We have discussed stocks, and how stock exchanges were begun.  Recent news’ stories have noted that new stock offerings, known as Initial Public Offerings,  (IPO’s), are starting to rebound this year, for the first time since the recession begin.  The experts say this is a good sign that the stock market may finally be in a recovery mode.  As private companies, have to see a big payoff- to go to the trouble.

Now let’s see how a company goes public, and gets listed on the stock exchange.

The Purple Haze Condom Company, we  introduced recently, is back in the news.

We discussed the company selling bonds  to generate capital to build a new factory.

Let’s remember, the company CEO is John Dick- is also the company founder and largest stockholder.  He is  third generation in the condom business, with Grandpa Dick founding the company, just as World War II ended-making a killing.

John Dick III, MBA, has inherited the company and is ready for the spotlight.  He has completed the new condom  factory, paid with their recent bond offering. His new condoms are selling like hotcakes.

His scientists invented a new condom that release medication that improves enjoyment for women.   Ladies all over the world are insisting on the use of this new condom, even after menopause.  Kosmo was calling it the Viagra condom, while even the Puffington Post was writing a piece about the-”Remarkable Rubber Rebound!”.

Meanwhile, back at Mr Dicks current secret location:

So Mr Dick, while flying back from Costa Rica, with his “Assistant” says, “Ms Washington, can you get this knot out of my shoulders-I am sooo stiff,  uhh, from golf, and I am a little old for acrobatics….”  “And did I tell you how many of our new medicated condoms we are selling- the profits are exploding-I think we need to go public!”

“But Mr Dick, I thought this was our little secret?”

“Not that, honey-buns, I mean we need to sell shares of  The Purple Haze Condom Company stock to the public.  I bet we can raise another $500 million-I will be able to trade this G-5  jet in for one of those airliners like Sergey B, and Mark C.”

So when the CEO arrives back at the office, he starts the proceedings to initiate an IPO-or initial public offering.  An IPO is the selling of stock of a private company to the public.  He gets investment bankers to study the books and decide how many shares might sell, and at what price.  The investment bankers that help with that process get first dibs on the stock, along with their wealthy clients and hedge fund buddies.

With the recent publicity of the Ladies Viagra Condom, the IPO (initial public offering) is over-subscribed.

“What does over-prescribed mean, Mr Dick?” said his assistant.  “I thought prescribing was something your doctor did when the condoms broke!”

“Hush your mouth, Ms Washington! You know our condoms don’t break! (much…)  Over-subscribed, not prescribed!  It means we have more buyers that want the stock,  than we have shares!  We can increase our offering price, and I can be even richer!”  Everyone seems to want to own stock in the company that makes the Ladies Viagra Condom!

He currently owns 90 % of the company, and since he wants to keep control, he only sells the 40% to the public.  He will be worth at least $100,000,000 plus by the end of the day.

(I wonder if someone will remind him to save a little of his new money, just in case he runs over a fireplug, and get’s hit with his own golf club.)

So let’s review some terminology involved in a company issuing stock to the public:

• Shares outstanding: how many shares of The Purple Haze Condom Company are available to the public.  Many times the company is still partially owned by founders-and those shares are not for sale.
• Market capitalization:  Usually known as “market cap”. The number of shares multiplied by the stock price on any  given day-the market cap of the Purple Haze is 1 billion- 10 million shares going for 100 bucks a share. That puts it at the low-end of a mid-cap or medium sized public company.  (For a recent example of market cap-BP lost over 70 billion in market cap over the first 8 weeks of the oil spill.
• Stock Exchange-when a company issues stock, they can choose which exchange to be listed-as long as they meet certain guidelines such as stock price and market cap.  That is where the stock is bought or sold. The major stock exchanges in the US are the New York Stock Exchange (NYSE), and  the NASDAQ exchange.

Since Mr Dick wants to be the Steve Job’s of the condom kingdom, he lists his company on NASDAQ, like Apple.  The new stock symbol is SEX.  As we leave Mr Dick’s office, he is on the phone arguing with the Time Square Billboard Company, about whether he can put a photo of his condom on his ad, or just a picture of the package!

Reader Questions:

Have you ever bought an IPO stock?

Have you purchased any single company stocks, and how did you do-did you make or lose money?

What terminology in the stock market keeps you confused?

Where did that word come from?  Who decided to call ownership share of a company-STOCK?

Well, being the scientist researcher type, I Googled it.  It seems the word Stock comes from the old English word-stoc. (makes sense, huh)

The word “STOCK” was initially used to describe the trunk of a tree.  The word also seems to be used for many wooden objects-such as the stock of a gun, and stocks used in sailing-which makes sense considering the word origin.

