The Amateur Financier

Ah, it’s Thursday already.  Time flies by when you’re spending hours each day in training at your new job.  So far, things have been going pretty well; a lot of general information about the company (Sanofi Pasteur) and the practices it follows are being presented, and we’re just starting to go over the actual building and area where I will be working.  I’ll working on vaccines for the H1N1 strain of flu (swine flu, don’t you know), so feel free to give me a passing thought when you’re lining up for your injections this flu season.

The only bad thing is that a combination of this job training and the fact that I’ve been feeling under the weather lately means that my blog has had to take a back seat for much of the week.  Once I am officially on shift and can get a good rhythm going, I should be able to catch up, but for now, I’m having a little trouble in keeping up with everything.  Don’t worry, though: short of coming down with the flu myself, there’s nothing that will keep me from updating my blog as often as life allows me the opportunity.

On that optimistic note, let’s see what some of the other personal finance bloggers out there are talking about:

Dairy Farms Rely on Illegal Immigrants – So often in debates about immigration, some basics of economics are lost in the shuffle.  Namely, more immigrant workers mean lower labor costs which in turn mean lower prices in the store (particularly for agricultural products, a field where most Americans aren’t exactly jumping for jobs).  On My Life ROI, these points and others are discussed in detail, a discussion that we as country seem to be endlessly trying to put off (but really can’t).

The Ultimate Financial Survivial Guide for New College Students – While the ‘ultimate’ in the blog title might be mostly good marketing on his part, Studenomics does an impressive job of covering many of the financial considerations of which incoming college students should be aware.  In fact, I’d go even further and extend his first few points to everyone over the age of twenty: if you are old enough to drink, you should have an online bank account, a retirement account, and a credit card already.  If you don’t, it’s time to get on the ball.

Deciding on Home Ownership – Given the recent decline in house prices as well as government incentives for new home buyers, it’s a good time to purchase a house.  That’s the thinking over at Green Panda Treehouse, apparently, as they finally took the plunge and purchased a townhouse.  Also covered is some of the logic behind the decision; while it’s a good time for those who want to be homebuyers, that doesn’t mean it’s the right time for all potential home buyers.  You need to consider your own needs and resources.

Spend Time to Save Money – Mrs. Micah provides a few good ways to spend a little extra time in order to save money on your purchases.  Using coupons (both online and off), creating a price book, negotiating lower insurance rates, and opening a higher yielding bank account are all good suggestions.  If you put your mind to it, there are plenty of ways to add some value to your life with only a (relatively) small investment of time.

What Kind of Saver Are You? – A list of different savings personality types, covering a range of people, is up on the Weakonomist’s website.  It’s kind of neat to read through his different descriptions and see which one fits you the best.  I like to think of myself as a Sweeper, for the most part.

Don’t Chase High Rates for Savings Accounts – I’ll admit, I’ve tried to chase high interest rates in the past (and actually, would probably continue to do so if the chance to earn a much higher rate presented itself).  Luckily, Stephanie of Poorer Than You provides a good idea of what to do with a wide number of online savings accounts, using each one for a different savings goal.  Not bad advice if you have a number of different accounts you want to put to go use.

I’ve discussed options briefly in the past, as part of my Investing 101 series.  While they can be useful as a way to profit from market movements without owning the underlying stocks, they can get a bit tricky.  To help you understand who profits from different option related situations, let’s go over a few examples.  (Don’t worry, there’ll be pictures soon!)

Calling in the Profits

As you hopefully remember from the aforementioned Investing 101 post, calls are options that enable you to purchase shares of stock at a particular value (the strike price) at some point in the future.  (Either at the expiration date, for European-style options, or at any time before or on the expiration date, for American-style options.)  You might be tempted to assume that after you have bought a call option, all you need to do is wait for the price of the underlying stock to go above the strike price, exercise the option (that is, buy the stock at the strike price), and bingo, instant profit by buying at a discount.

Well, that’s not quite the way it works.  In order to get someone to agree to sell you the stock at a particular, fixed value (which is known as writing a call), you have to give them an incentive (read: money).  This is called the option premium.  But that’s not the end; you also have to factor in the money you are paying to the brokerage in order to match you up with a call writer, the commission and other transaction costs.  All told, the price for you to break even on your option transaction (and make as much profit as if you simply bought the stock and held it while it rose in value) is found like this:

Break-Even Price (Calls) = Strike Price + Option Premium + Commission and Transaction Costs

If the price of the stock when you exercise the option is between the strike price and the break-even price, you (our option buyer) will be able to buy the underlying stock for less than the current market price, but the savings you get will not be enough to make the whole process (buying the option, then exercising it and buying the stock) profitable for you.  For a graphical representation, take a look at this (click the picture to expand it):

If we go from left to right across this chart (following the increase in stock prices) we see:

