An example of an undervalued stock would be one that is selling for $25 but can be figured out to be worth approximately $50 based upon what would be projected and predicted cash flow in the future.  There are many books available in the marketplace explaining undervalued stocks.

The first area to review as a potential investor would be a ratio known as the price to earnings ratio.  You also should investigate the management of the company behind the stock as well as the nature of business. As indicated in Warren Buffett’s 1989 letter to Berkshire Hathaway shareholders, “a value of a business is the sum of the cash flow over the life of the business discounted at an appropriate interest rate.” Warren Buffett, by the way, is commonly known as “The Oracle of Omaha.”

Therefore, as a potential future investor, you need to feel confident that a company’s stock may be undervalued based upon the future earnings as well as future interest rates. Some other examples would be:

1. What is the company’s history? And is it a stable consistent operating company?
2. The company does specialize in an industry that may fizzle in a short period of time.
3. The tangible (hard) asset value is not lower that the company’s selling price.
4. The company has a credit rating of a triple A, double A or an A.
5. During the last recession, the company did not experience a loss.

According to Buffett’s partner, Charles Munger, a good rule of thumb is the purchase price of an excellent stock at a fair price is more likely to be undervalued than a poor stock at a cheap price.

If you are a newcomer in the stock market, be sure not to invest more than you are willing to lose.  There are many stocks that could be classified as undervalued.  Some are what is referred to as penny stocks.  You need proceed with caution however, and do your research prior to investing.  You may be lucky and find undervalued stocks that really take off whereby you make a huge profit.  On the other hand, you can also lose your life savings.  Get information and be informed.  The information is available online, at the library or by seeking out a stock professional.

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Have you ever applied for a mortgage on a home? The process can be very frustrating as it involves several departments within a bank or credit union, starting with the loan officer who is the commissioned sales representative for generating the loan, to a processor who assists with the vast amounts of paperwork, the underwriter who inputs the income ratios, the loan-to-value ratios and other financial data together, and then the loan committee who ultimately makes the final decision.

Once the application is submitted, it seems like you can’t submit enough paperwork and it is never ending. You almost feel violated personally. Then there is the credit report whereby you are not judged by the other excellent factors you have, such as a long term solid relationship with your lender, or a good solid job where you are valued as an employee. It seems the credit bureau throws you in a box where you are simply judged and the loan decision is made upon your credit score? This is simply confusing.

Well, the instant loan decisions process and the companies behind them look at you completely differently. You can even apply if your credit is bad, you have a default situation on another loan, late payments or even a bankruptcy. How is this possible you might ask? The instant decision loan process is actually a short term advance on your paycheck. You only need to have an active checking account, and be 18 years of age.

There are a few pitfalls to watch out for however. The rates are higher because it is an unsecured debt. If you feel you cannot pay the instant loan with your next paycheck, run fast as you will have far more financial difficulty than when you requested one. There are contracts to sign. Make sure you read all the “small print.” If you don’t understand it, seek out someone who can. This is a legally binding document so proceed with caution and make sure you understand everything you are obligated for.

Another area is pricing. Because there are so many of these instant decision loans available by many different companies the interest rate can vary drastically. So if you are comfortable with this type of financing, make sure you shop around for the best rate. The companies that are making instant decision loans are everywhere: online, in shopping centers and strip malls. Do your homework and proceed with caution, but as long as you proceed with your eyes open wide, you should be fine.

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Loan Origination Fees
Most people choose a Home Equity Conversion Mortgage (HECM) – the are federally insured and are the most widely available reverse mortgage. On HECM loans, there is a 2% origination fee on the first $200,000 and then 1% on the value after that with a cap of $6000.

Non-HECM reverse mortgage loans are available that may have lower origination fees. The key with comparing loans is to look at the total cost. One loan may have lower origination fees but a higher interest rate which means a higher overall reverse mortgage cost.

Mortgage Insurance
With an HECM loan, borrowers are also responsible for mortgage insurance which typically runs 2% of the value of the home. There is also an annual mortgage insurance premium that must be paid and is usually half a percent per year. The mortgage insurance guarantees that the amount of your loan will not exceed the value of your home when your mortgage comes due.

