Posts Tagged ‘investments’

How do you keep track of your investment profits or losses?

Wednesday, October 6th, 2010

When you calculate your net profit or loss on an investment, you have to factor in what it cost you to make the investment in the first place. That’s called the “cost basis” or “tax basis.”

Here’s a simple example: let’s say you buy 100 shares of Company A for $10 a share – $1,000 in total. That $1,000 is your cost basis. Your gain on the investment is whatever you make that’s above that number. So if you later sell those 100 shares for $15 a share, you make $1,500 in that transaction, but you have to subtract your cost basis, so your profit is $500. If you sell them for $7.50 a share, you make $750, but once you factor in your cost basis, you actually have a $250 loss.

Rule of 72?

Tuesday, February 23rd, 2010

The Rule of 72 is a simplified method for calculating approximately how long it will take for an investment to double. In order for the rule to work, you have to know the rate of return on the investment, the rate of return has to stay constant, and you can’t add or take away any money from the investment.

The rule is simple: just divide 72 by whatever your rate of return is and you’ll get the number of years it’ll take the investment to double. For example, if your rate of return is 3%, you divide 72 by 3 and get 24. So your investment will double in about 24 years, assuming the rate of return doesn’t change and you leave the investment alone until then.

Why would a company split its stock?

Tuesday, December 22nd, 2009

A company’s value is basically spread out among its shares; the more shares there are, the smaller the percentage of the company each one is worth. Think of it as a simple equation: value of one stock = value of the company ÷ number of shares. So if a company wants to try to manipulate the price of its stock, it has to change some part of this equation. You can’t change the value of your company at will, of course; that depends on your market performance. But companies can change the number of shares they offer, and hence the price per share, by using stock splits and reverse stock splits.

Stock splits are just what they sound like – splitting a single stock into multiple stocks. The most common stock splits are 2-for-1 and 3-for-2. A reverse stock split is also just what it sounds like – in, say, a 1-for-5 split, every five shares become one. Because a company can’t just suddenly generate value, a stock split means stock prices also split: for example, in a 2-for-1 split, each share becomes worth half of its original price. As a shareholder, you don’t have to worry about stock splits because the company will make sure the value of your holdings doesn’t change – if the stock goes through a 2-for-1 split, your shares just double, so you still have the same amount of money.

If the value doesn’t change, why bother fooling around with the number of stocks? If a company is doing very well, a single stock can grow to be worth a huge amount of money. You can’t buy a fraction of a share, and if you have to shell out a huge amount of money just to buy a single share, you probably won’t bother. So splitting the stock makes the price of each individual share go down, and more investors can afford to buy. A reverse stock split happens when a company’s stock prices are low; when the number of shares decrease, the price of a share increases, and the company’s stock appears more attractive to investors.

Why can it be good to borrow money?

Friday, October 23rd, 2009

It’s a good question: loans come with interest, so you always have to pay back more than you borrowed. How is borrowing possibly a good idea?

Say you want to buy a house. Houses aren’t cheap, but they’re generally necessary (unless you want to live in your car). Especially if you’re fairly young and just starting out, chances are you probably can’t afford to just drop the full value of that house, in cash, up front, into the seller’s lap. But if you take out a mortgage to pay for the house, you can pay it back a little at a time. True, you’ll end up paying back more over time than if you’d just paid up front, but presumably you’ll be making more money as your life progresses, and then mortgage payments will count for less of your budget.

A Hedge is…

Monday, August 10th, 2009

A hedge is a financial strategy used to neutralize the risk of a certain bet. For example, an investor might buy a security in the health-care sector while hedging his or her bet by purchasing another security in the finance sector. The reason for the difference in investments is that if the value of one security goes down, the other might still go up. In plain terms it means covering your investments.

A Direct Investment is…

Wednesday, August 5th, 2009

A direct investment is the purchase or sale of a company’s stock through that company alone, without the intervention of a broker. This is done via a Direct Stock Purchase (DSP) or Dividend Reinvestment Plan (DRIP), where dividend income automatically goes to buying more stock. Basically, you deal with the company directly and eliminate the middleman.

Return is…

Monday, August 3rd, 2009

Return is the change in value of an investment over a period of time. For example, if a group of stocks in which you invested were worth $50,000 three months ago and they’re worth $75,000 now, you have a return of $25,000, or 50%, over that three-month period.

A Financial Advisor is…

Tuesday, July 7th, 2009

A financial advisor is an individual who offers clients financial advice in exchange for a fee or commission. They help and advise clients on their portfolio, estate planning, and understanding of the market.

Alternatives are…

Wednesday, June 10th, 2009

Alternatives are investments other than traditional stocks and bonds, like real estate, start-up companies, and blended funds.

A Ponzi Scheme is…

Friday, May 15th, 2009

A Ponzi scheme (named after Charles Ponzi) is an investment scam that promises investors high returns that aren’t actually real profits. Instead, each time a new investor signs on with the money manager, he uses their new funds to pay the high ‘returns’ to his older clients. Ponzi schemes fall apart because the manager eventually will fail to find new clients or regulators catch on – it’s generally just a matter of when.