bobmsmythe

In hopes of losing my rookie status, I was hoping I might provide something to the community. Now there are certain questions I *can't* answer-- I'm not going to make any recommendations and any general feelings I state have to be understood as being personal opinion, not investment advice. But, anybody have anything they'd like to ask? Want to know what a P/E ratio is? Why tax cuts don't boost the S&P? What it's like being on the phones during a market crash? Then fire away!

Bob

Cynthetiq

What defines insider trading?

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MSD

That "What does it feel like to be on the phones during a crash?' is something I wondered about.

Also, being a broke college student, I can't invest in anything big; are penny stocks worth considering?

bobmsmythe

Companies are required by the SEC to keep information such as earnings private until released publicly. In the most general sense, trading on information that hasn't been released to the public is insider trading. You're unlikely to be charged, though, unless you *specifically* knew the information was insider information. That's exactly what the deal is with Martha Stewart. Even if she did know that ImClone's application for their new medicine was going to be rejected, it would also have to be proved that she knew this information was "inside." Typically, unless you know somebody in the management of a company, you don't have to worry about it. There's always a certain amount of insider trading before news is released, usually amongst company employees, family, brokers "in the know," and sometimes journalists. That's one of the ways that we in the industry look for something that's about to make a move or have news, we examine the particulars of stocks in terms of volume and trade count and look for those that are trading on higher-than-average volume with no news.

Bob

bobmsmythe

A lot of our order flow is electronic now, but when things get really bad, the phones just ring like nothing you've ever seen or heard from. We give special numbers, private numbers, to our biggest clients. You have to remember, too, that most brokerage houses these days also have investment banking arms and the institutions have the advantage-- they've got the big volume AND the information so they get their trades in and out first. I've heard from some guys who were around in '87 that they got the word to just not answer the phone. That's why the SEC started mandating all the electronic quoting measures that we have these days, so the brokers can't shut their clients out completely. When there is a crash, though, you find 2 things happening. First, there are the guys who didn't see it coming-- their clients are calling and screaming. Every time this happens some of these guys get creamed. The others-- and this is maybe 5%-- had the good sense to get out before it happens and they are mostly *buying* stock, both in their own personal accounts and for their biggest customers. The general rule of thumb is that any big move is going to "give back" about a third to a half, so if you can pick the bottom on a dump it's a good way to make a quick buck.


Penny stocks are a fool's game, for a number of reasons. First off, they're too volatile on too little volume. Say you put 200 bucks into a stock trading at a nickel. Now you own 4000 shares. Penny stocks jump around all the time, up 20%, down 20%. But, your 4000 shares might make up a large percentage of the trade volume on any given day. Thus as soon as you've made a paper 20% and try to sell, you're likely to drive down the market. Also remember that it's *much* easier for something to go to zero than it is to go to a buck. Going from a nickel to a penny is a decline of 80%. Going from a nickel to a quarter is a gain of 400%. Realistically, the only reason a stock is even trading on the bb's is because it couldn't get listed on a real exchange. Nasdaq isn't *that* stringent in its requirements, so to be a bb issue a company has to be on really questionable footing. The only guys who make serious money on these are the pros, guys with knowledge of the industry and of specific companies. Most of them are crooks. One last thing, if this hasn't dissuaded you already, is that bb issues aren't regulated to the extent that even OTC equities are. Thus if you're looking at a quotation, there's no rule obligating a particular market maker to take your bid (or offer). Essentially you become the sucker, taking what the big boys are willing to give you.

As to what a broke-ass college student should invest in, I'm guessing that you've probably got maybe a couple of thousand dollars. Honestly, if you have money to spare, your number one choice ought to be to pay down any interest-receiving loans. Interest rates are low right now, but you're still probably paying out a good 4-6% on any outstanding loans for school that aren't funded by the government. If you have credit card debt, definitely pay that first-- those loans can be anywhere from about 7% all the way up to whatever the legally mandated maximum is these days. I've seen some folks walk in the door with a few thousand dollars who are paying 20% interest on ten thousand dollars worth of debt to MasterCard. I don't care who your broker is, if he says he can get you 20% per annum he's lying to you (or an idiot). If you'r'e debt-free, I would want some more specific information. Generally somebody in your age range is going to want to keep his assets as liquid as possible since you never know what (car, rent, beer money) is going to come up. Savings accounts don't pay much but at least you can pull your money out at any time. For a little bit less liquidity and slightly higher returns you can put it in a money market. If this is money you can definitely put away for two years or more and not touch, it might not be a bad idea to put it in a government treasury bill. It won't pay as much as corporate debt, but you won't have to get a broker *and* it will be backed by the U.S. government. You might look into EE Bonds, the minimum investment is just 25 bucks and you can get your money back, plus interest, in just 12 months. If you think inflation is going to rise (which I don't) you can also do the I bond, which is fixed to inflation.

