How Do I Make a Budget? Looking at the 50/20/30 Rule

The short answer: it depends. Not everyone is going to spend and save the same percentage of their income each month. However, deciding upon a feasible plan to allocate your monthly spending is important, and something that everyone should be doing once they receive an income. Currently, Americans have one of the worst savings habits in the world, demonstrated through the high average retirement age of 62. This means that knowing how much money to save as well as how much to spend are crucially important to financial well-being. In this article, I will discuss how much income should be saved and spent each month, and where your money should be placed to ensure financial security and freedom. I will be discussing the 50/20/30 rule, the hallmark budgeting rule, and why I believe it is the best rule to use.

The 50/20/30 Rule

When you start looking at your budget, you should follow the simple 50/20/30 rule. Spend 50% of your income on necessary expenses, 20% on savings, and 30% on discretionary goods and services. This layout will give necessary flexibility, but also a good baseline to start your budget from.

50% – Necessary expenses include rent, car payments, and groceries. These expenses are, by nature, going to take up the largest chunk of your budget.

20% – Money that is saved should go to various different savings and investment accounts to maximize the return on your savings. After all, that money is useless if it isn’t being put to work.

30% – Discretionary goods are goods and services that you want to buy. These include clothes or a gym membership. These types of products are not necessary, but purchased through a consumer’s decision.

Why the 50/20/30 Rule Works

You’re probably thinking to yourself, “why do these specific values work?” This is a good question. These values are seemingly arbitrary; they don’t adjust to context for different situations. You would be correct in thinking this way. The 50/20/30 rule is not meant to be followed to the penny, but in fact adjusted to different financial realities. Suppose you have a lot of college debt in addition to the normal necessary expenses such as car payments and rent. That college debt has not been factored in to the 50/20/30 rule. Thus, you are going to have to adjust your budgeting plan. Perhaps a 55/20/25 rule would suffice. Less money should go to discretionary spending, and more should be allocated to necessary payments.

The 50/20/30 rule has been praised by experts, and still remains one of the most popular and successful methods out there. It was created by Harvard economist Elizabeth Warren and her daughter. And most experts agree that at least 20% of your monthly income should be saved.

It is important to note that are many other budgeting methods out there, including the much simpler 80/20 model, which eliminates the need to differentiate between wants and needs. The only thing you should focus on is saving 20%, and using the rest on the other spending.

How do I implement this budget?

The hardest part of budgeting is actually following the budget. It is easy to set goals for yourself, but to follow them is the hardest part. To implement a budget, pick one of the following methods:

The Old Fashioned Spreadsheet Budget

To use this budget, simply print out some budgeting worksheets from online such as this one or keep a log in Microsoft Excel. Then, choose one regular spending months out of the year, and track all of your expenses. Keep all of your receipts, track your monthly income pulled in, and write it all down in the spreadsheet to the nearest penny. Make sure that all of your expenses are in neat columns, so everything is easily organized and understandable.

Budgeting Apps

Lately, budgeting technology has exploded, providing new alternatives for keeping track of budgets. Also, new technologies can link credit cards to your phone, allowing you to easily track all purchases.

The best budgeting app on the market by far is called Mint. It is an application released by Intuit that can manage your money, including your budget allocation. Your credit cards and bank accounts can be linked to the app through your phone, allowing you to easily centralize all of your expenses.

In Conclusion

Each method of budgeting isn’t going to work for everyone. For some, perhaps sitting down at a table, looking over all expenses, and recording numerical expenses each week is best. For others, a budgeting app will allow them to see their spending habits each time they make a purchase, and will also allow them to adjust accordingly. The goal of budgeting is not to use “the best” strategy, but to use what benefits you the most. There is no clear-cut budgeting strategy. That said, using a budget is much better than not using one at all!

Navigating the Marijuana Industry: 3 Stocks and 1 ETF to Buy in 2019

In the past few years, the marijuana industry has expanded at an unprecedented pace, and has not looked back. The recent legalization of recreational cannabis in Canada, as well as continual legalization in states has paved the way for manufacturers, wholesale distributors, and shops to take advantage of the rapidly growing market. Marijuana-based IPOs have increased, and will continue to sweep the markets this next year. In fact, the industry is doing so well that it is projected to grow by as much as 38% this year in 2019. This is a global phenomenon that many investors want to profit from. However, there are now many firms and companies vying for the same market share in the industry, so it is important to do your research with regards to picking certain investments. In this article, I will break down my top four picks for marijuana-based investments that you can add to your portfolio this year.

Aurora Cannabis Inc. (ACB)

Aurora Cannabis is my favorite marijuana stock. From a balance sheet standpoint, ACB looks healthy and even undervalued relative to the cannabis industry. With a Price/Book ratio of only 2.63, ACB is much more undervalued than its competitors such as Canopy Growth and Tilray, both of which boast P/B ratios of more than 10. Additionally, with quarterly revenue growth of over 360%, ACB has proved it can strategically expand its business at rates much higher than the aggregate industry in which it operates. When ACB becomes consistently profitable, it will be an even better company.

ACB is also a great company to invest in due to its large market share and strong advisory team. Aurora has positioned itself to have a dominating presence in the Canadian market, which has legalized recreational marijuana. By securing various licensing agreements and establishing a strong network of distribution facilities and companies, ACB will continue to be a major player in Canada. ACB has also secured experienced advisors, namely Nelson Peltz of Trian Fund Management. This move could propel ACB above the rest.

Canopy Growth Corporation (CGC)

Canopy Growth comes in close second in my opinion. Although CGC does not have as strong of a balance sheet, with a P/B ratio of 9.44, a profit margin of -265.24%, and a Debt/Equity ratio of 10.66, it is a solid company. Based purely on size alone, CGC is a behemoth in the industry. It has nearly double the market capitalization of the next biggest player, Aurora Cannabis, and has more than triple that of Tilray. CGC has the largest market share of the industry, with TTM sales of more than $70 million.

CGC is a great investment, not because of its balance sheet, which will improve with time, but because of its strategic merger and acquisition activity. Canopy Growth has played the M&A market the best out of any marijuana producer. It has acquired Acreage Holdings, Inc., a cannabis producer with one of the best exposures to the United States market. CGC has effectively positioned itself to take control of the U.S. marijuana market when more legalization occurs. Additionally, CGC has a lucrative partnership with Constellation Brands (STZ), which has invested $4 billion in the marijuana producer. Constellation Brands is a producer of liquor, so CGC has access to an entirely different and potentially valuable industry apart from cannabis. CGC has proved it can separate itself from the competition, something that will be important going forward as the cannabis industry continually changes.

Industrial Innovative Properties, Inc. (IIPR)

Industrial Innovative Properties is a company perhaps unlike any other within the marijuana industry. This is because IIPR is a REIT, or an investment trust in real estate, rather than a manufacturer or wholesale distributor. Additionally, IIPR has consistently stayed within the medical marijuana side of the industry, which allows them to position within 33 states, rather than just a few that have legalized recreational use.

IIPR has positioned itself within a niche corner of the marijuana industry: properties. In order to grow vast amounts of product, companies must purchase or rent very large spaces. Only a few plants can actually grow per square meter, meaning that the large competitors within the industry are going to have to continually acquire space that allows them to expand operations. By controlling the market for real estate rather than actual product, IIPR avoids a lot of issues with regards to regulation and allows them to truly focus on the bread and butter of their business.

IIPR also pays a dividend of 2.20%, which allows the dividend investor to open a position within the cannabis industry.

AdvisorShares Pure Cannabis ETF (YOLO)

The Pure Cannabis ETF, under the ticker symbol YOLO, is a brand new diversified marijuana ETF. It is actively-managed by one of the top ETF providers, AdvisorShares, and has a relatively low net expense ratio of 0.74%. It has holdings which present a diversified basket within the industry. If you are too afraid to take a position within one single cannabis company, this ETF should provide more safety through diversification among various companies, from small cap to large cap, as well as among various products sold. As the marijuana industry continually grows, so should this ETF.

In Summary

The cannabis industry has not nearly tapped into all of its potential yet. As more and more states in the U.S. legalize both medical and recreational cannabis, there will be more opportunities for marijuana sellers, licensers, and distributors to make money. The marijuana industry has continued to grow at incredible rates, and there are investments that can allow you to profit off of the trend.
Financial data from finance.yahoo.com

The History of Regulating the Financial Markets: The Great Depression and 2008

As much as investing is crucial to our economy, so are the rules which regulate it. As shown in history, when regulation was misguided or lacking, massive financial and economic crises have happened, most notably the Great Depression and Great Recession. Why are regulation so important? Most clearly, they prevent the misconduct which places excessive risk, usually on other less powerful actors. In this article, I will discuss the historical development of financial regulation in the US.

Pre-Depression Regulation

Before the 1900s, investing was an activity almost completely for the rich. Only the wealthy could find the money to invest and afford the risk of loss. Since it was restricted to so few people, it was also restricted in complexity and regulatory oversight; most pre-industrial revolution investing was in the form of private joint-stock companies, which are private agreements of shared ownership, and bonds from banks and governments. These required very little regulation as most joint-stock companies were formed with personal business associates and most bonds were issued by reputed institutions. However, as their was little regulation, investing was considered extremely risky to the less wealthy. It is important to note that the early flexibility in investing did fund the developments of factories and railroads in early America. These enterprises were lucrative, but minute in comparison to the big business of the 1900s.

The Industrial Revolution in the early 1900s granted a greater disposable income to the middle class, which they began investing in stocks and bonds, usually through brokerage firms. This practice grew and grew, causing the 1920s to be known for its booming stock market where more people began putting their money. Despite the increasing complexity and size, before the abrupt end of the boom, the only meaningful regulation of investing was the Blue Sky Laws. The Blue Sky Laws were a set of state laws which required the issuers of securities to disclose some basic information about their business. The general purpose of these laws was to protect investors from being ripped off because of a lack of information. However, since these laws were on a statewide basis and most administrations were dominated by pro-business forces, the laws were impossible to enforce federally and thus had little effect.

Floor traders gather on the floor of the exchange to buy and sell securities in the early 1900s

The Great Depression, 1929

The Blue Sky Laws definitely did not prevent the sudden and severe crash of stock prices on October 29th, 1929 which sparked the Great Depression. Before the crash, the prices of securities were vastly inflated; during the 1920s, stock prices rose continually because investors expected them to continue rise, leaving the book value of stocks far above the actual fair value. This phenomenon is called a bubble. Additionally, high-level stock brokers manipulated stocks prices in the short run to make off with immense profits and leave the uninformed investors holding the bag. And when expectations turned the other way, naturally the bubble popped, and the prices dropped severely. However, the collapse of the stock market would not have snowballed into the Great Depression if it were not for the banks.

Despite the Federal Reserve being established a decade earlier, banks were not properly regulated. Out of greed, they loaned much of their deposits to regular people to invest in stock markets, more than to commercial ventures, and when all that loaned money in the stock market disappeared overnight, the American public lost faith in the banks and rushed to withdraw money from them. However, since banks did not have enough currency in the vault to repay depositors, many banks went out of business, further ruining consumer expectations. All this lead to a drying up of credit and loans, which are vital to business investment and consumer spending. The Federal Reserve could have counterbalanced this by pursuing an expansionary monetary policy and pumping money into the economy, but it didn’t. As a result, the economy came to a halt in the 1930s: business laid off workers, which caused a drop in consumer spending, which in turn caused businesses to lay off more workers. At the Great Depression’s peak, or trough, the unemployment rate was 25%, and men all over the nation left for California in search of jobs, where there were none.

Roosevelt (and Hoover to a much smaller extent) tried to mitigate the depression by increasing government spending in the form of public works. Roosevelt’s package of government programs was called the New Deal, and it had a small alleviating effect on the depression, dropping the unemployment rate from 25% to 14%. The real solution, however, was the U.S.’s entry into World War II, which kicked the U.S. economy into overdrive, dropping unemployment down to below 2%; it was in effect an extreme increase in government spending.

Resulting Regulation

The more lasting effect of the New Deal was its reform of the Financial Sector. The Securities Acts of 1933 and 1934 made the disclosure of financial statements, the business managers, and the past performance of a business; and established the Securities and Exchange Commission (SEC) which mandates the rules of securities markets and is in charge of enforcing regulatory laws concerning securities, which it actually did. The Glass-Steagall Act attempted to prevent bank misconduct and greed by splitting up commercial banking and investment banking and capping the percentage of a bank’s income which can from securities. In addition, it established the Federal Deposit Insurance Corporation (FDIC) which insures banks, preventing future bank-runs.

Depositors in a bank gather in a famous “bank run,” fearing for the security of their money

The regulation following the Great Depression was focused on fixing the banks, which it reasonably did. The establishment of the FDIC resulted in the elimination of the fear of bank runs; rather future crises, like the Great Recession, were caused by the drying up of loans. In addition, the separation of commercial and investment banking reduced the misconduct of lenders. In the future, predatory loans would be made, not by banks, but by other institutions. The role of the SEC increased; gradually, they began actively investigating and regulating financial misconduct. Now, it is an important check on the market. These laws formed the first steps of the basic regulatory system of banks. The biggest unaddressed problem was the ever-growing size of the banks.

The Great Recession, 2008

All of this added regulation was controversial after the Great Depression ended; many believed they reduced the flexibility and thus profitability of the financial markets, which made U.S. investment robust, and so the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act in 1999. Bankers’ greed was again realized to the detriment of the U.S. economy: in the early 2000s, like the prelude to the Great Depression, banks made risky loans – called subprime loans – to finance assets – houses – which rose base on expectations. However, in this case, banks made the loans, not out of the belief that could collect on them, rather they planned to sell the bundle of risky loans to other financial institutions. These bundles were extremely profitable at first, as the prices of houses continued to rise, meaning defaults still led to profits.

A foreclosed home still struggling from the 2008 housing crisis

But in 2007, the housing bubble collapsed; houses which were purchased with massive predatory loans were now worth much less, and the people who took out the loans were unable to pay them back. Suddenly, banks were unsure what the value of their loans and securities based on loans was; and froze credit. Large financial institutions like Lehman Brothers were forced into bankruptcy, and others merged to survive.

Resulting Regulation

The government tried to take decisive action by bailing out banks, passing a stimulus package, and dropping the interest rate to 0%; all actions which were believed to keep credit and the economy flowing. However, there was still a significant recession and a sluggish, but constant, recovery. Officially the Great Recession of 2008 ended in June 2009. In 2010, The Obama Administration pushed through the Dodd-Frank Act, regulatory laws targeted toward permanently preventing another housing bubble: it mandated that all transactions of securities be made public; limited the types of risk banks could take on; proscribed a process to investigate and, if needed, dissolve large banks; and created the Consumer Financial Protection Bureau, which attempts to stop the type of predatory lending practices and financial misconduct which created the housing bubble. As an aside, the practices which caused the housing bubble and financial crash were new to regulators and investors, so it was unable to be properly managed.

United States President Barack Obama signs into law the Dodd-Frank Act to regulate financial institutions after 2008

It is still too early to absolutely declare whether these regulations worked, but there are some general conclusions which have developed. The practice of predatory housing loans have disappeared, but short-term predatory loaning and car and student loans have replaced it (partially at the fault of the government). And the CFPB has made significant progress for consumers, but many say it hasn’t taken enough action, especially after the current administration took over. Additionally, the Dodd-Frank Act has been called restricting to our traditionally robust financial market; this is troubling because our financial market is a catalyst for American growth and American economic supremacy. Furthermore, small banks were heavily burdened by the law, leading to a partial repeal of Dodd-Frank in 2018.

Conclusion

As the Dodd-Frank Act was partially rolled back in early 2018 and as the new Republican administration has taken a step back from regulation, questions have been posed whether more regulation of the financial market is needed. However, there are doubts that regulation will work. In the financial markets, there is robust innovation directed toward circumventing laws and earning the quick dollar. Therefore good regulation pursues the motives in addition to the methods: when greed and selfishness are curbed or prevented – either by decentralizing the benefits or limiting the returns – reckless actions are deterred into responsible ones.

Nevertheless, proper regulation of the financial sector is critical to everyone; it is in control of the transactions which determine the ability of the economy to flow. When those in control of the financial markets make poor decisions, out of greed or incompetence, there are severe consequences around the world. Both the Great Depression and the Great Recession caused global economic panic. Both crises precipitated from investors making decisions which were profitable in the short-run but placed great risk onto others (called moral hazard). Therefore, it is imperative that every investor does what he thinks is most profitable to his firm and in effect the economy in the long-run. The question is whether our government regulation is up to the task.

More Information

https://www.law.cornell.edu/wex/blue_sky_law

https://www.law.cornell.edu/wex/securities_act_of_1933

https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

Seven Things Students Can Do to Guarantee Future Financial Success

Seven Things Students Can Do to Guarantee Future Financial Success

For many students finishing up high school and heading to college, the prospect of planning for your financial future might seem intimidating. Between taking steps towards financial independence and learning how to rely on yourself as a primary income source, trying to navigate the world of money and finance for the first time can be overwhelming. Fortunately, we have compiled a list of seven things you should be doing as you head into college to ensure the financial security and success of your future.

1. Budget Your Income

One of the easiest and most often overlooked steps towards financial security is creating and sticking to a budget. We often hear about corporate and government budgets, but for an individual, budgeting simply means creating a financial plan for how to allocate future income and handle anticipated expenses. Setting up a budget early on is critical in helping you meet your financial goals and making sure that you always have enough money for your non-discretionary expenses. Another thing to keep in mind when creating a budget is thinking about both short term and long term financial goals, as the failure to acknowledge them both can be problematic.

Simply creating a budget is only half the battle. Once you have established your financial goals and designed a budget that will help you meet them, it is important to learn how to stick to your plan. In today’s world, there is no shortage of tools that can be used to aid you in this. From spreadsheet programs like Excel or Google Sheets to track and manage expenses, to new budgeting applications like Mint, Pluto Money, or PocketGuard, you can experiment with different methods of sticking to your budget to figure out what works best for you.

2. Prioritize Your Spending  

Along with creating a budget, comes the ability to learn how to prioritize your spending. This means creating a list of your monthly expenses. Once you have established a list of all the different ways you are allocating your money, you should go through the list again and classify your expenses as either necessary (bills, rent, food, transportation, savings, etc.) or discretionary (all other non-essential expenses). If this still seems complicated, think about as a way of sorting your expenses into wants and needs: what payments are absolutely critical and where do you have unnecessary financial leakages? Learning to evaluate your spending and cut back on discretionary expenditures can help you grow your savings and ensure a more promising financial future.

3. Pay Yourself First

As you learn to prioritize your spending, your number one financial priority should be paying yourself first. Even before allocating money to cover your necessary expenses like food and transportation, set money aside for savings. Learning to save your money early on is one of the simplest and most powerful ways of building wealth and creating financial security, and yet many people never learn this critical skill. The alternative— saving what is left over after your monthly spending— is not nearly as effective, as much of the money that might have been saved earlier on will go to discretionary spending. If you are unfamiliar with how to best safeguard this saved money, there are a number of savings vehicles you can familiarize yourself with, such as high-interest savings accounts or retirement savings plans.

4. Build Credit

Like with savings, it is important to start building credit early on. Often, young people share the common misconception that establishing good credit is only useful for significant far-off purchases, like buying a home. While good credit is certainly important when buying a home, it is also something that is very applicable for college students. For instance, student loans can affect both your credit report and credit score. Although student loans have the potential to impact credit negatively, if you are informed and actively work to build good credit, they can be an opportunity to build a history of positive credit. So how do you establish credit anyways? Building credit doesn’t happen overnight, but if you are diligent and make sure that all of your payments are done in full and on time, you will be in a good position. It can be tricky to build your credit up from scratch and it’s often said that it’s easier to damage your credit then build it back up, so it’s important to develop good credit habits early on.

5. Don’t be Afraid to Take Risks

So far we have discussed the many steps that you can take to ensure the security of your financial future, but it is also important to learn how to take risks. Although your youth is a good time to start saving and establishing good credit, it is also the best time of your life to take financial risks. In comparison to older and middle-aged adults, there is a lot less at stake and a much greater payoff from taking financial risks in your youth. That being said, in order to ensure that you can be in a position to take risks with your money, you should make sure that you have covered your bases in other ways (like, as mentioned earlier, by establishing credit and building savings).

6. Improve your Financial Literacy

The best way to guarantee that you are setting yourself up for future success is to make sure you are making informed decisions about your personal finances. If even the mention of building credit and sticking to budgets seems overwhelming, the best thing you can possibly do is to start learning about how to handle your money by starting with some of the most basic concepts in finance. Improving your financial literacy doesn’t have to be difficult, and in fact, if you have an open mindset, it can be very fun and rewarding. You can start by checking out some of the other lessons on our website!

Even if you feel like you already have a good understanding of personal finance, don’t let that be an excuse to stop educating yourself. To have a good sense of how to manage your money, you need to not only understand the basics but also be able to keep up with the ever-changing nature of markets, economic trends and the publications of new research and emerging theories.

7. Invest in Yourself

At the end of the day, the most important thing that you can do to ensure a successful financial future is to invest in yourself. Learning to take care of yourself and maintain healthy habits with regard to exercise, sleep, nutrition, and mental health is a necessary skill that often goes overlooked. Earning capacity tends to increase as you continue through life and more opportunities and prospects will open as you advance in your career, but you will only be able to enjoy these benefits if you are in good health.

It is also important to prioritize your education, to ensure stable employment and financial well-being in the future. Investing in a college education may be the best decision for you, even if that means taking on debt. Prioritize the educational opportunities that you feel will best benefit you in the long-run.

Instead of being overwhelmed by the growing financial responsibility that comes with graduating high school and starting college, by making use of some of the aforementioned tips, you can use your youth to your advantage.

Additional Sources:

https://www.thebalance.com/financial-tips-for-high-school-graduates-4140397

https://www.forbes.com/sites/kathycaprino/2014/08/21/7-simple-steps-college-students-should-take-to-build-financial-literacy-and-responsibility/#7498717025bb

What’s a College Degree Really Worth?

With admissions rates dropping and college tuitions rising, making decisions about which college to attend or what to study can present students with a difficult set of challenges. Often, labels of prestige and other societal preconceptions can overwhelm the decision making process. Fortunately, there are a number of tools that students can employ to help facilitate these choices, especially with regard to personal finance. In this lesson, we will analyze the different postsecondary steps for students and the economic impact they might have on one’s future. For many students, college (or other post-secondary paths) is the first time they are given significant financial responsibility for their future, and it is therefore important that students recognize this responsibility and make well-informed decisions.