Many non-English speakers complain about the difficulty learning English because our words can have so many meanings-so let’s look at  other uses of the word, Stock-which in 1889 Century Dictionary had 22 different meanings.

The farmer has stock on the north 40.  Could be cows, horses or sheep-but is still stock.  He takes them to the Stock-yard to sell.

The grocer stocks his shelves with canned goods.

He may take stock of his losses.

The plant/zooology world, uses stock as a source of material such as root-stock, or genetic-stock.  And I could go on, 22 different ways, but I will save you that.

So how did stock become known as a SHARE of a corporation?

Well it seems that in the middle ages, if one loaned the government funds, a stick was notched in a pattern to represent how much you gave them.  The stick was then broken in such a way that you had a matching pattern of notches, as did the government.

So when you presented it later for repayment, you were acknowledged to be owed that amount back.   Your stick was known as a stock, and the government’s half of the notched stick was the “counter-stock”.

Over time the use of stock as representing “ownership shares” of a company or corporation became common.

So how does the word, stock, translate into what we consider publicly traded stocks and the stock market or stock exchange?

Because of tax, and liability reasons, many businesses incorporate.  When a company incorporates, the company is divided into shares.  The owner may own all of the shares, called stock, or sell/give stock shares to a partner, family, friends and co-workers.  The stock-holders can be given a portion of the profits of the company-which would be called dividends.

Companies that want to sell shares to you and me, are considered “going public”.  A company that wants to go public, must go through an initial public offering or IPO.  This is an expensive process that requires lawyers, investment bankers, and numerous regulatory processes.

Where did Stock Exchanges come from?

Stock markets or exchanges have been around for centuries.  The intial stock exchanges were found in France, trading agricultural products.  The Dutch were the first companies to divide themselves into multiple “shareholders”.  And England was the site of the first true company stock exchange-with The Dutch East India Company being the first traded stock.

Having begun as gentlemen clubs, with brokers smoking their cigars and trading stocks-the exchanges themselves, such as the New York Stock Exchange, and NASDAQ are now billion dollar companies.  Stock trading, that started out as an agreement to exchange one or two shares a day, is now trillions of shares changing hands every day, all over the world.

Wikepedia has the list of the world stock exchanges.

In a future post, we will take the Purple Haze Condom Company public, to help you understand the process.  I know you can’t wait.

Talking heads are always discussing what is happening in the “Bond Market”.  Many suggest that Bonds are less risky than stocks.

Are your friends talking about the bond fund in their 403-b? Come on, I know they are not discussing the World Cup, or whether Lost is really lost…

You may  hear terms like:

• Junk Bonds
• Corporate Bonds
• Municipal Bonds
• Government Bonds
• Tax-Free Bonds
• Hi-yield Bonds
• Samurai Bonds

So WHAT the heck is a Bond?

A Bond is a basically a piece of paper, just like a stock certificate is a piece of paper, on which is written the promise to pay back a certain amount of money and interest.

How do Bond’s work?

The Purple Haze Condom Company,  needs to build a new plant to make condoms-business is great. (Hey, don’t forget I am a gynecologist!)  The condom company does not have enough money in the bank to build the factory-or they have the money, but the company CEO, John Dick,  wants his own private jet.  So they want to raise the 25 million another way.

They have three options to raise money:

1. Borrow from the bank.  (if their credit is good enough)
2. Sell part of their company ( by selling stock shares).
3. Sell  Bonds.

The condom company and it’s consultants, put their heads together and decides-which of the above ways to raise money.  Which  will be the cheapest and least risky for the company?

If they decide to sell bonds, they have several more decisions to make or are made for them:

• They decide how long it will take for the bond to mature.  The Maturity date is the date the full amount of the bond will be repaid to the bondholder (purchaser) usual face value of $1,000.
• The interest rate is then decided by bond experts-they judge the amount of interest to be paid on the bond, to get the public or large investors, such as pension funds, to buy.
• The bond has to be rated.  A company such as Moodys, or Fitch, or Standard and Poors, comes in.  They study the companies’ books, and management.  They issue a rating, and the higher the rating, the lower interest rate the condom company will have to pay to get people to buy their bond. Supposedly, the higher the rating, (AAA) the lower the interest rate, because the risk of the company going out of business is lower.  The ole high risk, high reward-low reward scenario!
• Another expert tells them when the time is right to put the bonds on the market.

