Kalen Smith Kalen Smith has written for a variety of financial and business sites. He is a weekly contributor for Young Entrepreneur and has worked as a guest blogger on behalf of Consumer Media Network. He holds an MBA in finance from Clark University in Worcester, MA.
Collectively, consumers tend to make some very strange choices when it comes to how they make purchases and manage their money. Similarly, investors in financial markets also tend to think as a group and make irrational decisions. It is almost uncanny how an event can trigger so many market participants to unconsciously react in the same ways.
Behavioral finance is a response to this strange behavior. The theory attempts to explain how investors process events and formulate decisions. Theoretically, understanding behavioral finance allows other investors to predict market movements and profit from them.
One of the problems that investors face in the stock market is figuring out the value of the stocks in which they are considering investing. Comparing a stock’s value to its market price allows investors to determine if a share of stock is being traded at a price that is greater or less than its actual value. There are a variety of ways that investors attempt to value stocks, but one of the oldest and most basic is the dividend discount model.
If you are active in the investing world, you’ve most likely heard something about dealing in derivatives. While this kind of investing may be too risky for those new to the game, it can be a great option for more experienced investors.
So, how does it work?
Read on for a breakdown of the practice, advantages, and pitfalls of derivative investing.
What Is a Financial Derivative?
Derivatives are securities which are linked to other securities, such as stocks or bonds. Their value is based off of the primary security they are linked to, and they are therefore not worth anything in and of themselves.
Recession-related job loss, cut backs, and bank crackdowns have left many debt-mired homeowners wondering what they can possibly do to save their homes from foreclosure. Unfortunately, for every downtrodden soul, there is a scumbag con artist waiting to take advantage.
These crooks disguise themselves as well-meaning, competent professionals who are capable of helping honest people avoid foreclosure. But, behind the masks, their eyes are targeted at your checkbook, or the title of your home, in some creative mortgage reconstruction scams.
Keep an eye out for these warning signs and make sure you don’t become their next victim.
Imagine that you spent several hundred dollars or more on homeowners insurance coverage, just so that you could have a little peace of mind if something went wrong. Now imagine that your insurance company denied your claim after your home was damaged or ruined beyond repair.
Denied claims make your life much more complicated, especially when you don’t have the cash to pay for the repairs on your own. But don’t start thinking of ways you can live with those burst pipes or that tree through your roof just yet. Take a deep breath and read on. There may still be hope.
In the topsy-turvy world of the stock market, the idea of investing in reverse might sound fitting, or it might sound crazy. Short selling is a risky, but potentially lucrative investing transaction that’s a backward version of buying and holding stocks.
When selling short, you borrow an asset from a broker and immediately sell it. Your goal is to see the price drop and then return the shares and pay the broker back at a lower price. Short selling is fundamentally different from “going long” a security in every possible way. Here’s how:
On March 12, 2009, Bernie Madoff pled guilty to the largest Ponzi scheme in history. He successfully swindled investors out of $65 billion. Although many Wall Street experts revered Madoff as a genius, many financial professionals were not surprised to learn that he was one of the biggest crooks they had ever come across. Some people were afraid they’d be ostracized if they spoke out against Madoff, and they simply kept quiet about their concerns about his investment portfolio and earnings.
Unfortunately, Ponzi schemes are fairly common, but this one was one of a kind. Most Ponzi schemes operate on a very small scale, but Madoff was clearly a big thinker who caused major damage.
Finding a flight with the fare you want is tough enough. When you consider the taxes and surcharges, extra fees for baggage, the cost of travel to and from the airport, and an extra five bucks a pop for a bag of peanuts, the last thing you want to add to your airfare’s bottom line is travel insurance.
Then again, when you’re already spending a few hundred dollars, protecting your itinerary with affordable travel insurance could turn out to be the best fee you ever pay.
How often have you read or heard news about a major company like Apple or Google and felt compelled to buy or sell the company’s stock? You want to invest in a company with a promising future, but once a story hits the news, is it already too late?
For years, financial experts have debated the efficient market hypothesis, which assumes that stock prices effectively reflect news and information.
You need to understand the hypothesis before investing – especially if you react to business news.
Auto insurance companies use statistics to predict a driver’s likelihood of getting into a car accident, and then set their rates accordingly. However, if you know what you’re doing, there are a variety of ways a good driver can get steep discounts on car insurance coverage. When you’re dealing with insurance companies, perception is the most important aspect of scoring a good rate.
Though it’s impossible to say that speeding and running a red light occasionally won’t happen at all, there are still a host of ways that you can save money on your car insurance by coming across as a more conscientious driver.
When I was in college, every semester I received a check from the federal government for text books and living expenses (read: beer). I didn’t give much thought to how I was going to pay the student loans back until the day after graduation, when a bill for $12,000 landed in my mailbox.
In retrospect, I got off easy, as many college kids have more than $100,000 of student loans they need to repay. But whether you have a little or a lot, interest builds quickly, and it’s best to create a solid plan for paying back the debt that works with your financial situation.
Health care reform may give hope to millions of uninsured Americans. They’re waiting eagerly for their chance to get affordable health insurance coverage for themselves and their families. At the same time, unfortunately, schemers and crooks are willing to take advantage of uninsured people’s vulnerabilities and exploit them by offering bogus insurance policies.
Scam artists follow the news and understand the public’s hopes and expectations. When they try to manipulate people, they often use popular terms and buzzwords like “Obamacare” and “health care reform.” Just dropping these words often helps them gain trust and credibility with their victims.
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