Bob

wraithhibn

Bob, I do some trading on the side. I was wondering what your opinion on the economy is for the next 6-12 months is. Have we seen the bottom(or double bottom) and gonna start moving back up or is it sideways for the near future.

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zf0enix

My question would be regarding using ETFs as an asset allocation strategy, as opposed to REITs or Treasury funds. I like the idea of an ETF, but I haven't done enough research to determine which class I like (small, mid, large cap etc.)

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zf0enix

Also, what about the apparent conflict of interests with Underwriters, analysts, brokers in the major brokarages (e.g. Morgan Stanley Dean Witter, or what ever it's called now). I know in the accounting/auditing/consulting world it's a big issue. But, it seems even more dangerous in an arena where so much money is made by the underwriters and the same company values the stock and promotes it to their clients.

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bobmsmythe

Honestly, I'm hedging my own bets as much as possible and expecting a continued slide. There are a number of problems out there. First, consumer confidence, while bouyed by the end of the war, is still slipping. Second, the Fed can't really cut interest rates any farther. Third, there's the whole SARS issue. Last, if this tax cut goes through the government is going to have to borrow more money to keep running, negating any downside pressure on the cost of money. Until we start to see some serious growth from one of the leading indicator sectors (like consumer goods), I think we're going to keep dipping. That's not to say that stocks are neccesarily going to keep taking hits, though. It seems like the property bubble is gonna burst sometime soon, out here at least prices are slipping, and you gotta put your money someplace. Unless people start putting it under the mattresses, that is.

Bob

bobmsmythe

When you start talking about investing in ETFs (Exchange Traded Funds, for those who don't do acronyms), what you're essentially saying is "I'm betting on the market as a whole." That is, if you buy the Q's, you're betting on strength in the techs, if you buy spiders, you're betting on the S&P, and so forth. Now ETFs can be attractive, but there are some disadvantages:
1)You're tying your money to the market. If the market stays down (which it has), you go down with it.
2)Unlike a mutual fund or diverse stock holdings, ETFs don't neccesarily pay dividends (though some do).

#2 isn't as strong of a disadvantage as #1. Basically, before you invest in an ETF, you have to ask yourself "is this sector of the economy going to outperform my savings account over the next 6 months/12months/10 years." In the short run, the 6-12 month period, my feeling personally is that the stock market is still overpriced and ETFs will sink with it. If, however, you're talking about the long term, stocks generally rise and ETFs are a low-cost, low-overhead way to diversify holdings. In terms of REITs, you have to ask yourself the same question about real estate. If the bubble bursts, a lot of people who've ridden REITs over the past 2 years are going to get soaked.

Bob

bobmsmythe

No question it's a conflict of interest. The average Joe, though, doesn't need to worry about it, since you've got a snowball's chance in hell of being called about getting in on a good IPO. Really, the problem for most folks is that the bankers and brokers conspire to make sure that the big customers get the best issues. The ones who end up paying the price are the companies. Say company XYZ issues stock for the first time. The underwriter needs to determine the offer price on the primary market. He values XYZ at 10, and the brokers sell it to their big clients that way. Over the course of the day the price goes up to 15 and the clients unload it. Basically the underwriter just gave 5 bucks a share to the insiders, 5 bucks that should have gone to the company XYZ raising capital. The problem is that unlike the sort of analysis-broker-banker schemes, this is hard to prove. The brokers are charged with selling the stock at the price at which it's valued. It's not up to them to figure out the right price. Really, you could charge the underwriters with incompetence, but that's about it.

