The Opportunity in Bear Stearns' Adversity By ANDREW BARY
THE RECENT TROUBLES AT BEAR STEARNS, including the collapse of two mortgage hedge funds and the forced resignation of one of its top executives, is heightening speculation on Wall Street that the maverick firm may be sold in the next year.
Nothing is apt to happen soon as Bear (ticker: BSC) seeks to ride out the recent storms in financial markets that have hurt two of its key businesses: mortgage trading and lending for leveraged buyouts. Bear's chief executive, the 73-year-old Jimmy Cayne, is a championship bridge player who'd undoubtedly want a stronger hand than Bear now holds before entertaining any thought of selling the 84-year-old company. If Bear Stearns does face any unexpected liquidity problems, it wouldn't be surprising to see Cayne's bridge-playing pal, Warren Buffett, ride to the rescue with an investment from Berkshire Hathaway. China, too, might invest in Bear.
Barron's has closely followed Bear Stearns in recent years. We wrote a bullish cover story on the firm three years ago, ("How Sweet It Is," Aug. 2, 2004), when the stock traded around 82. .
Our take, after speaking with some investors knowledgeable about Bear Stearns, is that the recent turmoil surrounding the firm, including the brief collapse in its share price after Standard & Poor's made a surprise -- and arguably rash -- decision on Aug. 3 to consider a downgrade of the firm's credit rating, may make Cayne and his main constituency, Bear's employees, more willing to consider a deal with a larger company. Employees own almost a third of the company's 149 million shares.
Bear Stearns CEO Jimmy Cayne may be pondering a question raised by an investor in his firm: How many near-death experiences do its leaders want to go through?
As one sizable Bear Stearns investor says: "If you're a 50-year-old senior managing director at Bear with $30 million of stock, how many more near-death experiences do you want to go through, even if they're based more on perception than reality?" The problem is that perception can become reality for a securities firm like Bear Stearns, which supports a $400 billion balance sheet with $13 billion of equity capital and a lot of debt.
The company has a valuable franchise that could be attractive to JPMorgan Chase (JPM) or one of several European banks, including Deutsche Bank (DB) or UBS (UBS). With a stock-market value of $16 billion, Bear Stearns is the most digestible of the top Wall Street firms. It has a well-deserved reputation as a nimble, trading-oriented firm with strong risk management that has delivered mightily for shareholders since going public in 1986. An insular place with a distinctive culture, Bear relishes its scrappy underdog image. Top management invariably comes from within, and employees often spend a career at the firm.
Bond and equity trading continue to generate the bulk of Bear's earnings, contributing two-thirds of profits in the first six months of its fiscal year. The firm also has a lucrative prime brokerage business, which involves providing hedge funds with an array of services, including custody, securities lending and clearing. Bear Stearns is the No. 3 U.S. prime broker, behind Morgan Stanley (MS) and Goldman Sachs (GS), in a business with significant barriers to entry. Among its other assets are its headquarters, a 43-story midtown Manhattan tower, completed in 2001, that could be worth $2 billion, way above its carrying value under $500 million.
Bulls argue that Bear Stearns shares, which finished Friday around 110, look attractive trading at 1.2 times their book value of $92.50. That's the lowest price/book ratio among the major Street firms. Bear's price/book ratio is also at the low end of its historical range. Lehman Brothers (LEH), whose trading-oriented business mix most resembles Bear's, trades at 59 -- 1.6 times book value -- while Goldman, now the Street's preeminent firm, trades for 180, or 2.2 times book. Bear's stock is the worst performer among its peers this year, off 32%, versus about 10% for Goldman and Morgan Stanley shares.
Bear Stearns stock lately has been among the brokerage sector's most volatile. In mid-July, it hit a high of 142; last Monday, it fell to an intraday low of 99, on the news that Warren Spector, the co-president and head of the firm's powerful fixed-income unit, had been forced to resign. Spector had been the odds-on favorite to succeed Cayne, Bear's boss of the past 14 years. By Wednesday morning, the shares topped 125. Then, they fell back.
