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.

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.

How to Become a Registered Investment Advisor

Registering an Advice Body
The advisor manages the assets of individuals and institutional investors, and performs the fiduciary duty to their clients of choosing the best possible investments for them, and providing full disclosure of transactions and ensuing fees. The investments may be in the form of stocks, mutual funds, hedge funds, or a combination of one or more forms of investment.

Registration of an investment advice body can be done in three ways, depending upon the sum of market value of assets being managed by that firm. This sum, commonly known as Assets Under Management (AUM), forms the basic registration criteria for the process of registration. While the exact definition of AUM is not clear, for registration purposes, the definition given under Form ADV Part 1, of the SEC, is used.

To register your investment advice firm with the SEC, you have to first determine the amount of AUM that your firm is managing. The amounts can be divided into 3 categories:

1. Up to $25 million
2. between $25 million and $30 million
3. above $30 million

Up to $25 Million
If your investment advice firm is not currently managing a sum of $25 million and does not anticipate managing $25 million within 120 days of registration, the firm has to register itself with the state in which it is operating.

$25 to $30 Million
If your AUM ranges between $25 and $30 million, you have the choice of either registering with the SEC, or with the state in which your firm is operating.

Above $30 Million
If your AUM is over $30 million, then the registration has to be done with the SEC.

Becoming an Investment Advisor
The first step is to figure out your AUM and the jurisdiction under which your investment advice firm falls. The firm has to pay the service provider fees to either the SEC or the state. If registered with the state, the fee comes to between $2,500 and $3,500, while for registering with the SEC, your firm might have to shell out anything between $4,000 to $8,000, depending upon the size and diversity of your portfolios.

As the firm is being registered, the registration bodies would feel compelled to test the knowledge of the investment managers and advisors, to ensure their accountability and investors’ safety. No test needs to be given if the advisor/manager is already qualified as a Chartered Financial Planner (CFP) or a Chartered Financial Analyst (CFA). But in case thy are not equipped with the above qualifications, they are required to give the Series 65 exam two years prior to registration, although many states allow registration on the basis of having given the Series 7 and Series 66 examinations.

Along with the examinations, you have to fill various forms such as the Registration Depository Form (IARD); Form ADV, which is mandatory for all investment advisors; Form ADV Part II, which covers all the information on activities of a registered investment advisor; and Form U4 which has to be filled by those people who represent the advisor.

Actually, a very small amount of advisory firms get themselves registered. A registration does not necessarily mean that the firm or individual is recommended by the SEC or any such body. However, it is considered safer to ‘bank’ upon registered advisors, as they are under the control and supervision of the SEC.

Choosing an Investment Advisor

Investment advisors provide advice to their clients on securities. In other words, they are individuals who specialize in advising people on investing in mutual funds, bonds, stocks, commodities, or real estate. Some advisors also manage their client’s portfolio of securities.

How are They Different from a Financial Planner?

While most financial planners are also investment advisors, all investment advisors may not be financial planners. Financial planners generally assess all aspects of a client’s financial needs such as estate planning, retirement, taxes, insurance, investments, and savings, and help in developing a financial plan or strategy for meeting his or her financial goals. On the other hand, investment advisors restrict themselves to providing advice on investing in an asset that is likely to generate good returns, or give regular income and/or dividends.

Why do People Need an Investment Advisor?

While most ordinary investors are intelligent people, with many of them being quite well-versed with the market, yet, they are often not very successful with their stint in the market. And that is quite understandable. After all, they make their living doing something else, hence, they do not have the expert knowledge that a professional would have. For example, if you were to fall ill, you would seek the expert help of a medical professional, even though you may be knowledgeable about various health related matters, or you would go to an auto-mechanic if your car had a break down, even though you may have a pretty good idea about cars.

Most ordinary people have a tendency of being ‘off’ in the timing of their investment. For instance, they buy when the market is high and not during the low periods. But to get the best returns on investment, it should be the other way round. The trouble is that most ordinary investors are influenced by factors like media hype, fear, and greed.

It’s here that a professional financial advisor can provide them the correct advice on how, when, and where to invest their money. However, make sure to hire a registered professional, who has a proven track record of successfully investing in securities or other assets.

What Services do They Provide?

