How to Invest in Distressed Debt

Possessing wealth is not enough. You also need to invest it in a proper manner, if you wish to enjoy it for a longer period. Most people go for some kind of investment to grow their money. People who are willing to take risks, put their hard-earned money at stake and invest in high-risk investment options like stocks, mutual funds, etc. Those who wish to play it safe, go for a fixed but low-return instrument like bank deposits. No matter what investment option you choose, it is imperative that you think logically, before investing your money in it. You simply cannot afford to allow your investment to shrink due to volatility in the economy. Distressed debt is yet another investment option for the enterprising folks, who are willing to take risks.

How Does it Work?

Distressed debt refers to the bonds of a company, which is not doing well financially. The company might have already filed for bankruptcy or could be heading towards one. When the company faces a financial crisis, it can choose to sell its bonds to new buyers, in order to attract capital. Thus, it simply means investing in the bonds of a failing company. In such a scenario, the company usually sells its bonds at dirt cheap prices. This is often the last resort to recover from a financial turmoil. Mostly, these buyers are financial entities such as mutual funds, private equity firms, brokerage firms, hedge funds, and specialized debt funds. These entities have their own criteria, which enables them to invest in the right companies. They usually check a company’s background on the basis of following parameters:

– Does it have any legal problems?
– Does it have overextended debts?
– Are there any operational issues?
– Has it been underperforming?
– Does it have potential for recovery in the future?

Returns

Returns on investment are usually high, if you invest in the right company. Such buyers are more interested in buying the debts of a company, rather than its equity shares. This is because in an event of liquidation, debt owners are given priority over equity holders, meaning that debts are liquidated before equity. The buyers often get a good return on their investment as the debt liquidates at a much higher price than its initial selling price. If the company survives, then the buyers have a greater stake in the restructuring of the company. Mergers, takeovers, and internal restructuring are some of the ways of resurrecting a failing company. If the company does well after reorganization, the investors can still claim a profit share.

Risks

Just like any other investment option, distressed debt investment is also not free of risks. Although, buyers of such debts often make neat profits, they may have to endure huge financial losses in certain cases. If the company does not perform well, even after restructuring, then the investors may not get any return on their bonds. During liquidation, the proceeds may turn out to be pretty expensive, thereby reducing the profit margin drastically. To minimize the risks, you need to thoroughly analyze the financial situation of a company before investing.

Distressed debt investment is exclusively for those who possess the requisite knowledge and acumen. It is definitely not for the novices in the field of investment.

Investment Advice for Beginners

Ideally, most people would like to earn money with as little effort as possible. Risk averse individuals, with sufficient liquidity, may consider depositing their money in Money Market Accounts (MMAs) that offer a rate of return that is comparable to the interest earned on a CD (certificate of deposit). Unlike a CD, there are no penalties for early withdrawal from a MMA. Moreover, the money that is deposited in a MMA is insured. Hence, people who are risk averse, have sufficient liquidity, and are interested in regular withdrawals would do well to deposit their money in a MMA in lieu of temporary financial investment.

How do Beginners Choose their Investments?

Stock Investments
Stock investment/trading confers upon the investor the opportunity to reap dividends and earn by way of capital appreciation. The preferred stock investing strategy, viz. capital preservation or capital appreciation, will determine the kind of (shares) investment that should be pursued by someone who intends to play the market. Investing in companies that are in the mature growth phase of the business cycle, and have been undervalued by the stock market, will result in the investor earning dividend income in addition to capital gains. In case of dividend-yielding stocks, the intrinsic value of a share is assessed using the Dividend Discount Model (DDM) while the return on investment (ROI) can be calculated using the following formula:

Return on Investment = (D1+P1- P0) / P0

D1 = Dividend Received
P1 = Selling Price
P0 = Purchase Price

Technical analysis may prove handy for those who are adept at reading graphs and charts, and looking for patterns and replications. Fundamental analysis, on the other hand, is useful for people who are comfortable with analyzing financial statements (10-Ks and the 10-Qs) in order to determine market timing. This is because investors relying on fundamental analysis believe that the price of a security may be mispriced in the short run, but will eventually correct itself over a period of time. Investors, who are solely interested in capital appreciation, should opt for growth stocks since value investing will not yield the desired results.