Is going to college even worth it anyways?

Reliance on one’s conventional wisdom might make the answer to this question seem obvious: of course college is worth it. For decades, a four-year university education has been the unquestioned next step to financial security and personal success. Those who attend college will have better opportunities, greater employment prospects, and earn more money, right? Well, kind of. A college education is undoubtedly beneficial, and it is true that college graduates face much lower rates of poverty and unemployment than their peers that lack four-year degrees. Yet in recent years, this same conventional wisdom that a college education guarantees success, has also come under fire, with some arguing that the economic benefits of college are often overstated, and failing to account for delayed graduation, drop out rates, and much more.

In economics, we often study opportunity cost, which is the forgone benefit of the next best alternative. This concept can be directly applied to the question of whether or not it makes sense to attend college. Students should ask if the benefits of a college degree, when coupled with astronomical tuition prices and burdensome student loans, outweigh all the alternative paths a student could pursue with the same money and time. The answer to this question is by no means uniform. For many students, a four-year university education is the safest and best choice. Between scholarships and financial aid to combat the price tag, the security of college guarantees the future that many aspire for. For others, an associates degree can be the perfect way of combating the economic and time constraints of college. And in the very rare cases of those such as Bill Gates and Mark Zuckerberg, a revolutionary idea and an ability for hard work can outweigh the cost of college. Regardless of the decision you make, analyzing the opportunity cost of your choice will help ensure that you have made the best decision.

So how do I decide which college to attend?

Let’s say you fit in with the majority of current high school students that make the decision to attend a four year college. Whether you are deciding which schools to apply to, or have already applied and are trying to figure out what school to attend, such decisions can seem incredibly daunting. Unfortunately, in the hypercompetitive world of college admissions that we live in, a student’s election of educational institution is often clouded by prestige. Recently, however, more and more people have been questioning whether it matters what school a student goes to.  And while what a student does in colleges is much more significant than the specific institution they attend, the school itself is certainly remains important. So how can one best evaluate their options for college and decide which school to attend? Although conventional measures of choosing a college, such as location, size or general atmosphere, remain a necessary means of analysis, it’s also important to evaluate an institution from a financial perspective. This analysis is different for all students, and depends on both a student’s motives for pursuing secondary education and their plans after college.

For those that are interested in obtaining a four-year degree with the intention of immediately entering the labor force upon graduation, gauges such as starting salary level or job earning potential can provide important insight. Many schools publish statistics showing the employment statistics of their alumni. These statistics are a valuable source of information for a potential student. Specific indicators to focus on include the average salaries of graduates upon entrance to the labor force, the average maximum income or earning potential of alumni, and the relative employment rates of graduates in comparison to the rest of the population.

What should I study?

Not only is it valuable for students to evaluate how a specific institution may impact their financial prospects, but it is also helpful for students to think about the area they plan to study. Of course, the highest priority for a student choosing a major or area of study should be to pick an area of interest and genuine passion. Yet while it is important for students to study areas that interest them, it is also critical that students understand the ever-changing nature of the job market. With the continuous technological advances in areas such as automation and artificial intelligence, the job market even ten years from now, will be greatly different from how it is today. In fact, a recent report from McKinsey found that roughly half of current jobs could theoretically be automated. The increasing automation of many modern jobs means that future employment opportunities will require creativity, complex problem solving, critical thinking, and emotional intelligence in greater demand than they do today, while jobs in areas that are easy to automate will continue to become increasingly obsolete. It is therefore important that students are cognizant of how the areas they study and the careers they desire will be affected by automation.

What if I want to continue education after college?

Many students choose to continue their education after college, whether that is by enrolling in a program to obtain a Master’s degrees or by going to Law or Medical school. Although this may seem far away for students making decisions about their undergraduate studies, the intention of continuing education beyond a four-year college degree should influence a student’s undergraduate choice. For example, students interested in either continuing on to graduate programs or following a more academic path may be attracted to accessible research opportunities during their undergraduate studies. Students can analyze the schools with the best opportunities for research by looking at the amount of research funding that schools receive from the federal government, as well as by analyzing an institution’s budget and spending. Schools that prioritize spending on aspects such as new athletic amenities and housing might not have as strong of research opportunities as those universities that allocate a greater amount of money to funding research projects and initiatives. Another way of analyzing the quality of an undergraduate program with regard to plans of future graduate studies is by looking at an undergraduate institution’s acceptance rates to graduate programs, and the subsequent success of the students that enroll in said programs. This helps illustrate the degree to which an institution prepares its students for further studies. Finally, those students interested in continuing formal education should be aware of the additional costs that they might incur.

How do I pay for all of this?

Another important thing for many students to consider are financial aid and scholarship options. The price tags of American universities are astronomically high and can present a significant financial burden for many students. So far, we have talked about ways to maximize benefit by choosing an institution that provides the best value for students, but we can also look at how to minimize cost and most effectively finance secondary education. The world of financial aid is complex and deserving of its own article, but fortunately, there are many resources available for students. The Federal Student Aid office of the U.S. Department of Education offers a substantial amount of information for students about paying for college, as well as pointers to other pages that might serve as interest. Additionally, many online databases provide a large set of scholarship opportunities.  

In Conclusion

In this day and age, students are often attracted to institutions for the label of prestige that they represent. While the prestige an institution is associated with is not unwarranted, an analysis of the aforementioned factors can help students determine the best path to pursue with their post-secondary plans.

Interesting additional reading:

https://www.bls.gov/careeroutlook/2018/data-on-display/education-pays.htm

https://www.wsj.com/articles/the-right-way-to-choose-a-college-11553266896

Mitigating the Effects of Inflation

If you have ever held on to money for an extended period of time, you may have noticed the money being worth less. Perhaps you were saving money to buy a new phone, but when you checked the price again it went up by twenty dollars. Perhaps you noticed that, although your wages went up, prices increased much more dramatically. This is because of inflation. In this article, I will talk about what inflation is and how it affects people.

What is Inflation?

Inflation is a sustained increase in the price level for goods and services over a relatively lengthy period of time. The target inflation rate for the economy is 2%. If the price level only increases for a short period of time, that is not inflation, as inflation occurs over an extended period of time. An example of inflation, as shown by this calculator from CNN, is how $2000 in 1957 would be equivalent to $16,634 now.

You may have heard of Venezuela, the South American country, known for its political upheaval and hyperinflation. Venezuela is currently dealing with the effects of unrestrained, uncontrolled inflation. The economic situation is spiraling out of control. According to the IMF, cited in The Washington Post, “Venezuela’s hyperinflation is poised to reach an annualized rate of 1 million percent by year’s end.” To put the sheer magnitude of that inflation rate in perspective, locals sell artwork made up of thousands of Bolivar notes because they are essentially worthless. In the United States, the government and the Federal Reserve are responsible for preventing hyperinflation through fiscal and monetary policy.

How Inflation is Tracked

Inflation is tracked through the Consumer Price Index (CPI). The CPI tracks the changes in the cost of living over time.The CPI is a major index and is the one used by the government. Since the CPI calculates inflation, the government can use it to determine the economic policies needed to prevent inflation. Inflation is also tracked through the GDP Deflator, which is used to deflate the GDP to base year prices, indicating real output.

Each year, the inflation rate is an important factor for the government and other agencies tasked with protecting the economy, particularly economic advisors in the White House and the Federal Reserve. Inflation can often dictate whether or not the economy is overheating, and if necessary fiscal or monetary policy actions must be taken.

Inflation Effects on Borrowers and Lenders

Let’s say you take out a loan on a fixed interest rate. You expect the inflation to be 3%, but it actually is 5%. If you are the borrower that means that the amount of money you have to return is worth less, so it benefits you. However, if you are the lender, the amount of money you get back is worth less than the original amount so it is detrimental towards you. Similarly, if the expected inflation rate was at 3% but the inflation turns out to be 1%, the borrower would have to pay back more than he or she borrowed, benefiting the lender but not the borrower.

What truly matters is your real interest rate, which is the nominal rate adjusted for inflation. If there is more inflation than expected, the real rate decreases, and the borrower ends up owing less. If there is less inflation that expected, the real rate increases relatively, and the borrower ends up owing more. The lender receives a high payment than before.

How Inflation Affects Individuals and How to Protect Yourself

Inflation commonly affects people’s savings. Suppose you decide to save $100 and put it in a cupboard in your house. If the inflation rate is 2%, then a year later you would need $102 to buy the same amount of goods $100 would buy the year before. As a result, individuals should invest their savings so that their purchasing power will not decrease. Many investments will rise with inflated prices. There is an opportunity cost to not putting your money to work.

Inflation especially affects retired people, as they will not be receiving additional income anymore. According to Poonkulali Thangavelu from Investopedia, you can safeguard your money by investing your money in Treasury Inflation-Protected Securities, stocks, or mutual funds. Although those are riskier than a savings account, you are able to get a higher return. Furthermore, consumers should know that inflationcompounds when trying to calculate the inflation for the future.

In order to further protect yourself from inflation, you can invest your money into real estate. However, you should realize that you need to hold onto real estate for a couple years in order to see the prices increase by a sizable amount. Furthermore, you can invest your money into real assets like gold. You should also make sure that you are protecting your savings and getting the best interest rate from savings accounts and investments. If you manage to find a good deal, your money could have a higher interest rate than the inflation, causing your money to have more purchasing power over time. You want to avoid having your money depreciate. You should also attempt to hold a job where your raises increase at a faster rate than the inflation, through negotiating wages that reflect expected inflationary prospects in the future. If this is the case, then you will not succumb to inflation and you will preserve the purchasing power of your money at the same level or higher than before the inflation.

Final Thoughts

Next time your wages go up, think about if you really got a raise. If the price level in the economy increased by 5% but your wages only went up 3%, your money is worth less and you have less purchasing power. Make sure to see if your real wages went up, not only your nominal wages! Hopefully this lesson will have made you more educated in making borrowing and lending decisions. There are important steps that you can take to protect against inflationary pressures that have the potential to devalue the purchasing power of your money. Inflation an important macroeconomic concept and one that needs to be understood in order to make educated consumer and financial decisions.

The Business Cycle: Is a Recession Soon?

It seems like the US economy crashes every decade or so, and there is some fact in this; the US economy and every other economy undergoes alternating periods of expansion and depression. This phenomenon is called the business cycle.

What is the business cycle?

Specifically, the business cycle refers to the fluctuation of the economy about the potential level of GDP. The potential level of GDP is the GDP when all resources are efficiently used and there is a normal rate of unemployment. The real level of GDP falls below potential GDP when resources are not used efficiently or when the unemployment rate rises above the natural rate. The real level of GDP rises above potential GDP when resources are overused – like destructive logging or disastrous pollution – or when some people who are economically unemployable are given jobs.

The business cycle consists of a period of expansion relative to the trend of long-term growth, after which the economy will reach a peak. Then, there is a period of contraction/recession relative to the trend of long-term growth, after which the economy reaches a trough. Then, the business cycle begins again. Cycles are not regular in length; sometimes depressions can occur within a couple of years, while other times decades may past without another severe depression. Government policy and regulation can have a huge impact on speeding up or delaying the cycle.

During the period of expansion, real GDP will rise, unemployment will fall, and inflation will increase; however, real income — income adjusted for inflation — will also rise, meaning consumers can buy more, and businesses produce more. Generally, everything which is part of a “booming economy.” This period is also called the inflationary period. In contrast, unemployment rises, and prices fall during the period of recession. Correspondingly, the real income will fall, slowing the economy.

What affects the business cycle?

The causes of the business cycle are not yet agreed upon, but it largely can be attributed to 2 things: supply and demand. When supply or demand is changed rapidly – shocked – the economy is pushed away from the equilibrium position; for example, when oil prices rapidly increase, like in 1973, the supply of goods is sharply reduced, slowing the economy and reducing output. When demand falls, the economy is likewise slowed because there is less consumer spending. An increase in either will have the opposite effect.

Common supply shocks are sudden changes in input prices, natural disasters, and technical discoveries. Natural disasters, like the Dust Bowl during the Great Depression, disrupt production, decreasing supply, while technical discoveries increase supply by facilitating production; the industrial revolution in the early 1900s led to the great imbalance between the supply of products and demand, resulting in crashes caused by too many goods and not enough consumers.

Demand shocks are caused by changes in consumer and business expectations; and financial crashes. If consumers and businesses expect financial hardships ahead, they will cut their spending, causing a decrease in demand. If they expect good economic developments, they will increase their investment and spending. Financial crises destroy the wealth stored in financial instruments; this causes consumers to spend less as they have less money. Additionally, financial crashes destroy consumer and business confidence, also decreasing spending.

Government and Federal Reserve Policies

After the Great Depression, the US Government has taken up mitigating the expansion and contraction, attempting to keep real output as close as possible to potential output. Its effort can be categorized as fiscal policy and monetary policy.

Fiscal policy is composed of changing government spending and raising or lowering taxes. These measures are decided on by the President and Congress. They are targeted toward increasing demand in depression and decreasing demand in an expansion, as demand is composed of – among other things – government spending and consumer spending, which depends on taxes.

Monetary policy is manipulating the supply of money in the economy. This is done solely by the Federal Reserve, the U.S. central bank. Increasing the money supply, or the amount of money in the economy will decrease the real interest rate, which increases investing from businesses and spending from consumers. Businesses invest more because money “costs” less to borrow and invest as the interest rate is the payment made on loans. Inversely, consumers will want to save less because they earn less on the money. Decreasing the money supply has the opposite effect of decreasing investment and consumer spending. It is important to note that I am talking about economic investment, which refers only to spending made to facilitate the future production of goods. As consumer spending and investment spending are a part of aggregate demand, controlling the money supply controls demand indirectly.

Where are we in the business cycle?

Recently, in the news, you might have seen news about President Trump disagreeing with current Chairman of the Federal Reserve, Jerome Powell. Their spat is fundamentally about the business cycle: the extremely low unemployment rate and robust growth in the stock market have convinced Chairman Powell that the US economy is approaching the peak of the business cycle, and so he has started to raise interest rates, which is contractionary monetary policy. Of course, this means slowing the economy to bring it closer to the long term trend line and to prevent or ameliorate the predicted-impeding contraction. President Trump, however, wishes to sustain growth, doubting a recession is imminent and that the expansion is coming to a close.

Is a recession approaching?

After the stock market took two serious hits in early 2019, the Fed has eased off raising interest rates, as it could scare investors into a financial crash. Additionally, unemployment (3.8%) still remains below the natural rate (4-6%). These indicators show that the economy is in a fragile position above the long-term trend line. The last three contractions in America were 2008, 2001, and 1991, about once every decade. The longest period of expansion was after the 1991 recession, lasting about 120 months. Our current period of expansion has already reached 117 months, meaning the US economy is due for another downturn soon. As such, correct monetary and fiscal policy should be implemented to soften the fall.

The 401(k): How to Save for Retirement

The 401(k) retirement account is one of the best ways to save for retirement. Unfortunately, living off Social Security just isn’t a reality for everyone, so being able to understand how to use retirement accounts to its fullest is crucial. In this article, I will detail what a 401(k) is, a little bit about the types of 401(k)s, benefits and limitations, and strategies.

What is a 401(k)?

A 401(k) is a type of retirement account that is employer-sponsored. A 401(k) plan is employer-sponsored because it is only offered to employees. This is because money can only placed into your 401(k) account from your paycheck, and some companies offer “matching contributions,” but it is capped to a certain percent. For example, if you are making $100K a year and your employer offers a 3% match, this means that if you choose to allocate $3000 a year from your paycheck to your 401(k) retirement account, your employer will give you another $3000. If you want to put any more than $3000, that’s fine, but you won’t be receiving any more money in the form of an employer match because that would exceed 3%. This percent varies at every company, and some companies may not offer any matching contributions at all.

Traditional 401(k) vs. Roth 401(k)

There are two types of 401(k)s, the Traditional and the Roth. The biggest difference between the two is that the Traditional 401(k) is tax-deferred. This means that you pay taxes on the money after you withdraw from the account, as opposed to before you put the money in the account in the first place. This means that you are paying taxes on both your principal and the compounded interest gained during the time you made contributions to the time you withdraw. The Traditional 401(k) is more common.

The key difference with a Roth 401(k) is that you are not taxed on the money you withdraw. Your contributions can only be made with the money you have after paying income taxes. So this means you don’t pay taxes on any of the money you made while your money was in the account. It is a subtle, but very important distinction. This is very very good, because it means you are losing money to income taxes only on your principal, and not everything you earned in the decades of compounded interest that took place while getting to retirement.

You may be thinking that the Traditional 401(k) sounds pretty pointless if the Roth 401(k) is so similar, yet is not tax-deferred. However, you have to make your decision based on whether or not you think you will be in a higher tax bracket in retirement than you are right now. If you will likely be in a higher income tax bracket in retirement, you would want to pay the taxes now, rather than later, to pay less taxes. If not, you would want to opt for the Traditional 401(k). In general, more companies will offer a Traditional 401(k) than the Roth, and individuals will use a combination of Traditional 401(k) and a Roth IRA to set up for retirement, which we will discuss at length later on.

Limitations

There is a caveat to the 401(k) plans. Each 401(k) plan has their own tiny little details and such, but in general, you can technically withdraw from your 401(k) retirement account at any time, but you may be subject to a 10% penalty if you are not at least 59.5 years of age. For the Traditional 401(k), this means you’ll be paying income taxes on your withdrawal and another 10% on that! 10% is a lot, so it is a really bad idea to withdraw from your account before you are 59.5 years old. There are some exceptions, like disability or emergencies, but that varies by plan. As of 2019, there is an annual contribution limit of $19,000 for individuals under 50, and $25,000 for those over 50 years of age. The big idea is that you should expect to put your money away for good, until you are about 60 years old.

Common Strategies

First off, it is best to invest as much as your employer matches, assuming that there is a match. A match effectively doubles your savings! While most people would call it free money, some actually see it as part of your compensation package. More employer benefits means less base salary; perhaps at another company that does not offer a match, you could be making more money. So in a way, not contributing to your 401(k) to fully utilize the employer matching contributions is similar to leaving money on the table.

Although a Traditional 401(k) is tax-deferred and technically not as preferrabe as a Roth IRA in that sense, the match makes the Traditional 401(k) a must. If you still can contribute to retirement accounts after making contributions to your Traditional 401(k), then start contributing to your Roth IRA. This is because putting more money into your Traditional 401(k) reaps no more matching contributions as you’ve hit the percentage limit, so the Roth IRA, with its tax-exempt withdrawal benefit, becomes more preferable. If you still have money after contributing to 401(k) up to the employer match and maxing out your Roth IRA limit of $6000, only then you go back to your Traditional 401(k). To learn more about IRAs, visit this article.

That was a lot. Here’s some numbers to see what it might look like in real life.

Let’s say you are making 100K a year(nice!), and your employer offers a generous 3% match on Traditional 401(k) contributions. This would be the strategy for most people:

  1. Contribute $3000 into your 401(k) to fully take advantage of the matching contributions. Your 401(k) is now at $6K, which is $3000 from you, and $3000 from your employer. Note that any more contributions will not be matched, since you’ve hit the 3% limit. That’s why we now move on to…
  2. Your Roth IRA account. The Roth IRA limit of $6000 is relatively low when compared to the 401(k) limit of $19,000 because it enjoys the tax benefit of not having to pay taxes upon withdrawal. So, max out your Roth IRA with $6000 of contributions. Since you can no longer put any more money into the Roth IRA, we now go back to the 401(k) account.
  3. With any remaining money you have left to contribute to your retirement account, which will vary with your own personal budget, place it in your Traditional 401(k). Based on our initial contribution of 3K back in Step 1, the max amount you can contribute at this point is $16,000 because you would then hit the 401(k) limit.

Essentially, it boils down to:

  1. Traditional 401(k) up to however much your employer matches, because you don’t want to leave any money on the table. Skip this step if your employer doesn’t offer a match.
  2. As much as you can into your Roth IRA, because tax-exemption on withdrawals is a massive benefit.
  3. Back to Traditional 401(k).

Retirement accounts are preferable to having plain cash in your savings account because you can use the money in your retirement accounts to invest in stocks, bonds, ETFs, and other financial instruments. That’s why we go back to the Traditional 401(k) in Step 3 after maxing out on Roth IRA contributions, even though we no longer get the matching contributions from an employer. The idea is to let that money accumulate for decades, up until you start withdrawing from those accounts to retire. With retirement accounts, those investments allow for compounded interest, which is extremely powerful and is discussed here. If you were to leave money in your savings account instead, not only would you be losing out on the money you could have earned in returns from investing, you are also losing money due to an average annual inflation rate of 3%. Most people use 8% as an estimated average ROI in the stock market over long periods of time, which means that you can either invest with money in your retirement account to make average real annual returns of 5%(8% returns – 3% inflation), or put it in a savings account, losing 3% per year due to inflation.

Ok, so we’ve established that retirement accounts make more sense than letting money sit in a savings account. Right now, I hope you’re asking yourself this: “Why should I use retirement accounts instead of a regular brokerage account that can also invest in investments like stocks and bonds?” If you are, then you are asking the right questions, which is 50% of the way there. If not, that’s fine too. This is the point of reading Financial Literacy Journal articles: to build a sense of financial literacy, which allows for better decision making.

The reason we want to invest in retirement accounts over regular brokerage accounts, when each can invest in the stock market, bonds, and other investments in the same way, is twofold. The biggest reason is that retirement accounts have massive tax-benefits. These benefits exist because the government wants to incentivize retirement investment so that you are better off, leading to less people that need to request for government welfare to retire. For one, 401(k) contributions are tax-deductible. This means that if you make $100,000 and you put aside $20,000 per year into retirement accounts, you are only taxed by the government on that $80,000 remaining! A 401(k)’s tax-deferral status is also a huge tax benefit. This is because you are only paying taxes upon withdrawal, somewhere around 60 years of age. With a regular brokerage account, you would have to pay taxes on each year of returns that you made by investing in the form of capital gains! Long-term capital gains rates can reach as high as 20% too, so even if you hold a stock over a long period of time, the returns will be taxed. Tax-deferral allows for your savings to grow much faster because your money is allowed to stay in that account to continue growing, rather than be subject to annual taxes on the money you made through investments. For a Roth IRA, the tax benefit is that you do not need to pay taxes on the money you withdraw. However, you may only contribute with post-tax income, any money you have left after paying taxes. This is very good because it is much better to pay taxes on your just principal, which would be a smaller amount than your principal plus decades of compounded interest.

