Money & Investing - Banks.com

Once again I’ve got a great reader question. Here it is:

I’ve been hearing a lot about ETFs lately from friends. What are they, and how can I trade them?

This is an excellent questions. ETFs offer yet another investment option for your portfolio. Let’s have a look at them:

ETFs: A definition

ETF stands for “exchange traded fund.” Essentially, this means that an ETF is a fund that is traded on a stock exchange as if it is a stock. It is a fund — or a group of stocks — that you can trade as if it were one financial instrument. It is important to note that ETFs do not contain mutual fund portfolios that are actively managed.

However, ETFs can contain financial instruments other than stocks. There are currency ETFs that track the performance of a variety of currencies being exchanged in forex trading. (Some forex traders use them as hedges.)

At any rate, you trade ETFs on the stock market as you would a stock, and the commissions and/or flat fees are similar on an exchange traded fund to what they would be on a regular stock.

Adding ETFs to your investment portfolio

It is worth noting that some ETFs are still considered somewhat volatile right now. They are gaining in popularity, though, because they can temper some of the riskier investments (like currencies) while still providing growth. And there are some conservative exchange traded fund options that grow at a slower pace.

Before adding ETFs, check your investment portfolio for diversity and your risk tolerance. If you need something a little different, and you can handle the risk, it might be a good choice.

The Street offers a look at 37 of the newest ETFs.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: ETFs, exchange traded fund, investing blog, investment portfolio,
risk tolerance, investments, forex trading

I got an interesting reader question recently:

I received notification from one of the companies that I invest in that a proxy vote was coming up. What is proxy voting?

This is a great question! And it’s timely as well, since spring is often referred to as the proxy season.

Proxy voting is basically when you get to let companies that you invest in know what you think of their policies. This is your chance to influence company policy, ranging from who sits on the board of directors to what countries the company invests in, to environmental practices.

Your proxy vote is one that you cast without actually being there. Most of the time, you get one vote per unit of stock you hold. So if you own 50 shares, your vote counts 50 times. You look at the available proposals, and then you decide how you want to vote. If enough shareholders vote the same way, the company has to make a change. This is one of the hallmarks of ethical investing: Many investors who want to change the practices of the companies in which they invest do so through proxy voting. This way, rather than merely avoid companies with questionable practices, some investors can force a change.

If you have a mutual fund, it is worth noting that you might have turned over your proxy vote to your fund manager. If you are interested in casting your proxy vote, contact a fund manager or a knowledgeable broker or attorney to find out what you should do.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.

Tags: stock market, stock market news, investing blog, proxy voting,
ethical investing, investments, mutual funds

I have a reader question today. It has to do with one of the common stock market terms:

I hear a lot about “valuation” with regards to stocks. What exactly is valuation?

Basically, stock valuation represents attempts to determine the fair value of a stock. This means that valuation is the process of trying to determine how much a stock is worth — and whether its worth is in line with its price.

It gets a little complicated. Especially since there are several theories of stock valuation out there.

Efficient market

One theory is that if a stock market is well-organized, and if there are many transactions, then the stock price of a share will be in line with its value. This may not always be the case, though. As you know, though, the psychology of investors can play a role in inflating a price above, or in depressing a price to below, its true value.

Perceptions of how well a stock or a sector is doing can affect the stock price as people buy or sell in fear or in expectation.

Discounted cash flow

This method of valuation is a little different. The idea is to take into account a risk premium (or the expected rate of return beyond the risk-free interest rate) in a discounted set-up. Future profits and cash flow are discounted in order to offer a present value. The idea is that there is a time value for money, and future profits can be discounted according to such factors as risk. This is the most commonly accepted method of stock valuation.

If you are still interested in learning more about stock valuation, you can watch this video explaining the basics of stock valuation:

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.

Tags: stock valuation, stock market terms, stock market blog, investing blog,
stock market, discounted cash flow, market efficiency