Going back to the Purple Haze Condom Company-The CEO, Mr. Dick says,” I agree with the consultants,” “We will sell 25 million dollars worth of 30 year bonds at a yield of 5% to build the most efficient, safe, and environmentally friendly condom factory in all the world!”

“I am so proud that Moodys has studied our company and decided we were worth a AAA rating!  We don’t have no junk in the trunk!”

“And I will  visit the new factory, on my new G-5 jet, with my girl..I mean my personal assistant-to welcome all the new employees of The Purple Haze Condom factory!”  “Maybe President O will give me one of those special medals, and allow me a night in the Lincoln bedroom for decreasing unemployment, (and giving his campaign $$$$).

The press releases are written, and the Bond salesmen go to work.  They convince enough people to buy the bonds to raise their  25 million bucks to build the factory.  The bonds are sold to pension fund managers, mutual fund managers, the Sultan of Oman, and his three hundred princely children!

And a certain gynecologist chooses to buy ten bonds and plans to use the interest  to help pay for his nursing home care.

What did I get when I bought my 10 bonds for $10,000? (remember they were $1,000 each)

• A piece of paper that says the The Purple Haze Condom Company will pay my $1,000 back in 30 years for each bond.
• Each year during that thirty years, I will get an interest payment of $500-either once or divided into two payments.  That payment will help pay for one of my 365 days of nursing home care-maybe….
• I might decide I need more of these bonds the way nursing home care costs are going up!!!

What were my benefits of buying the bond?

(Besides helping to make the world safer from AIDS, and unintended pregnancies, and giving the CEO an excuse to get out of town with his PA?)

• A fairly safe investment that returned 5% annually for thirty years. (rated Triple A!) Then I get my 10,000 bucks back to invest again, if I am still around.  If not, I am sure my children will toast me, when they get the check.  (They may be surprised when the check goes to my scholarship fund….:)

What were my bond risks during that time?

• Investment risks-what if the Purple Haze Condom Company went out of business because of poor quality control issues or a shortage of latex, or the company CEO kept flying and skipped the country with the companies’ money?  I might get a little of my money back when the factory was sold, but it is not guaranteed.  The rating agency might say they were sorry….(probably not!)
• Interest rate risk-What if I needed to sell my bond in a hurry to raise money to buy the night nurse at the nursing home a diamond.The interest rate on my bond is  5% but new bonds have a 7% rate.  I would have to sell my $10,000 bond at a discount.  Who wants a 5% bond when you can get a 7% bond-so my bond will sell for less than the $10,000 face value to make up for the lower rate.
• Market risk: Again,  if I needed to sell the bond to raise money quickly,  but  the overall stock and bond market had dropped that week-my bond would have to be discounted even further to get anyone to buy it.

In summary, bond investing is complicated.  I did not talk about the many different bonds out there.  I will leave that for Bonds-Part Two.  But most experts feel that bonds are safer overall than stocks, but certainly not risk free, as Enron,  World-Com, Lehman, and many other bondholders have found!

A diversified bond portfolio of various types and maturity lengths, is important- just like the diversification of stocks.  It  helps lower your  risk.  Most 403b or other retirement funds, have many different bond mutual fund choices to invest.

Reader Questions:

• Do you understand bonds?
• Do you own any bonds or bond mutual funds?
• Do you have a favorite bond or bond mutual fund?
• Where did the term “clipping coupons” come from?

Both have been in the news lately.  You may not have noticed because you have been busting your a…. at work, or trying to deal with the end of the school year.  Maybe  you who have just graduated from nursing or grad school and are pounding the pavement looking for work.

Many have asked, “Why  is the stock market and Wall Street so worried about Greece and the Euro?”  “Why is my 401-k,( insert IRA,403-B, Roth….) dropping like a rock?”

Keep in mind, however that many of the stock market indexes were 60% higher this year than at the bottom of the market in March of 09.  With that type rise, a drop of 10-15% was inevitable.   My answer, to “why is it dropping now?” would be, if I knew, how and where,  I would bet the farm, make a boatload of money and then quit my job.

The problem  with my betting on the direction of the stock market:

• I wouldn’t bet the farm on the stock market.
• I don’t know which direction the market will go tomorrow, or next year.
• I wouldn’t quit my job-even if I made a killing- I like my job.