The other reason is psychological; contributions made into retirement accounts are easily set up to be automatically done from your paycheck every month, and the 10% penalty of withdrawing from retirement accounts before 59.5 years of age is a huge mental deterrent. This makes for a much more painless way to contribute, and keeps you from picking away at your account.

Final Thoughts

By now, what a 401(k) is and why we use them should start to make sense. Don’t be discouraged if you aren’t getting 100% of this immediately. This was a dense article. However, these ideas and strategies are extremely important to know, even if you’re not currently employed – understanding retirement strategies is one of the biggest components of financial literacy. I highly suggest you to bookmark this article and reread this at a later time. Financial literacy is all about setting yourself up in a mindset to ask the right questions and make the right decisions in order to build wealth and reach financial independence. With knowledge of the 401(k) retirement account and its strategies, you will be able to set yourself up for a comfortable retirement.

What is the Phillips Curve?

Just as heart rate and blood pressure are used to measure well-being, economists rely on a number of indicators to help them understand the health of the economy. Although economic indicators can meet a wide range of definitions, certain indicators like the rate of unemployment or the price level are often seen as some of the most important measures of economic health.

Not only do these indicators provide us with important individual measure of economic health, but equally as informative is the relationship shown between these indicators. Specifically, in this lesson, we will focus on the Phillips curve which depicts the inverse relationship between the levels of inflation and unemployment within an economy.

Image result for the phillips curve

History

After a comprehensive study of many decades of data from the British economy, economist A.W. Phillips published a paper on his discovery of an inverse relationship between rates of unemployment and changes in money wages. The graph below is taken directly from the original publication of Phillips’ study and clearly shows the negative correlation he observed.

Related image

A couple years later, and following independent studies that had reached similar conclusions, economists Paul Samuelson and Robert Solow officially established the inverse relationship that is known today as the Phillips curve. This economic advance led to the formal acknowledgment of the tradeoff between unemployment and the rates of inflation. Although this Phillips curve was initially thought to represent a stable and structural relationship, economists would later conclude that the model was not reflective of the long run behaviors of an economy. Therefore, the inverse relationship first depicted by Phillips is commonly regarded as the short run Phillips curve.

Short Run Phillips Curve

An important component of the relationship that the Phillips curve depicts is the concept of tradeoffs. We face tradeoffs all the time in our everyday lives, whether deciding how to spend our time or what to eat for our next meal, we are constantly giving up one option in exchange for another. Economic trade-offs are very similar to those we face in our daily lives and the Phillips curve is the perfect example. At any given point of the Phillips curve, the rate of unemployment within an economy is correlated with a certain rate of inflation. So if an economy is facing high rates of unemployment, leaders might attempt to decrease rates of unemployment at the cost of increasing the rate of inflation. In contrast, an economy with high inflation rates might work to decrease the price level, at the risk of increasing the rate of unemployment.

Movements Along the Curve

We have now established that a given point on the Phillips curve shows the levels of unemployment and inflation within an economy and that there are trade-offs between different points on the curve. So how does an economy actually move from point to another along the curve? The answer is through changes in aggregate demand. Aggregate demand is similar to demand, except it represents the sum of all demand (by consumers, businesses, governments, and foreign nations) in an economy. When there is an increase in aggregate demand, the price level and output of an economy increases. This is shown by a leftward movement on the Phillips curve, as both inflation and production have increased (increased production means lower levels of unemployment). Similarly, a decrease in aggregate demand will lower levels of inflation and decrease production (increasing unemployment), causing a rightward movement along the Phillips curve.

Image result for aggregate demand and phillips curve

Shifts of the Curve

Not only can changes in the state of the economy cause movements along the Phillips curve, but the Phillips curve itself can also shift. Shifts of the Phillips curve are caused by the result of changes in aggregate supply. Aggregate supply is a measure of the supply of all goods and services offered within an economy at a given price level. An increase in aggregate supply causes a decrease in the price level, but an increase in output. This is seen by a leftward shift of the Phillips curve, as each point of output is now correlated with a lower price level. Similarly, a decrease in aggregate supply increases the rate of inflation at each amount of output, shifting the Phillips curve to the right. An easy way to remember this is that a shift of the aggregate supply curve will cause the Phillips curve to shift in the opposite direction.

Criticism

Although initially welcomed by many of the most renowned economists and established nations of the world, the relationship that the Phillips curve presented eventually proved unsustainable in accounting for long run economic trends. As many nations welcomed the idea of decreasing unemployment in exchange for higher levels of inflation, economists were beginning to notice varying levels of inflation at given levels of unemployment. In particular, America’s economic stagflation of the 1970s presented the Phillips curve with a new bout of scrutiny. Stagflation is the name given to an economy facing both increasing levels of inflation and unemployment. By nature, this occurrence is a direct rejection of the relationship presented by the short run Phillips curve. The phenomenon was eventually explained by the adoption of the long run Phillips curve.

Long Run Phillips Curve

The rejection of the Phillips curve as spearheaded by monetarists like Ed Phelps and Milton Friedman terminated with the conclusion that the negative relationship presented by the Phillips curve was only applicable in the short run. In the long run, however, it was determined that there was no such tradeoff between unemployment and inflation. The long run Phillips curve, instead, was established to be a vertical line, with the economy at the natural rate of unemployment for any level of inflation.

Image result for long run phillips curve

Today’s Economy

Since its conception, the Phillips curve and the relationship that it presents seems to have undergone constant examination in economic fields. In fact, in recent years, economists such as Larry Summers have argued that the curve is flatlining, and may be breaking down altogether. As for now, however, there is still consensus that the curve holds, and the relationship it presents can be very helpful in understanding the current state of the economy.  

The Inverted Yield Curve: Recession Predictor or Flawed Indicator?

If you follow the markets closely, you have likely heard of the infamous “inverted yield curve.” Many experts on CNBC may link this flip to a coming recession, or a bear market. The stock market responds to the news of the curve reversal with strong selling. Today, the indicator has just made its presence known again, and the market did in fact sell off, with the S&P 500 down 1.90%, the Dow Jones down 1.77% and the Nasdaq down 2.50%. All this occurred despite a massive rally since the 20%+ sell-off that carried into the end of December. The interest rate for the 90-day T-bill surpassed that of the 10-year Treasury debt security, the benchmark inversion. But is the inverted yield curve really a cause for worry?

NOTE: To understand the terminology in this lesson, you will likely want to understand bonds and U.S. Treasuries, so please read our lessons here and here

What is the yield curve? What does it mean when it inverts?

The yield curve displays various interest rates, or yields, associated with different length debt securities, such as Treasury securities or bonds, though “the yield curve” likely refers to the Treasury yield curve for Treasury securities. As you can see in the graph below, higher borrowing periods are associated with higher yields, or interest rates. This is because of something called Maturity Risk Premium, and according to the Motley Fool, it exists because “one of the dangers of investing in a long-term bond is the potential for it to lose value before it comes due.” If interest rates increase, for example, then the value of your debt security, such as your bond, will decrease. When purchasing a bond for a longer amount of time, you incur more risk of your security decreasing in value. Hence, the increasing nature of the yield curve.

In times of economic growth and a stable stock market, the yield curve and the bond market as a whole will be stable and “normal.” Returns in the stock market will be higher than those from bonds, so demand for bonds will be relatively minimal. However, what happens in a bear market is the exact opposite.

The yield curve can invert in a bear market. This is because the demand for safer, Treasury securities, which are safe and offer consistent returns through their yields, increases in bear markets. With this higher demand, the price of bonds increases, and accordingly, their interest rates decrease. The demand for short-term debt securities and Treasury securities, however, is not as strong in recessions. Thus, the interest rates for those short-term securities will rise. As a result, the inverted yield curve, as seen below.

You may commonly hear of the curve “flattening.” This, in effect, is a more moderate transition away from the normal, upward-sloping curve to a flat curve, in which the interest rates are very similar or the same for various maturity dates. Often, this flattening is the first step towards an inverted curve, as the inversion of the yield curve is often years in the making.

What does the inverted curve mean?

The true significance of the inverted yield curve has been of considerable debate for the past few years. The curve has flipped a few times in the past few years, yet the economy has continued its bull run. Some economists defend the inverted curve as a signal for a looming recession, that has proved itself many times. Others ignore its presence, citing strong growth prospects and corporate earnings in an economy. It cannot be ignored that the historical track record of the inverted yield curve is quite strong, accurately predicting the latest recession in 2008, and many prior to that.

In the global economy, there are some fears of economic downturn. Growth has been greatly slowed by the trade war, corporate earnings have been some of the worst in a while this year in Q1 of 2019, and political tension remains a potent force in the European Union. An inverted yield curve simply continues to increase investor fear, and increases expectations of a recession. The “fear index,” or the CBOE Volatility Index, spiked by 20.91% today.

Final Thoughts

The inverted yield curve is a good metric to use when predicting recessions, but it is not the only metric one should rely on. As with all occurrences in the economy, more context is needed to analyze and predict the future. If the curve inverts in a strong economy, then you can expect the curve to recover back to normal. But if conditions appear to be turning for the worse, an inverted yield curve can often confirm fears of bear markets in the future. As with all economic indicators, use the yield curve with a great understanding of underlying market conditions.

Data from finance.yahoo.com

OPINION: Free-Market Principles Do Not Apply to Healthcare

When looking at a market, leftists see a means by which the rich can exploit the labor of the poor to build on their fortunes. Proponents of economic freedom would see rational actors negotiating fair prices through competition, the effect of what Adam Smith called the “invisible hand” of the market.

Both are correct only in some circumstances. The vision of Laissez-Faire capitalists is correct in a world where all markets are competitive—all actors are rational and educated, and consumers can make an educated decision when deciding on a product. At the same time, the vision of leftists is only correct if markets are anti-competitive—that is, capitalists have no incentive to offer fair prices to consumers and reap unfair profits disproportionate to their value. The truth is that there are both competitive and anticompetitive markets in the United States.

Perfectly competitive markets are premised upon the idea of mutual consent to a transaction. An example of a perfectly competitive situation might be two adjacent grocery stores. If these two store fit the same niche in the local economy, an informed and rational consumer pick the one with the best deal, giving a strong incentive to both stores to lower their prices and increase their quality so their profit margin approaches zero—or lose business to their competitor it they refuse to do so. Marx, in Das Kapital, called this phenomenon the tendency of the rate of profits to fall, and it is the reason behind the success of capitalism in furthering the quality of life of the consumer.

However, many markets are not perfectly competitive. Healthcare is one of of these markets.

The healthcare industry exists almost entirely to serve people who are incapable of making informed and rational decisions, abandoning a fundamental principle of free-market capitalism. When you are in an ambulance on the way to an emergency room, you have no opportunity to shop around your area for the best deal you can find on healthcare services. In fact, you are not in a position to consent to a transaction at all given that any delay in your care could mean death or serious personal harm. These transactions are inherently extortive toward healthcare recipients.

The rational free-market response to this would be to form insurance companies which can negotiate on the behalf of a large number of consumers. As a consumer, you can look for the best rate and coverage from available insurance companies in advance, when you are healthy. That is, broadly speaking, what we have implemented today.

However, the status quo is still extremely faulty and will need to be propped up heavily by government regulations if it is to be maintained. Insurance companies have every incentive to minimize how much they have to pay—when it comes time for them to pay the bill, they work against you, not for you. They have an incentive to try to interfere with your medical care, reduce cost or even refuse to cover expensive illnesses at all—according to a study by the Doctor Patient Rights Project, patients with chronic illnesses have a 24% denial rate from insurance in the United States. Unless you think people deserve to die for being poor, this clearly isn’t the right system.

In addition, insurance markets have become increasingly concentrated and anti-competitive, leading to oligopolies or monopolies in large areas of the country. Using their disproportionate market power, The Wall Street Journal has reported that many insurance companies have forced hospitals into signing contracts with “most favored nation” clauses that prevent them from giving an equal or more favorable deal to any other insurance company. Insurance companies can and do collude with hospitals to fix prices high, further raising healthcare costs and reducing quality of service.

Even further, pharmaceutical companies holding patents to crucial medication are, as the result of extensive government lobbying, able to charge literally whatever price they want for the medication without any fear of competition. Given that patents take decades to expire, these profits dwarf any research costs to the pharmaceutical companies, leading to the pharmaceutical industry having the highest profit margins of almost any economic sector, per BBC News. Hospitals and healthcare insurance providers have nowhere else to turn for crucial drugs. Medicaid is actually forbidden by law from negotiating better prices, with Billy Tauzin (R-La.), the architect of the law, leaving congress within two months of its passage to take a $2 million per year job at the drug lobby Pharmaceutical Research and Manufacturers of America as reported by NBC News.

All of these monopolies layered throughout the healthcare industry conspire to make the American healthcare system one of the least efficient in the world. What is clear from this is that free-market principles as implemented now do not apply to the healthcare industry. Due to lack of consumer choice, hospitals, health insurance corporations, and pharmaceutical industries cannot be trusted to represent the interests of the consumer. Either the industry should be regulated far more than it is right now, or healthcare should be consolidated into a government-run single-payer system that is held politically accountable and does not operate for a profit.

Opportunity Cost: The Economics of Decisions

You may have heard someone say “There is no such thing as a free lunch”. This phrase was commonly said by Milton Friedman, a Nobel Prize winning economist. What Friedman meant is that even if someone else takes you out to lunch, there is still a cost, such as the time and energy you spent in order to be there. You could have used that time to do something else, such as golfing or studying. Whenever people make a decision, they are illustrating the concept of opportunity cost. This concept of opportunity cost enables economists to realize how their choices have consequences and it leads to better decision-making.

What is opportunity cost?

Opportunity cost is the next best alternative to any decision you make. For instance, you might decide to go fishing one day. Instead of going fishing, you could have been going to a movie or studying. However, you enjoy movies better than studying. As a result, your opportunity cost is the movie, not studying, as the opportunity cost is the next best alternative, not the next few alternatives.

How do I calculate opportunity cost?

Opportunity cost is the value of the next best option that is given up when making a decision. Say you were going to either eat a sandwich or eat a burger. If the satisfaction gained from the sandwich is 100 utils, while the satisfaction from the burger is only 80 utils, your opportunity cost while eating the burger would be 80 utils, or the value of the next best alternative.

Opportunity Cost in Real Life

Opportunity cost can help businesses make better decisions. By considering opportunity costs, businesses are able to assess the risks of each options as well as the potential returns. Furthermore, opportunity costs can help individuals see what they are giving up when making decisions. One example of a decision is going to college. If you decide to go to college, the opportunity cost is the four years of income you would have earned if you got a job instead. When deciding whether or not to go to college, you should see if the opportunity cost is worth it. For most people, going to college is better in the long run as their college degree would lead them to have a higher paying job that would make up for the loss of four years of income.

Another real life example is investing in the stock market. The stock market is very volatile so investors have to constantly weigh the opportunity costs of investing in stocks. For instance, let’s say you have $10,000. You could leave that money in a savings account with 5% interest or invest in a stock. If you decide to invest in the stock and the stock returns 7% then you have benefited. However, if the stock returns 1%, then the opportunity cost would be the additional 4% you could have earned if you put your money in the savings account. This is why you have to be careful when investing in stocks and look at the risks and benefits in order to ensure that you will gain a profit from the stock. Opportunity cost is a cornerstone concept of economics, and something that applies to all decisions, whether personal or in the complex business world.

How Opportunity Cost Affects You

Let’s say you wanted to start a business. You can either mow lawns or become a babysitter. Using the concept of opportunity cost, you can calculate and conceptualize what would be most profitable to you based on the price you charge for those jobs. If there is a lower opportunity cost for being a babysitter and you could earn more, then you would do more babysitting jobs than lawn jobs. Visualizing the opportunity costs between two decisions is important and has a real impact on your life.

Final Thoughts

In a world of scarcity, everything has an opportunity cost since there is always a trade-off involved in all the decisions you make. Instead of reading this article right now, you could’ve been reading, exercising, or learning a new skill. From now on, evaluate the decisions you make and ask yourself if the opportunity cost is worth the decision.

What is Supply?

In an earlier lesson, we introduced one of the most fundamental relationships in economics: supply and demand. In order to best make sense of the relationship between supply and demand, it is important to understand each element individually. Previously, we covered demand, which is defined as the level of desire for a good or service by consumers. In this lesson, we will look at the market from the perspectives of producers, focusing on supply.

Supply  

What exactly is supply? The definition of supply is similar to the definition of demand, but instead of looking at consumers and their desires and abilities to purchase goods, supply is controlled by producers. Specifically, supply is defined as the desire by producers to provide a good or service. The supply curve, which is the graphical representation of supply, shows supply as a direct relationship between the price of an item and the quantity supplied of that item.

Price (6).png

Law of Supply

Just as the Law of Demand can be used in understanding why the demand curve is downward sloping, the Law of Supply explains the upward sloping nature of the supply curve. Simply put, the Law of Supply explains that as the price of a good or service rises, the quantity of said item will rise as well. The Law of Supply makes sense when better understood from the perspective of a producer. As prices increase, producers are eager to maximize their profits, so they provide a greater amount of goods or service in question. This is demonstrated by the curve below.

Quantity Supplied

When the price of an item increases, the quantity supplied of that item will increase. Similarly, if the price of an item, the quantity supplied of that item will decrease. However, just because the price of an item changes, it does not mean that the supply of that item will also change.  

Price (5).png

Changes in Supply

Supply itself can also increase and decrease, but not as the result of a change in price. These shifts in supply occur as the result of one of the “determinants” of supply, which include changes in production costs, number of sellers, technology, or future expectations. An increase in supply is shown by a rightward shift of the supply curve, while a decrease in supply is depicted by a leftward shift.

Price (7).png

The Determinants of Supply

Cost of Production

There are a number of factors that can impact the costs of production, both positively and negatively. Such production costs include the costs of raw materials or other items used in the production of the final good or service (input prices), wages, taxes, and government-controlled rules and regulations. If any of these costs increase, it will be more expensive for a company to produce final goods, so supply will decrease. Likewise, if costs decrease, producers will be able to make more final products than before, and supply will decrease.

Technology

Changes in technology always affect supply positively, making for a more efficient production process. Such technological advances can span a range of developments, including everything from the invention of a new pesticide to improve harvest yield to improved systems of business management. Rarely, however, are practices adopted in which technological progress is reversed. Thus, changes in technology will (almost) always cause an increase in supply.

Future Expectations

Changes in future expectations of producers can have complicated effects on supply, depending on whether those supplying the product are the sellers or manufacturers of the products. At its simplest, when producers believe that they can sell their products for higher prices in the future, they will withhold their inventory. In the present, this results in a decrease in supply. The opposite occurs when suppliers expect that prices will drop.

Number of Sellers

If the number of sellers in a market increases, so will the supply. Likewise, when the quantity of producers decreases, supply does as well.

There are a few other determinants of supply, including the prices of related or joint goods and services that can impact supply both positively and negatively.

Summary

In conclusion, supply is the level at which producers want to provide a good or service at varying price levels. The Law of Supply helps illustrate the direct relationship between price and quantity supplied. Additionally, the determinants of supply can be used to explain shifts in demand.

Now that you have understood both supply and demand, you are ready to understand the interaction between the two, and how together, they form the market mechanism.  

Sources:

https://www.investopedia.com/terms/l/lawofsupply.asp

https://staffwww.fullcoll.edu/fchan/Micro/1determinants_of_supply.htm

https://xplaind.com/790162/determinants-of-supply

What Does It Mean to Be Unemployed?

There are a lot of misconceptions about unemployment, the unemployment rate, and the labor force. The term “unemployment” seems to imply that it represents all members of a country’s population that are not working — intuitively, this makes sense. However, the term is more nuanced, and there is a reason for that. With various macroeconomic indicators, such as the recent report on jobless claims, it is difficult, yet important to understand how the economy operates around you. In this lesson, I will explain what it means to be unemployed, the different types of unemployment, and the labor force.

What does it mean to be unemployed?

To be unemployed means to be actively searching for work. Simple, yet often confused with other definitions. Most believe that to be unemployed is to be not working. However, this definition would mean that a full-time homemaker is unemployed. This definition would not be accurate, as this individual is not actually seeking employment opportunities in the labor force.

To be either employed or unemployed means that you are a member of the labor force, which is comprised of those who are working, and those who are seeking employment opportunities. The unemployment rate is calculated by dividing the number of those seeking employment in the labor force by the number of people in the labor force. The unemployment rate in the United States was 3.8% as of February 2019.

One of the most commonly analyzed indicators regarding employment is the “labor force participation rate,” or how much of the American population is actually in the labor force, divided by the “Civilian Non-Institutionalized Population” (more about this here). For example, a child is not legally allowed to work, and would likely not be working anyway as they would be a full-time student. Thus, the child, under 16, would not be part of the “Civilian Non-Institutionalized Population.” The labor force participation rate in the United States is 63.20% as of February 2019.

Types of Unemployment

There are many types of unemployment, but I will cover the main three.

1. Cyclical Unemployment

Cyclical unemployment changes inversely with regards to the strength of the economy. In strong economic and business conditions, cyclical unemployment will be low. In recessions, cyclical unemployment will be high. In such poor economic conditions, firms will not be able to afford to pay as many wages, so workers will be laid off. The economy is said to operate on a “business cycle” of various fluctuations between various conditions.

2. Frictional Unemployment

Frictional unemployment will always occur in an economy, regardless of the economic conditions at the time. For example, suppose John is working at Walmart. Then, suppose the wages at Target increase. John has the same skills to work at Target, and there is a higher wage that is being offered. Thus, John will quit his job and try to find employment at Target. During the time that John is unemployed, he is said to be frictionally unemployed. He is looking for a new job, and transitioning from one to another.

3. Structural Unemployment

Structural unemployment is the most commonly discussed today. Structural unemployment occurs when technologies are able to do certain tasks more efficiently than humans. Thus, the humans, which cost more, and are often less efficient, are laid off and replaced with the new technology. Structural unemployment especially affects individuals with lower education levels, in industries such as manufacturing. It is more difficult for technology to replace workers in industries that require higher levels of education, such as law or medicine.

Why does unemployment matter?

Unemployment is important to all members of a society. The unemployment rate is a good indicator for economic conditions. Additionally, unemployment is something that many are going to be faced with in the future, especially structural unemployment. Recently, Chinese venture capitalist Kai-Fu Lee could be seen on 60 Minutes saying that the world could lose 40% of jobs within just 15 years. Thus, it is something that the world must face in the near future. Most importantly, however, is that understanding concepts such as unemployment will give you an informed perspective of the economy as a whole.