Title Insurance, Appraisals and other Closing Costs
Another similarity between traditional mortgages and reverse mortgages are the additional closing costs. Reverse mortgage closing costs include title insurance, a new appraisal, document preparation fees and possibly an inspection if your home is particularly old or it’s condition is questionable. All of these costs will usually run about a percent or two of the home’s value.

Interest Rate
Just like a traditional mortgage, the interest that you pay over the life of the loan will be your largest reverse mortgage cost. The total cost that you will pay will depend on your interest rate, the amount that you borrow and the length of your loan. On an HEMC mortgage, which is the most common type of reverse mortgage, you can choose between an adjustable rate mortgage that adjusts either monthly or annually and is tied to the 1 Year US Treasury Constant Maturity Rate which fluctuates weekly. For these types of loans the rate is generally the 1-Year Treasury rate plus a percent and a half.

Other reverse mortgage programs offer similar programs where the rate is tied to a particular index (not always the 1-Year Treasury index) with a margin of up to 4% added. Shopping around for the best deal is crucial to finding the best reverse mortgage loan.

Reverse mortgages can be a significant benefit to seniors who are looking to use the equity in their home to pay for the cost of living, medical bills or other expenses. However, reverse mortgage costs must be taken into consideration. Loan origination fees, mortgage insurance and reverse mortgage closing costs can meet or exceed 5% of the total value of the home being borrowed against, and that doesn’t even include the interest rate. With the information we’ve provided in this article you are now aware of the reverse mortgage costs you are likely to encounter. Hopefully this information will benefit you in your search for a reverse mortgage that will meet your needs.

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High Reverse Mortgage Costs
One of the larger pitfalls of a reverse mortgage are the high fees. Fees for reverse mortgages are based on the value of your home, which is different from traditional mortgages where the fees are based on the loan amount. Most reverse mortgages sold are federally insured and known as a Home Equity Conversion Mortgage (HECM). For an HECM mortgage, origination fees alone are usually 2% of the home’s value, and then there is the mortgage insurance premium of 2%. By the time you add an appraisal, title search, title insurance, and other reverse mortgage closing costs the total loan fees can reach 5% or more of the home’s value.

Loan Caps
Since HECM mortgages are backed by the government, they have instituted a limit on the amount that you can borrow. These limits range from just over $200,000 to $417,000 depending on where you live.  So even if your home is worth more than $417,000 the maximum amount the government will allow you to borrow will be limited.

There are non-government insured reverse mortgages available, but just like an HECM, the closing costs are high. The benefit to non-government reverse mortgages is that there is no loan cap and in some instances you can avoid the mortgage insurance premiums.

Equity is Required
Although you do not have to own your home free and clear to obtain a reverse mortgage, you do need to have equity. Although there are some traditional mortgages on the market that allow you to borrow more than your home is worth, that is not the case for reverse mortgages.

Negative Impact on Medicaid
Often overlooked, the impact a reverse mortgage can have on Medicaid is one of the scarier reverse mortgage pitfalls. According to the National Reverse Mortgage Lenders Association, a reverse mortgage that is paid out in a lump-sum can impact Medicaid benefits. In order to avoid this significant reverse mortgage pitfall, the lender needs to ensure that none of the lump sum amount is remaining the month after it is received. Otherwise the remaining amount can count as a resource and will impact Medicaid eligibility.

Age Requirements

Another drawback to obtaining a reverse mortgage is the age requirement. You must be 62 or older to qualify for this type of mortgage. If the home is owned by 2 or more people, all owners must be over the age of 62.
Reverse mortgages are increasing in popularity among senior citizens who are looking to use the equity in their home to pay for medical bills and other expenses. However there are many reverse mortgage pitfalls that need to be carefully considered before taking out such a loan. High closing costs, loan caps and Medicaid considerations as well as equity and age requirements all need to be balanced against the need for income. Hopefully this article has provided some insight into the pitfalls of reverse mortgages and will help you make an informed decision.