ALAN SCHWARTZ, A CO-PRESIDENT of Bear Stearns and head of its investment-banking division, became sole president following Spector's departure. That made him the frontrunner to succeed Cayne, who shows no interest in retiring. Schwartz says that his message to the firm's 15,000 employees was that there is opportunity in the market's dislocations. "This is a time that is tailor-made for Bear Stearns. We tend to outperform in difficult markets." Schwartz said the firm, backed by ample liquidity, will get back on the "offensive" by executing its long-standing strategy of taking prudent trading risks and building book value per share.
Bear declined to discuss any potential takeover. But bulls maintain that if the firm can maintain most of its recent earnings power, it could ultimately fetch $200 in a takeover next year -- about two times forward book value.
An investment in Bear Stearns is riskier than one in Merrill Lynch or Morgan Stanley, which boast more diversified businesses. The current quarter, which for Bear Stearns ends on Aug. 31, is proving to be difficult for brokerage companies because of credit-market setbacks.
Last week, Credit Suisse analyst Susan Roth Katzke slashed her third-quarter estimate for Bear Stearns to $2.20 a share from $3.20 and cut her estimate for the current fiscal year, which ends in November, to $12.40 a share from $14.65. Bear earned $14.27 in 2006. Katzke retained her Outperform rating on Bear Stearns, but cut her price target to 145 from 190 a share.
If Bear does earn $2.20 a share in the quarter, it probably would be a huge triumph because the Street appears to be banking on the possibility of an outright loss, despite the firm's assertion that it was profitable in June and July.
One of the biggest concerns about the company involves its loan commitments to private-equity firms for leveraged buyouts. Bear Stearns has an estimated $9 billion of such commitments. Because of the fallout in the credit markets, it could be staring at a loss of $500 million or more on those commitments, analysts write. Bear says it has been hedging its commitments, which would mitigate any losses.
Bear Stearns gets an estimated 30% of its fixed-income revenue from mortgage trading, a business hard-hit by the subprime-mortgage mess. The firm also is a leading participant in the risk-arbitrage market. That has been hurt by investors' doubts about whether private-equity firms will be able to complete such giant buyouts as those involving First Data (FDC), Archstone-Smith (ASN) and Clear Channel Communications (CCU).
Bear's brass hasn't endeared itself to investors lately. When Sam Molinaro, its CFO, sought to reassure investors about Bear's liquidity position via an Aug. 3 conference call, he apparently inflamed the situation by observing that Bear faces the worst fixed-income market in 22 years. Cayne read a statement at the start of the call, then disappeared. Some investors weren't happy about that.
By forcing out Spector, Cayne probably bought more time for himself in the top job because Schwartz may need to establish himself as legitimate CEO material. Schwartz, 57, is a very capable investment banker, but that business is only a modest profit contributor at Bear Stearns. Will Bear's board entrust the firm to an investment banker with no experience in the complex and capital-intensive trading businesses? It has long been speculated that Cayne sees himself as the last CEO of an independent Bear Stearns. It's possible that, in the event of a merger, Spector could return to the firm as its leader.
WHY MIGHT BEAR SELL? Its equity capital base, now $13 billion, has doubled in the past five years, but it trails those of Lehman, Goldman and others at a time when the securities business is getting riskier and more capital-intensive. Lehman has $20 billion of equity capital; Goldman, $35 billion; Morgan Stanley, $40 billion. Bear also gets less revenue from fee-based businesses like asset management. The upshot: a lower return on equity than its rivals. Bear also lacks scale internationally, unlike its main competitors. Some investors think Bear should sell its asset-management arm because it lacks size. Bear says it's committed to the business.
The Bottom Line
Bear Stearns is battered, but if it emerges intact from its latest crisis, it eventually could be sold at a price close to double its current price.
Bear's prime-brokerage business is a jewel, but has lost some ground to the larger Goldman and Morgan Stanley. Recent credit jitters don't help Bear's prime-brokerage operation because clients don't want to worry about their custodian's financial health. Goldman and Morgan Stanley assuredly are trying to capitalize on the situation. A merger with Bear Stearns would give JPMorgan CEO Jamie Dimon the formidable prime-brokerage platform that his bank has been unable to build on its own.