Now, back to Greece, the Euro and the stock market:

For those of you who don’t read the Wall Street Journal everyday, and watch “Squawk-Box”  daily at 6am on CNBC, (like me) I will summarize what is going on…

• Greece-the country of Greece (gov’ment as we say in the South)  has borrowed more money than it can pay back.  This is a problem, because Greece is part of the Euro-zone-which went all-in a few years ago to start a new currency- called the Euro.  Many of the banks that hold the Greek governments debts (bonds) are spread all over Europe-so if Greece doesn’t pay it’s debt-there is fear of massive bank failures in Europe.
• Part of Greece’s problem are uncontrolled governmental spending on social programs-(stories of workers retiring at age 40 with a full pension abound.)
• It seems the  choice for the rest of Europe’s countries, such as Germany, are to back-stop or guarantee Greek debt. This makes the German worker-at age 60, subsidize the retired Greek worker who is 40.  Obviously, that German worker, slaving away at his age, building a Mercedes on the factory floor, is pissed!.  Why is he pissed-because his taxes are helping to pay for a Greek guy to lay on the beach, watching the Babes, and the sun set over the Aegean Sea.
  

  Aegean Sunset! (photo by kouk cc)

• Another problem is that Spain, Portugal, and maybe Ireland and Italy, are right behind Greece as far as having huge government debts that may be beyond their ability to pay.

Hence, the SWOON in the local currency-The Euro.  That means the locals can’t buy as much today with a 100 Euros, as they could yesterday-the currency value is dropping.

Why Should It Matter To You?

That being said-what does that mean to those of us in Georgia, (insert Penn, NY, Iowa….).  Well our international companies like Intel, Microsoft, or Caterpillar, are not going to be able to sell as much in Europe.

This, because of the economic fears-just like  in the US last year-sales fell off the cliff. The people in Europe are scared-and will be slowing their purchases.  Therefore the earnings of these companies that sell internationally are expected to drop, which makes their stock worth less.

Many of the mega-US banks,  are also highly interwoven/kissing cousins with the big European banks-so  our banks may directly or indirectly be affected by  bank failures in Europe-if they occur.

Many pundits feel bank failures in Europe are  inevitable-so don’t be surprised to see much more concern in the news about these issues, before the next crisis somewhere else in the world occurs……

Fear: The fear of these bank failures in Europe, is spreading throughout the Wall Street crowd.  They don’t know what bank failure in Europe would do to our economy-so their automatic response is to sell stocks when they get scared.  When a few start selling, it becomes a contagion, spreading through the so-called “professional” investor community.

When Wall Street folks are selling, more than buying, the stock market index’s such as the S&P 500,  drop-making your account balance lower on your statement.

So what should you do?

I am twiddling my thumbs,while Rome burns myself…. Well, really, I am leaving things alone.  My opinion is the fears of  European debt issues causing us to have another recession is quite small.  Earnings of  companies in the stock market have surprised (meaning the shares go up in value) on the upside for the past two quarters, and I think that will continue.   This will make the stock market begin to go back up, the question is when???

Will that happen this summer? Probably not. The Wall Street guys like to go to the beach in the summer.  S0 traditionally the stock market tends to go down or at least sideways during the summer.

So, what should you do, already?

Either leave your accounts alone.  Or, if you can squeeze out another few bucks-increase your monthly deposit into your 401-K (403-b,  investment accounts,etc..)  Take advantage of the “sale” on Wall Street, I think your bravery will be rewarded in the future.

Disclaimer:

But remember, I am not a professional registered stock market broker, Certified Financial Planner, or banker.

I am old enough and have been investing long enough to have seen this type behavior multiple times.  As many of the best investors say-the time to make the most money, is doing the opposite of what the “crowd” is doing.  Buying now would probably qualify!!! But, as they say on TV-talk to your investment adviser!!!

The other “side-effect” of the scare on Wall Street is the movement into Treasury Bills, as the professionals sell stocks-they have to put the money somewhere.  Treasury bills (or T-Bills) are guaranteed interest bearing investments backed by the US Treasury-(hence T-Bills).  Now it would take a full post of it’s  own to explain how T-Bill’s work. But the short course is: the more people that want to put money into T-Bills, the lower the interest rate!

And  Mortgage rates are usually tied to T-Bill rates-so mortgage rates are down tremendously over the past couple of weeks-with good credit you can get a 15 year fixed rate mortgage for a little over 4%.  UNBELIEVABLE!  So if you are wanting to buy a house and are prepared-this is a good time.  If you need to refinance, and you have a good credit score (>720)-it may be a good time to refinance!

Summary-Greece and the Euro:

Tomorrow, during your  work break, instead of talking about Lost, or 24, you can discuss the “Greek debt  problem” with your buddies, and wow them with the breadth and depth of your knowledge-or put them to sleep as I have you…..

Reader questions: What do you think of about the current news?  Are you concerned about your investments?  Are you putting new money in the stock market right now?

Let me know.

