consumers, telephone, wireless, cable, and satellite services fall under the telecommunications sector.

One of the ten Global Industry Classification Standard (GICS) economic sectors, the utilities sector includes stocks for services such as gas and power. Typical companies in the utilities sector include electric, gas, and water utility providers. Although often referred to as utilities by consumers, telephone, wireless, cable, and satellite services fall under the telecommunications sector.

Because utilities require significant infrastructure, these companies tend to carry enormous loads of debt. With so much debt, utilities are sensitive to changes in the interest rate, because debt payments go up or down in relation to those rates. Thus, the utilities sector performs best when interest rates are falling or remain low, making them very popular during economic contraction periods.

Understanding the Utilities Sector

Although essentially a necessity, utilities perform differently than consumer staples. Many financial experts consider utility sector stocks the ultimate investment for those who are adverse to risk. While they do not tend to experience wild swings in value, utility sector stocks can provide steady growth and income, even during dangerous economic times. In fact, utilities sector stocks are usually the first to go up during economic recessions.

Because of their stable income base, companies in the utilities sector are usually able to pay steady, reliable dividends to their shareholders. Dividend yields historically fall somewhere between one and three percent higher than for guaranteed instruments, making them attractive alternative to other low-risk investments like certificates of deposit (CDs) or savings bonds. These stocks are often considered “defensive,” meaning investors can rely upon them to do well during bad markets. That makes them an excellent addition to most well diversified portfolios.

On the other hand, utilities sector stocks usually suffer from limited growth potential. Although they provide steady income, that stability in price and revenues precludes much capital growth. Moreover, although utility stocks are less volatile than stocks in the energy or technology sectors, FDIC insurance, or any other form of governmental protection, does not cover utility company stocks. Thus, as a low-risk investment, it is still slightly more risky to invest in utilities sector stocks than to simply squirrel money away in a bank or a CD because it is possible to lose money if the stock price declines and it does happen from time to time.

Investing in the Utilities Sector

Any full-service stockbroker, online discount broker, or investment adviser can point an individual investor towards a variety of utility sector offerings that pay competitive dividends and have experienced a history of stability. There are also mutual funds and exchange-traded funds (ETFs) that invest in utilities. Utility sector stocks often provide investors with a viable alternative to traditional low-risk, fixed-income offerings. While they do have a small amount of risk, these stocks are not subject to concepts like the negative yield of some bonds during periods of high demand—normally during economic contractions. For more information on investing in utility sector stocks or funds, check with brokers, financial advisers, or perform adequate research to determine the highest yielding but most stable companies.

The post Utilities Sector appeared first on Economy Watch.

Telecommunication Services is one of the ten Global Industry Classification Standard (GICS) economic sectors. The telecommunication services sector consists of companies offering fixed-line and wireless telecommunication networks for voice and data. Companies like wireless phone service provider T-Mobile, internet service provider EarthLink, and phone service providers like AT&T and Sprint all belong to this sector.

Telecommunication Services is one of the ten Global Industry Classification Standard (GICS) economic sectors. The telecommunication services sector consists of companies offering fixed-line and wireless telecommunication networks for voice and data. Companies like wireless phone service provider T-Mobile, internet service provider EarthLink, and phone service providers like AT&T and Sprint all belong to this sector.

Sometimes referred to simply as “telecom,” the telecommunication services sector has a significant social, cultural, and economic impact on modern society. In 2008, this sector accounted for $4.7 trillion in revenues: the equivalent of just fewer than three percent of the gross world product for that year.

Understanding the Telecommunication services Sector

The telecommunication services sector has experienced huge growth over the last few years despite enormous competition. As a result, many of these companies offer their investors great dividends. Numerous companies follow similar business models, in which revenue streams come from locking consumers into contracts of one or more years. However, the rapid pace of technological development in the telecommunication services sector has led to significant upheaval and expense for these companies, as well. Efforts to stay abreast of the latest wireless technologies, for example, have cost cell phone services billions in infrastructure costs.

Once dominated by a handful of titans, the telecommunication services sector now sees a number of new participants enter the market each year while others depart. Customer loyalty has also begun to wane in recent years, particularly in light of new offerings that allow customers to pay-as-they-go rather than lock in for longer contract periods.

Companies in the telecommunication services sector usually break down into telephone companies, cable companies, satellite service providers, mobile service providers, and telecom device manufacturers. The telecommunication services sector tends to overlap with, and track parallel to, the information technology sector.

Due to its similarities to the information technology sector, the telecommunication services sector tends to be underappreciated and misunderstood. Many investors and financial professionals believe this sector indistinguishable from information technology, and they assess sector performance and investment decisions based on that analysis. However, a number of factors uniquely affect the telecommunication services sector, such as government regulations, trends in service offerings, and unique consumer demands.

Investing in the Telecommunication Services Sector

As with most sectors, it is possible for investors to purchase stocks for individual companies or to use mutual funds of exchange-traded funds (ETFs) to explore opportunities in the telecommunication services sector.  Unlike most sectors, a relatively small number of companies dominate the sector, with others in the sector largely supporting those companies with products or supplemental service offerings. This can lead to a domino effect: when the fortune of one company rises or falls and carries the prosperity of another company along with it. Thus, thorough research is the best way to identify acceptable investment options in the telecommunication services sector, but thorough vigilance will be required to maintain the viability of that selection. Some investors may find this level of understanding hard to acquire, so the use of financial managers or simply investing in managed funds may be the optimal approach.

