Wednesday, September 24, 2008

A Quick Take On Short Selling

What is it? Who does it? Why do they do it?

Short sellers hold margin accounts. These accounts have money in them which is used like collateral during trades. Short selling gives a trader the ability to borrow stock on margin, sell the borrowed stock at a high price, purchase it back at a low price, and pocket the difference in value. The lender of the stock, often a bank or broker, can receive interest from the collateral money in the margin account backing the trader.

Naked short selling is the practice of selling stock at a high price without borrowing it, repurchasing the "stock" at a lower value before the delivery date, and the pocketing the difference in value.

The difference between these are that the Naked short sellers never have any security, borrowed or otherwise, behind their trades. They only have the promise to deliver the security if they do no repurchase it.

Short sellers can provide liquidity in a market by providing a ready market. They will purchase stocks when others are selling and they will sell their shares when others are buying. When short selling is banned, it may be more difficult and costly for a buyer or seller to find a counterpart willing to take that position.

The short sellers can cause the current market price for a stock to go down because of their sales. When a lot of short sellers are in the market around a particular security, they can influence the actions of traditional investors and other traders. These investors don't know why the price of their stocks are going down, only that the price is dropping. This can entice some investors to sell their actual stock.

Short sellers can often make money by betting that the markets are going down, but they will lose money if they guess wrong and the markets go up.

I'd like to thank my friend Paul Pace for giving me this topic idea for my blog post.

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Tuesday, September 23, 2008

En Passant: Scaring The Average Investor

I think the average investor must be getting spooked from this market. Over the last month the stock market has had huge up and down days. Oil is back up again. Every weekend it seems that there are major changes to financial system. Every headline scares them a little more because they don't understand it. Is it any wonder that some investors are considering hiding their money under their mattresses? That's a wealth accumulation model they can understand and don't need a financial adviser to explain to them. I suspect that this immediate flight to "safety" will continue until Wall Street can go a few weekends without being in the headlines.

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Monday, September 22, 2008

A Clean, Pressed Suit

Do you have a clean, pressed suit ready to go at a moments notice? I know this may seem like an obvious point, but I wanted to mention it for those that may not have thought about it. I know that dry cleaning can be an expensive hassle, especially if the dry cleaners is on the other side of town. However, if an event (like a surprise job interview) comes up where you need to stand out and look your best, it may be a good idea to have at least one good set of clothes ready to go. Look through your closet now to find that suit that will make you look your best, and make sure its looking its best. Plan for tomorrow, not just today.

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Friday, September 19, 2008

Thursday, September 18, 2008

Wash Sale Rule

The wash sale rule isn't a set of washing directions for new clothes. Its a rule that is intended to cut down on the number of people that use stock sales to take artificial losses for tax purposes. The rule is that an investor cannot claim a loss if a stock was sold and another nearly identical stock was purchased within 30 days, before or after the sale. In order to claim a loss with the IRS, if you have a loss on a position, you are unable to sell your shares for a loss and jump right back in and buy more.
An important note also is that your cost basis is adjusted with the wash sale, not reset to the new purchase price. Your "disallowed" loss is going to be added to the cost basis of the new replacement shares. If you have a loss of $50 per share and you purchased a new share at $30 a share, than your new cost basis will be $80.

Wash sales are important to consider before selling stock with the intention of a later repurchase.

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Tuesday, September 16, 2008

En Passant: 12b-1 Fees

Here is a quick review of 12b-1 fees from my Series 6 studying. The 12b-1 Fees on a mutual fund are used to cover some costs faced by the underwriter distributing the mutual fund. These fees are assessed once a year and may include:
1) Advertising
2) Underwriting Compensation
3) Dealer & Sales Personnel Compensation
4) Printing and Mailing Prospectuses
5) Printing and Mailing Sales Literatiure
The 12b-1 fees can be approved by the majority of shareholders, directors, and disinterested directors. The fees only need majority approval by the majority of shareholders and the disinterested directors to be stopped. These fees are intended only to cover marketing and advertising costs.

Okay, that's it for today. Good luck in the markets.

