Archive for the ‘Question of the Day’ Category

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If we need more money, why can’t the government just print more?

Sunday, October 18th, 2009

That could work, but then again, it might not be so simple.

Until 1971, the U.S. dollar was backed by gold and silver. That means that you could bring your dollar to a bank and redeem it for one dollar worth of gold or silver. Today, the dollar is backed by the strength of the U.S. economy and the size of its GDP. But for explaining purposes, let’s say it’s backed by marbles.

Let’s imagine you have five dollars and those are worth five marbles. To buy a marble, you need one dollar. If you print another five dollars without somehow producing another five marbles, your extra dollars aren’t really backed by anything. Basically, now your ten dollars are only worth five marbles and to buy one marble, you need two dollars. This is called inflation.

Now let’s say you owe your friend five dollars for the five marbles that she gave you last week. Unfortunately, you don’t have five dollars to pay her. If you print five dollars, then you can pay her what you owe but she will end up with dollars that are worth less. However, as long as we are producing more marbles, we can print more money because it has something to back it. In the U.S. we pretty much trust the Government to make sure we have the marbles to back our dollars. So when they print more money, we trust that the GDP will grow to match it.

Printing money may help us pay old debt but in the end, without a strong and growing economy, it does more harm than good by making all of our dollars weaker and forcing prices up.

What do we learn from all this? Printing more money doesn’t help us in the long run unless whatever is backing our money is growing too.

What do nonprofit boards do?

Wednesday, October 14th, 2009

The board of a nonprofit has many of the same responsibilities as the board of a corporation: they pick the chief executive, ensure that the organization is fulfilling its mission statement, and provide financial and legal oversight. They make sure the chief executive is doing his or her job running the charity’s programs, managing its money, and executing its stated purpose in its mission statement.

Nonprofit board members are often integrally involved in fundraising and raising awareness of the organization. Frequently they ask others to donate, appear at fundraising events, and donate themselves. In looking for more people to support their organization, they also find and recruit new board members.

Nonprofit boards, as you’d expect, are unpaid positions. Serving on these boards can be a gratifying and essential way to serve a cause that you care about deeply.

How much are you really worth?

Wednesday, October 14th, 2009

The obvious answer seems to be that a person or company is worth however much money they have, but that number isn’t always easy to figure out. It can be hard just to figure out how much money you have in the bank at any given time: you can print out an account statement, of course, but what about all the checks you’ve written and purchases you’ve charged to credit cards that have to be deducted from that number? How do you come up with a number that reflects what you’re really worth?

This number is called net worth. For both people and corporations, net worth is represented as total assets minus total liabilities. But even though the equation is simple, the calculations can be complicated. Anything of monetary value is considered an asset; any debts or payments you’re obligated to make constitute liabilities. So your house is an asset, but your mortgage is a liability. Your car is an asset, but your lease payments are a liability. Your salary is an asset, but your bills are all liabilities. You have to take all these little additions and subtractions into account in order to figure out your net worth.

Why is it good to have a credit history?

Wednesday, October 14th, 2009

When you’re hiring someone for a job, the best choice is probably a person who has a reputation for doing similar jobs well in the past. Although someone without any established reputation is better than someone with a bad reputation, he’s still something of a gamble – you have no special reason to think he won’t perform the job well, but no reason to believe he will, either.

Credit history follows the same principle. It’s basically a record of how you’ve used credit in the past. How much do you owe right now? Have you made your credit payments on time? Have you had any financial problems? In credit as in anything else, a long history of good behavior is a great asset because it inspires trust. For example, a bank may be more inclined to let you take out a loan if you have an excellent credit history; if you’ve repaid your debts in a timely manner in the past, odds are you’ll deal with their loan in the same way.

Is it worth it to buy a gift for Mom at the airport duty-free shop?

Thursday, October 8th, 2009

The quick answer is that it depends, but probably yes. As the name implies, a duty free shop has no ‘duty’ — or local import tax — on the goods that it sells. By buying something at Heathrow Airport in London, for instance, you don’t have to pay the import tax that the UK slaps on foreign goods (such as Russian vodka) and that a local store in London would include in its price for the same goods.

Because of this, goods at duty-free stores are generally cheaper than if you were to purchase them with the import tax inside the country. However, there are two reasons to be a little cautious: The first is that according to U.S. law, if you buy more than $800 worth of items purchased abroad (duty-free or not), then you will have to pay the import tax.  The second is that sometimes, depending on geography and exchange rates, an item may just be more expensive at duty free stores.

Basically, if you know the price of your mom’s favorite perfume at Macy’s and see it cheaper at the duty-free shop (and you dont plan on buying more than $800 of it), chances are it’s a good deal.

How do you decide whether to give anonymously?