Dr Dean

Fin Reg-It is not new rules to protect  shark’s fins from those who love shark fin soup, although my friends in Costa Rica say they do need such regulation.  Nor is it rules to keep the Miami Dolphins out of the playoffs!

No, Fin Reg, is the new buzzword used by the business channel talking heads and Washington DC insiders to discuss the impending new Financial Regulations, being sponsored by Senator Dodd-D Conn..  It is being called the greatest rewrite of financial regulations since the Great Depression!

The reasons for the new financial regulations (for those of you hiding under  a rock) are the last two years of financial turmoil.  Not just a few people think that our Congresspeople in Washington had a lot to do to cause the meltdown.  Encouraging Freddie Mac and Fannnie Mae to loan money to the poor amongst us-sounds great on the evening news interview…

But poor people have a hard time paying back loans-especially during a recession.

There is no shortage of people to be blamed for the financial morass of the last few years-I was even guilty of trying to corner the market on Gulf-Coast property-anyone want to buy a lot-financing available????

But excuse me if I am cynical about the ability of the Congress to write new rules/regulations that will save the children and the elderly from the piranha on Wall Street!

What really makes people change behavior?  Dealing with the consequences of their choices.  Having a bailout for everyone sounds great, but what happens next time.  “I got by without too much damage in 2008, let me invest in this new apartment complex with borrowed m0ney-the payments aren’t too bad!!”  “If I can’t make the payments, somebody will show up to help me out.”

What are  a few of the important parts of the new “Fin Regs?”

• A new consumer protection agency-we already have dozens of different consumer protection agency-and the only thing they protect is their own turf.
• Derivative regulations:  Derivatives are a complicated financial instrument used legitimately by a few, such as farmers, to hedge against sudden changes in commodity (ie corn, or soybeans) prices.  The big investment firms have used super-computers to come up with “derivative investments” that are nothing short of a spin of the roulette wheel.  Great reward, but when they don’t work-they can take down multi-billion dollar institutions-see Lehman Brothers and Bear Stearn’s obituary. The problem with regulating derivatives, is the folks inventing them are smarter and more ruthless than the regulators.  Warren Buffet is known to say-he doesn’t even understand many of the “derivatives” on the market.
• Too Big to Fail-the regulations designates a class of too big to fail bank and investment firms.  And it outlines those who would be eligible for bail outs in the future-I thought the whole idea was to eliminate too big to fail-not to codify a category, and give them special protection.  How does that eliminate risk????

The Heritage Foundation, a conservative think tank, has this article describing all the things wrong with the bill.

The Huffington Post, a generally left leaning (progressive, I believe is the new term) has this take on the bill-and as expected is generally supportive.

I can’t help the thought that the supposed “fixes” in the bill, will cause all kinds of unintended consequences for us, the “little people”.  But what’s new with that???

On the other hand, all those unintended consequences will give us financial bloggers a lot to write about over the next couple of years.

Do you have any thoughts on the current bill?  Do you have confidence our representatives in Washington are going to make the financial system a safer place for our hard earned investment money, our retirement accounts, and savings?

Let me know.  I am trying to decide if I will like “Fin Reg Soup”…..And do I want it cold or hot?

The Wicked Recession is dead, long live Dorothy, who killed the EVIL RECESSION!

Who is Dorothy, and how did she kill the EVIL RECESSION, that had so much power, it caused heartache for millions   and  the loss of trillions of dollars, all over the world?

The Recession’s Victims:

• Tina Brown says it’s the media folks who have all lost their cushy jobs!
• The Huffington Post reports “Blue Collar Males are the real victims of the recession!
• The Telegraph says it’s the children who suffer, stupid!!
• The CBS Early Show, says it’s DOGS AND CATS who suffer most!
• Overheard in New York says it is the cocaine addicts, who had to switch to a different drug!

I could keep going and going……

Every group, every special interest think they had it the worst during the recession, and “dammit, somebody do something, and do it NOW!”

That is what broad EVIL RECESSIONS do, they hurt everybody!

The Recession is over?

The Wall Street Journal is reporting that the first  quarter Gross Domestic Product or GDP was positive again-making the second quarter in a row of positive economic growth for the country as a whole.  That, two quarters of growth in GDP, by definition means the recession is over.  Does it mean everyone is feeling fine financially-no!

Does it mean everyone that wants to work is back to work?  Of course not!  Are there pockets in our country that are still hurting, and probably still in “recession” ?

Yes, I would say the town I live in is still in recession, looking at sales tax receipts, our economy has only had one month of growth since 2008-certainly not two quarters worth.