Bear has long defied doubters who say it lacks the firepower to compete against Morgan Stanley, Goldman, Merrill and the major banks. Assuming that it emerges healthy from the current financial tumult, it will have the luxury to decide whether to remain independent. A sale looks like a better bet than it did a few months ago. But either way, shareholders could win.
Article from: online.barrons
Saturday, 11 August 2007
Stock Tips: A Big Waste of Your Time and Money
Stock Tips: A Big Waste of Your Time and Money
In the last few years the majority of the general public seems to have accepted online stock chat rooms as somehow useful. Some of the over-hyped chat boards and news services include:
- CBS MarketWatch
- The Street
- Motley Fool
- Raging Bull
- Silicon Investor
Let us be blunt. Imagine you are at Motley Fool and you receive a stock tip. You now know it is time to buy whatever the tip is. Big problem here now. When do you sell? How much do you buy? Of course, the tipsters never try to answer these questions. Stock tips are kissing cousins to the ever-popular lottery tickets. They might feel good, but stock tips are for losers (just like lottery tickets).
For example, the stock market crash painfully proved the worthlessness of stock tips. No tip predicted the NASDAQ crash. How in the world could an opinion of some anonymous message poster, that only knows how to yell BUY, ever be useful?
Trend Following trading does not attempt to predict the market. We couldn’t care less what a company does or what its new economy potential might be. It does not matter what a company's business plan is or even whether they have a potential to make money. When you trade properly, your only concern is price. If the price is going up you buy. If it's going down you sell. Don’t waste your time trying to determine the potential of a company. And don’t waste your time looking for tips on chat boards. You will only lose money if you go down the stock tip path.
From: turtletrader.com
Friday, 10 August 2007
Diversify, Really
Diversify, Really
Your portfolio performance is heavily influenced by where you invest. The amount you allocate to stocks, bonds, and cash can make a real difference to your well being and your sleep patterns. That's why you'll often hear about diversifying your portfolio. However, to really diversify requires attention to the details. Here are some of the details.
Some investors think they diversify if they buy ten different Internet companies. That's not quite the concept. Diversifying means buying ten different industries with very low correlation among them. For example, if you were starting a portfolio, you might want to start with an Internet stock (and then put on your seat belt). But that shouldn't take all your investing dollars. In fact, it should represent less than 10% of your planned investments. Since the volatility of the 'Net stocks is so high, you would want to neutralize the portfolio by putting more of your investment dollars into a money market fund which won't move at all.
Then when you've added more to your investment pool, you can look at adding another industry group, one that isn't as volatile on a daily basis as the 'Net stocks, and one that isn't dependent on the 'Net for a major source of revenues. You might look at the drug stocks or the consumer nondurables. Again, you would want to add less than 10% of the available funds to each of these stocks.
What you're working toward: at least ten industries for the stock portion of the portfolio with each stock being the best stock, in your opinion, in that industry group. There should still be money in a money market fund (the equivalent of cash) as well as some in fixed income. Your age will help determine a good mix of these.
If you're below 30, you'll consider 80% in stocks or mutual funds, 10% in cash and 10% in fixed income as a goal for allocation. If you're 30 to 40, then pare back the equities portion a little to 70%, and 10% in cash, 20% in fixed income. If you're 40 to 50, then look at 60%, 10% and 30%. From 50 to 60, then pull in a little more to 50%, 10% and 40%. Over 60, consider 40%, 10% and 50%. If you're retired, then look at more fixed income in the mix at the expense of equities.
These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this will be the portion of your investments that protects you from the damage, not your fixed income.
Also, the fixed income of your portfolio should be diversified. If you buy bills, notes and bonds directly, then make sure you have at least five different maturities to spread out the interest rate risk. Of course, you can do the same with dedicated bond funds.
Diversfying in equities and bonds means more than buying a number of positions. Each position needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio, and how they might be affected by the same event such as higher interest rates, lower fuel prices, etc.. Put your portfolio together like a puzzle, adding a piece at a time, each one a little different from the other but achieving a uniform whole once the portfolio is complete.
