October 2011

How To Easily Save More Than $153 Dollars a Year

"Besides all the money you'll save, you'll also help save the environment."

According to the EIA, the U.S. Energy Information Administration, the average American monthly electric bill is $95.66 per month which is $1147.92 per year. According to several sources, about 20% of your electric bill is light related which means home lights are costing the average American $229.58 per year.


Compact fluorescent bulbs use about 1/3 the energy that incandescent bulbs use. This means that you can easily lop off 2/3 of the $229.58 the average American pays for electrical lights by replacing all your incandescent bulbs with compact fluorescent bulbs which comes to about $153 dollars a year. Just think... in 10 years that's a whopping $1530 dollars!


Plus, if you calculate in the cost of the bulbs you save even more as compact fluorescent bulbs last about 10 times longer than incandescent bulbs.

The Durbin Agreement and Camoflauged Profiteering

A lot of companies, not just banks, are blaming Dodd/Frank for something they probably would've done anyway.

How is the Durbin Agreement in the Dodd/Frank Wall Street Reform and Consumer Protection Act going to effect the average joe? In a number of ways, from your favorite video and streaming rentals to the local branch of your transcontinental corporate bank. What’s certain to go down is a whole lot of finger pointing at the Dodd/Frank Act by big businesses to attempt to excuse the fact that they’re jacking up prices on you and on retailers. Don’t believe them folks, they’re the largest blood-sucking parasites on the planet and they won’t be satisfied until every niche of the consumer market has gone the way of the movie ticket and airline fee.

Point one, Bank of America has initiated a program to charge their customers a $5 monthly fee for using their debit cards. This is supposedly a result of the Durbin Agreement, the provision of the Dodd-Frank Act that would limit the swipe fees that banks could charge small retailers each time a customer sued a debit card to pay for something. That’s reasonable right? The government is capping the amount of money the big banks can extract from retailers, so they’re shifting the cost to their customers. At least somebody’s still getting nickel-and-dimed. The problem is that last quarter along, Bank of America announced astounding profits, $6.2 billion over their numbers last year at this time, which were a small loss. Are they really concerned about their bottom line or are they trying to rewrite it? Due to public backlash Wells Fargo has recently announced it will scrap its program, the friendlier nicer version of Bank of America’s, in which they planned to charge their customers a $3 monthly swipe fee.

How Securities are Traded

"Short sales and the regulation of securities markets in the next post"

Types of Markets

There are different ways to trade securities. Direct Search is one method and it is the least organized. A brokerage is a second way and trading in a good is active. The other technique is through a dealer and trading in a certain type of asset increases. If an investor wants a more integrated market, an auction would be strongly recommended.

Types of Orders

In a price-contingent order, investors lay down the prices. For example, whether to purchase stocks at $90 or to buy 1000 stocks at $90.  There also stop orders that are crucial for short sales. Market orders can be executed immediately. The bid price is for selling and the ask price is for buying and I include this here as I had a lot of trouble with it when I took a financial economics course as an undergraduate at the University of Minnesota.

Trading Mechanisms

  • Dealer Markets – the dealer holds assets and buys and sells at the quoted price which is similar to currency exchange
  • Electronic Communication Networks (ECNs) – sometimes referred to as Alternative Trading Systems. Examples are NASDAQ, the American Stock Exchange and cTrader. These are private computer networks that connect buyers with sellers at once.
  • Specialist Markets – has allocated accountability for a certain security. Executes orders like brokers and earn commissions. Specialists can also act as dealers by making sales from their own inventory to earn the spread.

Check this out: A lecture on financial markets at Yale.

U.S. Security Markets

The Framework of Investing

Repsonsible Investing

For the beginner, there are three things you should consider before investing: risk tolerance, time horizon and diversification.

First, you need to determine the amount of risk you are willing to take and the amount of money you are willing to risk. Remember, the stock market makes no guarantees…you can and will lose money along the way. However, you do not need to be extremely aggressive. Risk tolerance ranges from conservative to aggressive, depending on your goals, the amount of time you have to reach those goals and your level of comfort.

Risk tolerance is defined as the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. While the concept of risk tolerance can be complex for the new investor, it is best to begin with a realistic view. A higher-risk stock generally yields a higher return but is also more volatile in price. If you are young, inexperienced and have limited funds to invest for your retirement, your risk tolerance is probably low to moderate. Although you have time on your side, you must consider your limited knowledge and funds. It is a balancing act, not to be confused as an outright gamble. Further, I have known many financial advisors who advise their clients to invest in ways that allow them to sleep at night. Investing in the stock market should not keep you fraught with worry.

Risk tolerance is also associated with the Risk-Return Tradeoff when investing. Consider the following explanation of the tradeoff. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

Time horizon is defined as “the length of time a sum of money is expected to be invested” and must also be considered when creating a financial plan. Since higher-risk stocks have more changes in price, it is best to invest in them only for the long term. If you need to your money within a year or less, you want to have it in a more secure, liquid investment.  

For example, if your goal is to fund a retirement plan, you will need to determine what kind of lifestyle you want when you retire and how much money you will need. A good rule of thumb is to think of this in terms of the salary you receive now. What kind of ‘salary’ do you need from your retirement plan when you retire? Will you have a mortgage or a car payment? You will need to plan for other expenses such as health insurance and medication, as well as everyday living expenses. Remember to consider inflation, which is generally considered to be three percent for financial planning purposes. Consider the following scenarios:

The Investment Process

When it comes to investing in financial markets, there are several factors that come into play. The information role, consumption timing and an individual or company’s appetite for risk are some of the vital elements in the process.

Asset allocation is the choice among wide-ranging classes of assets, whereas security selection is the choice of which securities to hold within the asset class. Security analysis involves examining these securities that are tradable financial instruments.