But Nationally, it looks as if the RECESSION IS DEAD.  So who killed the EVIL RECESSION?  Who is Dorothy?

Why that, my friends is me, you, him and her.  We are all slowly thawing from our spending freeze.  The ice on our credit and debit cards is gradually dripping away.

It looks as if the world is going to continue, and  you and I will need new clothes and shoes.  Maybe I won’t be living in the basement, guarding my home against marauding intruders, who were scrounging  for food, as we all seemed to fear a year ago!!!

Maybe  I can actually buy a real present for Mother’s Day, rather than the homemade card and phone call….

New Jobs?

The next step in the recovery is a huge one.  Hiring…. new jobs…. people going back to work, getting  folks out of the unemployment line.

Well jobless claims decreased this week as well!

“Does that mean unemployment rate is going down?”

Not really, it just means  maybe it is not going up anymore.

The real question on the economist’s mind is will this be a jobless recovery?  It is estimated that the “REAL” unemployment rate is upwards of 18%- if you include all those who aren’t looking for work.  Many are frustrated to the point of giving up.  Also not counted are  the folks who are stitching together a couple of part-time jobs just to feed their family.

That is why this  so-called recovery,  isn’t feeling like one. We  all know people who continue to struggle with their finances, and may remain out of work.

What does this mean?

To me it means, keep your credit card in your wallet.  Be careful that your  up-beat feelings -the thought-”maybe the world isn’t ending,”- results in your overspending.

Don’t let that “pent-up” demand, and those feeling of “I have been suffering, and now I need to reward myself !” take control.  You don’t want to wake up next year with a 600 buck car payment you can’t afford, because of a weak celebratory moment at the “End” of this recession.

Plan your spending carefully, continue to get out of debt.  Make your savings automatic, and continue to give and help others.

We will have another recession-you can count on it….  Do all you can do NOW to not participate in the next one.

“How,” you ask?”

By:

• Having your emergency fund in place.
• Staying out of  debt.
• Keeping your friends close, and your family closer!

What are your thoughts about the GREAT RECESSION?  Are you feeling better about the economy?  Do you feel like you were the MAIN VICTIM of this recession?

Let us know.

What is an emergency fund?

Emergency funds are savings accounts, built up for dealing with life’s surprises.  Some may call it a “just in case” fund.

• Just in case the transmission blows.
• Just in case the air conditioner condenser dies-(ask my nursing assistant what she thinks about this????)
• Just in case your softball nut breaks her leg sliding into second!
• Just in case you or your spouse get laid off…..

As a recent post suggested, your emergency fund gives you margin. A little space between a stressful day vs a financial disaster for you and your family.

So the usual guidance is to decide how much you would need to get by for  3-6 months without a paycheck.  This is so important, it was one of the first thing I posted about when I started blogging, “yeeearrs and yeeaars ago!!! (seems like it….)

I wanted,  today, to talk about emergency funds in a little more detail. To “dissect it”,  perform an “autopsy” or as we say in the Operating Room-let’s fine tune this baby-(well, we don’t normally say that, but maybe I will tomorrow, and see what happens!!!!

So, Let’s Fine Tune This Baby!

First, let’s see what the standard recommendations are:

1. You are in debt up to your ………-You need just enough money in your emergency fund  to handle the most basic of emergencies.   $1,000 bucks seems to be the standard here.  The thinking is to pour your extra income against debt, then build up a larger, long-term emergency fund.
2. You have a little/no debt, and a stable work situation-3 months expenses might be enough.
3. You have little to no debt, but you work contract, or commission and your income is up and down-6 months to even a year is better to help you handle those unknowns.

Now for the fine tuning:

• If you or your spouse are paralyzed by idea of only having a 1,000 bucks in savings while you are blasting away at those credit cards-bump that balance up until you both can sleep.  Having extra  money in the bank, can help your REM sleep, I promise…..
• If you know a life event is right around the corner-maybe a baby due this year- then quit  your debt reduction temporarily,  and pile up the cash until you know  the ending of the movie-(healthy baby, and mom, and no surprise medical expenses!)
• If you have no debt, but feel better having a huge pile of money in your emergency fund?  Then think about putting half in a money market account for easy access, and the other half in CD’s or a short-term bond fund that will pay you a little interest. (remember the post about inflation….)  If you have to grab that money, there may be a small penalty, but odds are in your favor that it will grow undisturbed.
• Make your deposits to your emergency fund automatic, so you don’t have to think about it.
• Make sure your money-market account is as high yielding as possible.
• Remember, you are saving for bare bones expenses, not necessarily 6 months of your total paycheck!

