Securities For Beginners

Thursday, December 22, 2005 on Bonds

This week Chris posted a nice article on bonds on InvestorGeeks. In my opinion, no investor should exclude bonds from his portfolio, because they are a secure way to create a regular income stream. Well, actually it isn't completely safe, as the Argentinian bonds showed in the past. But since rating agencies like Standard & Poor's publish bond ratings the risk can be seen as easily comprehensible compared to stocks - as long as you stay informed.

Chris mentions the yield to maturity formula to calculate a bond's actual rate of return. This formula gives you the exact rate of return but is very complicated. A less complicated formula is:

r = (c*B + (B-P)/n) / P


c = coupon rate
B = par value
P = purchase price
n = years to maturity

Note: This formula is less exact than the YTM formula, but it gives you a basic idea on the bond's rate of return. The actual YTM is below the above formula's result. Let's compare them with an example:

c = 6%
B = $1000
P = $980
n = 8 years

Simple formula: r = 0.0638 = 6.38%
Exact YTM: r = 0.0633 = 6.33%

You see: There is a little difference, but you get a first impression on the bond's rate of return.


Moneychimp: YTM Investing basics: Bonds

Tuesday, December 20, 2005

Introduction to College Saving

Please, be the next Einstein

The Motley Fool provides an introduction to Saving for your Child's College Fees. It starts rather disencouraging:
You're not going to like what you're about to read, but you probably suspect as much. You probably have a sense of looming unpleasantness, the kind of feeling you get right before you open a container of leftovers that has been in the fridge for a few months. But it's time to face reality, Fool.

But trust me, it's getting better as you read further. The statistics provided in the article will you give you some hope that if your "pride and joy" is just a little brighter than Forrst Gump he might recieve financial aid in some way.
In my opinion, the most valuable advice is hidden at the end of the article: Do as much as you can to save money for your child's education, no matter what time it is you realize that there is something missing you should have taken care of long ago...

Also worth looking at: What's the best way to save for college?

Friday, December 16, 2005

Terms Explained - P/E

A brief guide to ratios and financial statements - Part I: P/E

An important ratio reflecting the inverstors' expectations reagarding a single stock is the P/E - the Price-Earnings ratio. It's often published in advanced stock tables and expresses the relation between the stock price and the earnings per share.

It is calculated by dividing a company's stock price by its earnings per share:

P/E = stock price / earnings per share


earnings per share = total net income / number of outstanding shares

The lower the P/E the more attractive a stock is assumed to be. But be careful: A low P/E is not a guarantee that a stock is a "strong buy"! Nevertheless it is useful to compare stocks from different companies in the same industry, because in some industries the P/E is traditionally higher or lower than in other industries.
Since the stock price also reflects the investors' expectations regarding the growth and future development of a company, a high P/E may be the result of high expections of the inverstors.

Next term to be explained: Cash Flow

For further information look here:
Investopedia: Understanding the P/E Ratio
Invest FAQ: Analysis - Price-Earnings (P/E) Ratio

Thursday, December 15, 2005

News Thursday, 15 December, 2005

Ford to Save $850 Million in New Health Care Pact (NY Times)
Local auto union officials said yesterday that they had approved the Ford Motor Company's demands for lower annual health care costs, saying the agreement would save the automaker $850 million annually. The decision paves the way for a ratification vote by union-represented factory workers.

U.S. Trade Deficit Reaches All-Time High (Yahoo! Finance)
A surge in oil imports and a flood of Chinese televisions, toys and computers helped to drive the U.S. trade deficit to an all-time high in October.
The Commerce Department reported Wednesday that the gap between what America sells overseas and what it imports rose by 4.4 percent to $68.9 billion, surpassing the record of $66 billion set in September.

Broad stock index hits highest close since 2001 (
Stocks rallied on strength in industrial shares Wednesday, pushing a broad market index to its highest close in more than four years, although technology shares struggled after Apple Computer was downgraded by two brokerages.

Wednesday, December 14, 2005

Common mistakes

1. Bcoming greedy
Many investors become greedy when their shares rise. During the internet bubble many stocks rose 150 % within a week and the investors were happy – and sure that this is going to last forever. When the markets collapsed, profits of 300 % turned into losses of 95 % before most of the investors even realised what was happening. When your shares develop well, make sure it is because of the companies success in the market and not because of some hype. In addition, think about selling a good amount of your shares to take the profit and look for a new investment opportunity.

