Monday, March 28, 2011

Money Managing Basics: Why I Hate Banks

This post is going to be a tiny bit more educational than most I do, if you like it I can do more, if you don't then I promise to stop and I may erase all evidence I tried this. Note: This is not advice you should take without doing your own extensive research. 

The game is a game that we should all at least know about, may have lost/made tons of money off of it, or have dreamed about getting into. The Stock Market. I am going to assume that most of my readers are young, like me, so there is still time for you(us) to make your(our) millions and retire in a tropical paradise(or bomb shelter). The problem is that when people start making money, they don't know how to manage it well, and in the long run, good managing will make the biggest difference in your potential wealth.
This is the personal thoughts section of the post: I think you're at a huge disadvantage trying to get to that seventh figure if you don't take advantage of the markets. If you are young, then it is even more important because you can take advantage of the most important money-maker: Compounding Returns. I'll now take a look at various scenarios for you.

Banks:
        When my mom looked at bank CD's for my brother, the 1-year rate was .7%, meaning if he deposited $1,000 then at the end of the year the bank gives him $1007. You might think that's awesome, he gained $7 per year by doing nothing, but you don't see what the bank did with that money. The bank probably took that money and piled 300 other accounts like it into a mortgage for somebody buying a house that they then charged 6%+. So from my brothers money the bank made $60+ and paid him $7, not cool banks. Of course you have the security of a $1007 payment 1 year later.

Rating: Low Return, Low Risk      -- You don't really see any significant return until you have lots of money or if you own the bank.

Stocks
         Your two choices with stocks are buy/sell. You can buy a stock and hope it goes up, or you can short sell a stock and hope it goes down. A brief definition of short selling is that you are borrowing somebodies shares and selling them with the intention to purchase them back at a lower price than you sold them for. In this region of investing, you can have whatever you want, safety, risk, safer-risk, you can have almost whatever combo of Risk-Reward you want. I'm sure you have some idea of how the stock market works so I'll use my brothers $1000 as an example. Note: The market is kind of volatile at the moment so you might want to wait or at least investigate further before you jump in.

Stocks-Dividends:
      You pick a stock like McDonalds(MCD) that pays a 3.3% dividend to shareholders and you'd buy 13 shares @ $75 for $975 total. Now, the chances of McDonalds going bankrupt in the next year is almost 0, but the market will still affect the stock price so you will gain and lose money throughout the year, but as long as you hold on long term, you will earn $2.44 a share from dividends X 13 = $31.72 per year from your $975, which is 4.5 times more than the banks return(per year) and would take a little over 4 years to make using the bank example. 

Rating: Relatively low risk with decent reward if you're in defensive stocks over the long term(multiple years)

Stocks-Growth:
       The other idea with stocks is to go with Growth stocks, ones whose share prices will change large percentages relatively quickly. For this example let's choose Netflix(NFLX), if you used my brothers $1000 and bought 5 shares of NFLX on March 18th, 10 days ago, at $210 per share, you'd spend $840 to buy 4 shares. Today, 10 days later, those 4 shares are worth roughly $948, so you would have made $108 in 10 days using your $840 for a 12% return. With the bank example at a .7% return, that would take 15 years using the full $1000. You might see where this is going now, your money, while very safe in the bank (up to $100,000 per account), is not going to increase fast. Take note that you could also lose that same amount of money just as easily in stocks so it's not as safe as the bank.

Rating: Variable Risk: Variable Reward  --You can do whatever you feel comfortable with in stocks

 Options:
         These are for the gambler, like me, who wants huge rewards and is willing to take the extreme risk to get those rewards. I personally have lost 96% of an investment with options, that sucks, I have also made $180 in 1 minute 32 seconds, which is why my hourly rate is $7,000/hr  to mow the lawn mom. Those are the extremes, but This is the warning here: experiment with options using a virtual account first to make sure you've got it down because the results can be devastating. If this post works well I'll do a more in-depth look at options trading in the future.With options, experience is invaluable, so practice first.

Rating: Very Risky: Returns Depend on what you do--- This isn't really a viable choice for consistent investments, it's more of a substitute for Vegas. 

Stocks + Options:
 The most popular use of options is to supplement an already strong stock portfolio. This is mostly done by selling covered calls against your shares of stock for an additional return. If you have the money, the covered call can make your returns consistently massive. If you've got $35,000, the covered call calculators often suggest you can make over 100% per year selling weekly covered calls on Apple(AAPL) stock. Note: My personal dream for the last few months has been to build enough money to buy 100 shares of Apple stock so I can do this, as you'd make roughly $300-400 a week like clockwork. Again, that is not advice, but you should seriously investigate that for yourself if you have $35,000. 

Rating: If you have the money for 100 shares of a stock, Covered Calls are really something you should look into to supplement your stock earnings.

I hope you learned that I think banks suck and comment so that I know whether or not I should make a post on Options or delete this and forget it ever happened. 

6 comments:

  1. Wow great advice, what about buying gold? not good?

    ReplyDelete
  2. dude everyone hates banks, i love credit cards however
    check out my blog if your interested at all.

    ReplyDelete
  3. Agreed, good advice. Feels like Econ class all over again!

    ReplyDelete
  4. Everything's a big game. Politics, Banking, hell even the professional world is a game.

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  5. tldr, we should do that idea where everyone puts their money together to buy a bank.

    ReplyDelete