Thursday, October 8th, 2009

Ultimately, there is no correct answer to whether or not you should attach your name to your donations – it’s entirely a personal choice. However, there are valid arguments for either option.

People who want their donations to bear their names often want the recognition that comes with giving, but sometimes there’s a deeper motive. By making your donation public knowledge, you’re setting an example for others – saying, in effect, that this is a worthy cause to which your peers can and ought to donate. To some people, giving anonymously can feel like they’re somehow ashamed of their donation or that they don’t want to own up to it. Public donors want to give the exact opposite impression.

People who do decide to give anonymously often believe they are being more genuinely altruistic by doing so. If they give privately, they get no recognition for giving, and some people think this makes their motives more pure. In addition, some people who want to give outside their own foundation or organization choose to donate to other causes anonymously, basically in order to avoid the question, “If your organization is so great, why are you giving to another one, instead of sending all you can spare to your own cause?” (The answer, of course, is that there are always multiple causes worthy of attention, and you can’t necessarily be involved on an administrative level in all of them.) Since you’re already doing good by giving in the first place, choosing whether to be anonymous or not is basically a win-win situation – just pick whatever option, in your opinion, makes a good thing even better.

Why does the NYSE opening bell ring at 9:30?

Thursday, October 8th, 2009

The opening bell for the New York Stock Exchange (NYSE) has rung at 9:30am since 1985 when it was changed from 10:00am. The bell starts the daily trading session, which is the time in which all stocks are bought and sold on the trading floor. Until relatively recently, the technology to trade stocks from outside the trading floor didn’t even exist, so the trading session was really the only time when trading took place.

Now trading can be done at all hours from anywhere on the planet – even from your cell phone. However, the majority of trading is still done during the trading session. The board of the NYSE has discussed several times making the bell earlier to extend normal trading hours, but the hours haven’t changed for over 20 years.

What do you do if someone gives you insider information?

Wednesday, October 7th, 2009

When someone has privileged or sensitive non-public information about a company that could affect its share price once the information becomes public, they can use that information to either buy or sell stock at the expense of the people they sell to or buy from who don’t have this information. This is called insider trading and it’s illegal. Let’s say you work at a company and know that the company just lost a ton of money, even though the public thinks the company is doing great. If you sell  your stock to the unwitting public, that’s insider trading.

But what if you are just given the information and aren’t actually an “insider” at the company? This is often called “tipping,” and it’s still illegal for you to trade based on that privileged information because the effect is the same – if people think that it’s not safe to invest because they are going to be taken advantage of by sneaky insiders and their friends, they won’t buy stock, and that’s bad for everyone.

What and where is the black market?

Wednesday, October 7th, 2009

Drugs, guns, stolen goods, oh my! The buying and selling of these types of illegal products is the most infamous type of black market. In a more general sense, the black market is any marketplace that operates outside the law, or disregards trade or taxation regulations. It gets its name from the idea that business is done “in the dark,” out of sight.

As a trend, black markets tend to sprout up most in places with the least economic freedom. This means the countries with the most economic freedom tend to have the smallest black markets (proportionally). But countries with more corruption, regulation, and monopolies have fewer legitimate economic opportunities. For instance, North Korea has a robust black market for basic supplies like food.

In developed countries, black markets form in response to legal, regulatory, and taxation restrictions. One of the most famous examples comes from the 1920s. When prohibition made alcohol illegal in the U.S., it spawned an enormous black market where alcohol was smuggled into the country and sold at speakeasies and private bars. Spearheaded by the mafia, the black market sustained an era of organized crime and cost the U.S. an estimated $500 million in lost tax revenues every year. Economics teaches us about the laws of supply and demand; just because something becomes illegal, for instance, doesn’t mean everyone suddenly stops wanting it. Boom. Black market.

NASDAQ? DOW? S&P 500? Huh?

Wednesday, October 7th, 2009

With so many abbreviations running around the finance world, it’s only natural to be a bit confused.

These terms are often used in the news to give you a sense about the state of the economy. If the DOW is up, it’s a good thing and if it’s down, it’s not so good. But what’s the difference between these terms?

You can basically break them down into two categories: stock exchanges and stock indices. Stock exchanges are where different stocks are bought and sold – similar to a grocery store for household goods. Stock indices, on the other hand, measure a specific segment of the stock market by tracking the stocks of a particular group of companies – you could create indices that track car, agricultural, or computer companies.

NASDAQ is a stock exchange where over 5,000 different stocks are traded, while the DOW and the S&P 500 are stock indices. The DOW focuses on 30 of the largest American companies and the S&P focuses on 500 of the strongest American companies.

By looking at the performance (or daily change in value) of various stock exchanges and stock indices, investors are able to measure the strength of different sectors of the American economy.

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