Mutual Funds Investment
Mutual funds are good investments for people who would prefer relying on the expertise of a fund manager. The latter raises money by issuing shares whose net asset value (NAV) is the difference between the fund’s assets and it’s liabilities. Price per share and NAV are equal if one invests in funds that do not have a front load. The money that is raised is invested in stocks, bonds, and other securities in accordance with the fund’s mandate, viz. capital preservation and/or capital appreciation. Interest from bonds and dividends from stocks, that are either distributed to the shareholder in the form of cash or additional shares, and capital gains from the investment fund are contingent on the ability of the manager to pick out appropriate investments.

Bonds
Investing in treasury bonds that are issued by the US government provides the bondholder the opportunity of receiving regular interest income. The government issues treasury bills, notes, and bonds; I Savings Bonds and EE/E Savings Bonds. Treasury Inflation-Protected Securities (TIPS) provides a hedge against inflation, so that the expected and the accrued ROI are the same. The aforementioned fixed income securities are exempt from state and municipal taxes but are federally taxed. In addition to these securities, municipal bonds, viz. General Obligation Bonds (GO) and Revenue Bonds are also worthwhile investments. It would behoove the investor to note that treasury bills are sold at discount to par, and the return to the bondholder is the appreciation in the value of the bill.

Alternate Investments
Investing in commodities in addition to investing in stocks and bonds is an excellent way of diversifying one’s portfolio, since the relationship between commodity price index and the price of bonds and stocks is generally inverse. In addition to commodities, options trading is also very profitable for experienced traders. However, these investments entail a great deal of risk and may not be suitable for a novice.

Hopefully, the above article would have provided useful investment advice for beginners. People who are uncomfortable with the aforementioned investments can try their hand at passive income opportunities, since leveraged and residual passive income opportunities are a dime a dozen.

Best Short-Term Investments

Short-term investments provide an opportunity for investors looking to make a quick buck without a long hold. They can result in huge profits within a short span of time, if handled cautiously.

High-Yield Savings Accounts

High-yield savings accounts are one of the most common forms of short-term investment. Nowadays, many banks offer such accounts with a higher APY (Annual Percentage Yield) and a much better rate of return than the local brick-and-mortar bank. Basically, it is a savings account at an online bank, and offers the facility of transferring money to and from the person’s checking account. However, opening this account is not an easy task, as the banks offer this facility only to certain valued customers. The investor should meet any one of the following criteria, in order to open such an account:

– He should make a sufficiently large initial deposit.
– He should limit his transactions.
– He should maintain a high average balance.

It is always advisable to first check with the existing bank, if there is any kind of facility which can yield better profits. In case, the bank doesn’t have anything to offer, one can check online.

Penny Stocks

Penny stocks are those that trade for less than one dollar. As compared to others, they are a riskier form of investment; however, the monetary returns can be substantial. The volumes traded daily can run into hundreds of millions for a sub-penny stock. In the past, some of these stocks have shown an enormous rise from 25 cents to USD 20, and on the other hand, there have also been cases when these stocks have become worthless. They represent all the small companies across the US, and are gaining popularity because of the comparatively smaller initial investment. They are powerful enough to turn a small amount into a big fortune. An example being Tim Sykes who has made millions from an initial capital of just USD 12,000. Trends provide an efficient way to find profitable stocks. They are basically a repeating pattern of the market, which occurs consistently over the history of the stock. On close observation, an investor can see smaller patterns that occur at consistent intervals, which can be used as guidelines to forecast future movement.

Low-Risk Stock Funds

Low-risk stock funds are also a profitable option for the short term. The ideal way to look out for them is to measure their volatility, by the standard deviation of their monthly returns, over a period of time. These funds also provide the benefit to buy a ‘n’ number of units, for a diversified portfolio. Before opting for a low-risk stock fund, the investor should get a thorough idea of factors such as the risk involved, profits, and tax-efficiency. It should be kept in mind that generally, these types of funds are of high volatility and low tax-efficiency.