What is Demand?

Have you ever noticed that swimsuits are cheaper in the winter than in the summer? Or that it will cost you less to go to the movies on a Tuesday morning than it will on a Saturday evening? These everyday observations can be explained by one of the most fundamental concepts in economics: supply and demand. At the most basic level, supply and demand can be explained as the relationship between how much of an item is desired (demand) and how much of an item can be offered (supply). In order to fully understand supply and demand, however, it is necessary for us to look at each component individually.

Demand

First, let’s start with demand. Demand is defined as the willingness and ability of buyers to purchase a product or service. The demand curve, which is the graphical representation of demand, depicts demand as a relationship between price and quantity demanded.Price (1).png

The Law of Demand

The model above of the demand curve shows that as the price of a good decreases, the quantity demanded of the good will increase. By the same means, a higher price is correlated to a lesser quantity demanded. This relationship is called the Law of Demand. And it is more simple than it might seem. Let’s say a store is selling a candy bar for 100 dollars. Chances are very few people will be willing and able to spend the money to buy that candy bar. But if the prices of the candy bar fall to ten cents, a much larger portion of the population will have the means and desire to buy it.

Quantity Demanded  

It is important to note that as the price of an item drops, the quantity of the item demanded increases, but demand as a whole does not increase.  The quantity demanded is the exact amount of an item that buyers are willing to purchase, as represented by any unique point on the demand curve. A movement along the demand curve is due to a change in price, which will cause quantity demanded to change accordingly.

Price (4).png

Changes in Demand

Just as the quantity of an item demanded can change, there are a number of factors that can affect demand as a whole. A change in demand is represented by a shift of the demand curve and means that buyers are both willing and able to purchase a different amount of a good or service at each price.

Price (3).png

Determinants of Demand

Determinants of demand are the factors that can cause demand for a good or service change. Such determinants include consumer tastes and preferences, changes in income, related goods such as substitutes or complements, and market size.  

Tastes

Consumer tastes are highly impressionable and can affect demand both positively and negatively. If consumer tastes change favorably, then more of an item will be demanded at each given price, and demand will increase. For example, if a new study comes out declaring that drinking orange juice increases life expectancy, then demand for orange juice will likely increase. But consumer tastes can also have a negative impact on demand. So if an influential celebrity like Beyoncé tweets that she finds a certain shoe brand ugly, then the demand for that shoe brand might decrease.

Income

To understand the role a buyer’s income plays in demand, it is important to recognize that not all goods are the same. Typically, goods can be categorized as normal, inferior or luxury goods. When incomes rise, people have more available to spend, so the demand for luxury goods increases, while the demand for inferior goods decreases. The opposite happens when incomes decrease.

Substitutes

Substitutes are goods and services that are similar enough to other goods and services that can effectively act as a replacement. A common example of substitutes is Coca-Cola and Pepsi. If the price of one soda rises, then demand for the other will increase.

Complements

Complementary goods refer to those goods that often accompany the purchase of other goods. For instance, if marshmallows go on sale at your local grocery store and the quantity of them demanded subsequently increases, then demand for graham crackers and Hershey’s chocolate will likely increase as well. Similarly, if hot dogs suddenly get more expensive and quantity demanded decreases, then demand for hot dog buns will also decrease.

Number of Buyers

When the size of a market increases, then the demand for goods will also increase. Simply put, a bigger population means that there are more potential consumers. For example, if the birth rate rises dramatically, so will the demand for baby cribs and car seats.

In summary, demand can be thought of as the willingness and ability of buyers to purchase a good or service. The Law of Demand helps illustrate the inverse relationship between price and quantity demanded. Additionally, the determinants of demand can be used to explain shifts in demand.

Understanding demand is only the first step. In this lesson, we have focused on buyers and their actions. In the next lesson on economics, we will look at supply, and how producers can also play a critical role in markets.

Sources:

https://primeyourpump.com/2018/07/09/supply-and-demand-real-life-examples/

https://www.investopedia.com/university/economics/economics3.asp

https://www.intelligenteconomist.com/determinants-of-demand/

http://www.econport.org/content/handbook/Demand/Factors.html

https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/demand/a/lesson-summary-demand-and-the-determinants-of-demand

Finding Value Stocks Through the P/B Ratio

One of the most important technical indicators to value investors is the P/B ratio, or the Price to Book ratio. This ratio effectively describes the fundamental value of a company relative to their balance sheet. This strategy has been largely pioneered by the most famous value investors of all, Benjamin Graham and Warren Buffet. The P/B ratio, used in conjunction with other metrics and evaluations, can lead to the discovery of a solid value stock to add to your portfolio.

What is the P/B ratio?

The P/B ratio, quite simply, is the price of the stock, divided by the stock’s book value. The book value is the balance sheet valuation of the company divided by the number of shares of the company’s stock in the stock market, otherwise known as Assets – Liabilities/Number of Shares. The book value basically tells an investor what the company’s assets are worth (but doesn’t include intangible assets such as patents). The book value is important because it gives an indicator as to what the stock should be fairly priced at.

Buffett’s Strategy

According to Richard J. Parsons in Seeking Alpha, “Berkshire’s price-to-book value has reset to a 1.32 average.” Berkshire, of course, is referring to Berkshire Hathaway, Warren Buffett’s enormous conglomerate holding firm. Warren Buffett, the greatest value investor of this century, now tends to buy stocks with a P/B ratio of around 1.3.

For example, if company A is priced at $500, but its book value is $25, then its P/B ratio would be 20.00. Thus, the stock price is double the book value. Ignoring growth or other factors, this stock could not be characterized as a value investment. It is overbought, meaning the share price is much higher than what it should be. This is reflected in the very high P/B ratio. Warren Buffet would not buy this stock.

If company B is priced at $30, and its book value is $30, then its P/B ratio would be 1.00. Thus, the stock price is equal to the book value. As long as the company has a good future outlook, and a sustainable business plan, for example, then this would qualify as a value investment. The P/B ratio indicates a fairly priced stock.

Finding stocks with fair P/B ratios

Currently, the stock market is overbought, meaning that P/B ratios will be inflated above their normal levels as stock prices are much higher than the book values, which will not be inflated in overbought market conditions. However, there are still excellent value investments that can be made, and Warren Buffet is taking advantage of some of them right now.

Bank of America Corporation (BAC) – P/B ratio of 1.14

Micron (MU) – P/B ratio of 1.28

Chevron (CVX) – P/B ratio of 1.50

All of these companies have stocks with total market capitalizations of above $50 billion. These are blue chip stocks, that, for whatever reason, have been beaten down lately. In the case of Bank of America, a weakened financial sector has kept banks’ stock prices near their book values. Micron has seen some weakened demand for semiconductors lately. Chevron has experienced a bear oil market, with weakened demand and large supply. However, these companies are all worth investing in. They are run by excellent management teams, and command large shares of their respective markets. Most importantly, to the value investor, is that they are fairly priced based on their P/B ratios.

Special Cases

An example of a stock with a high, yet justified P/B ratio would be Amazon (AMZN). With a P/B ratio of 18.27, this is unlikely to be a company that Warren Buffett invests in. You may be thinking, this is clearly an overbought, overpriced stock! Here is what you have to consider – Amazon has had quarterly revenue growth of about 20% for many years, and continues to expand its operations. This is something that value stocks with beat down P/B ratios lack – they are not high growth. Thus, many stocks have justifiably high P/B ratios when they have growth, or when they have high profit margins. Many of the FAANG stocks will have large P/B ratios, but this should not discourage you from investing in these companies.

Google (GOOG), for example, has a P/B ratio of 4.47. Thus, it is not necessarily a Buffett stock, but it surely is cheap for a technology stock. As an investor, I know Google will continue to expand. With profit margins and quarterly revenue growth both above 20%, I may consider purchasing Google at these valuations. Perhaps the strict value investor may not, but the P/B ratio can still give you information about stocks that don’t qualify as traditional value stocks.

Final Thoughts

The P/B ratio cannot be the only indicator used to find value stocks. Is there a reason as to why the stock’s price is matching its book value? Perhaps the product or service offered by the company is no longer competitive. In this case, the stock would be a good purchase. The P/B ratio should be used to confirm the intrinsic value of a company, which, like any other trustworthy company, has good management principles, and a forward-thinking expansion strategy. It is one of the most important fundamentals used by the value investor, and one anyone should pay attention to.

Statistics from:

finance.yahoo.com

Introduction to Economics

If you don’t have much experience with economics, the subject might seem daunting and obscure. You might even assume that economics is all about money and finance, and that it has nothing to do with your daily life. This is far from the truth. First of all, it must be understood that economics is a social science. Although many economic principles are critical to finding success in business and finance, economics is also a tool that can be used to predict human behavior, understand the forces behind social issues, or simply, navigate everyday life. In fact, whether you are conscious of it or not, you are constantly making economic decisions, such as choosing how to spend your Friday evening or deciding if it’s really worth eating another piece of chocolate cake (it is!).

Scarcity

Fundamentally, however, economics is the study of scarcity: how to satisfy unlimited wants with limited resources. The world we live in is full people that have all kinds of needs and desires. The problem of scarcity is that there are a finite amount of resources— land, labor, and capital— that can be used to satisfy this infinite set of wants. This basic problem presents society with the following three fundamental questions to be answered: What goods and services will be produced? How will goods and services be produced? Who will consume goods and services? By resolving these questions, an economy can attempt to solve the issue of scarcity. Scarcity also gives way to a variety of key economic concepts, such as opportunity cost. Opportunity cost is one of the most basic economic principles, and demonstrates the idea of trade-offs: by making one decision, the benefits of all other alternatives are forgone. For example, by deciding to go to soccer practice after school, you might be giving up going to the movies with your friends.

Rational Behavior

Another critical idea to understand in the study of economics is the concept of rational behavior, which assumes that humans are constantly acting to optimize outcomes and maximize personal benefit (or, as it is referred to economics, utility). In other words, when given multiple options, people will always choose the option that provides them with the biggest economic incentive. Although the concept of rational behavior is important to understand since it forms the basis for many fundamental economic models and ideas, it can often be difficult to apply in the real world. Humans are impacted by a variety of different factors— ranging from cognitive to cultural— that cause them to behave irrationally. This overlap between the fields of economics and psychology forms the basis for behavioral economics.

Macroeconomics and Microeconomics

In understanding economics, it is also important to recognize the difference between macroeconomics and microeconomics. Microeconomics is the area of economics that focuses on the decisions and interactions of individual actors, such as buyers, sellers or business owners. Microeconomics, for example, might put emphasis on a specific product, firm or industry. On the other hand, macroeconomics focuses on the bigger picture. This can mean either the economy as a whole, or aggregates, which is the grouping of many smaller economic units. Examples of macroeconomics might include national economies and economic indicators such as GDP and unemployment rates. Despite their differences, however, both macroeconomics and microeconomics are interdependent.

Positive and Normative Economics

Another distinction to be made is the difference between positive and normative statements in economic analysis. Positive economic statements center on factual evidence, while normative economics emphasize value judgements and how things ought to be. For instance, to say that the unemployment rate in America is lower than the unemployment rate in Spain would be a positive statement. Conversely, to declare that taxes in Norway are too high would be a normative statement.

Now that you understand the basics of economics, start looking for these economic principles in your daily life. Can you find examples of scarcity and opportunity cost? Why do you make the decisions that you do? How do you choose to maximize your utility?

Sources:

https://www.economicshelp.org/blog/5628/economics/applying-economics-in-everyday-life

https://www.investopedia.com/terms/e/economics.asp

https://www.mbacrystalball.com/blog/economics/

https://www.investopedia.com/terms/e/economics.aspqhT

https://investinganswers.com/financial-dictionary/stock-market/opportunity-cost-2560

https://www.investopedia.com/terms/r/rational-behavior.asp

https://www.investopedia.com/terms/m/microeconomics.asp

OPINION: What’s So Important About Financial Literacy?

My obsession with finance and economics has opened many doors. From gaining interest in AP Microeconomics and Macroeconomics, to investing avidly in the stock market, I’ve learned many things. I’ve realized that human nature is in fact a force that must be reckoned with in economic analysis, and I’ve realized that history may be destined to repeat itself if with ignore the past mistakes of previous financial crises. However, above all the extraneous financial understanding that I’ve gained, I believe I’ve gained one of the most important practical skills: financial literacy. I’ve been fortunate enough to be able to understand spending, saving, and everything in between. This is something I hope everyone can have access to and be able to leverage.

Why is financial literacy important? Why should it be taught at an early age?

Many who lack a fundamental understanding of finance, especially personal finance in the United States are missing car payments, extending their earliest possible date of retirement, and increasingly relying on loans. Possibly already facing the crippling pressures of student loan debt, the burden of more and more expenses that must be paid off can financially ruin someone. This is exactly what is happening to millions of Americans, and this can be prevented through financial literacy.

Financial literacy is especially important in a consumer-oriented society such as the United States. Marketing is an incredibly large industry in this country because the American consumer buys the latest products and technologies. Thus, America has some of the highest global levels of consumer debt, specifically, credit card debt. In this way, financial literacy is especially important in teaching the basics of investing and saving for the future. The latest iPhone is now, but it cannot be purchased at the expense of saving for retirement.

Americans spending as a percentage of disposable income is one of the highest in the world

When children are exposed to financial concepts, as simple as saving money and earning interest, they have formulated early ideas about money. What purpose does it serve? Rather than having them figure it out on their own, they will already be predisposed to good financial habits. If students are exposed to the financial basics of adulthood – how credit cards work, how bills work, and the basics of taxes – they will be much more likely to make smarter financial decisions in the future. They will also understand the underpinnings that define the financial system. They won’t be confused when they have to file taxes for the first time. They won’t need help when their first credit card bill arrives.

As a society, we should not take financial literacy for granted. It is not simply a skill that can be picked up instantaneously, or even over a long period of time, without ample help. There has to be guidance – from parents or educators. When they want to learn more, there should be an online presence or resource to turn to.

Why I founded Financial Literacy Journal

I founded Financial Literacy Journal because, firstly, financial literacy is something that is important. There are the core subjects in school – math science, English, and history. Yet the practical skills, such as how to file taxes, or how to invest your money to earn passive income, are not taught and, despite recent legislative attempts, are not likely to be taught extensively anytime soon.

Financial literacy also lacks a strong online presence. There are very few organizations dedicated to spreading financial literacy to students and even adults. Other sources of financial information are complicated, or they only focus on economics courses such as AP Microeconomics. In this way, the basic ideas of money – how to invest it, or how much of it to save – are not actually taught. How do credit cards work? Why should I utilize a 401K? These are questions that remain largely unanswered to many, and the internet has not yet provided a source to answer these questions.

Access to financial literacy should be free. There shouldn’t be paid courses on how to invest, and it shouldn’t be required that students pay for basic financial literacy workshops. Resources should be widespread and accessible – not concentrated and expensive. Financial Literacy Journal is a completely free, accessible resource for lessons and articles on financial topics, and something I believe will firmly change how financial literacy is taught today.

Final Thoughts

Financial Literacy Journal is an ambitious organization, and our project is going to be difficult to accomplish. However, I firmly believe that by creating content that not only interests, but educates students and adults alike on financial literacy, our society will have better spending habits, credit scores will go up, and the population will be able to retire early with money earned from smart investments. Financial literacy is something that must be taught, and I hope Financial Literacy Journal can be a pivotal driver of financial education for everyone.

IRAs: Traditional vs Roth

One of the most important reasons to invest and save is retirement; in your lifetime, you need to accumulate enough wealth to continue supporting yourself without income, and the paltry sums which social security entitle you are just not enough to live off of. In this lesson, I will talk about one way to store and grow your money: IRAs.

Eligibility

There are two major types of Individual Retirement Account (IRA): the traditional IRA and the Roth IRA. Which one you can employ depends on your income. The maximum eligible income for Roth IRA depends on whether you’re married: a single person – or the head of a household – is qualified as long as his income does not exceed $122,000 (in 2019). Married couples who file jointly must earn less than $193,000 to qualify for a Roth IRA. Additionally, if as a single person, you earn more than $122,000 but less than $137,000, you qualify for partial contributions to a Roth IRA, but we will talk about what that means later on.

For traditional IRAs, the eligibility rules are more complex. In addition, to considering income, the IRS considers whether you have a workplace retirement plan option. If you are single and not covered by a workplace retirement plan, you are eligible for a Traditional IRA at any income level; however if there is a workplace retirement plan in place for you, you may only utilize traditional IRAs if your income is less than $64,000 (in 2019), and if you earn less than $10,000 more than $64,000, you qualify for partial deductions. If you are married and covered by a retirement plan, the income limit for a joint filing and full deductions is $103,000, and as long as you earn less than $123,000, you qualify for partial deductions. An entire explanation of eligibility for traditional IRAs can be found here.

Keep in mind the income which determines your eligibility for IRAs is your Modified Adjusted Gross Income (MAGI). This number will be close to your Adjusted Gross Income (AGI), as it is equal to AGI with some deductions added back. For the list of deductions go here.

Traditional IRA

In specifics, if you qualify for full contributions to a traditional IRA, you may pay up to $6,000 (in 2019) of your income every year into an account, which will be stored and managed by the bank or financial service company the account is opened with. If you are older than 50, you’ll be able to pay an additional $1,000 in “catch-up contributions.”

These contributions are almost always tax deductible. If you and your spouse are not covered by a workplace retirement plan, all contributions are fully tax deductible. Otherwise, it depends whether you qualify for full contributions. Once you pass the max limit for full deductions – $64,000 for single people and $123,000 for couples filing jointly – only part of your contribution is tax deductible. A chart of the phase-out can be found on most financial services website.

The money you put in this account grows by investing. You may choose what to invest in, or you may hand over control to a financial company, as with regular money. The benefit of using a traditional IRA, however, is that holder doesn’t pay capital gains tax on the investment.

However, withdrawals from the account are subject to several taxes, depending on the circumstances. In short, when you withdraw from a traditional IRA, you will have to pay income tax; The percentage is obviously equal to your current marginal tax bracket. Additionally, if you choose to withdraw before you reach the age of 59 ½, you will have to pay a 10% penalty, as a penalty for early withdrawal. There are exceptions for which no penalty will be charged the most common are distributions as a result of:

  • the IRA owner’s death
  • total and permanent disability
  • qualified first-time homebuyer distributions
  • payment of your qualified higher education expenses
  • payment of certain medical insurance premiums paid while unemployed
  • payment of unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
  • an IRS levy of the IRA

This 10% tax is only on withdrawal of investment gains, which means, before you reach the age of 59 ½, you can withdraw the value of the original contribution from a traditional IRA and pay only income tax on it. Thus it is important to keep records, detailing what counts as a “contribution” and what counts as an “investment gain.”

Once you reach the age of 70 ½, the IRS will mandate a required minimum distribution (RMD); this is the value of money which you are required to withdraw from the traditional IRA. If you fail to withdraw the amount, a tax of 50% will be levied, so it is important to take your money back.

Roth IRA

The Roth IRA is essentially the better version of the traditional IRA; You pay no income tax on withdraws or profits (early withdrawal penalties still apply), and there is no RMD. The tradeoff is that the money deposited is not tax deductible, meaning contributions are in post-tax dollars.

Additionally, contributions are capped at the same limit as the traditional IRA, and the “catch-up contributions” also allow contributions to be $1,000 more. But the phase-out works differently. For traditional IRAs, the amount which is tax deductible decreases as your income increases when you’re in the range where you qualify for partial deductions. However, for Roth IRAs, the maximum contribution decreases as your income increases. Charts for this type of phase out can be found on most financial services websites and an equation can be found here

Inheritance

If the owner of an IRA dies while there is still money in the account, that money can be inherited in three ways: lump sum distribution, distribution into the spouse’s IRA, or the creation of a special IRA. Lump sum distributions is a one-time payment of the entire value left in the account. This payment is subject to income tax if the account is a traditional IRA and subject to other taxes if the account is a Roth IRA and younger than 5 years. No early withdrawal penalty is applied, however.

If the beneficiary of the funds is the spouse of the original holder and the sole beneficiary, the beneficiary may choose to add the complete value of the account to his or her current respective IRA, with no extra fees or taxes. Afterward, the money is regulated according to the rules of the spouse’s IRA.

Otherwise, the money will be transferred into another account of the same type. If the original owner of the account is younger than 70 ½ and the account is a traditional IRA or if the account is a Roth IRA, the beneficiary may then choose to transfer the money into life expectancy account or a 5-year account. A life expectancy distributes the money throughout the life of the decedent, while the 5-year account distributes the entire sum as a lump sum on December 31st five years after the original owner dies. If the owner of the account is older than 70 ½ and the account is a traditional IRA, the options are restricted to a life expectancy account. Nonetheless, these accounts will follow the rules of regular accounts, meaning income tax is applied to withdrawals and there is an RMD if the account is a traditional IRA. However, as both methods move forward the time table for withdrawals, no early withdrawal penalty is imposed.

The specifications within the laws regarding IRAs can be read here

Final Thoughts

It is never too early to begin saving for retirement, and IRAs provide a great way of storing and growing money over your lifetime. IRAs, like other portfolio tools such as index funds, are incredibly easy to manage and provide an excellent source of passive income after retirement. Whether you are paying off student debt, or seeking retirement, an IRA is a trustworthy tool that one can employ to help bring about financial success and stability.

What Does the Hyperloop Mean for Tomorrow’s Transportation?

For 80 years, humans have been placing themselves in metal tubes that whiz around the earth’s atmosphere at 600 miles per hour. Today, Elon Musk is doing the same thing, only instead of putting these vessels miles into the air, he is planning to place them on the ground.

The Hyperloop is a light, aerodynamic pod that travels on a bed of air atop a rail system. Using “air bearings” — much like those on an air hockey table — to eliminate friction, the Hyperloop system would be capable of reaching speeds up to Mach 1.1 (800 miles per hour), according to Musk’s 2013 white paper, “Hyperloop Alpha.” Musk first pioneered the concept as a response to California’s plan to build a high-speed rail (HSR) between San Francisco and Los Angeles. However, the proposed rail would have cost $77 billion to build, a fortune compared to the estimated $6 billion construction cost of the Hyperloop. The Hyperloop is extremely cost and energy effective, with minimum maintenance costs, and “motors” powered by solar panels on the pod. Musk also claims that the Hyperloop would be able to transport passengers from SF to LA in less than 30 minutes — 5 times faster than the rail.