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One of the smartest things you can do as an investor is to stay abreast of new investment strategies so that you don’t miss any tricks. Michael over at over at Stock Market Investing Today is holding a ‘blog carnival’ which will take a look at a series of hot investing topics from various sites on the net. It’s well worth browsing through some of the information shared here so click on over and take a look.

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With the uncertainty and fluctuations of today’s stock market, many investors are looking for more secure methods of investing their money. Money market investing is one of the strategies that can be used as a conservative but relatively secure investment strategy, and is an interesting alternative to a traditional term deposit or even a high interest savings account.

The money market is effectively a type of fund in which the fund managers invest in a range of short term securities. These can include certificates of deposit, government issued treasury securities, and other financial instruments that generally have a short term or fixed maturity of less than one year. These instruments are referred to as ‘paper’ or ‘commercial paper’

Money market investment is considered a safe strategy for parking your cash, due in part to the liquidity of the securities. However while it is relatively low risk, it is also low reward – hope to stay ahead of inflation but don’t be surprised if you make as little as a few percent return on your investment.

Benefits of money market investing

One of the great benefits of money market investments, apart from their security, is the flexibility with which you can access funds when needed. This is in contrast to fixed term deposits. In fact, many money market funds have an option to write check s against the balance of your fund.

Money market funds also allow purchasers to enter with a relatively low investment.

Points to consider

• Like any fund, investing in the money market will mean paying fees to the fund manager. If you are only parking a small amount of cash, factor these costs into your projected return on investment.
• Low ROI. Despite the uncertainty and risk associated with the share market at present, there are still plenty of good buys. In fact, some argue that there has never been a better time to pick up bargains. By taking the safe route and plunging all cash into low return but secure funds, investors are giving up potential gains.

As with any investment tool, money market investing is a valuable way to reduce the risk associated with a volatile market. However, make it a component of your portfolio while still using some of your cash assets to give yourself the chance of generating better returns.

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DRIPs are offered by nearly every corporate firm.  By offering a dividend reinvestment program, a company allows people to buy shares in the company directly from the company itself rather than on the open market.  In most cases, you are able to buy stock from the company at a discount (sometimes a very significant one) compared to buying the stock on the open market.  Additionally, with a DRIP you can set up direct deposit style withdrawals from a banking or checking account in order to buy a small amount of stock each month.  On top of that, when you are enrolled in a DRIP investment, any dividends that the company issues are used to buy more shares of the stock rather than the standard method of a check.

Why use a DRIP?

Together, the discount on share price, monthly purchasing, and the reinvestment of dividends allows you to build up a large position in a company’s stock in a relatively short period of time.  Most people who are enrolled in a DRIP find that they hold a very large number of shares before they even realize that they have been building a position over time.  A DRIP also does not require a great deal of effort or attention in order to build a sizable number of shares owned.  In fact, DRIP investing is one of the best ways to invest if you are not a person who enjoys watching the monthly ups and downs of the market.

How to Enrol in a DRIP:

The most common form of DRIP is an employee DRIP.  That is, if you work at a company whose stock is on the open market, it is usually possible to enroll yourself in your company’s DRIP, particularly if part of your compensation is in the form of stock and options.  You can specify that a certain portion of your paycheck be used to build your position through your DRIP, and in some cases a company will match a certain portion of your contribution every month.  An employee DRIP is a wonderful way to earn money beyond your base salary.

The other form of DRIP is a stockholder DRIP.  To enroll in one of these programs, you must hold a certain number of shares in a company before you are allowed to enroll.  Most firms, however, set this minimum at one share.   Once you are a shareholder, setting up a DRIP is as easy as contacting the firm’s investor relations department and asking about their dividend reinvestment program.  Since most companies handle the specifics of their program differently, it is impossible to offer individualized advice on this matter.  However, in most cases you will be asked to transfer your currently held shares from your brokerage to the company itself and/or its transfer agent.  Should you decide to enroll in a firm’s DRIP, you should strongly consider allowing them to debit your checking or savings account for a set amount of dollars each month.  There are numerous benefits to this:

1. You will be forced into a sound investment strategy.  When you buy a certain dollar amount of shares each month, you automatically buy more shares when the price is low and less shares when the price is high.  Additionally, you will be forcing yourself to think on a longer-term basis.  When you buy shares each month, you are less tempted to look for cheap or easy gains.
2. You will be saving money without having to make a conscious decision each month.  One of the hardest parts of actually saving money is actually making the decision to do so. When the decision is made automatically for you, you have no choice but to make the right decision.
3. You will build a very large position over time.  Most people buy and sell shares in large chunks and wonder why they are unable to build consistent positions.  Automatically purchasing shares in a company each month is an effective way to build a huge position.
4. Dividend reinvestment programs are one of the open secrets of stock market success.  The investing public is generally unaware of these programs, but savvy investors take full advantage.

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Why use fixed asset accounting?

Companies that properly utilize fixed assets accounting receive a number of tax benefits, primarily in the form of depreciation, which can significantly reduce a firm’s total tax liability at the end of the business cycle.  Additionally, the use of fixed assets makes expense accounting very simple and predictable in the future.  By properly accounting for your assets, your company will save a great deal of money and headaches over the long run.

Determining the ‘cost’ of a fixed asset

The declarable depreciation of a fixed asset depends on its initial cost, so it is important to get this number right.  Including the price you pay for your fixed asset, you should also include delivery costs, installation costs (including time spent and labor), and an estimate for the labor and materials required to dismantle and sell or destroy the item at a later date.  It is not advised that you inflate you’re your accounting of the cost, but at least be aware that the cost of your fixed asset will usually be well in excess of its purchase price.

Determining depreciation expenses

Each company handles depreciation a little differently, but for the most part, standard accountancy dictates that you use a fixed depreciation schedule.  For example, the standard computer will be economically viable for three years before it will need to be replaced or significantly upgraded.  Because the life of a computer is relatively predictable, you are able to classify it as a fixed asset and depreciate it in a straight line—that is, each year, you will charge one third of the computer’s value as an expense.  This expense will count as a standard expense against your revenue, and the computer’s net asset value will decrease by the corresponding depreciation amount. Given the complexity involved in depreciating multiple items, fixed asset accounting software can be a valuable tool for larger business entities.

By treating these types of assets as fixed assets, you will be able to accurately and legally determine the value of your assets, have a very predictable and easy to determine expense schedule, and reduce your overall tax liability.  There are a number of guides and books that detail exactly how to account for every conceivable type of fixed asset.  While there are more advanced forms of fixed asset accounting, opting to use the simplest method is generally the best for small business owners or sole proprietors.

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Option ARM mortgages add another layer of complexity to the standard ARM.  With an option ARM mortgage loan, the borrower can choose what “type” of payment they wish to make every month.  The choices, in order from smallest to largest, include a minimum payment, an interest only payment, a payment calculated by a 15 year amortization schedule, or a payment calculated by a 30 year amortization schedule.  The size of these payments are determined by the current level of interest rates in your country.  Here’s a simple explanation of each payment type:

Minimum Payment

A minimum payment is typically about one half to two thirds of the accrued interest on an ARM.  This means that, for a typical $200,000 loan, your minimum payment may only be about $1,000.  Please note though that there is a definite cap to the number of minimum payments you can make.  The cap will depend on the terms of your loan, but its parameters are clearly defined.  Some loans allow you to make minimum payments for six months to three years.  The other cap is determined by something called the “negative amortization level.”  When you make a minimum payment on an option ARM, it is typically much lower than even the amount of interest that has accrued over the month.  The difference between the minimum payment and the accrued interest is then added to the loan’s balance, which is called negative amortization.  Most option ARMs have a negative amortization cap of 110%, which means you are only able to utilize minimum payments until your loan’s balance has reached 110% of the original principal.  It does not take very many minimum payments to reach this cap.  With moderate interest rates, it typically takes a year to reach your negative amortization cap.  Because of this, borrowers who hold an option ARM should try, if at all possible, to avoid making minimum payments.

Interest Only Payment

This is a very cut and dry payment.  It is simply a payment of the interest that has accrued over the course of the payment period.  The cost of the interest only payment can vary by a lot due to fluctuations in the national interest rate, so be wary of economic trends.  Most option ARMs only allow you to make interest only payments for ten years, at which point you will have to make true amortized payments.