Bob

HeyAgain

How long do companies who just issued new IPOs have to wait until they are able to repurchase any outstanding shares that may be available to them?

i.e. They issued new shares at $10 per share, but has now dropped to $5. Can they repurchase the shares quickly after IPO issue to:

1) Reduce # of shares available
2) Drive up the current price of shares

clues_blues

what is a VUL? i know it is a mix of life ins. and retirement, but are there a few words you could say to a layman?

c_B

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bobmsmythe

There's no restriction on this. There is a restriction on insiders *selling* stock issued to them, but the company can always repurchase on the open market. They have no way of *forcing* a sale, though. For instance, Prudential Financial's IPO was in late 2001 IIRC. By Feb of 2002 they were already buying shares back on the open market. The only thing I can think of that would limit this ability is that in the initial prospectus (the document issued for IPO purposes) the company is required to state what the money will be used for. I suppose theoretically if XYZ said "we're going to use the money to buy widgets" and instead put a lot of it into a buyback program, an investor could sue. However most "use of proceeds" sections are written so generally these days that it would be a tough case-- they're usually along the lines of "to help grow the business" or "to succeed in initiatives in x sector" or whatever.

Bob

bobmsmythe

It stands for "Variable Universal Life." An insurance salesman might know more about it than I do, but essentially what it does is allows you to turn a life insurance policy into an investment vehicle. You can allocate the funds you place in the policy however you want. Basically, like any insurance policy, the "value" of the policy upon your death is variable. However you can invest this value rather than letting it sit unused. It acts like any other investment account, except there are some restrictions on withdrawals and there is no income tax paid on it once you die. Again, this isn't an area where I'm particularly expert-- I avoid life insurance salesmen like the plague.

Bob

yangwar

Bob, this is one of the best threads ever.

Now for a few questions:

1. I have $1000 to invest towards some long term goals like retirement/house/etc. I'm getting married soon and we'll both be in our early 20's fresh out of college so time isn't a problem. I've been thinking that good market or bad, some SPDRS might be a good option as there's a relatively low transaction cost and maintenance fees. What other options are available to me (that you think are worthwile) for the $1000 range?

2. I'm currently working on a BBS in Finance. Once I graduate, I'll be doing 4 yrs in the Army as an officer. I plan on staying in the Army until retirement but just in case I change my mind, do you have any advice on getting into the industry?

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zf0enix

I agree! Bob are you going to start charging by the hour? I have a ton of questions, like books to read, discount brokers, etc.

This is definately a valuable "Ask ____" thread. Thanks for the information!

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Skettios

Bob, no questions here, but I've enjoyed reading this. Great stuff!

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bobmsmythe

First off, I'm assuming you aren't carrying any outstanding debt. If you are, then that has to be step one. If you're paying 10% on your credit card, paying that down is the same as investing you money and getting 10% back. Now, you're in your early 20s-- should I assume you're looking at buying a home at some point? If so, you're going to want to keep your assets relatively liquid so that you can get that money into your down payment when the time comes around. I'm pretty bearish on the stock market right now, as you can probably tell. There aren't too many brokerages that will let you open an account with $1,000, anyway. Even those that do will charge you commission to trade. The cheapest of discount brokers are going to charge you about 10 bucks per transaction (I know there are cheaper, but they don't usually operate starting at the $1,000 level). So just to ante in is going to cost you 1% of your capital. Then when you want to get your money back, it's going to cost you another 1%. So already you've put yourself in a 2% hole. That's without even talking about the downside of the market.

If you plan on being able to invest some amount of money on a regular basis, and don't need to pull it out, you might want to think about an IRA. That has the advantage of being tax-sheltered, meaning you don't pay income tax on what you make, if anything. But from what you're describing I would say your best bet is probably something like a treasury bill-- it's safe, it's secure, and it's guaranteed. You don't need a broker to buy them and you can get your money back at any time.

Overall, stocks are a good investment, and you're right to want to diversify (as the spiders do right off the bat). But the short term picture doesn't look that great. Unless you're prepared to really sock that money away for the long haul, I'd keep it out of the stock market.

Quote:

2. I'm currently working on a BBS in Finance. Once I graduate, I'll be doing 4 yrs in the Army as an officer. I plan on staying in the Army until retirement but just in case I change my mind, do you have any advice on getting into the industry?

Best way to get into the industry is to know somebody already in the industry. Second best way is to major in business or economics and try to take internships through college. Honestly, it's really, really hard to get in right now-- everybody is cutting back. Hopefully in four years it will be better. If #s 1 and 2 are out, I'd recommend trying to locate individuals at companies for which you'd consider working and finding out which ones served in the armed forces. That can take you a long way.