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Diagrams from Musk’s paper “Hyperloop Alpha” (2013)

Much progress has been made on the Hyperloop since its inception in 2013. This is because after laying down the groundwork for Hyperloop technology, Musk opened up development on his project to the public, allowing start-ups, students and established companies alike to bring his idea to reality. While the Hyperloop initially began as an alternative to an HSR between SF and LA, it has become an international engineering phenomenon. Maharashtra in India, the United Arab Emirates, and the Netherlands have all announced plans to implement Hyperloop systems in their respective regions. The most prominent team working on the Hyperloop is Virgin Hyperloop One, which has recently been backed by Richard Branson’s Virgin Group. So far, the Virgin team has generated over 300 million dollars in funding, and built a 500m long test tube in Nevada, successfully launching pods at over 240 miles per hour. The team plans to officially put the Hyperloop in service by moving cargo to and from Los Angeles, with a start date projected as early as 2021.

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The Virgin Hyperloop One Testing Track

Being a revolutionary form of transportation, the Hyperloop seriously threatens both the commercial airline and train industries. Because the shuttle would be able to achieve plane-like speeds without the delays of landing and takeoff, Hyperloop could make trips quicker than today’s airplanes, and is a prime alternative for mid-distance routes. In addition, Musk plans to offer Hyperloop tickets for approximately $20, far cheaper than the average $112 for the airplane ticket between San Francisco and Los Angeles. On top of that, Hyperloop passengers would not have to go through the hassle of airport security, bag checks, and a slow boarding process. Instead, the experience would be much more comparable to going through a train station. This trifecta of speed, cost and convenience would lead to a predicted yearly loss of $1 billion for the airline industry. Yet, trains are also bested by the Hyperloop, which would travel 2-3 times faster than the fastest HSR, and 10 times faster than traditional rail systems. Besides, pods are projected to leave every 30 seconds, making the Hyperloop even more convenient than calling an Uber, much less a train. As Hyperloops gradually become integrated into our transportation system, today’s trains will slowly phase out. In 10 years, it is more likely that you will be taking a Hyperloop than either a train or a commercial airplane (supersonic jets are another question).

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A chart comparing commute times of various transportation systems between LA and SF (the Hyperloop is in blue)

It is important to note that the aforementioned numerical predictions on the Hyperloop come mostly from Musk’s own mouth. Critics often perceive the true cost of the Hyperloops to be nearly $100 billion, and believe the $20 ticket price tag is unattainable. However, doubters of Musk have historically been proven wrong the hard way — after all, this is the man behind both Tesla and SpaceX.

The biggest concern with the Hyperloop is its safety. What happens if the pod depressurizes, or the track malfunctions? What about extreme weather? Well, Musk claims that the Hyperloop will be safer than any conventional form of transportation. According to “Hyperloop Alpha,” the system would be “immune” to rain, fog and snow, and in the emergency case of a loss in cabin pressure, oxygen masks would drop — just like in a plane — to counter the vacuum that forms in the pod. Pods are also equipped with emergency brakes, so if one pod malfunctions, other pods would not be affected.

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A mock-up of a Hyperloop station

Needless to say, no matter how safe any given transportation is, there will always be people concerned with its safety.  At the time of the airplane’s inception, the idea of a metal tube flying people around at the speed of sound turned many away, but it has become the safest form of transportation in the world.  Just stay optimistic, because the Hyperloop is tomorrow’s transportation, and “tomorrow” is not too far away.

Marginal Tax Rates: How Do They Work?

With tax season quickly approaching, many Americans are yet again faced with the daunting task of filing their returns. Taxes are nearly always given a bad reputation, for their confusing nature and because of the incredibly mysterious tax laws that the United States currently has in place. However, understanding the tax system of one’s country is one of the most important ways to be financially literate and responsible. By understanding the tax laws, you are able to potentially save money and regulate your spending so you know what to expect each year when it comes time to deal with the IRS.

In this article, I will explain a particularly confusing aspect of income taxes – marginal tax rates. There are many misconceptions, especially with regards to income taxes, as the United States taxes different income brackets at different rates. This may seem difficult to understand at first, but it will become clearer soon.

How does the marginal rate tax brackets work?

The 2019 tax brackets with marginal rates listed in the left-hand column

As of 2019, the tax brackets for earned income are shown above. For the sake of simplicity, only focus on the “Single Filers” column on the left (the “Married Filers” column on the right simply means that a married couple is filing their taxes jointly as one income, so they get lower tax brackets). To file as a “Single Filer” means that an individual is eligible to file as a single person in the eyes of the IRS.

As you can see, there is a “Rate” on the very left, with tax rates up to 37%. This is the marginal tax rate. For each rate bracket, you owe that given rate on the income that is specified for each bracket. This will make more sense in one moment.

View the 2019 federal income tax brackets here

Example

Suppose you have an annual taxable income of $50,000, and you are filing as a single filer. Note that we are ignoring deductions and other factors that could potentially decrease your federal income taxes owed, such as a standard deduction of $12,200. To find your total federal income tax owed, first check to see where you fall in terms of the highest marginal rate. Since the annual taxable income is $50,000, you would find that this corresponds to a top rate of 22%, for incomes between $39,476 and $84,200.

To find the federal income tax owed, first we deal with the first marginal rate of 10%. This rate applies for income from $0 to $9,700. This means that your first $9,700 earned is taxed at a rate of 10%. Thus, the total federal tax income owed for this tax bracket is 10% of $9,700, or $970. Next, we will go to the 12% bracket. Here, all income from $9,700 to $39,475 is taxed at the marginal rate of 12%, meaning our next $29,775 earned is taxed at a rate of 12%. Thus, we owe 12% of $29,775, which is $3,573 for that bracket. Finally, we are at the top bracket. Here is where it gets complicated. Since we earn only $50,000, we are going to be paying the rest of our income at a top marginal rate of 22%, even though this bracket goes all the way up to an income of $84,200. Since there is only $10,525 left to be taxed, this $10,525 is taxed at a rate of 22%. Thus, we owe 22% of $10,525, which is $2,315.50 for that bracket.

Finally, we add all of the taxes calculated up to find the total federal income tax owed. This is $970 + $3,573 + $2,315.50 = $6,858.50, so your total federal income tax owed is $6,858.50.

Common Misconceptions

Not surprisingly, there are many misconceptions about marginal taxes. You may hear people say “I paid a 35% federal income tax this year.” This statement is misleading, as it may lead you to believe that a 35% rate was paid on all taxable incomes. This is not true. This was simply the highest marginal rate that could be taxed with that person’s income.

As you can see from the example we did above, the total federal income tax owed was $6,858.50. Dividing this number by $50,000, our income, would give us a percentage of 13.7%. If the hypothetical taxpayer in this scenario were to say “I paid a 22% federal income tax this year,” referring to the top income bracket in which they owed taxes, they would be misleading you. Their “effective tax rate” was really only 13.7%, much less than 22%.

Final Thoughts

If you are a taxpayer, it is important to understand the tax laws, and how your taxes work. If you fail to understand what you owe, you will be confused, and may fail to spot deficiencies in your annual calculations, owing more than you actually should.

The Difference Between Investing and Trading

Investing and trading are two different types of stock market strategies. Generally, the investor seeks to create slow and steady returns through investing in companies’ business plans and balance sheets. The trader, on the other hand, seeks to make risky short-term plays in market equities, often entering and exiting a stock position in seconds. Both have benefits and risks. It is important to understand each strategy when seeking to buy and sell stocks in the stock market.

Investing

When you invest in a stock, you are picking the stock for a variety of reasons, and typically plan to hold the stock for a long period of time. When you buy a company’s stock, you buy into the company’s values, management team, and fundamentals. Does the company have a trustworthy, experienced executive board? Can the stock continue its high revenue growth for the next 10 years? Is the company’s product or service a sustainable one? Will the company maintain a dominant industry presence? These are questions that the investor must answer.

Investing will generate slow, but consistent returns. Each year, you can hope to gain anywhere from 5-10%. It must be stressed, however, that the investor will not tend to care about these numbers. As long as their portfolio features a diversified basket of stocks, each of which has good potential in the long run, the portfolio will trend upwards with the market.

You may think that a 5-10% return is not very good. However, assuming you reinvest your returns, you can make quite a bit in the stock market over long periods of time. Suppose you make a consistent 7% return each year in an investment portfolio, and continue to reinvest your returns. On an initial $10,000, you would end up with $38,696.84, or nearly four times your initial investment. Suppose you continually add a portion of your income to your investment portfolio, these returns would be magnified even more.

Trading

You have likely heard of the “day trader.” The day trader often sits in front of multiple computer monitors, screening multiple stocks, options, and other equities, and making up to thousands of trades in one day. You may have heard of something called “technical analysis.” This is the main strategy employed by the day trader, where 1-day charts are analyzed for patterns. Technical signals such as the SMA (simple moving average), MACD (moving average convergence/divergence), and RSI (relative strength index) are just a few of the indicators used to trade stocks.

A technical analysis of a stock

Day traders are able to make small returns by entering and exiting positions quickly throughout a day, hence the name “day trader.” A day trader favors market volatility, which brings about wild price swings in equities. The day trader is able to use this volatility to make greater returns in stocks.

Day trading is generally unprofitable, especially for the everyday day trader. The overwhelming majority of retail investors who try to day trade will lose money. In the long term, day trading is not a profitable strategy, unless you have the tools and expertise to do it properly. Many investment banks, such as Goldman Sachs and Morgan Stanley, have trading desks, where proprietary traders (prop traders) use algorithms and high frequency orders to make small returns in fractions of fractions of a second. The same goes for hedge funds. However, these trading divisions at banks and hedge funds are becoming less profitable. If the big corporation is struggling to make day trading profitable, then surely the day trader will be having an even more difficult time.

Bottom Line

The investor seeks to find valuable companies to invest in the long run, while the trader seeks to take positions in stocks for short periods of time, hoping for price swings and market volatility.

In the long term, investing will make you generous returns. By doing research, and ensuring you are loosely following the markets and your portfolio, you can make excellent profits through good companies that have solid business strategies. Day trading requires work, and often requires the right skills to make it profitable.

How to Get a Mortgage Loan

Getting a loan is one of the most important things in the life of an adult which the US education system has failed to teach its students. It allows us to set up our lives without having the money to do so. In this article, I will try to talk you through, step-by-step, getting a fixed interest rate loan for a house, and after you have finished this article, you should know everything you need to know about the loan process.

The Five C’s

The traits that determine whether you are approved for a loan is Credit, Capacity, Collateral, Capital, and Conditions.

Credit is the most important trait. It measures your history of paying your financial obligations; when you pay all your debts on time, every month, your credit rises, but if you fail to, your credit falls. A credit score of 760 is excellent, and you will struggle to get a loan with a credit score under 630. In addition, if you have very low credit, you will be unable to pay the loans you can’t make, making raising your credit impossible. As a remedy, you might cosign with someone with a higher credit score which will increase the likelihood of approval of the loan.

The very important 5 C’s of credit

Capacity is your ability to pay back the loan; it is mainly measured by your Debt to Income Ratio (DTI). Banks determine DTI by taking all necessary spending, like loan payments and rent, and dividing it by the client’s monthly income. The lower the DTI, the better; Generally, you should try to keep it under 35% which would put you in the top category for loan officers.

Collateral and capital both essentially mean assets, but collateral is assets which you ensure your loan with, while capital is assets which you can use to help pay the loan. As a result, if you are unable to pay the loan, your collateral might be seized, but putting up collateral is critical to securing a loan.

Conditions are all other external factors. They can include your plan with the money, the amount of money, the economy’s health, and even your history as a customer. These weigh less than the above values.

A more in depth explanation of the critical characteristics are on most bank sites such as here

Application

The first step of actually securing a loan is the application. While applications vary bank by bank, they all require the same things: your name, phone number, social security number, annual income statement, your bank account balance, and equity. In addition, you will fill out the amount of money you request and the time period you will pay it off over, but these are both subject to change. With the application, you will also need to pay an application fee, which ranges from zero to several hundreds of dollars for house loans, dependent on the bank.

All this information will go to a loan officer. Their job is to check the accuracy of all the submitted information by going over your pay stubs, loan payments, bank statements for the last 60 days, and 2-years worth of tax returns, all provided by the applicant. As loan officers earn a commission on loans, they often support the applicant when in negotiation with the underwriter.

Approval

The underwriter is the “gatekeeper” of the loan. They decide who gets approved and who gets denied. They decide based on the 5 C’s, which includes credit. For the underwriter to check your credit, they will need to contact credit agencies, which costs money. The bank charges you the fee, which is usually around $25.

To preserve his impartiality and thus profitability for the bank, you will not be able to speak with your underwriter. Instead, your loan officer will try to convince the underwriter, as he earns a commission, but his ability to change the outcome of the review process is very limited; The underwriter judiciously reviews the raw documents and values and makes the decision.

Negotiation

Negotiation is a misnomer; in reality, your power to affect the deal is very limited unless you are a serious investor who can bring significant business, in which case you can leverage the future loans you will make.

Your credit score is important for getting a good loan

Firstly, interest rate is heavily reliant on your credit. If your credit is high, it is low, and if your credit is low, it is high. Additionally, the length of the loan and amount affects the interest rate; The larger they are, the more you pay.  As an aside, you may get offered the option of a percent buy. A percent buy is the option to pay money at the start of the loan to lower the percent interest. While it depends on your situation, if you plan on paying it over 4 years, you should take the option. From the values above, a formula is used to calculate the obligatory monthly payments; there is no leeway in negotiating this. For a more in-depth explanation on the factors that determine your mortgage interest rate, see here

While you determine the general length of the loan, the amount loaned is based on your down payment and the appraisal of the house. The required down payment depends in large part to how many houses you already on. On your first house, with assistance by the government, you may not have to put any down; on your primary residence, you will usually have to put down 10 to 15 percent of the value of the house, and on investment houses, you will usually have to put down 20 to 30 percent. The value of the house is not determined in negotiations; rather, it is decided by the appraisal process. The bank will arrange for an third party appraisal company to decide on a value of the house. The cost of the appraising is charged to the person seeking the loan and usually is around $1,000.

Another significant cost is the escrow payment. Essentially, it is money taken from you when you get the loan to pay for future expenses. Most commonly, banks will take half a years worth of property tax and insurance. The reason banks do this is to ensure you’re irresponsibility doesn’t cost the bank by missed payments.

The greatest and least known cost is hiring a title company. Title companies make sure the current owner of a house is legally allowed to sell it. This is necessary because sometimes a house will be tied up in legal disputes and other people may have a legitimate claim against it, called a lien. Usually hiring a third-party company, which is required by banks, will cost 0.5 percent of the house’s value.

All these terms and costs will come to you in a loan disclosure document, which you must sign to move forward. It is not legally binding, but may be used as a record of agreement. After signing this document, the official legally-binding loan document will be drawn up. The bank may charge up to $1,000 as an origination fee for drafting the documents. You may back out of the loan as long as you haven’t signed the loan document, only losing the money paid in fees and possibly earnest money – a small amount of money paid to the house seller to reserve the house. Additionally, all fees – except for the credit check fee, the appraisal fee, and the application fee – will be collected when you sign the loan document. After paying the fees, signing the loan document, and transferring the down payment to the title company, you will then own the house; the bank will transfer the loan directly to the title company, who will send it to the house seller after taking its share. As a side note, the fees must be paid in cash unless you take some legal, but very uncommon steps.

Final Thoughts

Loans are complicated and take a lot of work. You should expect it to take around 45 days and cost close to $3,000 in fees, but it is all worth it if you use the money wisely. However, if you invest poorly or take loans from unsavory sources like payday loans or subprime loans, they may ruin your life. NEVER take money from these loan sharks; their predatory interest rates will destroy your financial situation for possibly many years.

I didn’t talk about business loans because they are much harder to get and far more uncommon; however if you are interested, you can expect them to cost substantially more and take substantially longer, all depending on the size of the company. As an alternative, most small business raise money either out of pocket or by private investors. I didn’t talk about car loans because they are far simpler. There is no title company, no appraisal, no negotiation. As soon as you’re approved, which takes no more than a day, you can buy the car. The fees will amount to about $100, but you will have to pay somewhere close to 30 to 50 percent of the value of the car as down payment if you use a legitimate bank.

The Rise of High Frequency Trading in a Technological Market

On May 6, 2010, the Dow Jones cascaded into a nine percent plunge. Down nearly 1000 points, the markets were in an absolute frenzy. Blue chips with solid fundamentals and no surprises in the news were shocked with losses as high as 40%, in just 30 minutes. Then, equities climbed right back up as fast as they had dropped half an hour before. NYSE officials and SEC regulators were scrambling to understand what had happened, traders were in a panic, and spectators came up with various theories that would explain the event.

That day marked the beginning of what the markets would come to know as HFT, or high frequency trading. It became clear that the stock market was changed forever, ruled now by the machines, by algorithms, not by the retail investor. This new era of technological change within the markets is just the beginning of the future of a market structure defined by HFT.

What is HFT?

High frequency trading is precisely defined in its name. High volumes of orders are placed for various equities in the stock market. Computers, algorithms, and various programs are used to place, cancel, and fill orders for stocks, bonds, and treasuries in fractions of fractions of a second. Proprietary traders at investment banks, as well as hedge funds, tend to use high frequency trading the most, having access to the fastest computers and brightest technical minds in the industry.

High Frequency Traders on the trading floor

High frequency trading truly began to cement itself in the late 2000s, largely pioneered by the hedge fund Renaissance Technologies. Led by James Simons, a widely honored and praised mathematician, Renaissance employed “quants,” or quantitative researchers, with backgrounds in math, physics, and engineering. These master’s degree-holders and Ph.D.s would help change the markets forever. (Read more about Renaissance Technologies and their recent attempts to innovate within HFT here)

Although it was attempted to make the stock markets computerized and automated by the early 1980s, it was largely difficult to institute high frequency trading and successful algorithms due to a lack of knowledge in the field, and a lack of computing power to institute the trades. Actual electronic trading was not even available until the 1990s.

A Growing Market Share for HFT and How It Generates Profits

Recent estimates have stated that algorithmic trading currently comprises up to 70% of the entire trading volume in the stock market. This number may seem very surprising to some, but if one looks at the volume within the market over the last few decades, it’s clear that the volume growth is not from retail investors. Electronic trading has made access to the stock market easy for all who want to invest or trade, but the number of retail investors has not grown this much in the past four decades. The rise of algorithmic, high frequency trading, has propelled volume growth.

Stock market volume growth since 1972

Given that robots are able to generate profits for firms, it is clear why they would want to employ high frequency trading strategies. Computer programs can recognize arbitrage within the markets — that is, small difference in the prices of stocks that exist within incredibly small periods of time.

The Flash Crash, Market Making, and Criticisms of HFT

When the retail investor realizes that there are many traders on Wall Street generating profits by simply using a powerful computer, they may become frustrated with the system. Throughout the past couple of years, many of these complaints have been justified. As described earlier, the Flash Crash of 2010 was a cause for anger towards HFT and electronic high speed trading.

The 2010 Flash Crash

The Dow Jones dropped nearly 1000 points, or nearly 10% in a matter of minutes. The reason? Market manipulation through the use of an illegal technique called “spoofing.” As Bob Byrne explains, a spoofer “is simply trying to create the illusion of extreme supply or demand [through the use of spoofing]. As the fake supply pushes prices lower, the participant can bid into the weakness, completely cancel all his fake orders, and sell his recently acquired inventory into the price rebound.” In effect, the individual involved in spoofing sells his stock at a premium.

Many individuals participated in this elicit tactic. Then, it went wrong. Billions of dollars were spoofed, eventually causing the Dow Jones to plummet. These were largely attributed to one futures trader located in the United Kingdom. He was charged by multiple authorities for illegal market practices. More importantly, however, was the use of the algorithms that allowed for spoofing, and as a result the Flash Crash. It was highly technical algorithmics, and HFT methods that allowed traders to do these fake trades. For all we know, these tactics are still being used today.

HFT deserves criticism in many aspects. Continued proof of market manipulation due to HFT has remained prevalent. Just last month, Singapore had a $41 billion flash crash, likely due to market manipulation practices on a blue chip conglomerate stock. The result was bulge bracket banks blaming each other for the mess. Last year, silver futures contracts had a 10+% flash crash overnight. These types of occurrences should never happen, in the midst of no panics or harsh news. The reality that must be accepted is that with the rise of technology in the markets, more and more of these “Flash Crashes” have occurred.

The Benefits of HFT

The perception of high frequency trading is very poor, especially in the media and to the outside observer of the stock market. In many cases, these issues with HFT are rightfully justified. However, high frequency trading has truly helped the average retail investor in many ways. The main benefit that algorithmic trading has provided is a decrease in the Bid-Ask difference. You see, when somebody wants to buy a stock, they cannot simply buy the stock at the price that is displayed next to the ticker symbol. The seller has to be willing to sell the stock, and usually this “Ask” price is higher than the actual ticker symbol price of the stock. Similarly, the “Bid,” or price that the buyer is asking, is usually lower. Thus, in order to have a buy order filled, the “Ask” price must be reached.

U.S. stock market Bid-Ask spreads since 1994

In the past, the Bid-Ask spread used to be much higher than it is now, which made it difficult to make trades quickly. What HFT has done to correct this problem is added massive liquidity to the markets, causing the Bid-Ask spread to decrease from “0.17% in 1994 to 0.025% in 2004” as cited by Worstall in Forbes. This is incredibly significant, and occurred in only one decade due to the rise of technology and HFT. Higher volumes means more accurate prices, and more easily-fillable orders. The retail investor benefits from this, not having to pay such a high premium. 0.17% is quite a large percentage of a stock price in a short period of time.

The Future

High frequency trading is a relatively new phenomenon. It is also widely unknown. The only people that actually understand HFT are the ones that utilize it, and government regulators are slow to catch on to emerging technical trends in the stock market. For this reason, SEC regulators should continue to learn more about algorithmic trading and its potential downfalls. Just nine years ago, we saw what potential destruction HFT could bring to the markets. Human authority and reason must remain above automated systems.

As computers continue to get more powerful, and with the emerging technology associated with quantum computing, trading could become even more interesting. It is important that such practices are used responsibly. Firms have access to great technologies, which can be just as easily misused as they can be used to develop the markets for everyone.


Safe High Yield Dividend Stocks

Dividends are often the key factor for long term investors in differentiating between risky and safe plays. In time of great market volatility, or even bear markets, an expected cash quarterly cash payout is a safe haven for investors. The global markets are heading for a 10 year expansion, but some underlying risks do remain present.