A Carnival of Emergency Fund Stories

Emergency savings accounts are so strongly recommended by all the experts, there is no limit to the amount of info you can find, about the why, how, and mistakes in emergency fund management.  Here are several posts from other personal finance bloggers, to give you different takes/opinions on this subject.  Check ‘em out.

Tips on how to save up/add to, your emergency savings:

Free From Broke has these thoughts about emergency savings.

From Consumerism Commentary:  50 tips to help you build your fund-50 tips-no more excuses!!!!

Not Made of Money has these tips for funding an emergency account. Tips, tips and more tips!!!

Emergency Fund Investing Options discussed:

Cool to be Frugal, has this controversial subject, putting part of your emergency fund in a Roth IRA.

Redeeming Riches, talks about your savings safety net, with suggestions for CD Laddering-a way to maximize CD returns.

Personal Finance, By the Book, discusses the use of the emergency fund, to partially self-insure, therefore saving money on your  insurance costs-I love the idea of a high deductible health policy/tied with an HSA-makes a lot of sense….

Real world usage of the emergency Fund!

Well Healed Blog has a real world story, about her use of her “Freedom Fund”

Christian Common Sense saved his honeymoon, (and maybe his marriage) with his emergency fund!

And last but not least:

Budgeting In The Fun Stuff, has this take on Emergency Money

Learn Save Invest writes this about the Emergency Fund!

And Tom at Canadian Finance Blog, has this advice from the far north on your emergency savings!

SUMMARY:

Now, if you can’t get all you need to know about Emergency Funds, in this article, then you just don’t want to do it!!!

Don’t put it off another minute- make the call, visit the bank, or  get online  to get your emergency fund started.  And when it starts to build, return to the ideas above, to:

FINE TUNE THAT BABY!!!!

Let’s hear your thoughts on Emergency Funds-Do you have one, how big is it, have you ever used it???  Let me  know!!

Single stock investing-just what does that mean?

Single stock investing means buying stock in a single company, such as General Motors-well,  maybe not General Motors exactly-but buying shares of a single  company.

If you buy a share of  a mutual fund-then you are buying a small percentage of the total of the stocks that make up that mutual fund.  The mutual fund company usually owns stock in many different companies.

So with a single company stock purchase-you own a piece of that company-yes you can go tell those folks how to run their business-well let’s not get carried away….

With a share of a mutual fund-you own a percentage of the  stocks that mutual fund company owns.

Now why own stocks or mutual funds?

The purpose of owning stocks or mutual funds is to “GROW” your money.  To help you understand the concept, and why it’s important,  let’s look at three scenarios.

Inflation, a short video discussion:

1. You put $1000 under your gurney mattress-In 20 years-you have $1,000, right-well you may have a bill labeled a 1,000bucks, but it will only buy $553 worth of stuff  if inflation runs three percent per year-decreasing your purchase power.
2. You put $1,000 bucks in a CD paying 3%-in 20 years you will have $1800 bucks in 20 years-which holds the value against inflation-you can purchase the equivalent of 1000bucks of stuff at today’s prices.
3. If you buy a stock or mutual fund that grows 8% per year for 20 years-then you will have $4,460 at that time-outpacing inflation-actually GROWING your money.  And that happened while you were at work, asleep, on vacation, whatever-NEAT HUH!!

Why Simply Saving Money is not really saving money:

So, that simple exercise tells you that saving money is not really saving at all, if  your money is not growing at a reasonable rate of return.  That is why there is all the hoopla about investing.  Why there are several cable networks dedicated to investing, and why people spend billions of dollars trying to figure it all out.

Investing:

Investing is simply a way to make your money work- to be making you more money. Rather than you working to make more money.

Cause, see, your time is limited.  You can only work so many hours per week, right.  So to increase your wealth, your money needs to be working for you 24/7.

Buying Single Stock  Shares:

“So how does buying a single stock share grow my money, while I am sleeping?”  “How does that work?”

When you buy a stock share, you are indeed buying  partial ownership of the company.

If you buy a share of Bank of America-the largest bank in the country right now:

• then the price today is ~18 1/2 bucks.
• There are 18 billion shares of the stock.
• So with your one share, you own 1/18,000,000,000 of the company.

Now you may say, “How can owning one share out of 18 billion make me any money, especially in a huge company?”

When you own a share of stock, any growth in the company (in this case Bank of America, loans money receives interest income, charges you fees for the privilege of banking their)  , is usually rewarded by a higher share price.

So over time, your shares become more valuable.

The problem is that if the company is poorly run, or we have a bad economy, then the value of the share can drop-which means if you sell the share, you have lost part of your money.  That is what is known as “RISK!”