An investor can manage his or her portfolio in two ways. Active management happens when there is continuous effort to find mispriced securities and to time the market. On the other hand, passive management occurs when there is no attempt to find undervalued securities or to time the market. Passive management is typically followed by investors who hold a highly diversified portfolio.


The Arbitrage Model: A short introduction


An arbitrage is defined as a transaction which leads to profits with zero-risk and zero-investment. An opportunity for arbitrage is when the same asset trades at a different price in different markets. Another arbitrage opportunity is when two assets with identical cash flows and risk-profiles trade at different prices.


The Players


  • Business Firms – they tend to be net borrowers


  • Households – they are typically net savers


  • Governments – can be both borrowers and savers


  • Financial Intermediaries
  • Banks
  • Investment Companies
  • Insurance Companies
  • Credit Unions


  • Investment Bankers – the career that I am pursuing right now and enjoying immensely. They carry out specialized services including mergers and acquisition advisory, consultation and facilitation services for companies.

How firms issues Securities


Investment banking, private placement, shelf registration and initial public offerings (IPOs) are the ways in which firms issue securities.


Investment Banking


Shelf registration


This was introduced in 1982 and it is known as U.S. Securities and Exchange Commission (SEC) rule 415. The securities that are ready to be issued are on the shelf and should be sold within 2 years after the initial registration. Shelf registration is great because a company can get the registration process done and go to the market fast when there favorable conditions.


Private Placement


This occurs when there is a sale to a restricted number of sophisticated investors. However, this is institutions tend to control this procedure. Although, it is a very active market for debt securities, it is not so for stock offerings.


Initial Public Offerings


This process requires registration with the SEC. Road shows and book building then follow. Underpricing seems to be a problem and is definitely a cost to the issuing firm.


Bank of America Nets Huge Profits While “Nickle-And-Diming” Customers

After announcing a plan to charge a $5 monthly debit card fee to protect their bottom line, BofA announces $6.2 billion in profits last quarter.

Bank of America, based in Charlotte, NC, has come under fire repeatedly in the last months for a number of reasons ranging from their involvement in the foreclosure crisis and the use of “robo-signers”, to a recent announcement that they’ll be charging a debt card fee to customers in 2012. BofA is setting a precedent for banks to institute new fees to counteract financial regulations coming into effect in 2012, something that has largely been explained by executives as a profit-protecting measure. However, their most recent announcement, that the bank has earned $6.2 billion in profits in the last quarter alone, flies in the face of their recent “profit-protection” measures.

Are You Planning (Investing) for Retirement?

Responsible Investing

We have hopefully all become more aware of the instability of the economy and the importance of saving, all due to the current financial conditions. With the fragile condition of Social Security and the almost nonexistence of pension plans, it is of utmost importance that we aim to secure our future and our retirement by making smart money decisions, and that includes investing, even with current market conditions. Further, there are many reasons to invest for retirement and to do so as early in life as possible. Many people are not investing because they fear the volatility and uncertainty of the stock market, usually because they do not understand the basic concepts of investing; thus, they limit their earnings potential. Sadly, people who do not plan accordingly for retirement may find themselves working well into their "golden years."

A Brief Introduction to the Investment Environment

An investment consists of resources that are committed towards something with an anticipation of procuring benefits sometime in the future.

Risk and Uncertainty

The Risk-Free Return is key and it is defined as the rate of return given to an investment with zero risk. Specifically, it signifies the interest on an investor's money that he or she would anticipate from a completely risk-free investment over a particular time period.

The other important point in investing is the lack of certainty. The chance of multiple outcomes gives a possibility for high rewards or big losses. These tend to carry an element of risk with them. Risky investments could range from something as conventional as investing in the stock market to something more creative like a bet on Brett Favre’s retirement in the summer of 2010.

Treasury Bills or T-Bills are a perfect example of a risk-free investment. However, it is interesting to note that the bond market seems to say that United States debt is riskier than Warren Buffet’s Berkshire Hathaway. [1]

Real Assets as opposed to Financial Assets

The idea of investment involves reduced consumption now to plan for consumption in the future.  There is also a distinction between real assets and financial assets. Real assets are assets that are used to produce goods and services such as real estate and consumer durables. Whereas, financial assets are claims on real assets such as mutual fund shares, life insurance reserves and debt securities.

Types of Financial Assets

A contract which offers its bearer some privileges is called a financial security. Debt securities are an undertaking to provide an income stream. Commercial paper, Certificates of Deposit and T-Bills make up the money market and these are short-term and low-risk in nature. On the other hand, the capital market is made up of T-notes, T-bonds, municipality bonds, agency bonds and corporate bonds that are long-term investments.

Equity is the same as Book Value which is assets minus liabilities. An equity security is a contract that gives its possessor prorated ownership and control of the company’s capital stock.

A derivative is a contract and the payments from it are decided by the price of other assets. Call options, put options and futures contracts are examples of derivatives.


Bank More Simply with BankSimple.com Online

A new online-only banking service forgoes all of the gimmicky nicke-and-dime schemes by bigger brick-and-mortar banks.

With Bank of America announcing a new monthly debit card fee, with ATM fees slowly climbing (even if it is your bank's ATM), and with more nickel-and-dime tricks for customers than ever, it might seem like your checking account is dying a death of a thousands cuts. That's why the newest entity in online banking is garnering so much attention. BankSimple, an online-only banking service, not only holds your money, but it manages it too, with none of the gimmicks of traditional brick-and-mortar banks. Completely interactive through online deposits or smart phone apps, BankSimple changes the way that we think of retail banking. With 70,000 people already signed up for their beta, and over $13 million in startup funding, it's certainly going to make a waves when it launched in late 2011/early 2012, according to Singularity Hub.