This last week, corporate earnings were mixed. Many top companies did not deliver on expected EPS and revenue growth estimates, and guidances were revised and lowered for many top names by the likes of Amazon (AMZN) and Nvidia (NVDA). However, the CBOE Volatility Index (often termed the investor’s “fear index”) has steadily declined for the past few months, as a new quarter of expansion has descended on the markets.

Regardless, high market capitalization dividend picks are typically safe bets. In this article, I will discuss a few high yield dividend stocks that you can hold for years, taking in a nice quarterly or yearly dividend payout.

AT&T

AT&T (T) is arguably the largest player in the media and telecommunications business, owning a variety of subsidiary media companies such as DirecTV. AT&T is also in the process of appealing a decision to acquire Time Warner for $85.4 billion. With all of these mergers and acquisitions, however, the risk with AT&T is highly prevalent within its leveraged structure. AT&T has had to resort to great leverage to acquire companies, completing many LBOs (leveraged buyouts).

AT&T provides an excellent dividend yield

That being said, AT&T is the largest company chasing a 5G network, with constant research and development funding being poured into creating a 5G network. With low latency and high speed, AT&T will look to prove its continued consumer growth numbers. AT&T has also made it a priority this year to deleverage itself, paying off debts and decreasing spending. With excellent management and a dominating market presence, AT&T still maintains a yield of 6.93%, an unprecedented number.

Exxon Mobil Corporation and Chevron Corporation

Exxon Mobil (XOM) and Chevron (CVX) are both major players in the energy sector, particularly in oil and gas, controlling nearly all aspects of the production and sales processes within each corporation. This should be expected, given their longstanding history as subsidiaries of Standard Oil, the Rockefeller’s oil monopoly. With dividend yields of 4.36% and 4.00% respectively, both look to be excellent picks to give a portfolio exposure to the energy sector.

Both oil production companies will provide a safe dividend

Both companies continue to control vast expanses of mines, oil rigs, and research and development technologies for energy, as two of the most powerful companies in the world. Energy will remain a necessity across the world, and both companies will remain the top players in the industry. As oil prices should continue to rise, both corporations will seek to benefit, and should increase production of energy. Despite failed OPEC supply cuts, Exxon and Chevron will be solid long-term plays.

Qualcomm Inc.

With a yield of 4.89%, Qualcomm (QCOM) is an excellent stabilizer for any portfolio. With a diversified set of assets, ranging from semiconductors to telecommunications, Qualcomm is another excellent example of a growth-potential. Like AT&T, Qualcomm is rapidly trying to expand and develop their 5G network, which could would inevitably magnify capital inflows from investors.

Qualcomm is at a discount and has a high yield

Qualcomm has recently had more than its fair share of issues, ranging from a failed buyout attempt from Broadcom (AVGO) to conflicts with Apple (AAPL) as a result of a court case regarding the usage of Qualcomm modems in the iPhone. As a result, not only is Qualcomm trading at a discount right now, but its yield remains strong.

High Yields Too Good To Be True

In today’s market, many dividend stocks seem to be safe, high return plays. One may look at equities such as Mesabi Trust (MSB) or MV Oil Trust (MVO), and see dividend yields of nearly 20%. Upon closer inspection, these equities trade at incredibly low volumes. The average volume of Mesabi Trust is only around 130,000. The total market capitalization is only $380 million, and the stock has historically been subject to wild price swings. There is no point in speculating on a 20% yield if the stock crashes to half of its original value.

When finding good dividend stocks, one must understand that a high yield does not equate to a safe play. One must also realize that just because a dividend exists, it is not immune from a cut if the company’s future prospects are not positive. A good dividend stock is just like any other stock you would want to purchase — excellent management, a good balance sheet, and a sustainable strategy.

Data from finance.yahoo.com

The Importance of Portfolio Diversification

Diversification is one of the most basic but important tools used to manage risk within a portfolio. Before we jump into why diversification is so important, let us first define the term.

What is diversification?

Diversification in a portfolio is when an investor buys assets of all different types. A well-diversified portfolio will have different financial instruments, such as stocks, bonds, or ETFs, that vary in financial sector, industry, and market cap.

Let’s look at a basic example. You may know of mutual funds, a large pool of money from investors used to purchase many different securities. The biggest reason people invest in mutual funds is that they can enjoy the safety derived from investing in hundreds of different financial instruments, without having to buy each of those hundreds of investments themselves. So, diversification is the key component behind mutual funds.

Why is diversification so important?

Diversification is important because it helps us reduce risk when investing. There will always be a certain degree of risk in investment, but diversification helps us minimize risk. By investing in all different sorts of investments, your portfolio won’t be immensely affected overnight.

This is a bizarre example, but let’s say some aliens came down and fired an EMP wave on the entire West Coast of the US, rendering all electronic devices useless. Granted, there are bigger problems at hand, but let’s look at how this scenario might affect investors with varying degrees of diversification. Billy has invested only in FAANG stocks, namely Facebook (FB), Apple (APPL), Amazon (AMZN), Netflix (NFLX), and Alphabet/Google (GOOG). All of the FAANG company headquarters are on the West Coast and have been compromised. Investors are jumping ship, rightfully speculating failure. Stock prices for all of FAANG drop 90%, and Billy’s portfolio plummets from $10,000 to $1000 overnight.

On the other hand, John has been keeping up with Financial Literacy Journal articles, and has been diversifying his portfolio ever since. He is invested in FAANG, but also in stocks outside the tech industry. John is ready for a recession since he has invested in the Consumer Staples sector, as well as stocks that have proved strong performance in recessions, such as McDonald’s (MCD) or Dollar Tree (DLTR). John loses some from his FAANG investments, but also gains from his other investments.

As you can see from this simplified model, Billy’s undiversified portfolio suffers, whereas John’s diverse portfolio is healthier following the alien attack.

Drawbacks

Suppose Jimmy, like Billy, has an undiversified portfolio. However, instead of FAANG stocks, he’s put his funds into a triple-leveraged oil ETF, greatly magnifying both his profits and his losses if the price of one barrel of oil increases or decreases, respectively. One day, OPEC decides to cut oil supply in half, greatly increasing the price of oil. Jimmy’s profits soar, and his returns are magnificent.

Although Jimmy took an undiversified approach, he still made more than a diversified portfolio. Why? Diversified portfolios limit risk, and limited risk translates into limited potential returns. Jimmy’s one-equity portfolio, incredibly riskier, potentially multiplies his profits.

It may seem that the greatest returns should be the main goal. This is not the case for the risk-averse investor. If OPEC instead decides to increase the supply of oil, oil prices will fall, and Jimmy will have lost a great deal of money. Additionally, in the long run, Jimmy’s portfolio will be subject to wild price swings and volatility.

Final Thoughts

There is no such thing as an investment without risk; however, different investments will have different risks. The takeaway is this: when you diversify your portfolio, you are essentially taking a whole bunch of different risks that offset each other in order to provide stability to your investments. Failure to diversify your portfolio means you are taking the same risks – putting your eggs all in one basket – meaning you could potentially lose everything.

What is Credit? Why is Credit Important?

Credit is an important financial concept that each and every individual in an economy must be aware of and understand. Whether you want to buy goods with a credit card, or want to be able to take mortgage loans from the bank so that you can buy a house, you must have a good understanding of what credit is, and ensure you keep your credit healthy. In this lesson, I will cover the definition of credit, where it is used, and why you must keep a good credit score.

What is credit?

In school, you may have heard of credit with regard to an assignment. A teacher may tell you “if you do not put your name on your paper, you will not receive credit for this assignment.” The teacher is willing to give you that credit, but is trusting you to do that assignment first. The teacher has to have a belief in you before you receive the credit.

The financial definition of credit is a little more nuanced and has a different conceptual meaning than the one you may hear in school, but the idea that trust and faith between two parties remains constant. When we refer to credit in the financial sense, we are talking about a certain level of trust or belief that one party will be able to repay a debt or a loan granted to them. This may sound complicated, but I will guide you through it.

Credit Cards

You probably know about credit cards, how they work, and when they are used. Credit cards are now the widely used method of payment for any consumer good, ranging from grocery store items, to gas, to retail purchases such as clothes. You may commonly see commercials for different credit cards, offering different benefits for using their card, such as cashback on purchases and loyalty rewards.

Credit cards rely on credit, as we have defined above, in order to be used and issued. Suppose that you want to get a credit card in order to buy goods. You will have to apply for the credit card through one of these companies. In order to be considered for the credit card, you will definitely need to have a good credit score.

Credit Score and How to Build It

Credit score refers to a number that a person is assigned based on how trustworthy they are regarding their payments on debts and loans. The credit score is calculated to reflect how well one can be trusted to be responsible for their payments. Credit scores are incredibly important for financial well-being and security. A FICO credit score is within the range of 300-850, but a good credit score is defined as being between 670-850. Based on statistics from Experian, only 66% of Americans have a good credit score or better.

A look at credit scores and what they mean for your finances

It is very crucial to maintain a good credit score. This can be done by ensuring a few things. Firstly, you must make sure to keep your spending under control. If you spend too much money, have to take out loans, and then can’t repay your debts, your credit score is going to be lowered permanently. Secondly, you must pay your bills on time and in an orderly fashion. Even if you have the money to settle all of your debt obligations, you must pay them in the first place. Forgetting to repay a debt can also permanently affect your credit score.

Why is credit important?

Once lowered, your credit score can put you at risk for financial downfall. Assuming you don’t have much extra cash for unexpected costs, you are at a great risk. What if your car breaks down? You can’t take out a loan, because your credit score is too low and banks don’t trust you to loan you money. As a result, you can’t drive to work. What if you are hit with unexpected medical costs that your insurance doesn’t cover? You are stuck in a hole. In order to truly maintain financial freedom, a healthy credit score should be one of your first financial priorities.

Top 10 countries based on their gross savings as a percentage of GDP

In today’s economy, especially in America, consumers save only 18% of GDP. America is a consumer society. In other countries, savings rates are as high as 40%. It is especially important to live below your means, so that your credit score and freedom will be preserved. Don’t get caught up in purchasing the new iPhone, or a new sweatshirt that you so desperately want but know you can’t afford. Although these concepts may not affect you now, it is good to start building healthy financial habits that carry on into the future.

The Future of Personal Transportation & Why Uber and Lyft Will Die

In 1908, Henry Ford revolutionized transportation by bringing the Ford Model T, the first mass-produced automobile, to market. Today, we are in the midst of another revolution in transportation: autonomous driving. It’s a buzz-phrase that has been around for a while, but is only recently truly coming to fruition. Car companies and tech giants alike have begun looking into the autonomous vehicle industry. This ambition is for good financial reason: Aarian Marshall of Wired predicts that “driverless tech will add $7 trillion to the global economy.” While the autonomous vehicle revolution will profit car manufacturers who are willing to invest in it, it will also be the downfall of today’s rideshare companies like Uber and Lyft.

How Does an AV Work?

Image result for autonomous vehicles
A concept of autonomous vehicles communicating with each other

Let’s first define what autonomous driving actually means. An autonomous car is a vehicle that can recognize its surroundings, and act accordingly without any human action. There are many exciting technologies that go into achieving true autonomous driving. Tannya D. Jajal from Medium labels a driverless car as “essentially a data center on wheels.” Most driverless cars use sensors, cameras, and GPS to collect data and analyze it with machine learning algorithms. Because the vehicle would have to collect and analyze massive amounts of data continuously, advancements in Cloud technology allow AVs to communicate over multiple network layers in real-time. For example, vehicles would be able to communicate with other vehicles on the road, and in the future, maybe even roadside devices like traffic lights, parking lots and infrastructure. Ultimately, the vision is for a truly connected car that is able to learn from other cars, and adjust to external changes. While we are not quite there yet, companies around the world like Google, Tesla and GM are investing billions of dollars in this technology every year.

Ride-share and AVs: a Tricky Relationship

A Google Waymo test car

The next logical step is to try and combine the ride-share technology with autonomous vehicles. Both leaders in ride-share services, Uber and Lyft, have begun researching, developing and testing AV technologies themselves, ambitiously announcing plans to launch driverless rides sometime in the next 5 years.  Meanwhile, many smaller companies, like Google’s Waymo and Drive.ai have also begun small-scale, revenue generating services using their own manufactured AVs. Yet, Uber and Lyft will not profit from this. This is because the technological barrier for autonomous driving is so much higher than the barrier for ride-share. Therefore, companies should flesh out AV technology first, and then worry about combining it with ride-share. Both Uber and Lyft have at least acknowledged this tenet, since they have tried to develop their own driverless car technologies.

However, by diverting their efforts between their traditional services and their AV projects, the standards have dropped on both sides. Uber’s treatment of its drivers has been widely criticized in the last year, and Uber was even forced to shut down its autonomous driving program after an Uber self-driving vehicle killed a pedestrian while on a test in Arizona. Meanwhile, Lyft’s smaller market share means it doesn’t have the resources to fully research and develop their driverless technology to perfection. By failing to let go of their lower echelon innovation — ride-share — and trying to solve the issue of transportation all at once, Uber and Lyft have suffered the consequences, and both companies’ driverless programs are looking grim.

Image result for uber and lyft
Uber and Lyft are the two largest rideshare companies, and would likely be hurt by AV technology

Eventually, as Uber and Lyft fall farther behind on driverless technologies, companies like Waymo, who focus nearly all of their resources on self-driving technology, and even automotive giants like Nissan and Tesla will be the ones to come out on top. This is not to say that the rideshare technology will die — instead, it will be integrated directly into the autonomous vehicles. AV companies will eat up the rideshare companies, taking over their role and vertically integrating from design to production to actual rides. After all, why would AV companies give traditional rideshare companies like Uber and Lyft any slice of the pie, if they can just control the rideshare market themselves?

Imagine a situation where you need to get to a lunch meeting. You don’t own a car, but you paid for a contract with Tesla for so-and-so many miles per month (or something of the sort). You open up your “Tesla” app and call a Tesla car. In 2 minutes, the car comes, and drives you to your meeting. The car then drives away to service another Tesla customer. Afterwards, you call a Tesla back, and a different car comes to take you home. In this future, car companies would no longer sell cars to consumers: they would selling rides, and shares of cars.

What Are The Effects?

Experts predict that AV technology will greatly reduce the need to own a vehicle. Governments may even outright ban human-driven cars — or at least heavily regulate them — mitigating the risk for self-driving cars to drive alongside their less predictable, human-operated counterparts.  Driving would be limited to a recreational activity, much like horse-riding. Of course, the biggest concern surrounding autonomous vehicles is whether they are safe. In a recent survey by Fortune, only 26% of respondents said they would purchase an autonomous vehicle. While self-driving technologies are obviously not yet perfect, they are growing exponentially more sophisticated every day. After all, the original intent of autonomous driving was to eliminate the human errors that contribute to six million road accidents in America every year. Needless to say, as AV technology continues to improve, rider safety will soon surpass its level with a human driver, and reach unthinkable heights.

It is likely that driverless cars would only be used for short trips, like a trip to a friend’s house, or a grocery run. With other revolutionary technologies being developed like Elon Musk’s Hyperloop, it may not be economical — or efficient — to take a car over long distances. Nevertheless, we should be optimistic about the future of personal transportation, because we are truly experiencing an autonomous revolution.

OPINION: Why Investors Play a Crucial Role in the Economy

Society loathes the investor, and it’s quite clear why. They seem to profit off pure luck and others’ hard work, and very tellingly, their income is legally called unearned. Additionally, their irresponsibility and greed have caused the Great Depression and the Great Recession, resulting in a fervent anti-Wall Street movement. But in reality, they actually render a great service to the economy. In this article I will explain why I think this is.

A Crucial Role in Company Growth

The most fundamental job of the investor is to select the companies and industries that, he or she thinks, have great potential. While this seems to contribute nothing to the economy, it actually funds worthy startups which grow the economy and increase the quality life: startups, usually, don’t have a large amount of cash in the bank, and that prevents them from growing or even staying afloat. But these startups can remedy their cash-flow problem by selling stocks or bonds of the company.

To whom can they sell these seemingly risky securities? Investors, of course. Only the investor has the money and willingness to back these potentially invaluable startups, and the practice of relying on funding from investors is ubiquitous; Facebook, Google, Snapchat, and essentially every major tech company have raised the funds needed to run their company this way, and undoubtedly their products have benefitted us as well as the investors.

A Crucial Role in Banking

Investors also make banking possible. We take for granted the ability to store your wealth in a bank and earn interest on it. But banks can only carry out this function by employing investors. Investors take the money you and I store in the bank and invest it so as to make enough revenue to pay the interest and make a profit. If banks had no investing sector, they would be unable to store and grow our wealth and as a result, they would either not exist or exist only as a branch of government, preventing the current institutions we have which facilitate our everyday lives.

What investors do with the money in the bank also benefits us; they take that money and invest it back into the community by issuing loans. These loans go to businesses who use that money to start up their company, as talked about previously, but also these loans go to normal people who use that money to invest in their lives – by building a house, or buying a car. Nonetheless, they stimulate the economy and increase the GDP. Thus a small change in the supply of money can change the total GDP drastically, by investors re-investing the money whenever its put in a bank. This function of investing is so pronounced that macroeconomics has a word to describe it: the money-multiplier effect.

A Crucial Role in Public Policy

Furthermore, investors are critical to the economic policy of the government. The government’s monetary policy relies on its ability to control the money supply, utilizing three methods: changing the discount rate, changing the reserve ratio, and open market operations. The discount rate is the rate at which banks can borrow from the Federal Reserve; The reserve ratio is the ratio of the deposits banks must keep in their vaults; and open market operations are buying and selling securities in the financial market. While the first doesn’t directly deal with investors, the second and third do. Investors enact the re-investing of money in banks, as described above, and the purchase and sale of bonds. So essentially they carry out monetary policy.

The Federal Reserve headquarters

Interestingly enough, the operational function probably isn’t the most important role the investors serve to public policy, for they also help direct the policy itself. The past three chief economic advisers to the president were investors before the stepped into the public arena, and the news is filled with investors giving their take on the current economic policy and how it will affect the stability and growth of the economy, criticizing when criticism is needed, praising when praise is warranted. They are the indicators to public policy; when they get giddy, the politicians get worried.

Final Thoughts

Investing, to the eye of the outside observer, seems to contribute little to society, but it actually serves a crucial role in the economy. Investors give companies limitless growth opportunities that they would lack without investment. Investors help facilitate the flow of funds to those who need it and uphold the institutions of banking. Investors promote monetarily and fiscally smart policies, while questioning those that are not. Truly, we would all be poorer without the investor.

Value Investing: How to Build Wealth

With a net worth of over $80 billion, Warren Buffett has already cemented himself into the annals of stock market history. Buffett’s conglomerate Berkshire Hathaway has grown its assets to the hundreds of billions, and currently has major stakes in dozens of large market capitalization companies. However, although Buffett’s success may instill awe in the average retail investor, it is how “The Oracle of Omaha” got to this point that is truly important: value investing. In this article, I will explain what value investing is, how it gained popularity, and why it is a sustainable strategy for the retail investor.

Buffett’s Mentor

Benjamin Graham, a legendary Wall Street mogul, pioneered the idea of value investing. He mentored Warren Buffett on various concepts of value investing, including diversification and fundamental and technical analysis. Graham wrote the book The Intelligent Investor in 1949, detailing the ideals of value investing, the goals of a successful stock-picker, and how to build true wealth by investing in companies. The Intelligent Investor is the most popular investment book in the world, and has been reprinted in multiple editions for the past 70 years.

Benjamin Graham, legendary value investor

I would highly recommend anyone looking for information on how to invest and build wealth to read The Intelligent Investor. It is the Bible of the stock market.

Buffett’s Philosophy

At its core, Buffett’s philosophy prioritizes buying a company when purchasing a stock, rather than following any technical chart or aiming for a quick buy and sell transaction. It is part of the reason Buffett has grown his holdings of The Coca-Cola Co (KO) or Kraft Heinz Co (KHC) to over $10 billion each. Buffett continues to add shares of Apple Inc. (AAPL) because, in the words of Benjamin Graham, the tech giant “promises safety of principal and an adequate return.”

Buffett’s investment strategy mainly plays along buying companies that were once solid – or are still excellent companies – but have been deeply oversold, to the point where their price is unjustifiably low. To this end, Buffett’s purchases would likely be along the lines of having a low P/B ratio, indicating a stock’s price has tumbled, as well as high yields on dividends, indicating that companies respect shareholders and intend on delivering tangible results.

Coca-Cola (KO), a widely acclaimed Buffet stock

That being said, Buffett would not solely focus on fundamental analysis of stocks. There can be a variety of red flags in companies, such as a low market capitalization, high debt combined with low free cash flows, and an unsustainable management strategy. Although Buffett prioritizes what is called an “intrinsic value” of stocks in its fundamentals, the entire picture must be taken into consideration.

In today’s market, Buffett would likely reference Bank of America Corp (BAC) as a good value pick. With a price-to-book ratio of 1.18, a price down from highs of $53.85, and an excellent management team led by Brian Moynihan, Bank of America would be a trustworthy stock that Buffett would advise to buy and hold for decades to come. That is exactly why BAC is one of Buffett’s top holdings in his portfolio.

Alternative Strategies

A high frequency trader sits and monitors stocks

As Graham eloquently put it in The Intelligent Investor, “investing is a unique kind of casino—one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor.” Other stock traders, primarily hedge funds and HFTs (high frequency traders) attempt to trade securities with high volatility, high risk, but potentially high return. They will quickly buy and sell stocks in fractions of a second, to make quick returns. They are not analyzing the value of a company – the management principles, the innovation over the past decade, or the room for growth – but rather technical charts and patterns that a computer can analyze. These types of strategies are anathema to Buffett’s careful, pragmatic philosophy.

Final Thoughts

Whether you support Buffett’s conservative approach to investing or not, there is something to be learned from value investing. Even if you choose to invest in high volatility ETFs, or trade options with a high IV (implied volatility), the main tenets of value investing such as safety margins and risk limitation should be paid attention to and adapted to risky strategies.

Value investing is an important concept to learn for the retail investor. It is important to realize that in order to build true wealth, it is best to invest in the broader market. One such way is to invest in value stocks, which legends Benjamin Graham and Warren Buffett have been able to prove can deliver excellent returns.

OPINION: The Tech Monopolies: Should They Exist?

