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.

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

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.

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.

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 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.