Article from: aol.theonlineinvestor
Your portfolio performance is heavily influenced by where you invest. The amount you allocate to stocks, bonds, and cash can make a real difference to your well being and your sleep patterns. That's why you'll often hear about diversifying your portfolio. However, to really diversify requires attention to the details. Here are some of the details.
Some investors think they diversify if they buy ten different Internet companies. That's not quite the concept. Diversifying means buying ten different industries with very low correlation among them. For example, if you were starting a portfolio, you might want to start with an Internet stock (and then put on your seat belt). But that shouldn't take all your investing dollars. In fact, it should represent less than 10% of your planned investments. Since the volatility of the 'Net stocks is so high, you would want to neutralize the portfolio by putting more of your investment dollars into a money market fund which won't move at all.
Then when you've added more to your investment pool, you can look at adding another industry group, one that isn't as volatile on a daily basis as the 'Net stocks, and one that isn't dependent on the 'Net for a major source of revenues. You might look at the drug stocks or the consumer nondurables. Again, you would want to add less than 10% of the available funds to each of these stocks.
What you're working toward: at least ten industries for the stock portion of the portfolio with each stock being the best stock, in your opinion, in that industry group. There should still be money in a money market fund (the equivalent of cash) as well as some in fixed income. Your age will help determine a good mix of these.
If you're below 30, you'll consider 80% in stocks or mutual funds, 10% in cash and 10% in fixed income as a goal for allocation. If you're 30 to 40, then pare back the equities portion a little to 70%, and 10% in cash, 20% in fixed income. If you're 40 to 50, then look at 60%, 10% and 30%. From 50 to 60, then pull in a little more to 50%, 10% and 40%. Over 60, consider 40%, 10% and 50%. If you're retired, then look at more fixed income in the mix at the expense of equities.
These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this will be the portion of your investments that protects you from the damage, not your fixed income.
Also, the fixed income of your portfolio should be diversified. If you buy bills, notes and bonds directly, then make sure you have at least five different maturities to spread out the interest rate risk. Of course, you can do the same with dedicated bond funds.
Diversfying in equities and bonds means more than buying a number of positions. Each position needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio, and how they might be affected by the same event such as higher interest rates, lower fuel prices, etc.. Put your portfolio together like a puzzle, adding a piece at a time, each one a little different from the other but achieving a uniform whole once the portfolio is complete.
Article from: aol.theonlineinvestor
Initial Investments
Initial Investments
If you're just starting out as an investor, doesn't matter your age, it's kind of scary. You know you're supposed to do something with your money, but what? Where do you really start and what's considered safe? Here are a few thoughts.
First, relax. Don't think you have to know everything today. It takes years to understand investing, and no one fully knows exactly what's happening all the time. So you're not alone if you're feeling a little overwhelmed and under-informed. Eventually you make investment decisions with as many facts as you can assemble but realize you can never know everything. Part of investing is to learn to live with the anxiety of the unknown.
First, you'll probably want a brokerage account. Many brokers will open an account with no minimum amount to invest. For a comparison of online brokers, please see: www.gomez.com It gives the services of the brokers, including an initial amount needed to open an account. Opening an account with a broker is a good idea because when you're ready to invest, you'll have all the paperwork done and can simply enter your order.
If you don't want to work with a broker, you can buy many stocks directly from a company. It's hard to find the advantage anymore of buying stocks from individual companies because commission rates are so low with online brokers, plus you have all your investments on one statement. But some investors still want to buy stocks directly from a company. For a good directory of companies offering direct stock programs, please see: www.netstockdirect.com
But stocks shouldn't be the first choice for a new investor. Instead think about a money market fund or a mutual fund. A money market fund is a great way to park your money and earn interest before you make your first investment. In fact, if you open a brokerage account and place money in it, your cash will start earning interest the day you deposit it. The broker puts it in a money market fund automatically. You might like to have a checking account attached to your brokerage account so you have access to your money. With that feature, you just write a check for any amount up to the deposit you made. So if you open a brokerage account, deposit some money, you've made your first investment in a money market account.