The reform journalists in the early 1900s have made monopoly into a bad word. Every worker and consumer in America scorn the word as if it was cheater or exploiter, still conjuring an image of the strike-crushers and robber-barons who made millions in oil and steel. As a result, no company today wants to be known as a monopoly, not the least because of the regulations of them. Really, a monopoly is a business or organization which controls the output of an entire market, and in this article, we will explore if there are useful monopolies which deserve their immense power.

The History of Allowing Monopolies

Between the 1900s and 1990s, monopolies were vigorously pursued by the federal government under the Sherman Anti-Trust Act, as most government officials held the legitimate view that monopolies hurt consumers and workers. The ultimate victory of the anti-trust action was the forced break of Bell Systems.

But recently economists have started to believe in a necessary type of monopoly. A natural monopoly occurs when a certain service or good can only be produced on the large scale profitably and so a single organization is needed to occupy that role; a good example is the US postal service, which is run by the Federal Government. If several companies attempted to center their businesses on delivering mail at the low price which the US Government charges, they would all surely bankrupt themselves, no doubt due to the largeness of the organization needed.

A common 20th century depiction of the robber baron

The idea of not breaking apart these helpful monopolies was first popularized by Robert Bork, a conservative judge in the late 1900s, and since then his ideas have become more widespread; while these monopolies suffocate free trade, breaking them apart hurts consumers, and that defeats the whole reason we love competition amongst companies. Cleary then breaking apart these monopolies is a wrong step, but are there actually monopolies which benefit the consumer.

What About Monopolies Today?

I do think there is one modern type of monopoly which is not only acceptable, but good for the economy: Technology. Technology is a perfect example of a necessary and helpful monopoly. A tech company that serves everything and everyone, which most now do, can only exist if it owns a large market share; for example, if Google didn’t hold all available information in its servers or wasn’t able to deliver this information in a moments notice, no one would use it, and if they didn’t have such a wide base of users, they wouldn’t be able to maintain the servers to hold and deliver the information.

Facebook is commonly criticized as a monopoly

Additionally, some tech companies are rightfully monopolies because of the network externality; a network externality is a condition of having an increased value with more users; a classic example of the network externality is Facebook. If my friends and family weren’t on Facebook, I would not want to use it either because I would not be able to interact with the people I care about. Users can’t be social without other users to connect with. So for social media sites, having a monopoly is a necessity and benefits the consumers.

Finally, some tech companies most pour huge amounts of resources into research and development; new hardware and algorithms must be created to deal with the vast and increasing amount of data, and these improvements are only possible when financed by huge tech giants. Without these improvements, consumers would surely face longer waiting times and slower access.

Final Thoughts

It is evident that some recent developments may validate Robert Bork’s beliefs on monopolies. But also within the past couple of years, Facebook has been caught up in a scandal wherein they helped a foreign country possibly influence an American election, and many other tech monopolies regularly sell consumer’s information. These monopolies can still violate the trust of the consumer, and their usefulness does not warrant an absolute absence of regulation. A monopoly, by definition, has vastly more market power than consumers; They decide what deal the consumer takes because the consumer has no other options. And as a result, consumers can be cheated and exploited, like the consumers who had to deal with the monopolies of old. Governments must still assure a fair deal between the consumer and businesses, but maybe they don’t need to take the saw out.

Robinhood: How to Start Trading and Investing Real Money

According to Robinhood, “Getting started with a small amount of money is better than not investing at all.” This statement greatly reflects why you should begin your investing career in Robinhood. Offering free trades, an easily understandable platform, and the ability to easily buy and sell equities, Robinhood is quickly becoming the top choice for those entering the stock market.

Practice First, Apply the Skills Later

It is important to note however, that in order to dabble in the stock market, you should have some practice. It is incredibly easy to gain applicable investing skills through something called “paper trading,” or using a stock market simulator and fake money to buy and sell stocks. There are many great resources for paper trading practice, but I would highly recommend Investopedia’s “Stock Market Game” simulator here. The idea of using fake money and a simulator should not deter you from paper trading. These simulators model a real trading portfolio very well, and are nearly always accurate in delivering stock prices. That being said, this article is meant to inform you on investing with real money.

You have been paper trading for a year now. You’ve won some trades, and you’ve lost some, but you’re ready to invest your own money. Now what? You have to find an online stock broker to trade from. Here’s why you should start with Robinhood.

Expenses

Trading is expensive. The average cost of online stock trading can be nearly $9 per trade, an incredibly expensive fee. If you have $1000 in your account, one trade would cost you nearly 1% of your entire portfolio. Especially since you are just beginning to invest, you shouldn’t use a large amount of money to trade. There are also account management fees that you have to be cognizant of. So, a cheaper alternative has to be found.

Various stock brokerages that are available to use

Robinhood is precisely that alternative. Offering free trades, and no extra fees, your trades will be easily executable and you won’t have to worry about large, expensive commissions.

You’ll Need to Understand What You’re Doing

If you are new to the stock market and trading real money, you’ll want to be able to understand what is going on inside of your portfolio. The screen should be easy to manage and understand, and trades should be easy to execute. Robinhood offers exactly those things.

Inside of your portfolio, you will be able to easily see your stock holdings, account value, where to get trading ideas, and your watchlist.

A look at the Robinhood trading platform

When you want to trade a stock, Robinhood makes it incredibly easy. Just click on the stock that you want to buy or sell, and you will be quickly prompted with options. Then, you can input how many shares you want to trade, and even the order type (we will cover these later). You will be presented with the estimated cost of your transaction.

Drawbacks

Robinhood is an excellent brokerage platform for some, but it is not without its drawbacks. Firstly, you are not able to short-sell stocks and other equities. You are still allowed to buy “inverse ETFs” and other financial products that are bearish on certain indexes, but you cannot short-sell stocks. Many traders are driven away from using Robinhood’s platform for this reason. Understandably, Robinhood wants to keep their platform free, and allowing short-selling would open up a wide variety of potential issues, such as margin accounts, requiring more work and risk on their end.

Robinhood also doesn’t allow for many other financial products to be traded, including mutual funds and options. Until recently, Robinhood had also not provided for foreign investments, but now there are many ADR (American Depository Receipts) that you can purchase. Larger brokerages such as Charles Schwab and Fidelity offer more asset classes, such as mutual funds. Fidelity, a large brokerage has a FundsNetwork that provides for different funds.

Placing an order in Robinhood

Final Thoughts

In conclusion, Robinhood offers the perfect inexpensive, understandable trading platform for the beginner. Although you cannot short-sell equities (we’ll cover this later), and there may be day trading restrictions, Robinhood is a great place for the new investor to grow wealth and gain experience in the stock market.


OPINION: The United States Can No Longer Ignore a Growing Debt Crisis

As the level of debt in the United States continues to increase, the country cannot continue to ignore unchecked federal spending and increasing student debt. According to Just Facts, government debt alone is equal to “105% of the U.S. gross domestic product,” and “617% of annual federal revenues.” By 2050, it is estimated that U.S. debt will reach 250% of gross domestic product. So, as the debt figure quickly approaches $22 trillion, government officials and economic policy advisers must find a solution.

The Federal Reserve and Interest Rates

The Federal Reserve meets to discuss economic issues and policy

One direct action that can be attributed to the exponentially increasing debt figure is a growing U.S. spending deficit of over $1 trillion last year. It is important to note that the government is required to pay interest on this debt, so Fed Chairman Jerome Powell’s raising of interest rates in this past 2018 did not help the situation. The first step to fixing the growing crisis is resolving the federal spending. The federal budget must be looked over, and cuts must be made.

The Federal Reserve’s recent choice to maintain a neutral interest rate policy should hopefully help to calm this crisis. However, we are continuing to sit on a growing issue that cannot be ignored. If you want some perspective on federal debts alone, take a look at the United States debt clock here: http://www.usdebtclock.org/

Student Loans and Mortgage Debt

U.S. student loans are also at an all time high, with college graduates increasingly unable to pay off student debt. The Federal Reserve has just reported that 400,000 U.S. families have been unable to afford homes due to crippling student debt. The debt is quite a significant amount, $37,172 for the average college graduate, when the average annual salary for a college graduate is only $50,516.

The largest outstanding debt for the American consumer is mortgage debt, which can quickly turn into a large problem as real estate prices continue to fall and the real estate market slows down. Mortgage debt alone is in the tens of trillions for the American public. Thus, it is now increasingly difficult to sell a home for a profit, and mortgages cannot be refinanced. A vicious debt cycle occurs, as home prices continue to fall and the American consumer is hurt.

Preserving Economic Health

Although the rising stock market and healthy corporate earnings may tell a different story, rising debt remains a possible disaster. The United States’ economy is doing well right now – but if true economic health is to be preserved, the government must fix its spending and ensure that the public can be free from any overbearing burdens from student debt or mortgage debt.

Lawmakers in Capitol Hill must put the American people before unsustainable policy

It is imperative that Capitol Hill get this crisis resolved as soon as possible. With politicians involved in partisan policies that promise too much to the American public, the government debt has to absorb the damage from detrimental, unsustainable fiscal policy. Between unsustainable tax cuts, as well as unaffordable entitlement programs, United States politicians must find a bipartisan solution to this crisis.

What is the Stock Market?

What is the stock market? You may have heard of the NASDAQ. What about the NYSE? Have you heard of the CME? All of these are exchanges, or places in investors or traders can purchase or sell securities or equities (such as stocks, bonds, or commodities).

What is it?

Traders and brokers gather in a frenzy on the NYSE floor

The stock market is a place in which buyers, sellers, and brokers interact to buy and sell monetary vehicles such as stocks. However, when we refer to the stock market, we are often referring to U.S.-based stock exchanges, such as the NYSE (New York Stock Exchange) that you may often see on TV, with an expansive trading floor, and many stock brokers running around frantically. The NASDAQ is also a U.S.-based exchange, but interestingly, it is all virtual, and made up of a series of servers that are housed in Carteret, New Jersey. Regardless of the type of exchange, each serves the same purpose – to facilitate the buying and selling of stocks, bonds, and other equities.

Futures Market

The U.S. also has an exchange for financial derivatives and futures (we will cover these later). This exchange is called the CME (Chicago Mercantile Exchange), and is has a data center in Aurora, Illinois similar to the NASDAQ.

A look at the 16 exchanges with a market capitalization over $1 Trillion

There are 60 stock exchanges located across the globe, with each serving a different region. There is a stock exchange for London, one for Hong Kong, and even one for Australia. Within each exchange, countries that are local to the country in which the exchange is based are traded. Thus, U.S.-based companies will be traded in the U.S.-based exchanges.

The History of Stock Markets

The Amsterdam Stock Exchange, the first stock exchange

The way in which stocks are exchanged in an exchange has changed drastically over the past 400 years with the growing use of technology to facilitate liquidity and volume. The very first stock exchange, the Amsterdam Stock Exchange, as well as other early stock exchanges, were located in bazaars or open-air markets, in which buyers and sellers of stocks would shout across the room to make transactions. The CME (as I discussed earlier) started as an open-air market in which butter and egg futures contracts were traded. In the 1960s, digital marketplaces became a commonplace for stock exchanges.

The purpose of the stock exchange has not changed. Next time you hear someone talk about “the stock market,” remember that it is a place that facilitates the transaction of stocks and other securities.

What is a Bond?

As you are handling your investments or reading the news, you might come across the word bond. What is a bond? What does it do? When is it appropriate to buy? In this article, I will try to explain the basics of financial bonds in the simplest terms.

How does a bond work?

A bond is a loan by the buyer to the seller, which is usually a government or corporation. It is fixed-income, which means it pays a fixed amount of interest every year, and at the maturation date, the date at which the loan is due, it may be turned in for the original amount of money loaned. Bonds’ main function for the buyer is to maintain and grow wealth.

For example, if you buy a U.S. Treasury bond for $5000 with an annual interest rate, sometimes called coupon rate, of 3% for 10 years, every year you will receive 3% of $5000 or $150 and in 10 years, the $5000 will be returned to you; In total, the investment would net you $1500 in 10 years or 30% of the principal investment.

How are bonds used?

In terms of the seller, city, state, or corporate bonds are used to raise capital/money; if a city wants to build a new park without having adequate money, they might issue bonds to pay for it, essentially taking a loan from the people. The U.S. Federal Government, and many other governments, use bonds differently; they buy and sell bonds to control the money supply, or the amount of money in the economy. This is not an important function of bonds to know as an investor, as it only pertains to the big picture, but it does explain the sometimes changing interest rate.

The changing interest rate can lead to you owning bonds which have a lower interest rate than the market interest rate. If you try to resell bonds to other investors when the current interest rate is higher than the interest rate you bought the bond at, you will need to offer your bond at a discount to attract buyers.

What are some drawbacks to bonds?

Bonds are not full proof. If the bond seller cannot pay its bond payments, it can refuse to pay them, making them worthless; Argentina has defaulted its bonds several times, and as a result they are considered toxic to investors. In general, U.S. bonds are one of the safest investments because they are backed by the U.S. Government. The most risky domestic bonds are corporate bonds, as corporations can go bankrupt, so to allure buyers corporations often offer higher interest rates. Credit agencies will rank the riskiness of bonds, using the letter system. Bonds rated AAA are extremely safe, while bonds given lower than B should rarely be bought.

In short, bonds are usually low-risk, low-reward investments. And as a result, they are a great way to save for retirement as you grow older; Bonds do not have as high a growth rate as stocks or other investments, but they do safely preserve and slightly grow wealth for retirement.

What Is the Macroeconomy?

When you think of the world “macroeconomy,” you likely think of a magnified economy – the economy of a nation, perhaps even a global economy. This is the right idea. The macroeconomy is a certain economic institution or system that operates on a large scale. Rather than reducing economic units to the household or the individual, the macroeconomy focuses on aggregates – consumer spending as a whole, or investment demand as a function of interest rates for firms in a nation. The idea is focusing on the whole and the large parts, rather than the small part, which causes small, insignificant change or deviation.

Studying the Macroeconomy

In studying the macroeconomy, we want to think about the institutions, the economic indicators, and the groups that contribute to a magnified economic system. Examples of such institutions would be the Federal Reserve System, which sets benchmark interest rates, and can greatly influence dozens of important aspects and subsystems of the national economy. The stock market is another example, facilitating willing investors with companies – providing a necessary influx of capital from investors to new projects or infrastructure. An example of an economic indicator in the macroeconomy would be the GDP growth rate. How fast does an economy grow each year? What fiscal or monetary actions must be taken to adjust this rate?

In opposition, the study of the microeconomy would focus on small parts of the economic system. The individual, and how they choose to spend their money based on utility maximization principles, or the firm, which chooses how to price their products based on the structure of the industry in which they operate. These are important concepts as well, but not important in the grand scheme of the macroeconomy. One individual firm’s choices are insignificant in the macroeconomy – if a firm chooses to overprice its products in a perfectly competitive industry, that firm will be pushed out of business. This does not deviate the path of the macroeconomy, which necessarily solely depends on aggregate units, or large collections of such firms or individuals in the economy.

Suppose a group of individuals choose to spend more money – this will cause a significant change in the macroeconomy, which is why macroeconomists tend to only focus on aggregates.

The Importance of the Macroeconomy and Macroeconomics

In studying macroeconomics, or the study of the macroeconomy, we can better understand the economic trends that influence an economy. We can begin to understand why aggregate groups make decisions – if the interest rate is high, why does investment decrease? How is the nominal interest rate connected to the real interest rate? How does an increase in unemployment compensation affect the unemployment rate? These are all complicated systems that function as part of the macroeconomy.

Macroeconomics becomes even more complicated when we think of the macroeconomy on a global level. How do the economies of other nations influence the global economy? How do global recessions start? These are just a few questions that can be uncovered and answered through the study of macroeconomics.

Final Thoughts

Studying macroeconomics is incredibly important, because it can and will affect you. You may watch CNBC or Bloomberg Markets, and hear discussion of the Fed’s raising of interest rates. How will this affect that new mortgage loan you wanted to take out? You may overhear that the housing bubble is about to burst. You can use your knowledge of macroeconomics to understand that you probably should wait to buy that new house you wanted. These are all macroeconomics concepts, but they affect you. Understanding what is happening to the macroeconomy keeps you informed and financially ready for anything.

China Presents an Unprecedented Opportunity for Investors

Predicted to have the world’s largest economy by 2030, China has continued to prove to be a financial powerhouse for the past decade. With a GDP growth rate of at least 6% every year since 2008, China is a force to be reckoned with. However, recent trade war tensions and Beijing’s crackdown on corrupt Chinese financial companies have pummeled Chinese stocks and leading indicators for the past year. Chinese stocks are down nearly 30% from their highs achieved in late 2018. For this reason, investing in China, especially in its lucrative tech companies, could be the opportunity of a lifetime.

E-Commerce Potential

E-commerce giant JD.com has been growing rapidly

China has produced e-commerce giants Alibaba (BABA) and JD.com (JD), both of which boast quarterly revenue growth rates of 54% and 25% respectively. JD’s quarterly earnings growth (yoy) is nearly 200%, yet is down to nearly $20 from its high of $49.23 in January of last year. Alibaba is down to nearly $150 from its high of $204.29 in January 2018. Such high growth stocks are bargains at these prices for the long term investor. BABA holds a P/B ratio of 6.10, while JD holds a meager 3.41.

Streaming Giants

Streaming service iQiyi has been expanding its users and content

China’s recent stock difficulties are not limited to online shopping, however. Chinese streaming giant iQIYI (IQ) is down to $17.82 from its high of $44.20 in June of 2018. Dubbed “the Netflix of China,” this streaming platform has excellent top-line growth prospects. Also dominating the tech world is Baidu (BIDU), with highs of $272.97 in June of last year. Both of these companies continue to innovate, with iQIYI’s new acquisitions and licensing deals, and Baidu’s autonomous driving projects.

Powerful Conglomerates

Tencent has the resources to consistently dominate markets

China’s heavyweight Tencent Holdings (TCEHY) also cannot be ignored. With a market cap of nearly $400 billion, Tencent continues to prove to be an jack of all trades. Tencent should be treated as the tech Berkshire Hathaway of China, with billions in e-commerce, video game, and IT acquisitions and subsidiaries. Tencent is down nearly 40% from its highs of around $58.20, and should be a great long term play.

Changes and Future Outlook

China has recently named a new Chairman of the China Securities Regulatory Commission. The effects of a new securities commission head, Yi Huiman, will be seen. However, being a seasoned banker at the ICBC, it is yet to be seen how regulation will be affected.

China has also recently reported GDP growth results, and it seems that the trade war with the United States has certainly had a substantial impact on Chinese investment spending, growth prospects, and business confidence. Though the growth rate may have lowered by nearly 2%, China’s growth is certainly still healthy.

That being said, the question that remains to be answered is whether or not the incredible growth rates that China has produced for the last decade are sustainable.

Projected Chinese growth past 2020 looks to continue the trend of slowing expansion

Chinese growth prospects are projected to surface below 6% annually, a number that government officials in Beijing do not want to fall below. China will remain a global superpower, and will nearly certainly surpass the United States in the near future.

The reality of investing in China is that such internet companies are not limited to the globe. China’s population of nearly 1.4 billion, and its internet users reaching above 800 million people are driving tech and IT companies’ success. As U.S. equities appear riskier, foreign markets present a new opportunity for alpha-seeking investors. China’s supercharged economy should be a safe play for investors seeking to enter new markets abroad.

Data from finance.yahoo.com

OPINION: Justified Protectionism Against Huawei

Ask any classical economist, and he’ll tell you free trade maximizes benefits for all parties; producers are able to sell more goods, and consumers get a lower price. But they will also likely add that there are some cases in which that tenet doesn’t apply, be it for a variety of reasons. I believe undoubtedly the substantial dangers of importing from the Chinese telecom company, Huawei, makes it one of those cases.

Free trade benefits the consumer

The total effect of trade protectionism is negative because it results in higher prices for consumers and higher prices for domestic producers who need the imported product as an input, and the gain by producers in the specific industry is canceled out and overshadowed by the loss of consumers and producers in the general economy; if steel was completely manufactured in America, car companies and construction companies would have to pay higher prices to produce and would in turn be able to produce less. Even in dumping cases – where a country subsidizes its production to drive foreign companies out of business – economists argue that tariffs and quotas should not be placed because the cheap products benefit consumers more than it hurts producers. Milton Friedman once said, “The more dumping, the better,” and called it a sort of foreign aid. All of this supports the accepted law that free trade is good.

The case against free trade

Objections to total free trade come from several legitimate justifications: quality control, labor and environmental issues, national security, and innovation. An often cited, but erroneous, reason for trade-restricting policies is to protect producers. By placing restrictions on imports, policy makers can make domestic products in that industry cheaper relative to foreign products and thus boost domestic products in the market. 

Justification #1: Quality Control

Let’s examine such justifications for protectionist trade policies. Quality control refers to wanting to ensure that only products of a certain quality make it to market. This is prescient when one country has a higher regulatory standard than another. Usually, in milder cases, a country will only order inspections of imports to certify the product meets domestic standards, but occasionally all imports of a certain kind will be blocked. For example, South Korea stopped the import of fish from Japan after worries about nuclear contamination after the Fukushima Incident. However, quality control isn’t really relevant in the tech industry, but the US has other legitimate reasons to block Huawei.

Justification #2: Labor and Environmental Concerns

Labor and environmental issues refer to concerns about whether the exporting nation is following environmental regulations, maintaining a reasonable working environment, and paying a livable wage. Huawei is a Chinese mega-corporation, which means it has some skeletons in its closet. News organizations like WIRED have conducted investigations into the hazardous working environment for manufacturers, including workplaces with high levels of a chemical known to cause neurological damage. And while the engineers are paid high salaries at Huawei, the culture bred by its roots in the Chinese military has been described as wolf-like and has caused enormous stress in its employees, resulting in an astronomically high turnover rate. Additionally, the culture has caused employees to engage in unethical behavior to get ahead ranging from, stealing American intellectual property, as alleged by T-Mobile, to collaborating with Iran, as the CFO of Huawei was arrested for. Undoubtedly, there are fundamental problems in how Huawei treats its employees, but this consideration pales in comparison to the threat to national security.

Justification #3: National Security 

Historically, national security protectionism has centered around products which the US would need in times of war, when formerly trade partners might cut off supply to the US; a classic example of this is placing tariffs on boots to ensure domestic productive capacity during a war. However, national security concerns are slightly different in Huawei’s case: there are legitimate and serious questions about whether Huawei could be used as a tool of the People’s Republic of China; while the company is privately owned, the CIA has alleged that it receives funding from and has close ties to the PRC.  And as a telecom company, it through duplicitous means could monitor and shut down communication, which would be devastating in times of crisis; in fact, allied intelligence agencies have investigated whether Huawei built into its equipment “backdoors” for government use. Additionally, in times of crisis, the US would be unable to quickly re-establish its own service if the US market is dominated by Huawei. Reasonably then, policy makers must object to its imports to guard our security and communications infrastructure from being compromised by one of the US’s most powerful rivals.