One must remember that these investments need to be handled carefully. The time required to get the best benefit is usually very precise, and even a single mishandled purchase or selling opportunity can result in a big dent in its value. If required, one should take the help of a financial advisor.

Good, Safe Investments

Investing money for future use and liabilities is a known concept to the majority of us. Most people secure themselves and their families financially through different means of investments such as stocks, government bonds, property, etc. In wake of a global financial meltdowns, that leads to many asset losses and unemployment, it is understandable why individuals are vary of investments that do not give good returns immediately.

As an investor, one needs to understand three important things before investing hard-earned money. These three things more or less decide how safe an investment option is.

Risk Appetite: The amount of risk one is willing to take is termed as risk appetite. Higher the risk, higher the returns.

Time Frame: Time frame refers to the duration one is willing to invest for, keeping in mind volatility of the market and personal requirements and liabilities. Time frame includes short, medium, and long term investments.

Diversified Portfolio: Diversifying one’s portfolio helps to spread out risk in different types of investments. Diversifying helps in wealth management, as one can move funds between different investments, as per need and markets, without sustaining losses.

Good Return on Your Investment

Most investment advisers follow standardized formulas for calculating the proportion of investments one should make. ‘Start investing young’ holds true if you want to increase your returns, even in a bad market scenario. The following is one of the many formulas used to help one assess and understand the concept of safe investments.

Age Matrix Formula
Formula: 100 – age of the investor
For example: 100 – 30 (age of investor) = 70
Therefore, 70% of the total amount to be invested (wealth assets) should be put in equities and the remaining 30% in government backed securities.

A younger person can invest in a high risk market, as the age component makes it a relatively safe investment. The common misconception that has arisen due to the fall of stock markets worldwide, is that stocks are not safe to invest in. However, all long time investors know that for any stock or share to provide a good return, the money invested needs to be locked in for a minimum of 7 years. A longer duration of the investments eventually evens out the ups and downs of the market. There is no better proof of this fact, than the resurgence of the world stock market (though slowly), after a low of nearly ten months. Assets invested in government securities like fixed deposits, bonds, debentures, etc., are low risk investments that yield low returns, but assure that there are no monetary losses. Similarly, for an older person, particularly someone close to retirement, who needs regular income, it makes sense to invest more in government securities and less in stocks.

Types of Investment Options

Types of investments can be classified under financial and non-financial instruments. One can choose a variety of options to diversify the wealth portfolio. All investments carry risk with them, a thorough study of these investments, along with the company that one is investing in, is of extreme importance.

Financial Instruments

Equities
Equities are traded in stock markets. By purchasing an equity (shares or stocks), the purchaser becomes a part owner of the business. This form is a good long-term investment option, as the returns are generally higher than most other investments. However, greater returns also mean greater risks, so this has to be a long term plan. Being part owner of the company also entitles one to vote at shareholder meetings and receive profits (dividends).

Bonds
Bonds fall under the category of fixed income group, and refer to securities that are founded on debt, for the purpose of raising capital. When one purchases a bond, it is like lending money to a private company or government. In return, interest is received on the money. Bonds are generally considered as safe, and the incoming interest is mostly stable. However, they come with risk, though a lot lower than others.

Mutual or Growth Fund
A mutual fund refers to a group of people, who pool their money together and have it professionally managed. They are set up with a specific strategy in mind, which includes a predetermined investment objective of earning higher returns. Mutual funds are a popular investment type, as one can invest low amounts monthly, and risk is diversified as the money is invested in stocks, bonds from government and companies, etc. This again is a long term investment and is subject to market risk.

Deposits
Investing in banks, government schemes, post-office deposits, such as fixed deposits, recurring deposits, different plans, etc., are a very common way of securing surplus funds. However, these instruments give low returns as they involve very little risk.

Non-financial Instruments

Real Estate
Despite the fall in the real estate market in the United States, markets are predicted to go up again in the near future. The fact that land is becoming scarce, cannot be disputed. Hence, real estate is a profitable investment proposition.