Bob

bobmsmythe

My pleasure, Skettios. Hope it gives some folks some ideas.

Bob

bobmsmythe

My pleasure. For books to read, I'd start with A Random Walk Down Wall Street. That's probably the number one introductory piece. It's a little bit outdated now, but in general it's still pretty on the money. As for discount brokers, I'm a little bit leery of recommending specific houses (for obvious reasons). If you tell me what sort of investing you want to do, though, I can at the very least point you in the direction of some good websites.

Bob

HamiC

I have been in the financial services industry for nearly 8 years and was skeptical about what I would find in this thread. I must say, I think your answers have been terrific.

I particularly like your anser to yangwar's question about the $1,000......I'm biased towards retirement savings.......and was expecting to see something that I would disagree with (high fees or high risk)........but your answer was dead-on target given the likelihood of short-term need and the corresponding need to protect principal and minimize fees.

Great job. Keep it up.

bobmsmythe

See? Not all of us sellside guys are assholes. Thanks, HamiC.

Bob

bobmsmythe

Well, it worked, and I've lost my rookie status. But I will still continue to answer your questions, should you have any more.

Bob

denim

Fair enough.

I finally got out of debt last month, and couldn't stand to see my savings account accrete with the stock market at a low (IMO), so I opened a funds account and a brokerage account with a major company.

I put $4K of the initial $5K into an index fund, and the rest into a money market, with the idea of going into the stock market. Then, the week before Apple opened its music business, I bought in. Total, I got 100 at $13.44, so things are looking nice. I also bought another computer company which is at what I expect is a low, which simply can't get much lower, and with the amount of money that I could lose it w/o being too concerned.

My current plan is to pay off the credit card each month (my major debt) and put the excess into some financial vehicle. The coming payday check will go into savings, as I'm not happy with that just yet, but other checks will go into funds, both ones I've already got and others.

I also have an active 401(k) with my current company and a RO IRA, but those are inviolate other than how the money is currently arranged in them.

So, what do you think of this? Any general suggestions?

cheerios

'Nother broke college student here.. can you tell me more about treasury bills (what are they, min investments, time ranges, interest rates), and EE's? what IS an EE bond? it's really just 25 bucks? Is there some kind of fee that is involved w/ investing money like this? What do I have to do to buy bonds? I can't seem to get the couple hundred needed to open a savings acct. I know that paying off interest is high priority, but really, I'm living hand to mouth till I can finish my degree and get working full-time.

bobmsmythe

Well, I'm not going to recommend any single company, but I will state that generally once a stock runs up on a new concern, it will give something back as people overestimate the upside on the news.

When you say you plan to "pay off" your credit card, do you mean you're paying down an outstanding balance, or you're just not carrying a balance from month to month? If it's the former, I'd definitely finish paying down the cc before worrying about investing in the stock market.

Index funds are generally a good bet, though if you think the stock market will sink your fund will sink with it. It might be a good idea, if possible, to invest in a number of index funds, including some non-U.S. markets, if you have some extra cash.

Picking stocks can be a risky business. Keep in mind also that in a brokerage account you're going to be paying taxes on anything you make. Are you keeping the money taxable for liquidity purposes? If you are using the funds for income and growth, that's fine, though you should limit your expectations. If you plan to put the money toward retirement, though, you should definitely think about putting it in the IRA.

Overall, it sounds like you've got a generally sound plan-- you're trying to keep diverse via the index fund, while leaving a little bit of money to "play" with. You might want to diversify away from stocks, you could put some of the money in bonds. Municipal and U.S. bonds are often tax-free under certain circumstances, too.

When you talk about investing $5,000 in the markets, be very careful to rein in your expectations. If you can get and hold onto about seven or eight percent a year, you're pulling in some decent income and will have a good bundle when it comes time to retire. You can also liquidate and use to buy property or invest in a business, etc. However, and this is the mistake most new investors make, you have to learn to be satisfied with consolidating your returns over the long term. If you start thinking, "boy, I picked AAPL at the right time, I bet I can make ten percent a month," you'll probably regret it. It's possible you're the next coming of Warren Buffet, but it's unlikely. So you're wise to keep the largest chunk indexed.


Bob

denim

Definitely the latter. My bad wording, sorry: I'm paying it off completely each month.