Let's assume you've done some reading, and are ready to make an initial investment. One of the most comfortable ways to do it is to buy a mutual fund. Some funds will allow as little as $50 as an initial investment. Then you usually have to add the same amount every month for a certain period of time. Other funds require at least $2000 for that first purchase. One fund we found, for institutions, requires a $5,000,000 initial investment. You probably don't want to start with that one. For good information on mutual funds, see the Mutual Fund Magazine site (www.mfmag.com).
The type of funds you might want to consider: a balanced fund, one that has both stocks and fixed income; a short bond fund, specializing in bonds that mature within 3 years; growth and income funds which buy both growth and dividend paying stocks; an index fund, one that invests in the stocks that make up an index such as the Dow Jones Industrial Average or the Standard & Poor's 500 Index. Any of these funds will fluctuate in price, and your principle is at risk. But they give you a good place to start investing, and you don't have to put all your money in them initially. In fact, if you put in a set dollar amount each month, you will buy more shares when the fund is down, and fewer when it is up, thereby lowering your average cost for all your shares. Keep good records of each purchase because when you sell your shares, you'll have to account for each transaction.
Buying at least two or three funds is a good way to diversify your portfolio. If you have a small percentage of each kind of fund and the balance in cash, you can add different funds as you learn more about investing. Of course, each fund will have a good diversity of stocks or bonds within the fund, and a professional money manager will be running your money.
While you're starting out, read everything you can about investing. And watch CNBC, Louis Rukeyser, Lou Dobbs, all the financial programs. That way you'll hear the same phrases over and over, eventually wearing away their mystery.
Knowledge is power in investing. When you start, you have no knowledge and feel powerless. Keep in mind that you don't have to do anything bold initially. Start with the above strategy, then diversify into individual stocks as you gain more understanding of what investing is.
Article from: aol.theonlineinvestor
If you're just starting out as an investor, doesn't matter your age, it's kind of scary. You know you're supposed to do something with your money, but what? Where do you really start and what's considered safe? Here are a few thoughts.
First, relax. Don't think you have to know everything today. It takes years to understand investing, and no one fully knows exactly what's happening all the time. So you're not alone if you're feeling a little overwhelmed and under-informed. Eventually you make investment decisions with as many facts as you can assemble but realize you can never know everything. Part of investing is to learn to live with the anxiety of the unknown.
First, you'll probably want a brokerage account. Many brokers will open an account with no minimum amount to invest. For a comparison of online brokers, please see: www.gomez.com It gives the services of the brokers, including an initial amount needed to open an account. Opening an account with a broker is a good idea because when you're ready to invest, you'll have all the paperwork done and can simply enter your order.
If you don't want to work with a broker, you can buy many stocks directly from a company. It's hard to find the advantage anymore of buying stocks from individual companies because commission rates are so low with online brokers, plus you have all your investments on one statement. But some investors still want to buy stocks directly from a company. For a good directory of companies offering direct stock programs, please see: www.netstockdirect.com
But stocks shouldn't be the first choice for a new investor. Instead think about a money market fund or a mutual fund. A money market fund is a great way to park your money and earn interest before you make your first investment. In fact, if you open a brokerage account and place money in it, your cash will start earning interest the day you deposit it. The broker puts it in a money market fund automatically. You might like to have a checking account attached to your brokerage account so you have access to your money. With that feature, you just write a check for any amount up to the deposit you made. So if you open a brokerage account, deposit some money, you've made your first investment in a money market account.
Let's assume you've done some reading, and are ready to make an initial investment. One of the most comfortable ways to do it is to buy a mutual fund. Some funds will allow as little as $50 as an initial investment. Then you usually have to add the same amount every month for a certain period of time. Other funds require at least $2000 for that first purchase. One fund we found, for institutions, requires a $5,000,000 initial investment. You probably don't want to start with that one. For good information on mutual funds, see the Mutual Fund Magazine site (www.mfmag.com).
