How Not to Make Major Financial Decisions

May 19th, 2011


(photo credit: BaronBrian)

Looks like wealthy Russians (and, yes, wealthy lunatics everywhere) are spending their nest eggs on underground apocalypse-proof nests. After all, the world is scheduled to be laid to waste on December 12, 2012. Or May 21, 2011. Depending on which irrefutable evidence you’re looking at.

But this seems like as good a time as ever to point out that basing your financial strategy on the ancient Mayan calendar is probably about as smart as trying to time the market. Base human emotions – fear, anxiety, and greed, for example – don’t mix well with financial transactions.

Wait… Can you time the market? Could we all be getting ridiculously rich quick before the end of days? Why didn’t we think of this before??

How Not to Make Major Financial Decisions

May 19th, 2011


(photo credit: BaronBrian)

Looks like wealthy Russians (and, yes, wealthy lunatics everywhere) are spending their nest eggs on underground apocalypse-proof nests. After all, the world is scheduled to be laid to waste on December 12, 2012. Or May 21, 2011. Depending on which irrefutable evidence you’re looking at.

But this seems like as good a time as ever to point out that basing your financial strategy on the ancient Mayan calendar is probably about as smart as trying to time the market. Base human emotions – fear, anxiety, and greed, for example – don’t mix well with financial transactions. (See Frank Murtha talk about it if you don’t believe us.)

Wait. Can you time the market?

Supply and Demand is…

May 19th, 2011

Supply and demand is an economic model that determines prices in a competitive market. Generally speaking, supply refers to how much is available for sale, and demand refers to how much consumers want it. The selling price represents where supply and demand meet.

Earnings are…

May 19th, 2011

Earnings are the amount of money that a company makes over a certain period of time, usually after taxes. So if you have a painting business for the summer, your earnings for the summer would be the amount of money that you’re left with after paying your employees, buying all the materials, and paying taxes on your profit.

Price Per Share is…

May 19th, 2011

Price per share is the current market price of a single share of stock.

A Management Fee is…

May 19th, 2011

A management fee is the compensation that investment fund managers get in exchange for constantly trying to make a fund profitable. The money for management fees comes from investors, who pay into the management fee pot every time they invest in a fund.

The amount of the fee is determined in different ways. Sometimes it is a fixed rate and sometimes it is a percentage based on the manager’s investing success. Sometimes it’s both!

A Windfall Profit is…

May 19th, 2011

A windfall profit is a big profit that you don’t expect. If you own a store and make a steady amount of profit every month, you probably expect that the next month you’ll keep making the same amount.

But if one month you bring in twice as much money as you normally do, then the unusually large profit is called a windfall profit. Windfall profits are unexpected and sometimes you don’t even know why they happened!

A Reverse Stock Split is…

May 19th, 2011

A reverse stock split is when a company adjusts the number of shares they have available to artificially increase the price per share. Technically, the shareholders don’t lose or gain any money when this happens, but the company buys itself some time to rebound from an economic drop.

The easiest way to explain reverse stock splits is with an example. Let’s say you own 100 shares of Apple stock, each worth $10. (For the record, AAPL is nowhere near that cheap in real life.) Unfortunately, Apple is suddenly hit hard by the recession – nobody’s buying iThings anymore – and the price of their stock falls to $0.50.

Apple knows that if their stock price remains under $1 for 30 days, it may be delisted from the NYSE. So in order to increase the price per share, Apple asks for a 10 to 1 reverse stock split. Suddenly, instead of having 100 shares worth $0.50 each, you have 10 shares worth $5 each.

In order to get from $0.50 to $5, you have to multiply $0.50 by 10. Imagine smooshing 10 of your $0.50 shares into one big ball of shares. Instead of 10, you now have one. And that one is worth $5.

You haven’t lost a penny. But Apple has just saved itself from being delisted.

A Keogh Plan is…

May 19th, 2011

A Keogh plan (named after U.S. Representative Eugene Keogh) is a type of tax-deferred retirement plan specifically for small businesses or people who are self-employed. It allows you to set aside a certain amount from your income before it is taxed, so that you can rack up savings while saving money on your taxes today. Meanwhile, you’re accumulating the cash you’ll need when you stop working in the future.

The plan is tax-deferred, not tax-free, so you will eventually have to pay Uncle Sam when you start withdrawing that money.

An Intangible Asset is…

May 19th, 2011

An intangible asset is an asset that a company owns even though it isn’t a physical thing – you can’t see it, touch it or measure how much of it you have, but it does have value. For example, an idea (also known as intellectual property) is an intangible asset because no matter how good an idea it is, it’s just a thought until you do something to turn it into a physical reality.

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