Gold
While most markets were down, physical gold prices rose. In fact, this is the only commodity that has seen an upward swing in recent times. Besides physical gold, a number of products which derive their value from the price of gold, such as gold futures and gold exchange traded funds are also available for investment.

Safe investments are generally those that are well diversified, as they can help cushion the impact of a fall in the stock market. All investments should be done keeping in mind the age of the investor, and expected future liabilities. Consulting an analyst is a good option for those who don’t have a good enough understanding of investment options. If possible, one must study and research different options well, before investing in them.

Fundamental Analysis for Beginners

Fundamental analysis is the detailed assessment and analysis of a company’s future or growth, which gives a fair idea about its worth in the stock market. It involves careful study of the revenue, expense, sales, asset management tools, liabilities, and all the financial aspects dealing with an organization’s performance and survival. It’s the best way to determine whether the stock in question is valued, undervalued, or being traded at a fair price.

Need for Analysis

The elements that decide the value of a stock, keep fluctuating due to a variety of reasons. Ideally, it’s market value or current rate should almost be the same as its real value. But, the market price is either more or less than its original value. This deviation may prompt people to buy or sell a share. If the price is less than the intrinsic value of the stock, we ideally buy it, and if the stock is overpriced, we sell it. This is exactly where fundamental analysis comes in picture. In order to determine the real value of a stock, a number of parameters have to be scrutinized. Hence, it is all about evaluating a security’s value, based on an authentic set of information.

Stock Fundamental Analysis

Consider an investment of USD 100 in a stock which rises to USD 120. The profit gained is USD 20 or 20%. Now consider another company’s stock which has USD 1 as market price and it rises to USD 2 in the same trading session. This is a 100% rise in the value. If you invest in 10 stocks of this company, the earnings would double, in this case USD 20. Thus, it can be seen that a lower-valued tax can fetch better profit on a relatively small investment. There are many companies in a wide variety of sectors which don’t have much in common. All organizations listed on the market have some factors mentioned in the beginning as their ‘investment friendliness’ measures. Revenue, assets, and liabilities are some common aspects of any firm across different business segments. These factors gives us a broader perspective for comparison between various firms, and also highlighting the best deals on offer.

Technical analysis is many a time confused with fundamental analysis by the beginners. The former one is a type of stock research, which is based only on the market prices, their volatility, and the trends of a company’s performance graph concerning the rise or fall of its stocks. The most important difference between both is that, technical analysis never deals with the real value of a stock. It is essentially a study limited to the market positioning and behavior of a firm. The concept of fundamental analysis can be applied in many different areas. For example, its scope can extend to bonds and their assessment, based on the economic factors that govern it, such as credit ratings or the condition of the parent economy.

Techniques

– EPS ratio (Net earnings/Outstanding shares): If a firm earns USD 20 per share, and the outstanding share or divisions of earning is 4, each investor will earn USD 5. But, if the outstanding share is 2, then the earnings per share for an investor is USD 10. Thus, higher EPS ratio can be a basic analysis tool.
– P/E ratio: This stands for the price per share/earnings per share ratio. The price of a single share of a company as compared to its earnings on that share is decided by the market acceptability of that organization. If the firm’s share is valued much more than its earning, it signifies a rising stock. This factor clearly states the relative earnings of a company as compared to the other listed firms.
– Projected Earnings Growth (PEG): The P/E ratio divided by the percentage future growth over a defined period gives the projected earnings. A share with P/E ratio 20 and a growth of 10% for say next one year, has a PEG of 2.
– Price of a share/ sale price of that share (P/S): This factor is the market’s designated value for the sale of one share.
– Price of a share/ Book value of a company share (P/B): This states the theoretical value calculated for a share.
– Dividend yield and dividend payout ratio: Earnings of a firm/ stock value of the share gives the yield for a stipulated period; whereas, a payout ratio is the Annual dividends paid by a firm to its EPS.

A successful investment involves detailed market observation based on the above factors, which are incorporated in the analysis procedure. Warren Buffet of Berkshire Hathaway and Peter Lynch of Fidelity Magellan Mutual fund, are prime examples which tell us that fundamental analysis could play an important role in a person’s wealth creation.