The type of funds you might want to consider: a balanced fund, one that has both stocks and fixed income; a short bond fund, specializing in bonds that mature within 3 years; growth and income funds which buy both growth and dividend paying stocks; an index fund, one that invests in the stocks that make up an index such as the Dow Jones Industrial Average or the Standard & Poor's 500 Index. Any of these funds will fluctuate in price, and your principle is at risk. But they give you a good place to start investing, and you don't have to put all your money in them initially. In fact, if you put in a set dollar amount each month, you will buy more shares when the fund is down, and fewer when it is up, thereby lowering your average cost for all your shares. Keep good records of each purchase because when you sell your shares, you'll have to account for each transaction.
Buying at least two or three funds is a good way to diversify your portfolio. If you have a small percentage of each kind of fund and the balance in cash, you can add different funds as you learn more about investing. Of course, each fund will have a good diversity of stocks or bonds within the fund, and a professional money manager will be running your money.
While you're starting out, read everything you can about investing. And watch CNBC, Louis Rukeyser, Lou Dobbs, all the financial programs. That way you'll hear the same phrases over and over, eventually wearing away their mystery.
Knowledge is power in investing. When you start, you have no knowledge and feel powerless. Keep in mind that you don't have to do anything bold initially. Start with the above strategy, then diversify into individual stocks as you gain more understanding of what investing is.
Article from: aol.theonlineinvestor
Bid, Ask, And Size
Bid, Ask, And Size
When you enter an order to buy or sell a stock, you see the bid and ask for a stock and some numbers. What are the bid and ask, and what do those numbers mean? One, the bid, is what you need to know when you are selling a stock. The other, the ask (or offer) is what you need to know when you're buying. But you also need to know those numbers. Here's how it works:
If an investor looks at a computer screen for a quote on the stock of XYZ, it might look something like this: Last: 20 Bid: 20 Ask: 20 1/4 BSize: 12 ASize: 5. The translation: the stock of XYZ is being bid at $20 a share and offered at $20 1/4 per share. There are 1200 shares bid for and 500 shares offered. If you are looking to sell stock, now you know there is a firm willing to pay (that's the bid side of the market) $20 for your stock, and that you could sell at least 1200 shares of stock at that price. Those are the two parts of the bid side of a market on a stock: the price and the quantity of shares at that price.
If you are looking to buy XYZ stock, you would have to pay $20.25 and could buy at least 500 shares of stock. Again, there are two parts to the ask side of the market: the price at which you can buy stock and the amount of stock you can buy.
When you look at a quote for a stock, it's only good for the time at which you check it. The bid and ask and the sizes for each side change constantly. If you were to check back in two minutes and you'd like to sell your XYZ at $20, the $20 bid may not be there because the stock may have moved up or down in that time frame. So each time you trade, you'll need to check the bid and ask to see where your particular stock is trading.
Whenever you enter an online trade, a "live" quote will be shown so you'll know where the stock is trading and what to expect if you buy or sell your stock. However, be aware that the stock can move very fast and that you may not get the price shown on your screen. That's because by the time your order is sent to the floor to be executed, the bid and ask may have changed because there was an order that came in ahead of yours and wiped out the bid or offer. Then the stock moves to a new level and the bid and ask will be different from what your screen showed when you entered the order. This doesn't happen very often, but it does happen. And when investors enter their market orders (meaning they will buy or sell stock at the market, no matter where the market for the stock is), look at the bid or ask, and then see their execution price is different from the stock prices they saw, they have to realize that stocks can be very dynamic, sometimes changing just as their orders are entered.
Another bit of jargon: the words ask and offer are the same thing. This is the side of the market where investors can buy stock. So when you hear: Where's the stock offered? Or what's the "ask" on the stock? They're both asking the same thing.
The size of the market can help you decide on the timing of your purchase or the price. For example, if good old XYZ is trading at $20, and the bid size for the stock is 200 and the offer size is 5, that means there are 20,000 shares bid for and only 500 for sale (when you see the amount of stock bid for or offered, just multiply it by 100 for the actual amount of stock. If you see 999, that means there are at least 100,000 shares). If you're looking to buy the stock, you might want to get your order in quickly because if the buyers of the 20,000 shares get excited and start to buy all the stock around, no matter what the price, it will push up the price. On the other side of the trade, if you are a seller, you may want to wait a little while because that kind of size to buy suggests that maybe the price will be moving up if the buyers don't have patience and want that XYZ stock NOW.
