- REITS (check out REIT of the week)
- Cryptocurrency
- Foreign Exchange
- Commodities
- Types of Stock
- Index Funds
Here we will talk about a few different things having to do with stocks and the market you should understand before moving on to investments. We will talk about different types of stock, Crypto, Foreign Exchange (Forex), and Commodities.
What are REITs
REIT stands for Real Estate Investment Trust, it represents a company that owns, operates or finances real estate and investing in a REIT is an easy way for you to add real estate to your portfolio without buying actual property.
A REIT owns different kinds of real estate, such as hotels, office buildings, warehouses, apartments, and more. Most REITs, however, will specialize in one type of real estate. And generally, a REIT leases out the properties that it owns and collects the rent as its main source of revenue.
To qualify as a REIT, a company must:
- Invest at least 75% of total assets in real estate.
- Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from real estate sales.
- Pay at least 90% of taxable income as shareholder dividends each year.
- Be an entity that is taxable as a corporation.
- Be managed by a board of directors or trustees.
- Have a minimum of 100 shareholders.
- Have no more than 50% of its shares held by five or fewer individuals.
Types of REITs
- Equity REITs. Most REITs are publicly traded equity REITs, which own or operate income-producing real estate, such as warehouse buildings and apartment complexes.
- mREITs. Also known as mortgage REITs, mREITs provide financing for income-producing real estate by buying or originating mortgages and mortgage-backed securities and earning income from the interest on the investments.
- Public non-listed REITs. These are REITs that are registered with the SEC but don’t trade on the national stock exchange.
- Private REITs. These REITs are exempt from SEC registration and don’t trade on national stock exchanges. These can typically only be sold to institutional investors.
Why Invest??
REITs provide a great way to get into the real estate and housing market without buying actual property. If you like real estate but do not want to work with tangible assets and worry about fixing walls and tenants, REITs are for you.
REITs also pay a very nice dividend because of the 90% or more payout. This means growth over time if re-invested is very high and returns can be even higher. Now these dividends can be very volatile because they are purely based on revenues, but even so the yields are the best on the market. As of January 2020, REIT dividends have paid 3.93% on average, according to NYU’s Stern School of Business. For context, S&P 500 funds offer dividend yields of around 1.71% as of August 2020.
Finally, it is a good way to diversify your portfolio, as many portfolios do not have investment in real estate directly this could be a great way to get into it.
Risks and Downsides
Most of the income that REITs distribute to investors counts as ordinary income rather than qualified dividends. That means it’s taxed at your marginal income tax rate instead of the lower rate given to long-term capital gains and most other dividends. Because of this, depending on tax bracket you could be taxed up to 37%. Even after deductions which could get you down to 30% this is 10% higher than the maximum 20% tax rate for qualified dividends and long-term capital gains.
Volatility - The housing market and property markets are very volatile and subject to huge swings in as little time as a few months. This means re-financing, buying and building new properties, and the FED can all have a huge impact on performance.
CAP RATES
The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property.
Capitalization Rate = Net Operating Income / Current Market Value
Since cap rates are based on the projected estimates of the future income, they are subject to high variance. It then becomes important to understand what constitutes a good cap rate for an investment property.
The rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, a property having a cap rate of 10% will take around 10 years for recovering the investment.
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Cryptocurrency
A cryptocurrency is a digital, encrypted, and decentralized medium of exchange. Unlike other forms of currency crypto does not have any real forms of regulation and coins such as Dogecoin can have an infinite number of issues.
Before we talk about bitcoin you have to understand how these coins are mined and what one really represents. Blockchain is used to record all of the crypto transactions, think of blockchain as a notebook and each time there is a transaction that is one page in the book, and blockchain represents the whole book, or all of the millions of transactions daily. This helps prevents fraud as each transaction is put through a safety scanner embedded in the blockchain.
Next up is proof of work, this is "a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve,” says Simon Oxenham, social media manager at Xcoins.com. In other words, whenever you hear someone say they are mining for bitcoin this is what they mean, they have a computer racing to solve this mathematical puzzle to "mine" bitcoin.
Use the URL for this website for example, it could have been the puzzle answer for a bitcoin, and a computer is running through thousands of these URL's trying to figure out which one is the bitcoin. Once the computer figures it out (If it figures it out before another computer because there are a limited amount of Bitcoin) they are rewarded with 6.25 Bitcoin currently (subject to change).
What can crypto be used for and how?