Types of Investments

Investment is the process of risking one’s savings in the hope of a monetary gain. An investment involves the act of using a good or its money equivalent to create another good or fetch the returns of the invested amount in terms of interest or profit share. The basic purpose of an investment is to hold an asset in order to obtain recurring or capital gains. Take a look at the various types of investments.

Aggressive Investment: Aggressive investors invest in stock markets and business ventures. This type of investment can involve the act of investing in a real estate, renovating it, and renting it out. Aggressive investment involves a greater amount of risk.

Business Management: The value of the business assets is determined after which they are used to generate revenue. Business assets can be physical, financial, or intangible. Physical assets include property and machinery that is in possession of the business. Financial assets include the liquid assets of a business and the company stocks and bonds.

Conservative Investment: Conservative investors invest in cash. They put their money in investment accounts like savings, mutual funds, and certificates of deposit.

Economics: In context of economics, investment is the per unit time production of goods, which are not consumed and are rather used for production in the future. Tangibles like property, as also intangibles such as the costs incurred in on-the-job trainings are included in this type of investment. Income and interest rates form the determinants of an investment decision. A growth in income boosts investments while a rise in the rates of interest is not conducive to greater investments as it makes borrowing money costlier.

Finance: Investments in finance refer to the cost of capital invested in buying financial assets and securities. They include investments made in shares, bonds, and equities. Investments in the finance sector are made through banks, insurance companies, and other investment schemes. Learn all about the different types of insurance.

Foreign Direct Investment: When a company from one country invests in another country, it is known as foreign direct investment. This investment is generally of the physical form with the intent to build a factory in another country.

Investing in Gold: Investments in gold can be done through ownership or by means of certificates and shares. Here is a list of the types of gold investments.

Bar: Buying gold bars in one of the very traditional ways of investing in gold. It is practiced in Argentina, Austria, and Switzerland where gold bars can be purchased from major banks in these nations.
Coins: Coins, which are priced according to their weight, are purchased in this form of investment in gold. The British gold sovereign and the Swiss Vreneli are some examples of bullion coins.
Accounts: Swiss banks provide the customers with gold accounts which can deal in gold transactions.
Gold Exchange-traded Funds: In this scheme of investing in gold, gold can be traded on major stock exchanges.
Spread Betting: Firms in the UK offer spread betting in gold investments. Spread betting is about predicting the rise or fall in the prices of gold before investing in it.
Investing with the Mining Companies: Trading in the shares of gold mining companies is one of the means of investing in gold.

Investing in Silver: Investing in silver is similar to investing in gold. The various ways in which one can invest in silver are also the same as those for gold investments.

Land Investment: Land investment can turn out to be a long-term and rewarding investment if the purchased land is developed properly.

Moderate Investment: The investments made in cash and bonds and those which involve low or moderate amounts of risk, are known as moderate investments.

Personal Finance: Personal finance includes the money that is put aside on a regular basis with the aim of saving it. Mere saving of money involves only the risk arising out of devaluation of the saved amount due to inflation. However, saving money and investing it involves the investment risks like capital loss. Learn more about personal finance planning.

Philatelic Investment: The investments made in collectible postage stamps with the intent of making profits are known as philatelic investments. Rare stamps can serve as unique pieces of art and excellent collectibles. Investors dealing in stamps have chances of benefiting from the nation’s growing wealth. Know more about philatelic investment.

Real Estate: Investment in real estate is the one made in purchasing property. Property is purchased with the intent of holding or leasing. Residential real estate investment involves the process of buying other people’s houses while the investment in commercial real estate involves the purchase of a large property that can be rented to a company. Commercial real estate investment is riskier than that in residential real estate.

Socially Responsible Investing: This investment strategy aims at fetching financial gains for a social cause. Investors prefer investing in practices that promote human rights, equality, environmental awareness, and other social concerns.

Stock Investment: There is a rising interest among the masses for investing in the stock market. Stock investments can prove to be rewarding if share trading is done wisely.

Value Investing: It involves buying securities whose shares seem under-priced.

Investment is after all, the means to channelize money in order to secure one’s future. I am sure you would want to consult an efficient investment adviser for guidance on investing wisely.