Of course, the buyers may not move from the $20 price, or may find another stock that is more attractive and buy that one instead. So you can't know with certainty what will happen with the stock's price. But then, except for death and taxes, certainty just isn't part of life or investing.
Article from: aol.theonlineinvestor
Thursday, 9 August 2007
Buying Stock
Buying Stock
To a seasoned investor, buying a stock seems so obvious. But one of the most basic aspects of buying a stock, actually paying for it, is a question many new investors have. Can you use credit card? How long before you have to pay for it? Do I need money in the account first? Here are some answers.
There are no specific rules that apply to each brokerage firm. Many brokers have very strict and conservative ones while others are more lenient. You'll need to ask your broker what its rules are when you're opening your account so you won't be surprised when you're trying to buy a stock. In general, the following is most typical for new accounts.
When you first open an account, it will most likely be a cash account. That means you settle trades in cash. A stock trade settles three days after the trade date, or the day you actually enter the order and buy a stock.
But you may not be able to enter an order to buy a stock without having money in your account first. That's because you don't have a track record of paying for stock with the broker. If your credit is outstanding and can be demonstrated through a credit check, you'll probably be allowed to buy up to a certain amount of stock, say up to $2500 or so. But most people will have to deposit the amount of money they'd like to invest before they enter an order to buy a stock.
That means you have to send a check (the most common way of paying for stock) to your broker or deliver it in person if there is a branch nearby and have that check clear before you can buy a stock. You'll earn interest on your deposit on the day you hand over the check so you won't lose any interest income on your funds. Once the check is cleared and the money is free and clear in your brokerage account, you can enter an order to buy a stock for up to the amount of money you've deposited.
You may find a broker who isn't this cautious and will allow you to enter an order with no money in your account, but that is the exception. Again, you are not known to the broker so you must establish a pattern of payment for your stocks. That's why it's important to make sure you have the funds in your account before you do the trade. Then, as you do more trades and you have some securities in your account, you'll be able to enter buy orders without putting money in your account first. Then it's important that you pay the future purchases on time.
This part can't be emphasized strongly enough. Make sure your payments for your trades, usually checks, are made by the third business day after you purchase a stock. Don't mail the check on the settlement day or even the day before. The check has to be in the broker's hands by settlement date.
That's because someone has sold the stock to you, and that party is looking for its money, just as you would if you sold a stock. So if the broker doesn't have your money to give to the selling broker, it has to pay the money from its own account. Brokers hate to do that (just as you and I do when we have to "cover" for someone else's commitments). That's why you have to have the money in your account by settlement date. Brokers don't want to have to write a check from their own account for you. They want your money because you entered the order and are now responsible for the trade. Conversely, when you sell a stock, and you want your money on settlement date, you will receive it, whether or not the broker has received it from the person to whom the stock was sold. It works both ways.
If you don't pay for your purchases on time, your account becomes restricted. That means you can only buy securities if the money is in the account before you enter the trade. A restricted account can be a real pain, especially if you want to take advantage of a market dip. By making sure your checks are in by settlement date, you won't have to worry about having your account restricted.
And once in a while, an investor will not respond to a broker's calls to pay for stock. By the way, that's why you're not allowed to use a P.O Box in your application. The broker has to be able to reach you. You have to give an address and a phone number. When the broker is ignored after repeated tries to the client, the stock is sold out of the account. If there is a loss, the client is responsible for it. If there is a profit, the client must first pay for the stock before receiving the profit. And then the account is closed.
There's been some talk of using a credit card to buy stock, and some firms have offered this to highly credit worthy investors. But in general, it has not been widely used. Even if you have the opportunity, don't use your credit card to pay for stock. The interest on the borrowed money is at least 18% and if you make that in a year on a stock, you're doing very, very well. Also, there is always a fee for taking a cash advance which is what buying a stock is. And finally, you're borrowing money to buy something that might go down. Imagine owing the credit card and having a stock that's worth less than the debt. If this option is available, don't use it.