Justification #4: Innovation

Furthermore, letting Huawei’s incredibly fast and new, 5G network into the US market would stifle American innovation. Its monopoly on the 5G market would make any US foray into the market unprofitable in the short-term, preventing US technology development in the long-term. And of course with any monopoly, Huawei would be able to charge exorbitant prices and strangle new up-starts once it has established its stranglehold. But more importantly, the US has been the leading country in technology and innovation for the past century, but the US is already falling behind while China surges.

Looking to the future

The Trump Administration has already taken action against Huawei; on top of its trade war with China, it has empowered federal departments to block Huawei products and leaned on close allies, especially ones we share intelligence with, to refuse any Huawei technology. These policies are already hurting Huawei: CNBC reported that the company “is preparing for a 40% to 60% drop in international smartphone shipments,” and many companies, like Google and Android, have followed the US’s example. Protectionism decreases the total economic surplus, but in some cases, against some looming threats, for some achievable goals, it is necessary to ensure both liberty and safety.

OPINION: Solutions to the Student Debt Crisis

The price of a college education has been spiking in recent decades. Although this may now seem like a fact of life, it was not always this way. In fact, the spike distinctly began around 1982.

Data from the https://nces.ed.gov/fastfacts/display.asp?id=76

So, what happened? Supply (the number of degrees awarded per year) remained steady, so the rapidly increasing cost indicates an explosion of demand. What caused this demand?

In 1978, the United States Congress passed a slew of educational reform bills. Among them were the Middle Income Student Assistance Act of 1978 (MISAA), and the Education Amendments of 1978. These two bills did two very important things. MISAA drastically increased the scope of federal subsidies to college students through amending the Higher Education Act of 1965, while the Education Amendments of 1978, among other things, provided broad access to cheap, federally-backed credit to college students. These bills, and others that followed them, had the effect of ballooning the amount of money students could afford to pay on their college education.

It costs a lot of money to build a college, but, after colleges are already built, it costs very little to add an additional student. In economics, this model is categorized as a high fixed cost, low marginal cost venture. Following this model and taking into account the overwhelming importance of a college education in future fiscal success, the result is a system where the only determining factor of the price of college is what prospective college students are willing to pay. This is why airlines and hotels quote different prices to different customers depending on the buying power of the concerned customer—to capture as much of the consumer surplus as possible.

And this is precisely the cynical philosophy behind colleges instituting so-called “need-based financial aid,” which allows them to set prices no lower than precisely what they think a potential student can afford. It is through this kind of individualized price-setting that Pell grants and federal student loan programs allow colleges to raise college tuition—these programs, through artificially lowering loan interest and providing access to easy credit, inflate the amount of money students can borrow to pay for their college education.

The result, as you might expect, is not cheaper tuition. Students, upon getting access to an abundance of cheap credit, are financially able to borrow more money. Colleges, realizing this, increase prices. In the end, the result of this policy is that students still end up paying as much as they can afford out of pocket—the only difference is that they borrow more and colleges greedily suck up any tuition subsidies. Accordingly, colleges that accept federal loans have a tuition roughly double that of their similarly-ranked peers.

The problem here is a poorly designed federal policy that artificially inflates demand, allowing student subsidies to flow from the taxpayers into the pockets of colleges without giving any benefits to the students. So, what exactly is the solution to this? Well, there are two main potential fixes with any promise, with various ideological motivations or levels of political feasibility.

The first is to return to the model that was in place before the federal government was involved in the market for college education. This would cause college demand to plummet and as a result prices would also fall, but it would also have major societal downsides. Colleges would become, as they once were, places more or less exclusively for the rich. The poor and lower middle class could not afford a college education, and this would widen the opportunity gap between the rich and the poor. Education is one of the most important factors in financial success, and making it harder to access for people born to poor families would widen the opportunity gap between the rich and the poor.

This potential fix is closest to the official deregulatory stance of the Republican party, although Republicans fall short of complete dismantlement of grant programs, instead favoring significant cuts. Although partially fixing the issue, it would also result in far less equity between classes due to the pressures of affording college, while preserving the inflated college prices arising from an economy mixing government grants with a free market.

The second potential fix is to have the government directly pay for college. This would give the government immense bargaining power, making them able to negotiate with colleges on equal terms for fair tuition rates. Although it would result in higher taxes, these could be mitigated through the government requiring students to pay for some portion of their tuition (if they are able). Since the government is not a for-profit institution, they would have financial incentive to seek the lowest price possible from colleges, as well as an electoral incentive to charge the lowest price possible for students. The effect of this solution would be to lower college tuition while preserving equity between the rich and poor, and this is the solution that I would support.

This solution does not currently have a feasible path to becoming law. Although it has surged in popularity following Bernie Sanders’s influential 2016 democratic primary campaign and is now endorsed by a significant fraction of the Democratic party, it has virtually no support from Republicans. Since it looks almost inevitable that the Republican Party control the Senate for the foreseeable future, they will have the power to block any such ideologically extreme legislation even if it passes a Democractic house.

Meanwhile, the mainstream Democratic college reform plan, the AIM Higher Education Act, completely ignores the root causes of the college debt crisis, instead choosing to actually expand the Pell grant program and focus on social wedge issues like allowing undocumented immigrants to apply for federal tuition grants.

Although there is bipartisan agreement that our current healthcare system if flawed, there is currently no plan from either party to fundamentally change it. The problem here is that, although either nationalization or privatisation is economically feasible, anything in between is doomed to inefficiency arising from government involvement in a capitalist system. We, as a nation, have to decide whether college should be a public utility or a commercial commodity–it can’t be both.

Understanding the Foreign Exchange Market

What is the foreign exchange market? How is the value of a currency determined?

If you have ever traveled outside of the country, you have likely dealt with the process of exchanging your national currency for that of the country you are traveling to. You have also probably noticed that the price tag on an item from your home country might look very different from that of the country you are visiting. For example, a new pair of sneakers that costs 50 dollars in the US might cost 500 Swedish Krona in Stockholm. So what determines the values of these currencies? The answer lies in the foreign exchange market.

What is the foreign exchange market?

Often referred to as simply FOREX, the Foreign Exchange market is a decentralized financial marketplace where traders can buy and sell different currencies. Unlike some marketplaces and stock exchanges, the decentralized nature of this network is significant, as it is not tied down to a physical location. The FOREX market is also interesting in that it can be split into two different levels. The first level is that of the interbank market. This top-level of the FOREX market is primarily composed of private banks that conduct significant transactions, often experiencing trillions of dollars in transactions every day. On the second level of the FOREX market is the Over-The-Counter (OTC) market, where individuals and companies have the opportunity to participate. Together, the supply and demand forces of the foreign exchange market determine a currency’s floating exchange rate and help indicate the value of said currency.

How does the value of a currency change?

To understand how the value of a currency changes, it is worth knowing that when the value of a currency increases or decreases, these changes are always relative to that of another currency. This means that if the US Dollar increases in value (or appreciates) relative to the Euro, the Euro has lost value (and depreciated) with relation to the USD. Additionally, the basic laws of supply and demand can be applied to understand exchange rates. For instance, if something causes the supply of Yen on the foreign exchange market to increase (or the demand for it decreases) then the Yen will, relatively, drop in value. An increase in demand or decrease in supply would cause the opposite to occur.

What factors affect a currency’s supply and demand?

There are a number of factors that affect the supply and demand of a currency on the foreign exchange market. A change in any one of these factors will cause a reciprocated change in that currency’s value. While these factors are numerous and complex, on a basic level, they often include price level, interest rates, tastes, income, and political stability. If, for example, Country A is experiencing heavy inflation and has a higher price level than Country B (which has a lower inflation rate), there will be an observed increase in demand for currency from Country B. Or, in contrast, if Country A has a higher interest rate than Country B, foreign investors will move their capital to Country A, and its currency will appreciate. Changes in income also affect the quantity of goods and services that a country imports, and as good and services must be paid for in the currency of the country where they are being sold, supply and demand will be affected. Finally, an increase in political turmoil or instability is associated with an increase in risk, and will cause a currency to depreciate.

What is the difference between floating and fixed exchange rates?

The values of many currencies are controlled by floating exchange rates. These exchange rates are dictated entirely by the supply and demand forces of the market and are said to be self-correcting. However, many currencies are not free-floating, and instead deemed to be fixed, or pegged. These fixed exchange rates differ from floating exchange rates in that the government or central bank of a country is responsible for setting and maintain that currency’s value. Although central banks don’t normally trade currencies, they do have the ability to control foreign exchange reserves and interest rates in a way that can significantly affect a currency’s value.

Historically, the values of many countries’ currencies were determined by the gold standard. Following the Great Depression, however, this system began to disappear. Then, in 1944, the Bretton Woods Agreement fixed the values of international currencies to the US dollar, which was still being determined by the price of gold. In 1973, Nixon ended this system and the Foreign Exchange market developed into what it is today.

While many countries transitioned to floating exchange rates, fixed exchange rates (as controlled by a Central Bank) are not uncommon. Sometimes, for example, countries, such as Saudi Arabia, with economies heavily reliant on exports, will choose to peg the value of their currency to the US dollar. Although there are certain advantages to these fixed exchange rates, especially with regard to trade, there are also some negatives. Fixed exchange rates can be expensive to maintain and require a large amount of foreign exchange reserves. This constant maintenance of a currency’s value can have large economic repercussions, such as increases in price level.

Conclusion
Although the modern foreign exchange market has only really developed in the last half century, the concept of exchanging currencies with fluctuating values is by no means a new concept. Today, the foreign exchange market is the biggest financial market in the world and plays a significant role in the maintenance of our increasingly global economy.

The Importance of Insurance: The Benefits of a Safety Net

Life is very unpredictable. You could get in a car accident or contract a terminal illness. These things can all lead to massive debt if not handled correctly. This is where insurance comes in. Although paying for insurance may be bothersome, and researching various plans for different scenarios is difficult and often complicated, you’ll be thankful for a solid safety net when an unpredictable event happens.

What is insurance?

Insurance is where a company or government agency provides protection against some type of loss, such as damage to property, or surgery to correct a health problem, in return for a payment, called a premium. The idea behind insurance is that you are protecting yourself against any future uncertainty. It is more likely than not that you will need to use your insurance plan in the future, so ensuring that you are protected from the unpredictability of life is important.

Insurance Vocabulary

When talking about insurance, there are many vocabulary words that you may not know. This section will define some of those terms.

Deductible: The amount of money the insured person needs to pay before the insurance company starts to pay for the loss experienced

Premium: Amount of money paid for an insurance policy

Co-pay: A fixed amount the insured pays for covered services (usually only applies to health insurance)

Types of Insurance

There are many types of insurance, but I will be talking about the most important types in this sections.

Life Insurance

Life insurance is important especially if you have a family. It can replace lost income, pay for your child’s college education, and help pay debts for your family after you die. If you’re single, life insurance can pay debts you leave behind and pay for your burial.

There are two types of life insurance, term life insurance and permanent life insurance. Term life insurance is a policy where you pay for a certain amount of time. Permanent life insurance is where you have to pay for your whole life. Term life insurance is more flexible while permanent life insurance has an investment component. Most people have term life insurance as it is much more affordable. You can learn more about term life vs permanent life insurance here. Remember, life insurance is cheaper when you are younger so don’t wait until you need it to get it. You are more of a liability to the insurer as you age.

Health Insurance

Health insurance is very important because if you suddenly fall sick or obtain an injury, health insurance is what pays for your treatment at the hospital. If you don’t have health insurance, you may find yourself unable to receive treatment at the hospital. Furthermore, medical debts are responsible for nearly half of all bankruptcies in the United States.

Unfortunately, health insurance is expensive, and has continued to increase in price. However, that is not an excuse to not get it. If you don’t have health insurance through your employer, one option is for a high-deductible health insurance plan combined with a Health Savings Account (HSA), a tax-advantaged savings account specifically for paying medical expenses. Benefits of having a HSA are tax-free growth, tax deduction, and tax-free withdrawal. You can also explore the federal healthcare marketplace or even buy your own health insurance. Although buying it yourself may seem more expensive, if you’re self-employed, health insurance premiums count as a tax deduction.

Automobile Insurance

Everyone needs auto insurance as it is against the law not to have it. It also covers a very expensive asset that most people do not want to lose. Besides covering the car, auto insurance can also help pay medical and legal defense expenses. Auto insurance has different types of coverages. Liability coverage will cover the cost of injuries or property damage you caused in a collision to the other car. Collision coverage covers the cost of damage to your own car. Comprehensive coverage covers the damages caused to your car that are not from a wreck, such as fire, theft, or vandalism. The level of coverage one needs depends on the type of car, and the price of auto insurance will depend on where one lives, their age, and driving record.

Homeowners/Renters Insurance

If you have a mortgage, homeowners insurance is required. When you borrow money from a bank, insurance premiums are typically built into the mortgage payment. Property is usually a person’s greatest asset so it is important to keep it insured. Additionally, homeowners insurance can include extended dwelling coverage. This means that the insurance company will replace or rebuild your property even if the cost is higher than your insurance policy. They’ll usually pay about 25% higher than the amount you are insured for. If your property is of very high value, extended dwelling coverage is something you should look into. You should also make sure that your homeowners insurance includes floods and earthquakes, as not all insurance policies do. You can check with your insurance agent regarding your insurance policy.

If you’re a renter, you might be thinking “Great! I don’t need to pay homeowners insurance!” However, you still have to pay insurance, just a different type, called renters insurance. If there is a burglary or a fire, renters insurance will cover most of the replacement costs.

Long-Term Disability Insurance

Long-term disability insurance covers the loss of income that will happen when you are unable to work for a long period of time due to illness or disability. Although you may believe that you will never get disabled, statistics show that 30% of workers entering the workforce will become disabled and unable to work before they reach retirement. This means that you should definitely have long-term disability insurance just in case. Otherwise, you may not be able pay for your kid’s college or buy a car. Even if you have great health and life insurance, without long-term disability insurance you may find yourself unable to cover living expenses if you can not work for an entire year. Many employers offer long-term disability insurance as well as short-term disability insurance. However, you can skip on the short-term disability insurance if you believe you can cover your living expenses for a few months.

Steps for Choosing and Maintaining Insurance

Most Americans get insurance from the company they work in. You should check with your employer as that insurance is usually the most affordable. However, if you are currently unemployed or want to explore more options, this is how you should pick your insurance.

  1. Speak to an insurance agent
  2. Consider the co-pays, deductibles, premium costs, network coverage and covered expenses to determine which plan saves the most money by doing research on the internet (there are various sites and online resources to do this)
  3. Calculate effect of new premiums on your spending and disposable income
  4. Constantly monitor whether or not your insurance is adequate for your current scenario

Conclusion

Insurance is very important to your financial well-being. You should definitely have the five types of insurance that are covered in this article. However, you can also invest in more types too, such as pet insurance or long-term care insurance. Although insurance may seem very expensive, you will feel grateful to have it when something happens. Never skip having insurance, as it is a crucial tool that ensures your protection in the future.

What is a Checking Account? What is a Savings Account?

When you go to a bank to deposit your money, you will need to open both a checking and a savings account. Although they are both types of bank accounts, there are key differences in each that affect how you should use them. In this article, we will go over the basic differences between checkings and savings accounts.

What is a checking account?

This is your everyday account. Most of your paycheck should go directly in here, and you should be paying bills and other expenses with this account. The checkings account has no limit to the amount of withdrawals you can make. According to the FDIC, the average interest rate for checkings account is 0.09% APY. This percentage is incredibly low, and is practically useless. When you use a debit card, money is withdrawn directly from your checkings account.

What is a savings account?

Contrary to popular belief, a savings account is not where all of your savings should go. A savings account should only be your emergency fund, about 3-6 months worth of your income. Money in this account should only be used in case of a dire emergency, or during a brief time of unemployment. Usually, you have to transfer the amount you want to withdraw from your savings to your checkings first. The amount of times you can do this is 6, in accordance with Regulation D, a Securities and Exchange Commission (SEC) Regulation. Interest rates for savings accounts vary wildly from bank to bank, but the rates are generally higher than that of checkings accounts, but lower than an average long-term ROI from the stock market of 8%.

What else should I use in addition to checking and savings accounts?

For the savings aside from an emergency fund, they should go into brokerage or IRA accounts to invest in the stock market. Given that the rate of interest that you earn on deposits on both checking and savings accounts is closer to 0 than 1%, the real value of your money is decreasing with inflation at 2% a year when it sits in a checking or savings account. Your average long-term ROI of 8% from the market will be considerably higher than the interest rate at any checking or savings account, so it is important that you let your excess money grow. Although 8% may not sound like a lot, it is very strong when factoring in compounded interest, which you can read more about here. It is crucial to understand what various accounts do and how you can successfully leverage them to make your money work for you.

How do I choose which bank to open my accounts at?

First off, each bank has different types of checkings and savings account, which vary by many different factors, such as a monthly service fee, minimum account balance, ATM transaction fees, and many more. It is likely that you will find a type of account that will work for you at any bank. Bank accounts have monthly service fees, but can be avoided if you have a certain amount of money in them. Accounts with higher minimum amounts may offer more features such as no ATM transaction fees, or online bill payment. Go with the account where you know you will always be above the minimum amount to avoid fees, but also the account you’ll get the most benefits.

For example, most students would prefer the Chase College Checking Account over the Chase Premier Plus Checking account. They are both Chase checkings account, but the college account has a lower minimum balance of $5000 to avoid the monthly service fee, while the Premier Plus account requires $15,000. Because students usually have less money, the Chase College Checking Account would be the way to go.

But perhaps you’re a young working professional with more money and more complex financial needs. Because you know you will always have more than $15,000 in your account, the Premier Plus account is preferable. It pays some interest(very little, but it’s better than nothing), offers 4 ATM fee exempt transactions a month, and grants access to a deposit box, among numerous other small bonuses. It costs you nothing more than the College Checking Account, so long as you stay above the minimum balance, so there would be no reason to not choose this one.

Closing Remarks

Perhaps the first of many steps in managing your finances and taking control of your future, opening a checking and savings account is an important milestone. You won’t remember every detail from this article, but do remember this: your checking account is for everyday use, and your savings account is strictly for a 3-6 month rainy day fund, and should not be withdrawn from. In addition, look carefully to find the right account for you based on the minimum account balance required to waive monthly fees!

What Are Commodities?

Ever wonder why gas prices change every day? One day, gas may cost $3.09 per gallon. A few months later, that price could be $3.70. Ever wonder why jewelry may become more expensive over time? The reality is that these price fluctuations are driven by changes in the price of commodities, such as crude oil, silver, gold, and other raw materials. These commodities, though not as widely known or understood as stocks or bonds, are an important backbone for the economy, and a significant driver of global economic outlook.

What is a commodity?

Commodities are their own asset class. This asset class consists of various basic resources: generally, agricultural resources and natural resources. These resources are effectively the same, regardless of how they were collected, and who collected them. The crude oil drilled by Company A is the same as that drilled by Company B. The grain harvested by Farmer A is the same as that harvested by Farmer B. The gold pieces found by Individual A are the same as those found by Individual B when melted down. Products such as clothes, for example, could not be considered commodities. Each piece of clothing is different, created with different materials and methods. However, the clothes are created with commodities, such as cotton, for example.

Commodities are broken into four categories: metals, energy, livestock and meat, and agricultural. Examples of commodities are gold, natural gas, meat, and even orange juice.

What affects commodity prices?

The price of commodities, just like the price of any other good, is determined by supply and demand. Suppose a hurricane hits Florida, and orange producers lose their crops. The supply of oranges decreases, and the price goes up. This will be reflected in the Orange Juice May 19 futures contract price. Suppose weather across the United States looks better than forecasted. Demand for natural gas to heat homes will decrease, and the price goes down. This will be reflected in the Natural Gas May 19 futures contract price.

Commodities are mostly exchanged in the futures market (two examples of which I linked above), where buyers and sellers of commodities come to buy and sell the futures contracts that determine the price of commodities. The futures market will be more extensively covered in a future lesson, but you can read more about it here.

How do commodity prices affect the market?

The prices of commodities are largely correlated with much of the stock market. For example, Exxon Mobil, a producer of oil and gas, would likely see an appreciation in its share price if the price of crude oil increases. Since Exxon is a major producer of crude oil, the higher price would spill over into the stock market. The opposite occurs for a company such as Delta Airlines. With an increase in the price of crude oil, Delta Airlines would likely suffer. Gasoline, a key part of flying airplanes, would become more expensive, lowering the profit margins of Delta.

If you analyze commodity prices for a while, you will see how changes in the prices of commodities can affect entire industries and sectors in the stock market. The stock prices of producers of commodities typically change the most as a result of changing commodity prices.

What do commodity prices tell us about the market outlook?

Suppose that gold prices decrease. This may be a bullish signal. Demand for gold has potentially decreased, thus decreasing the price of gold, as more money has been parked in the stock market with the expectation of a higher return from those alternative investments, rather than from gold. Higher gold prices often signal the opposite. Demand for gold has increased, pushing the price up, as investors are worried about a bearish market. Thus, investors seek a safe return in the form of gold.

Suppose that industrial commodities such as steel and copper begin to fall. This may be a bearish signal. Assuming other aspects of a bearish market, such as high unemployment and lower inflation, become clear, the fall of industrial commodity prices may confirm lower demand by manufacturers for such resources, greater inventories, and lower sales, which subsequently leads to a recession.

As with all market indicators, commodity prices cannot be the only metric used to gauge future market outlook. Just because the price of gold increased does not mean the markets are entering into a bearish phase. There are other factors to consider. Perhaps gold miners find less gold. This will make it more scarce and push up the price. This does not indicate that the markets are dangerous or bearish. However, applying knowledge of commodity prices and price movements relative to certain global events can enhance your understanding of the financial markets. It can allow you to branch out from stocks into different asset classes as well.

Final Thoughts

Commodities are a truly necessary and important part of the financial system. The price fluctuations and trends of various commodities have substantial effects on other aspects of the global economy, and can help predict certain economic trends. However, commodities should not be the only indicator used to gauge the economy. Rather, they can be used in conjunction with other information to more accurately gauge the future of the financial markets.