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Monday, September 15, 2008

En Passant: Out Of The Cubicle

Sometimes fresh air and sunlight can provide you with a new perspective on a problem or issue at work. You may want to leave the cubicle during your next lunch break. For that matter, try leaving the building. Go for a walk around the block. You might find that the answer will come to you more easily when you stop pushing against your mental block.

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Friday, September 12, 2008

En Passant: Student Loans

I realized the impact of the credit crunch today when I started looking into student loan consolidation. When I went looking for one, I found very few banks that were willing to offer those loans. I went to a loan comparison site, and they said that none of the providers that they tracked offered loans anymore. I found Wells Fargo actually still offers it, but it's at higher rates than my current rates. I'm not sure that consolidation is the right choice for me now. At least the loans were available while I was in school. I've heard that loans have gotten much more difficult for students this semester. Here's one example.

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Wednesday, September 10, 2008

Municipal Bond Characteristics

As part of my Series 6 studies, I've found the need to review the characteristics of the municipal bond. I thought that this could be an area where others could benefit from this quick review as well.

Municipal bonds are debt securities issued by state and local governments to finance public projects by local governments to finance public projects such as construction. They can be classified as either GO Bonds or as Revenue Bonds.

GO Bonds, also known as General Obligation Bonds, are considered low risk because the bond is backed by the taxing power of the government. Revenue Bonds are issued to finance projects that will generate income which will be used to re-pay the bonds. Revenue bonds are considered riskier because there are no taxes backing payment. If a project is unable to generate sufficient revenue, then the bonds can go into default.

The primary advantage to having municipal bonds is their tax status. Interest income earned on these bonds are generally tax free at the federal level. For investors that live within the state or municipality issuing the bond, the interest income is also potentially tax free at the local level. This is partially because municipalities would like to give an incentive to the citizens to support local government construction and infrastructure efforts. These tax advantages can be especially interesting for those in a high tax bracket because the earnings generated may be tax free.

There is a special kind of revenue bond that deserves a little more description because it does not have this tax advantage. Industrial Development Bonds can be issued to finance projects that will be leased to an outside company. The lease payments are used to re-pay the bond. Since the facilities are used by private industry, interest income on these bonds is taxable by the federal government.

Hopefully this review about municipal bond characteristics has been useful. If this topic interests you, feel free to drop me a comment. Thanks.

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Monday, September 8, 2008

En Passant: Dollar Cost Averaging

While in the course of studying for the Series 6 Licensing Exam, I've come across a term that I was not sure if I have covered in in any of my previous posts. I thought it should be something that I should touch on. The markets can be a rough and tumble place for your money; sometimes the volatility can be quite high. With "Dollar Cost Averaging" an investor can invest a set dollar amount at a set interval, usually monthly. This method of investing slowly and systematically eliminates much of the timing risk an investors faces. Without needing to worry as much about getting into the market at the top or the bottom, an investor can focus more on where an investment will go in the longer term and less about where it will be tomorrow.

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Saturday, September 6, 2008

Tying Up Loose Threads

Until I have the time to finish my Basic Accounting Review Guide series that I started last winter, I felt that I should provide you with a few links to some other useful accounting sites. All of these sites should help you learn a little more about the art of accounting:

There are many, many more useful accounting blogs and sites that can be found on this list here:

Time permitting, I will eventually get back to my Accounting Review Guide. However in the meantime, hopefully you will find some good information on those sites.

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Friday, September 5, 2008

En Passant: To Get Busy Or Not To Get Busy?

As you can tell by the infrequency of my recent posts, I have been unable to find the time to make regular lengthy posts. I have decided that I would like to post more often, even if the depth of my content isn't as complete as I might like. My goal will to post at least 5 sentences per post, with one post published every weekday. And now, on with the show...
When you have more things to do than you have time to do them, you have to focus and prioritize. Myself, I am currently focusing on studying for my upcoming Series 6 license exam, improving my fitness level, and spending more time with my girlfriend. Your priorities will change over time. Every few weeks it is necessary to review your priorities to ensure that you are being as effective as possible.

Have you reviewed your priorities lately? Consider how focusing your energy on just a few big ticket items could improve your life.

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