That's an interesting idea.

Yes.


Okay, serious question: Is it okay to contribute to both a 401(k) and an IRA in the same year? Mine is a roll-over IRA. So, I can contribute other amounts to it other than at RO times?


Liquidity, yes?

Not with my assets, agreed. I figure to hold it a while and see what happens. I don't aspire to be Mr. Buffet. I'm simply investing in companies I feel are well positioned or of which I have an understanding.

zf0enix

Congrats Bob, you're no longer a rookie

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bobmsmythe

Yes, this is fine, though to be sure it doesn't neccesarily make sense if you aren't already contributing the max to your 401(k). This is *doubly* true, literally, if your employer matches your 401(k) contributions.



Absolutely. Most people in the 20-35 age range will be making some serious purchases in the short-to-mid terms. It's extremely important to keep some assets liquid for these purposes-- otherwise you can get nailed when you try to get the money out for down payment on a home, for instance.

Bob

bobmsmythe

Thanks, zf0enix. Glad to contribute something worthwhile to the community.

Bob

denim

I'm not doing the max contribution, but I'm doing enough to get the maximum match, you bet.


Some day, Real Soon Now, I'll be able to settle down. Not yet. I'm only just out of debt. I'll need a job where I feel MUCH more secure.

Thank you, sir!

redrover

Hi, I'm 19. I am a live-at-home college student. I work part time in the winter and fulltime in the summer. Alltogether my savings and money market accounts total about $7,000. I was hoping someone could put out a few suggestions as to what options I may have to invest. I do not want to risk a loss, but I want to make something better than a 1.5% return, and it also be somewhat liquid....

cheerios

dang bob, I feel so unloved, ya skipped right over me! :P Oh well, guess it's time to hit up google...

bobmsmythe

Sorry, I didn't see this one before. Treasury bills are short-to-mid term issues from the United States government. You invest a set amount up-front and are either (in some cases) paid interest along the way until the bill comes due and the principal is repaid, or you are (at the end of the term) paid the "face value" of the discount. You can make a bit of money with them if you can stash money away for a year, though you won't make the full amount. The EE bond is probably the simplest bond available-- it's called a "bond" because its a 30-year issue-- and yes, you can buy them at $25. Details are available here: http://www.publicdebt.treas.gov/mar/martdeebond.htm . Again, though, if you've got interest-due credit, take care of that first, you're not going to make enough to compensate for your interest.

Bob

bobmsmythe

Well, there are a couple of things you can do. If you can put it away for a year, you should look into treasury bills and bonds. If you don't like the idea of the government holding your money (and some of my clients don't, God bless 'em), you could put it into a CD at the bank, you won't be able to get it out until the term is up but at the very least you'll get more interest. Another option if you don't want to incur any risk, since you've got a bit more money to play with, is to put the cash in a brokerage account and invest in preferred stock. The price of preferreds is essentially stable, since they only move with interest rates. You're guaranteed a regular dividend, though make sure to see exactly how much before buying. You can also look at corporate and municipal debt, though again these will require broker fees and may be out of your price range, depending on how big the ante is. Short-term debt can be had and it is also possible (though sometimes costly in small denominations) to unload longer-term debt instruments. Realistically speaking, for somebody who will need the money sooner rather than later, you're probably best off keeping half in cash and putting half into a government-backed security, such as the EE bond.

Bob

NoSoup

Just wanted to let you know- this is really interesting.

I just got into the stock market not too long ago, and am trying to find how many shares are outstanding (I believe that is the term, the current number of shares that are being shorted)

Thanks-

bender

Bob, this is great.
I don't live in the US so some of this doesn't apply, but let me ask you your thoughts on mutuaal funds for long term no touch ?
Good
Bad
or Ugly.

zf0enix

It is very interesting. I think the term you're looking for is the "short interest". Shares outstanding are just the shares currently available to trade on the market. If you go to NASDAQ you can easily find the short interest. Here's an example of Yahoo's short interest.

Bob, is that accurate, or am I doing something wrong? Maybe I should just shut up and let the professional answer !

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bobmsmythe

No, shares outstanding is simply the number of shares currently held by the public, as opposed to those that have not been issued by the company. What you want is the "short interest." This indicates how many shares have been shorted and not yet bought back. It is considered bullish, since these people have to repurchase.

Bob