The most popular cryptos, such as Litecoin, Ethereum, and Bitcoin can be used to purchase goods at some participating companies. However, most people use this as an alternative form of investing to the economy, such as Gold. When people do not feel the US dollar is safe (such as during high inflation) they will invest in Gold for security, and it is the same for some cryptos. They can be purchased through crypto exchanges such as Coinbase where you can link your bank account and purchase this investment.
Foreign Exchange
Next up is Forex, which is the over the counter (1) global marketplace that determines the exchange rate for all currencies. Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is relative to the value of the other. This determines how much of country A's currency country B can buy, and vice versa.
The forex market is used for currency conversions, facilitating global trade (across borders), which can include investments, the exchange of goods and services, and financial transactions.
Types of Forex
The value of a country's currency depends on whether it is a "free float" or "fixed float."
Free-floating currencies are those whose relative value is determined by economic forces, such as supply and demand relationships. Ex. US dollar, Japanese Yen, and British Pound
Fixed float is where a country's governing body sets its currency's relative value to other currencies, often by pegging it to some standard. Ex. Panamanian Balboa and Saudi Riyal
There are 3 types of Forex Markets
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Spot Forex Market: The immediate exchange of currencies at the current exchange.
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Forward Forex Market: An agreement between the buyer and seller to exchange currencies at an agreed upon price and at a set date in the future. No exchange of actual currencies takes place, just the value.
- Futures Forex Market: Similar to the forward market, in that there is an agreed price at an agreed date. The primary difference is that the futures market is regulated and happens on an exchange.
Commodities
Commodities are hard assets you can touch grouped into agricultural, energy, and metals. Their prices are traded every day in the commodities market. As a result, the prices of gasoline and many food products change frequently.
A significant amount of trading occurs in oil, gold, and agricultural products. Since no one wants to transport those heavy materials, they trade futures contracts (2) instead. Similar to in Forex these are agreements to buy or sell at an agreed-on price on a specific date. Commodities contracts are priced in U.S. dollars. So, when the dollar's value rises, it takes fewer dollars to buy the same number of commodities. That makes commodity prices fall.
Types of Stock
We are rolling right along into the 4 types of stock.... Authorized, Issued, Outstanding, and Treasury.
Authorized, this is the amount of shares a company is authorized to sell on the stock market. This does not mean they have to sell this many just that they have the ability to sell this many legally.
Outstanding, the total number of shares owned by investors like you and me.
Treasury, this is the amount of shares a company owns of their own stock. A company would do this to raise Earnings per share (3) and they do not have to pay dividends (4) on treasury shares.
Issued, this is the combined number of outstanding and treasury shares.
Basic - Shares held by all shareholders.
Diluted - Total # of shares if convertible securities of the company were exercised (filled and completed). These include stock options, stock warrants, convertible bonds, etc.
Index Funds
An index fund is a portfolio of stocks or bonds designed to mimic the composition (make up) and performance of a financial market index. A market index is a portfolio of investments that represents a select piece of the market.
The most popular example is the S&P 500, which tracks the 500 stocks with the largest market cap on the stock market. Another example is the Russell 2000, which tracks small cap stocks.
Investing in an index fund means betting that whatever stocks the index tracks are going to succeed. It is a great way to diversify your portfolio by only investing in 1 stock. By investing in an S&P 500 stock index fund you are investing in each of those 500 stocks. This means that if one stock falls 25% you will only take a small hit because you have 499 other stocks bringing up the average performance.
A lot of investors prefer to only invest in index funds as they have stable returns every year above inflation, diversify your portfolio, and over the past 100 years the market has always recovered and came back stronger after every dip or recession. This means betting on the US economy with index funds is historically a great idea no matter when you buy the stock.
(1) - Over the counter (OTC) = Online market where investors can trade stocks, bonds, commodities, etc. directly between two parties with no middleman or broker involved. Each party sets their own price and date, and they are responsible for conducting the deal. This leaves much more room for defaults, risky investments, and fraud.
(2) - Futures Contracts = A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future. Can be used to hedge or protect an investment position or to bet on the directional move of the underlying asset.
(3) - Earnings Per Share (EPS) = EPS indicates how much money a company makes for each share of its own stock and is a metric used for estimating corporate value. It is calculated by taking (net income - preferred dividends) / # of common shares outstanding.
(4) - Dividends = Since a stock represents part ownership of a company, a dividend payment is really about the company sending some of its profits to its owners. Most US stocks that pay dividends do so each quarter on a fixed schedule. Every three months, you receive cash via direct deposit into your brokerage account, a check in the mail, or you can automatically reinvest them back into the company. For example, if you own 100 shares of a stock with a $.25 quarterly dividend, then you will receive $25 every three months, for a total of $100 per year.