|When you buy a stock, you're buying a piece of a company.|
At least that was how things used to be. Now days, you can buy a stock and buy pieces of several companies. These stocks are called "ETF"s.
Why would you ever buy an ETF? Well, sometimes you want to leverage the expertise of people that know what they're doing who buy and sell several different related stocks at the same time. For example, you may want to buy a share in Johnson & Johnson, but you may not realize that 30% of Johnson & Johnson's profits depend on the price of the oil. In such scenario, an expert trader may hedge his portfolio by not only buying Johnson & Johnson's stocks, but also invest 30% of their money into an oil future. With such balance, the expert trader would not see a dramatic loss in his profits due to a skyrocketting of the oil price since his profits in the oil future would make up for his losses in the ownership of Johnson & Johnson. So you, being the neive investor who is not "in" on such knowledge, may wish to simply invest in a prepackaged stock bundle.
A prepackaged stock bundles are usually called "mutual funds" or "hedge funds." Or just simply "funds." Except mutual funds and hedge funds are not traded at any stock exchanges. When the exchange rules became less strict in the past several years, funds that are tradeable on the exchanges appeared. These are what we now call "ETF"s, which is short for "Exchange Traded Funds."
ETFs have their benefits compared to normal mutual fund or hedge fund investments. In order for you to trade in mutual funds or hedge funds, you need to hire a stock broker and pay the broker fees for keeping your portfoil maintained and keeping the mutual and hedge funds maintained. This is not so with ETFs - because these stocks are traded directly on the exchange, you can buy and sell at their face prices without paying anyone percentage commission, except for maybe the electronic service you're using to trade the ETF, which is usually a flat fee.
Also, since ETFs are just funds, you can have not only a bundle of long positions in stocks, but the bundle may also contain short positions in stocks. If you want to short a stock without the risks associated with shorting a stock, you can just buy an appropriate ETF. Recall that normally if you short a stock, you're borrowing a stock from someone else then selling it, with the hope that you can buy the stocks back at a lower price then returning the stocks back to the loaner with an interest and any dividends that were paid out during the time the stock was borrowed. This is a very complicated process and, depending on how the stock does, you can lose an infinite amount of money but the guaranteed gain is only the price of the stock - shorting a stock has all the risks with little potential benefit. But if you purchase an ETF, you're long in a fund which shorts stocks - so you gain all the benefits of shorting a stock without the risks of shorting a stock directly. That is, if you can find the ETF that shorts the stock you're looking for.
ETFs also have their downsides. Recall that the whole mortgage crisis happened because subprime mortgages were bundles with less-than-subprime mortagages. So be careful that the ETFs that you're purchasing has the stocks that you're really interested in without the stocks that you're not. Also, it's not always easy to find the ETFs that are good in quality at the right price - but that's always the case with any stocks you buy. So just keep your eyes open and understand what you're buying when you trade ETFs, just as you would with any responsible trade you do with regular stocks.
|Apparently I get props only when I talk about the stock market. Not even a picture from the Miss USA Connecticut pageant can get me a prop. It's sad... because Miss USA Connecticut deserves props. Alright, so here it goes with the stock market again... I dedicate this entry to Miss Connecticut.|
There are various types of interest rates in the world of finances - interest rates for your credit card, interest rates for mortgages, interest rates when banks borrow money from each other, interest rates when banks borrow money from the Federal government, etc. These interest rates have a percentage rate, such as 12.99%, which may be a typical credit card interest rate.
When the market needs a little boost, such as it does now, the U.S. government may cut the interest rate it charges for the banks to borrow money from them. The U.S. government may also raise the interest rate if it believes the U.S. dollar's inflation rate is too high.
When the U.S. government changes its interest rate, the media uses the terms "percentage points" and "basis points" to describe the change in the interest rate. For example, if the Federal government changes its interest rate from 1.5% to 1.25%, it is said that the "Feds have cut their interest rate by 0.25 percentage point." You can't say that the Feds have cut their interest rate by 0.25 percent, because a change of 0.25 percent is equivalent to 1.5% * 25% = 1.5% * 0.25 = 0.375%, not 0.25%. To make the distinction clear, the term "percentage point", not "percentage", is used.
The media also uses the term "basis point" or "bp". This term is used more as a convenience. Since the Federal government raises or cuts inerest rate by a percentage point usually less than 1 percentage point, it is cumbersome to talk about "zero-point-whatever percentage point" all the time. As a shortcut, the media will use the term "basis point", which is equivalent to 100th of a percent, or as I like to say "percent of a percent."
So, for example, if the Feds change the interest rate from 1.5% to 1.25%, the media can say either that "the Feds have cut the interest rate by 0.25 percentage point", or that "the Feds have cut the interest rate by 25 basis points." The two are equivalent, and the media will use the two terms interchangeably as long as the numbers in front of the term are adjusted accordingly.
Basis point has a symbol that kind of looks like a percent sign but with two small zeros after it. It kind of looks like this: %00. Not that you'd ever see that symbol because the media never uses it, but I thought you'd like to know. But the term "basis point" is used all the time so you should know it if you ever watch or read the finance news.
That's my friend in the silver dress. Isn't she pretty? She's half Korean. She won 2nd runner up.
Left: A free MOMA ticket from earlier this month. Can't beat free!
Right: The Miss Connecticut and Miss Teen Connecticut pagent ticket for this weekend. It says Miss USA and Miss Teen USA because whoever wins competes for the national title.
|Doug: Hey, the Dow is down 650 points!|
Me: What? It was down only 470 when I went to the bathroom!