So the Billion Dollar Secret, is buying stocks that go up, not down in value.  Simple, huh.

Of course we all know-it is not easy to  tell which direction a company’s stock will go-up or down.

That, my friends, is the reason why so many financial experts discourage individual investors from buying single company stocks.

You have to be an expert to consistently pick companies that grow and increase the value of your share….  And the number of investors who are able to do that on a consistent basis is pretty small.

Even the average mutual fund manager has a poor track record at picking the right stocks more than 50% of the time.

So does that mean we just quit trying????  NOOOO!, because if you do, inflation will kick your behind, every time!

Now this is a long enough post on this subject today-I will continue this same thread in another post and discuss further the pro’s and con’s of buying single stocks.  This concept is very important to understand- so let’s get the basics down.

Kind of like studying anatomy and physiology, if you are in the health-care profession.  If you don’t know how the body works-how you gonna fix it????

So keep checking with us, here at The Millionaire Nurse Blog, for more information on how to make your money grow!!!!

And ASK QUESTIONS BELOW, IF YOU DON’T UNDERSTAND SOMETHING!!!!

Roth and Traditional Ira’s-a topic of a great deal of discussion.  I have written previously about these differences in a recent Investing 101 post.

This subject is still “greek” to a lot of folks, if my discussion with my nurse friends is any indication.

Comments like, “What the hell were you talking about-I didn’t understand a word you were saying!”  Or, “you lost me when you started discussing the different stock   indexes like the Russell 2000, what the heck is that?  Is that similar to a Jack Russell Terrier or something??????

So my goal is to continue to break these investments issues into small segments, and allow things to sink in.

As I was taught by the senior residents, when I was an intern-Practice, Practice, Practice-we are only letting you admit every patient for the next 72 hours, because we are here to help you learn!!!

So I taped this video, the same day I taped the one about  opening a local brokerage account, at a bricks and mortar office-something that intimidates a lot of folks.

In this video today, Hal, a registered broker is discussing a few of the differences between Roth IRA’s and Traditional IRA’s.

Take Home Points in  the Roth/Traditional IRA decision tree:

• Both are better than neither.
• They offer a way to put away more money for retirement, than you might be able to put into your work IRA
• They are more in your control than your 401-K or similar work accounts-the choice of investments is almost endless!
• The Roth IRA is more limited by income as to who is eligible
• The Roth is usually considered non-deductible but is tax free on withdrawal
• The traditional IRA is a tax deduction for most eligible folks but is taxed  on withdrawal.
• But as I said in the first bullet point-either one is better than nothing!!!

If you have any questions, please feel free to let me know.

I will do a  few posts soon-interviewing a CPA-with their  thoughts on these issues from a tax standpoint.  As  soon as they get over tax season-Tax season to a CPA is much like Christmas shopping season to a retailer, it is good for the bottom line, but heck on your Family Life!!!!

Thanks again to Hal, and Julie at Warren and Brannen Inc. for their assistance.

Opening a New Brokerage Account-For Beginning Investors

You want to open a brokerage account, but you have several concerns:

1. You don’t have much money:  Many accounts have very small minimums, especially if you tie it to an automatic deposit, which I highly recommend-maybe 20-50 bucks a month.  Then try to add to it every quarter or year.
2. You don’t think they will take you seriously, you are” just a nurse”… If they don’t take you seriously, answer your questions with sincerity, or you feel they are looking down on you, GO SOMEWHERE ELSE!!!!
3. You don’t have time-This is important-it is something you make time for.  Make it a priority.
4. Do you open an online or local  bricks and mortar account as described in the video?  That depends on your needs.  If you are computer savvy, or there are no local brokerages (we have several in our small town)-then go with the online option.  If you need someone to teach you, and you like having a real person in front of you, then go with the local brick and mortar office.
5. Which is cheaper? That question is too complicated to answer.  Every different type of account can have a different fee schedule.  Fees can definitely affect how well your account does, and it is important, as you build confidence, to keep them in mind.  That being said, for all those people like you who don’t even have an account at all, then fees are inconsequential.  A high fee account, will still give you more money in twenty years, then no account-(spending all you earn…..is not a good plan).

Key Points to Remember:

Now, remember these key points and if you are still nervous, practice these vocalizations….

• I am worthy of opening a brokerage account.
• I want to learn to build wealth for my families future.
• I will be a good customer, who wants to learn-they are lucky to have me.

So, thank you Julie, at Warren and Brannen, for allowing me to interview you.  Your Bosses are lucky to have you!!!!!