Buying stock is easy. You just have to keep certain dates in mind and develop a good pattern of paying for them. It makes buying and selling stocks in the future much easier
Article: theonlineinvestor
To a seasoned investor, buying a stock seems so obvious. But one of the most basic aspects of buying a stock, actually paying for it, is a question many new investors have. Can you use credit card? How long before you have to pay for it? Do I need money in the account first? Here are some answers.
There are no specific rules that apply to each brokerage firm. Many brokers have very strict and conservative ones while others are more lenient. You'll need to ask your broker what its rules are when you're opening your account so you won't be surprised when you're trying to buy a stock. In general, the following is most typical for new accounts.
When you first open an account, it will most likely be a cash account. That means you settle trades in cash. A stock trade settles three days after the trade date, or the day you actually enter the order and buy a stock.
But you may not be able to enter an order to buy a stock without having money in your account first. That's because you don't have a track record of paying for stock with the broker. If your credit is outstanding and can be demonstrated through a credit check, you'll probably be allowed to buy up to a certain amount of stock, say up to $2500 or so. But most people will have to deposit the amount of money they'd like to invest before they enter an order to buy a stock.
That means you have to send a check (the most common way of paying for stock) to your broker or deliver it in person if there is a branch nearby and have that check clear before you can buy a stock. You'll earn interest on your deposit on the day you hand over the check so you won't lose any interest income on your funds. Once the check is cleared and the money is free and clear in your brokerage account, you can enter an order to buy a stock for up to the amount of money you've deposited.
You may find a broker who isn't this cautious and will allow you to enter an order with no money in your account, but that is the exception. Again, you are not known to the broker so you must establish a pattern of payment for your stocks. That's why it's important to make sure you have the funds in your account before you do the trade. Then, as you do more trades and you have some securities in your account, you'll be able to enter buy orders without putting money in your account first. Then it's important that you pay the future purchases on time.
This part can't be emphasized strongly enough. Make sure your payments for your trades, usually checks, are made by the third business day after you purchase a stock. Don't mail the check on the settlement day or even the day before. The check has to be in the broker's hands by settlement date.
That's because someone has sold the stock to you, and that party is looking for its money, just as you would if you sold a stock. So if the broker doesn't have your money to give to the selling broker, it has to pay the money from its own account. Brokers hate to do that (just as you and I do when we have to "cover" for someone else's commitments). That's why you have to have the money in your account by settlement date. Brokers don't want to have to write a check from their own account for you. They want your money because you entered the order and are now responsible for the trade. Conversely, when you sell a stock, and you want your money on settlement date, you will receive it, whether or not the broker has received it from the person to whom the stock was sold. It works both ways.
If you don't pay for your purchases on time, your account becomes restricted. That means you can only buy securities if the money is in the account before you enter the trade. A restricted account can be a real pain, especially if you want to take advantage of a market dip. By making sure your checks are in by settlement date, you won't have to worry about having your account restricted.
And once in a while, an investor will not respond to a broker's calls to pay for stock. By the way, that's why you're not allowed to use a P.O Box in your application. The broker has to be able to reach you. You have to give an address and a phone number. When the broker is ignored after repeated tries to the client, the stock is sold out of the account. If there is a loss, the client is responsible for it. If there is a profit, the client must first pay for the stock before receiving the profit. And then the account is closed.
There's been some talk of using a credit card to buy stock, and some firms have offered this to highly credit worthy investors. But in general, it has not been widely used. Even if you have the opportunity, don't use your credit card to pay for stock. The interest on the borrowed money is at least 18% and if you make that in a year on a stock, you're doing very, very well. Also, there is always a fee for taking a cash advance which is what buying a stock is. And finally, you're borrowing money to buy something that might go down. Imagine owing the credit card and having a stock that's worth less than the debt. If this option is available, don't use it.
Buying stock is easy. You just have to keep certain dates in mind and develop a good pattern of paying for them. It makes buying and selling stocks in the future much easier
Article: theonlineinvestor
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