• Red: The call writer gets to pocket the option premium, and doesn’t have to part with his stocks.  Good for him, bad for the call buyer.
• Yellow: The call is exercised (it is ‘in the money’, meaning the strike price is less than the market value) but the savings on the buyer’s part don’t cover the cost of the option.  The call writer gets the strike price for the stocks, as well as some profit from writing the call, although not as much as if the stocks stayed below the strike price.  The call writer’s profit decreases the further to the right you do in the yellow area.  (Actually, because of the commissions charged by the brokerage, the far right area of the yellow section is one where neither the writer nor the buyer profit.  As a result it’s possible for opinions to be a lose-lose proposition (at least for everyone but the brokerage).)
• Green: The call is exercised, and the total cost to the option buyer is less than the cost of purchasing the stock at the new, higher price.  The buyer profits, and makes more profit the higher the stock price goes, while the call writer makes less profit than by holding and selling the stock outright.

Where are you Putting that?

Puts, in case you forgot, are essentially inverse calls; rather than allowing you to buy a stock at the strike price (regardless of the current market price), puts enable you to sell stock you own at a given price, regardless of the current market value.  Buying a put is a way to profit when your stock goes down in price, without having to sell the stock and buy it back later.  Of course, as with call options, puts have a premium and commission costs associated with them.  However, because you expect the price of your stock to go down (or are trying to insure against such a fate), when calculating the break-even price, we need to subtract these costs from the strike price:

Break-Even Price (Puts) = Strike Price – Option Premium – Commission and Transaction Costs

It might seem a bit odd, if you’re used to regular stock investing, but when buying puts, the more the stock price declines, the more profitable the put becomes (as it forces the writer to buy the stocks at a much higher than current price).  To see how this works in graphical form:

As you can see from this chart, the lower the stock price, the more profitable the put option.  If we go from right to left:

• Green: Below the break-even point, the put buyer can force the put writer to buy the underlying stock at the strike price for more than current market value, also netting enough profit to more than cover the cost of the option.  The buyer benefits, while the writer has to pay an overpriced amount for a declining stock.
• Yellow: The put is exercised and the put buyer can force the writer to buy the underlying stock for more than current market value, but not enough to cover the cost of the option.  The further to the right you go, the more profit from the option premium that the writer gets to keep.  (Again, the area right next to the green portion of the grid is one where, due to commissions, neither party will actually make a profit.)
• Red: Above the strike price, the put writer gets to both keep the premium and not have to buy the underlying stock.  The put writer benefits, while the put buyer is out the option premium and commission costs.

One final point about options before we call it a day.  You might be wondering why anyone would bother to buy options, when there are two areas of our graphs, the red and (most of) the yellow, where selling yields a profit.  Well, there are several reasons; first, no matter how the stock price moves, the only profit you can get from selling options is the option premium.  By way of contrast, when buying an option, you can get spectacular profits if the stock shoots into the stratosphere (with a call) or drops to nearly nothing (with a put).  Second, if you find yourself on the wrong on of one of the aforementioned greatly profitable deals (and did not buy back your option), you could end up selling a spectacular stock for a song or forced to buy a crummy one for much more than market value; whereas the option buyer will only be out the option premium and commission costs if the trade breaks badly for him or her.  Finally, if you are working with American-style options, all you need is one day when the option you sold goes into the green territory, and you can find yourself losing your profit.

What’s the moral here?  Don’t underestimate the risk with options, particularly when selling them; unlike buying options, you’re abdicating your ability to control when (or if) the option is exercised, leaving you to the mercy of the option buyer.  But don’t forget if you choose the buying path that you need to not only need to be concerned about the strike price, but also the break-even price.

Options aren’t for the lazy or weak of stomach; if you decide to invest in them, be sure you understand everything, including all the ways you could lose money (ESPECIALLY all the ways you could lose money) and only put a small portion of your portfolio at risk, at least until you become an options expert.  (And even then, only use options when needed.)  Good luck, and happy investing!

(Welcome once again to my ongoing feature, Investing 101.  This week, we’re looking at indexes, those things whose prices you hear quoted at the end of most business news reports.  But what are they, how do they work, and why does everyone seem so concerned about this ‘Dow Jones’ guy?  Read on for the exciting answers to these and other questions of vital importance!)

Q: So what is an index, anyway?

A: An index is simply a collection of stocks, bonds, or other individual investments.  Depending on the particular index, it can represent the entire market or some smaller portion, divided up according to index creator’s criteria.  You can think of them as imaginary portfolios holding the particular investments that it tracks.

Q: Alright, why should I care about indexes?

A: Well, if you are investing in index funds, where the mutual fund company attempts to own all of the stocks in the index (or a representative portion, in some cases), then indexes should be quite familiar to you.  They serve as the basis of your funds’ holdings.  You can thus use the performance of the index (which are frequently reported in newspapers) as a proxy for your investment performance.  (Although, it’s worth mentioning that your index fund will (almost) always lag the performance of your index; real mutual funds have expenses while indexes themselves do not.  Still, your fund should perform roughly the same as the underlying index, making the index a useful tool.)