Amortized Payment

This is a payment that is based on the amortized interest + principal over the course of either 15 or 30 years.  This payment can and will be dramatically higher than either a minimum payment or an interest only payment because it is taking the loan’s principal into account.  Also, this payment is re-calculated every month depending on the LIBOR.

When you hear in the news about option ARMs “resetting,” what the news anchors are typically referring to is borrowers being forced to make amortized payments.  There are a great deal of risks involved with using an option ARM.  Aside from fluctuating interest rates (which can sometimes double or even triple monthly mortgage payments on its own), option ARMs also naturally, due to negative amortization, increase the base level of risk in holding a mortgage.  When you make a minimum payment on an option ARM, you are literally reducing the equity in your home because your mortgage’s principal is increasing.  An economic  environment with falling housing prices and rising interest rates can be absolute disastrous to holders of option ARMs

So then, who should actually seek out an option ARM?

It only makes economic sense for somebody with a quickly growing income to seek an option ARM.  For example, a junior trader at an equity firm or a first-year accountant can expect to have a rapidly rising income.  The way an option ARM is structured, payments are very low in the beginning and become very high over time.  Only those who can expect quick pay raises should seek an ARM.

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Price: The price in dollars at which you can purchase a security (be it a stock, bond, fund, or otherwise) on the open market.  You can find the price of a security simply by typing its ticker symbol into Yahoo or Google finance, or the financial information website of your choice.

Value:   The value in dollars of a security (be it a stock, bond, fund, or otherwise) that is available to purchase on the open market.  Unlike the price, it can be exceedingly difficult to find the value of any given security.

As you may have already guessed, there is often a very significant difference between the price of a security and the value of a security.  This difference has been attributed to many things—market irrationality, improper valuation methods by the market, market momentum, market manipulation, etc.  Whatever the reason, a value investing strategy is predicated on exploiting this difference to make a profit—over the long run—in the market.  Warren Buffett’s teacher, Benjamin Graham, often remarked that in the short run the market is a measure of popularity but in the long run is a measure of value.  By this he meant that over the long run, the market will eventually price securities close to their underlying value, even if there are massive fluctuations in the short term.

So with all of that said, just how do you value a security?  This article will focus primarily on stocks, as it is quite a bit easier to value publicly traded firms than, for example, bonds, funds, or derivatives.

Earnings. Otherwise known as income, this is the oldest metric by which the value of companies is measured.  If you’ve spent any time at all dealing with stocks, you know about that pesky term “price/earnings.”  This is a very simple statistic:  it is the stock’s market price divided by its most recently measured annual earnings.  In the most general sense, the lower the price is in relation to earnings, the better a deal you are getting.  However, there are dozens or even hundreds of other factors to consider, including the quality of a firm’s earnings, future earnings, growth of earnings, sustainability, and so on.  The historical market average P/E is approximately 15.  However, the P/E ratio is notoriously unreliable to use as a metric during times of market turmoil, which are often the very best times to invest.  As such, the primary question you need to address regarding earnings is:  “Will this company earn money in the future?  If so, will those earnings justify or more than justify its current market price?”  If you can answer yes to both questions, you are likely making a good value buy.

Book Value. This is the company’s tangible value as determined by its balance sheet.  To find this, you simply subtract the company’s total liabilities from its total assets.  Some companies have a negative book value, while some companies have a book value far in excess of their price.  Generally, a high book value is good, though you should only trust it if you have good knowledge of the company’s assets, liabilities, and how these things are calculated.

Intangible value. This encompasses dozens of different aspects, including branding, patents, market trends, quality of management, economic indicators, and so on.  The very best value buys often have a very strong intangible value proposition.

Once you put these three things together, you can generally determine the value per share of a company totally independent of its market price.  Once you’ve assigned a value to a company, you can then compare it to the market price.  If it’s lower, you buy, and if it’s higher, you don’t buy or you sell it short.  Because of stock market fluctuations, nearly every company in the history of western civilization has been a good value investing play at some point.

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