The post Telecommunication Services Sector appeared first on Economy Watch.

The materials sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. The materials sector consists of companies that explore, discover, develop, and process raw materials. Sometimes also referred to as the “basic materials” sector, it includes the mining and refining of metals, chemical production, and forestry products.

The materials sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. The materials sector consists of companies that explore, discover, develop, and process raw materials. Sometimes also referred to as the “basic materials” sector, it includes the mining and refining of metals, chemical production, and forestry products.

The materials sector is sensitive to changes in the business cycle. Because the sector supplies materials used in other sectors for things like manufacturing and construction, its fortunes rely heavily on a strong market with significant consumer spending. This sector is also sensitive to supply and demand fluctuations, due to the demand for the commodities these companies produce.

Understanding the Materials Sector

The materials sector is cyclical so that when economic growth slows there is less demand for the products and services that use the materials these companies produce. Conversely, this sector typically sees a boost during economic recovery periods. However, because the sector is so diverse, some subsectors have their own unique cycles and may boom or collapse independently from other materials.

Over long periods, the materials sector generally outperforms the rest of the economy. During the first decade of the 21st Century, materials returned at 150 percent versus the overall average of 105 percent experienced by companies in the S&P 500. Of course, during a weak economy, this sector will also underperform other sectors. Thus, during the US recession of 2007-2009, the materials sector lost roughly 56 percent while the S&P 500 experienced an average of 54 percent loss. However, since the US economy began its recovery in 2009, the materials sector has only seen returns of 130 percent on average, as compared with 133 percent for the S&P 500.

With growing middle class populations in large, emerging nations like China and India, the world demand for food and other materials is rising. Agricultural products and materials like coal, metal, sand, tar, and concrete (all used in construction) all fall within the materials sector. Similarly, after the global economic downturn following the US recession in 2008, many nations around the world began using gold as a reserve currency. This boosted global demand for gold as a commodity to an all-time high and sent stock prices for gold producing companies skyrocketing.

Investing in the Materials Sector

Investing in the materials sector is relatively easy. Investors can pursue this in two ways: investing in the companies or investing in the commodities they produce. As with any sector, individual stocks are available for purchase, or investors can participate in mutual funds or exchange-traded funds (ETFs).

Many investors like coupling investments in materials with investments from other, related sectors. For example, maybe a technology sector company will use rare metals for the production of one of their products and the demand for that product expects to be high.  Investing in the materials sector companies that supply the raw materials might be a good way to bring higher yields from investments based on the same research.  Consult with a financial adviser for advice on the best strategy to meet specific financial goals.

The post Materials Sector appeared first on Economy Watch.

The information technology sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. Sometimes referred to simply as the “technology sector,” it encompasses companies engaged in research, development, and/or distribution of technologically based goods and services. This sector contains businesses focused primarily on manufacturing electronics, creating software, developing computers or other electronic products, as well as the services relating to information technology and support for these devices.

The information technology sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. Sometimes referred to simply as the “technology sector,” it encompasses companies engaged in research, development, and/or distribution of technologically based goods and services. This sector contains businesses focused primarily on manufacturing electronics, creating software, developing computers or other electronic products, as well as the services relating to information technology and support for these devices.

The technology sector is literally the sector of the future, and it typically rests on the cutting edge of scientific advancement. As such, this sector offers a wide range of products and services for both customers and businesses. Consumer goods like computers, mobile phones, and televisions all fall into this category and represent the types of products that continually experience improvements and upgrades. Software for individuals and businesses, information networks, and internet and hosting services also fall under this category, as do the tech support services all of these products require.

Importance

While the information technology sector may not serve as an economic indicator in the same way the consumer discretionary sector does, it is still very influential on the rest of the economy. Every other sector depends on advancements in the information technology sector in order to achieve greater levels of productivity, accountability, innovation, and growth through automation.

Information technology also experiences rampant competition and rapid cycles of product obsolescence. For example, most mobile devices are obsolete and replaced by a beefed up version at least once a year. Computer processing power tends to double every year and digital storage capacities grow, while the size of products tends to shrink. Today, the phone in one’s pocket is likely several magnitudes more powerful than the most expensive consumer computers available just five to ten years earlier. With that constant drive to innovate and compete, no company in the information technology sector can rest on its achievements or it will be out of business almost immediately.

This rapid cycle means industry leaders do not necessarily retain that position for very long. While Microsoft and Apple have been two of the most notable exceptions, even they have experienced their fair share of position jockeying throughout the life of their corporate existences. Because of these dynamic changes and impressive growth, information technology is a sector that many investors use for growth and high returns in their portfolios.

Investing in the Information Technology sector

Investment options abound in the information technology sector. From capital venture to individual stock investments, and hundreds of mutual and exchange-traded funds (ETFs), there are many ways for investors to sample this sector. However, it is not for everyone. Many investors dislike the volatility and dynamic nature of this sector and stay clear of it. Given the importance of this sector, however and its influence on the other economic sectors, staying away from information technology entirely is almost impossible. For those reluctant to become involved in information technology, a better approach may be to thoroughly research and follow the trends for well-established and long-standing companies like Apple, Microsoft, Hewlett-Packard, Sony, and others. These companies may have a more stable ebb and flow than newer market entrants.

The post Information Technology Sector appeared first on Economy Watch.