Q: That’s fine for index investors, but I buy actively managed funds and individual stocks.  How do indexes help me?

A: Well, indexes serve as a benchmark for your actively selected investments.  If you own an actively managed fund (or attempt to manage your own money), you should compare your returns to an appropriate index.  If your fund is not outperforming the index (or an index fund, to take into account the aforementioned mutual fund fees) that holds the same type of investments, you should consider switching to an index fund and being done with it.  You’re paying higher fees (or trading commissions) to achieve worse results than you could get with an index fund.  (Now, of course, be reasonable with your comparisons; dropping a fund for one year of under-performance is not usually justified.  But do be sure to watch how your active investments perform compared to an appropriate index.)

Q: Alright, what sort of indexes are out there?

A: There are literally hundreds of indexes, run by numerous different companies.  There are indexes created by Standard & Poor’s, Morgan Stanley, and the Russell Investment Group, amongst others.  Three of the most commonly encountered indexes are the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite Index:

• The Dow Jones Industrial Average, commonly called the Dow, is composed of 30 different stocks that are among some of the largest companies traded in America.  These companies are considered some of the leaders in their fields, and the index, although limited, is considered a good representative of how American industry is doing.  It’s also the most commonly and prominently mentioned index on financial and other news programs, and thus one that’s easy to track.  For a more complete picture of how American business is doing, we can look at:
• The Standard and Poor’s (S&P) 500 Index, which measures the performance of 500 of the largest companies in the United States.  It includes all the Dow stocks and an additional 470 stocks of large companies, making it a more complete and accurate picture of American industrial performance.  It does not include mid- and small-cap stocks, though,
• The NASDAQ Composite Index measures the performance of the more than 4,000 stocks that trade on the NASDAQ exchange.  It tends to be weighted towards technology and other ‘hipper’ stocks (one reason why it suffered a tremendous fall at the end of the tech boom).

Q: That’s quite a list; you say there are other indexes?

A: Oh yes, indeed.  There’s the DJ Wilshire 5000, which includes all the stocks in America, making it even more representative of the American economy than the S&P 500, the MSCI EAFE, which invests in European, Asian, and Far Eastern stocks, and the Russell 2000, which invests in small- and mid-cap stocks (a total of 2000 of them, to be exact).  Which index funds (and related indexes) you should invest in and how much money you put into each one will depend on your goals, financial situation, and personality.

Good luck in the wonderful, funderful world of indexes, and see you for the next edition of Investing 101!

Hello, good readers.  If you’ve been following my little ramblings for the past month or so, you’ve heard me give advice on several aspects of job hunting, from how to behave at a job fair to how to follow up on a job interview.  Of course, the ultimate goal of job hunting is to find new employment.  (Unless you’re a rich tycoon with an odd sense of fun who gets a kick out of interviewing for jobs you would never, ever, really accept; in that case, do whatever you want.)  So, if (or more properly, when) you get your chance, how should you behave on your first day of work?

First, even before you get to work, dress appropriately.  What constitutes an appropriate outfit will depend on what sort of work you’re doing.  If you work on a construction site, blue jeans and a T-shirt will likely be all you need; if you’re working in an office environment, wearing a suit and tie (or nice skirt and jacket, if you happen to be a female) will work best.  If you need to wear an uniform or other specialized outfit, be sure you know whether you need to put it on before you get to work or whether you are changing on the job.  In either case, ensure that you have the appropriate outfit available before you get on the job site (unless it’s provided in a locker room or other staging area at your job site).  If you don’t know what to wear, or will have training in a classroom setting before getting on the actual job site, business casual attire is a safe bet, such as seen here:

An example of Business Casual Attire

Speaking of training, know what you’re going to be doing on your first day of work.  If you have several days of training, covering the details of your job as well as the rules and regulations of your company, be sure to bring any needed supplemental material to your training session.  Handouts from your interviews, paper for notes, writing implements, folders for any handouts (and there can be lots of handouts), all should be part of your first day training session supplies.  While attending your training, listen closely, take any notes you need to follow the material, and be sure to ask questions, particularly if there is anything you don’t understand.

If your first day has you shadowing someone, be sure to pay close attention and study what they do as  you watch; it might be your best chance to learn what the job entails.  Chances are you will spend your first day observing and learning the ropes, but don’t let that be an excuse to slack off.  You only get one chance to make a good impression on your instructor, who is likely to be your overseer on the job, as well.  It’s best to be on your best behavior and try to make a good impression.

On that subject, one last consideration: be friendly with your coworkers.  You don’t have to find a new best friend on the job site, but if you are pleasant, cheerful, and willing to chat with your new fellow workers, chances are that you can make your on-the-job time more enjoyable.  In addition, if your coworkers have a positive impression of you, it’ll only help when you face job reviews or have to get their help with some aspect of the job.

That’s all there really is to getting started on the job; dress appropriately, be prepared for the first day’s tasks, and try to make some new friends.  Have a great first day on the new job, and enjoy your work!