Basically, they do all the legwork such as the research and analysis. Also, more importantly, their primary focus is kept on the market, particularly in the area of their specialization.

Since most of their energy and time is spent in researching, deliberating, and analyzing, it is natural for them to have a better sense of the market, along with its movements, compared to ordinary investors who cannot expend this kind of time and attention to it. They usually recommend the best products in the market, and those which suit the client’s needs and financial capacity.

Before hiring any financial professional, it is important for you to be cognizant about what kind of services you require, what he or she will deliver, if they have any kind of restrictions on what they can recommend, what services will you be paying for, their cost, and how they get paid.

How are They Paid?

Let’s look at some of the ways in which the advisors are usually paid:

– A fixed amount that both you and the advisor agree to.
– A commission based on the securities that they sell.
– A percentage of value of the financial assets that they handle for you.
– A combination of any of the above.

Each of these payment methods has its pros and cons. Find out from them about the nuances of each, and which would be most suitable for your needs. Lastly, check if the fees are negotiable.

Making that Decision

If you make a cursory search on the Internet, you would discover that there are innumerable registered advisors in the United States. However, not all of them maybe good, so how would you ensure choosing the right one? Well, most large-sized brokerage agencies maintain a list of investment advisors that they work with, including information about their past performance. However, this resource is not foolproof, since they have a tendency of recommending people who do their business through the agency, or buy products of their firm. Hence, you will have to be careful about conflict of interest issues.

Another way is to subscribe to any of the database services, which provide information as well as rankings, too, on such professionals. However, these services can be quite expensive.

Provided below are few of the factors that need to be kept in mind when hiring one:

– Make a verification of their record, taking into consideration their past performance.
– Check out their strategy to see if it will work in different market conditions.
– As much as possible, find out about their business operation.
– Check if the agency has any regulatory problems.

Apart from the above, you should also make sure that you can trust the advisor with your investment choices, and build a good rapport with him or her.

Basics of Investment Banking

An investment bank is a type of financial intermediary that performs a variety of functions such as underwriting, facilitating mergers and acquisitions, or brokerage services for institutions. The work of an investment bank begins right from the counseling before the underwriting sessions, and stretches right till the securities are properly handled and distributed. These institutions play a very crucial role in market transactions on behalf of, or for private and public investors, governments, and corporations. There are some that also provide highly professional services in assisting their clients with industrial know-how on various parameters.

Industries from diverse sectors like media and telecommunications, real estate, industry, finance, health care, consumer products, and various such segments are provided assistance by investment banking services. Along with these, they also deal in the securities trading services, credit counseling, financial engineering, and merchant banking. The primary source of income for investment bankers is the commissions, fees, and gain margins on transactions provided for the above mentioned institutions.

The role of an investment bank as a mediator is to directly familiarize the nature of the investment and the entity being invested in. In case of conventional banking, people deposit finances in the form of cash, assets, and so on with a bank. The bank in turn can lend to a borrower under some standard norms to utilize it in his own way. In the case of investment banking, there is a direct familiarization of both the investor and the borrower. This means that an individual or institutional investor has an option to choose his type or division of investment into any given entity looking out for funds.

Investment banks provide companies with expert guidance and formulate strategies on their behalf for disinvestment, and also to merge or acquire new entities. Good investment banking involves procedures to maintain and upgrade the quality of services and keep a close watch on the emerging trends in the market, where their customer’s money can be invested. It also incorporates risk management services in order to streamline the flow of capital, check its overuse, and come up with a detailed analysis of credit risks.

A big firm should ensure a number of parameters before tying up with an investment bank, in order to ensure sizable profits. The bank should have a long-standing reputation of providing quality and consistent service. It should be accountable for all the transactions done through it. You need to do a thorough market research, compare and contrast the functioning styles of different banks, the consistency of their workforce in staying with a particular deal, or the reputation of their previous clients.

The investment banking market was increasing leaps and bounds, until the recession struck. Banks all over the world are trying to recoup the losses. The US is the biggest market, followed by Europe, Middle East, Africa, and Asia. Its global hubs are a few economically sound centers like London, New York, and Tokyo. However, it is not restricted in its scope to a few regions of the world. It caters to a global community, which makes it highly sensitive to global ups and downs, along with innovative fluctuations. A career as an investment adviser is both a challenging and a highly rewarding career option.