2. Relying on your broker’s advice only
There is nothing more important than a good and unbiased research before buying a companies shares. People often buy stocks because their brokers recommended them – but when your broker is such a genius, why is he still working for the money? Don’t reject your brokers advice in generel, but do your own research instead of following blindly.

3. Not cutting the losses
People are often afraid of accepting the main fact in investing: There is no perfect investor. Everybody makes a wrong decision sometimes, but the good investors sell their shares when they realise they made a mistake. Instead many people keep their shares although they already lost 10 % and more because they hope it will rise again. Don’t do this! Accept your mistake, take the loss and learn from it.

4. Losing patience
When you have done your research, found that company X is a strong buy, set a price target and bought the share you expect the share price to rise – immediately. Unfortunately the stock market hasn’t been waiting just for you to invest, a good investment takes time to develop. So don’t lose patience and sell too early just because the share gained 3 % instead of the expected 10 %.

5. Investing money you need for other purposes
Don’t ever invest money you need in the future for paying your children’s college fees or maybe to repair your house’s roof. If the money you plan to invest is not “free money”, meaning money you saved but won’t necessarily need in the next 5 years, don’t invest it. Otherwise you will get nervous when your investments behave in a way you haven’t expected making you sell it before it got the chance to develop. This also applies to lent money: Never ever borrow money for investing! If things go wrong, it’s not just the invested money that’s gone – you’ll have to pay the interest rates without getting compensated by your investments.

Monday, December 12, 2005

News on Monday, December 12, 2005

A $30B energy merger may be in works (CNN/Money)
Oil major ConocoPhillips is in advanced talks to buy oil and gas producer Burlington Resources Inc. for more than $30 billion, the Wall Street Journal online edition reported.

China trumps US as top PC, phone exporter (
China surpassed the United States as the world's top exporter of laptop computers, mobile phones and other information and communications technology devices in 2004, the Organization for Economic Co-operation and Development said on Monday.

Paramount to buy DreamWorks (
Paramount Pictures on Sunday agreed to buy DreamWorks SKG in a $1.6 billion cash-and-debt deal that gives the Viacom Inc.-owned studio a much needed boost and ends the efforts of Steven Spielberg and two other moguls to build an independent movie and television empire.

OPEC won't cut output now (CNN/Money)
OPEC ministers agreed Monday to keep oil supplies at a 25-year high to hold prices in check as the U.S. winter sets in, delaying for a few more weeks a difficult decision over when to cut output.

Basic knowledge on stocks (Links only)

To make it easier for you to get in touch with the topic I give you a few links explaining the basics on stocks: Stock Basics Tutorial
Yahoo! Finance: What is a Stock, Anyway?
Yahoo! Finance: How Stock Markets Work

Just one thought on this: It is important to know the basics of stock investment to understand what you do when investing your money. If you don’t know how stocks and the stock markets work in general, you can go to the casino and make a bet on “Red” as well, you’ll have a bigger chance to succeed!

Sunday, December 11, 2005

Here we go

I finally launched this blog. Well, nothing extraordinarely new so far.

But what is the goal of this weblog?

Well, it's quite simple: Providing information on personal finance and securities useful for the beginner in this field. Although I'm not an expert myself, I learned a few things about business and economics at university as well as by surfing the www. I know that there are a lot of websites providing useful information with the same goal, so I focus on publishing basic introductions rather than in-depth investment information. Every instructional post will contain links to sites that offer in-depth information on the covered topic in order to give you a hint were to look if you are interested in reading further.

Besides the mentioned instuctional posts I will regularly post interesting news regarding investing, business and economics. I will limit the sources to websites that provide the news for free, because the fees demanded by the professional business news services just don't pay off for most of us.

You will not find the ultimate way to get rich in here. Why not? Because this way doesn't exist. Don't believe people who tell you they know it - they do not. If they knew, why would they share it with you? Well, there is one way to get rich: Hard work. But I think you knew that already, didn't you?

The information on this site is provided for general information purposes only. Accuracy of the information cannot be guaranteed, no investment decisions should be made based on this information. Under no circumstances does this information represent a recommendation to buy or sell stocks, bonds or any other securities.