Monthly Archives: March 2017

Investing Dictionary #3: Expense Ratio

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Expense Ratio is a rare word to stumble upon, it is a word prevalent in-between companies and it varies on more private talks the market community has seen. So going back to Expense Ratio, it is actually a measure of what it costs an investment company to operate a mutual fund.

You may ask how expense ratio is determined; well according to the Investopedia: An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management (AUM). Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors. It is also known as the management expense ratio (MER).

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All You Need To Know About Expense Ratio

Expense ratio varies very differently on each type of fund, operating expenses vary widely. One of the biggest parts or the crucial component of operating expenses lies on the fee paid to a fund’s investment manager or advisor.

Further costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Investopedia makes a clear distinction between funds, “expenses that are charged by the fund as reflected in the fund’s daily net asset value (NAV) and do not appear as a distinct charge to shareholders.”

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Funds to Keep In Mind

There are two different expense ratio fund; Index Funds and Actively Managed Funds are both type of funds to keep a list on. Index Funds usually carry very low expense ratios; the managers who oversee these funds are plainly repeating a given index, so the need to have a full management team on staff is deliberately discarded.

Actively managed funds, on the other hand, employs teams of research analysts examining companies as potential investments. By coming up with a team, creating and managing this team adds more costs that are then get passed on to shareholders in the form of higher and bigger expense ratios.

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What is the FCA?

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If you’ve been around the Forex trading market, you’ve probably heard or saw FCA somewhere on those trading websites and what have you. First of all, FCA stands for Financial Conduct Authority; they are the regulator for over 56,000 financial services and firms and financial markets in the UK and the prudential regulator for over 24,000 of those firms.

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What Does FCA Do?

FCA is the pioneer for the safer and more honesty financial market, they promote fairness and effectiveness for all consumers all over the world. FCA said, “It is our aim to make markets work well – for individuals, for business, large and small, and for the economy as a whole.”

The FCA started on April 1, 2013. They then started to grow and grow each year, regulating over 56,000 financial and the prudential regulator for over 24,000 of these firms. FCA governs 2.2 million people that are employed in the UK financial service who contributes 65.6 billion pounds in tax to the UK economy.

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How Does FCA Do All The Regulating?

According to FCA’s website, this is how;

Our strategic objective is to ensure that the relevant markets function well and our operational objectives are to:

Protect consumers – we secure an appropriate degree of protection for consumers.

Protect financial markets – we protect and enhance the integrity of the UK financial system.

Promote competition – we promote effective competition in the interests of consumers.

The Financial Conduct Authority continues as a public body that is funded completely by the firms and financial service providers they regulate by charging those fees. They are also accountable to the Treasury, which is responsible for the UK’s financial system, and to the parliament.

Finally, they also work with several consumer groups, trade associations, and professional bodies domestic regulators, EU legislators, and a wide range of other stakeholders.

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The Types of Dollars in the World

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We all know that the dollar is the native currency in the United States, but there are actually more countries that call their currency the dollar. These are some countries that share the same currency name with the land of the brave!

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Canadian Dollar

Canadian Dollar or CAD for its ISC code is the currency people in Canada use! It is mostly represented as C$ to remove any confusion among other dollars, but often times it is also represented as $. Just like any other dollar CAD is also subdivided into 100 cents, CAD is one of the major Forex currencies and is currently the 7th most traded currency in the world.

The CAD, as of today, produces and circulates 5 cents, 10 cents, 25 cents, 50 cents, 1 dollar and 2 dollars. Unfortunately, the production for the 1 cent was discontinued somewhere around the year 2012, banknotes that the CAD produces and circulates are in the form of 5, 10, 20, 50, and of course 100 Canadian dollar. One more thing about the current Canadian bills is, they are made of polymer as of 2011, as opposed to paper for the previous years of production.

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Belize Dollar

Belize Dollar or BZD for its ISC code is the major currency of Belize, it is represented as BZ$ for further distinguishing from other dollar currencies. This currency dates as far as 1976; it then replaced the current currency of the country which was the British Honduras Dollar. Like any other dollar, the BZD is also subdivided to 100 cents.

Along with the transforming of British Honduras on late 1976, it also replaced its currency to Belize dollar. It was freed from the British colony in late 1981, now it trades in the rate of BZ$2 to US$1.

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Australian Dollar

One of the most popular dollar currency, the Australian dollar or AUD for its ISC code; like most of the dollar currency, AUD is also subdivided to 100 cents. It is commonly represented as A$ to disperse any further confusions.

The AUD was once known as the Australian pound in 1966. But after several years, 1983 to be exactly, the pound was then transfigured from pound to dollar. As of late, the AUD is one of the major currencies exchanged on the world’s Forex markets. It ranks as the 5th most traded currency just behind the USD, EUR, JPY, and GBP.

The AUD circulates coins at 5 cents, 10 cents, 20, cents, 50 cents, 1 dollar, and 2 dollars. While the current banknotes circulation it has is as follows; 5, 10, 20, 50, and 100. The banknotes circulated are all made from polymer instead of papers.

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New Zealand Dollar

The New Zealand Dollar or NZD for its ISO code, the most common symbol the New Zealand dollar is recognized as NZ$. Like any other dollar currency, it is also subdivided to 100 cents. A common slang the NZD has is Kiwi, because of the kiwi bird that is present on their NZ$1 coin.

The NZD replaced the New Zealand pound at 1967, it has been pegged for a quite bit through a series of different currency pegs but has been allowed to float freely since 1985. The NZD is one of the major currencies exchanged on the world’s Forex markets. NZD currently circulates coins in 10 cents, 20 cents, 50 cents, 1 dollar, and 2 dollars. It also currently circulates banknotes are 5, 10, 20, 50, and 100 dollars.

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What is Exchange Trade Funds?

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Exchange Trade Funds or ETF according to the Investopedia is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Where is ETF Found?

ETF is usually found on shares of stock, bonds. Oil futures, gold bars, foreign currency because it is a fund type which owns underlying assets, and one more thing, ETF divides ownership of those assets into shares.

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ETF Shareholders

ETF Shareholders, well if you want to be one, don’t directly own or have any direct portion to the underlying investments in the fund, but indirectly own these assets. ETF Shareholders are then given a portion of the profit, some of which are the dividends paid, and ending up acquiring a residual value in case the fund is liquidated.

Residual Value according to Investopedia is an estimate of how much it will be worth at the end of its lease, or at the end of its useful life. The lessor uses residual value as one of its primary methods for determining how much the lessee pays in lease payments. As a general rule, the longer the useful life or lease period of an asset, the lower its residual value.

Why Would You Own ETFs?

The best effort ETF give out to its shareholders is the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share. Maybe the best thing about ETFs are their expense ratio is probably and more likely to be lower than the average of the mutual fund, but you would still pay the same amount of commission to your broker when you pay on any regular order.

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Investing Dictionary #2: Interest Rate Risk

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For today’s word of the day, it’ll be Interest Rate Risk. IRR according to Investopedia is the risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve, or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (such as through an interest rate swap).

More On Interest Rate Risk

The values of IRR heavily affect the value of bonds better than stocks, the way IRR affects bond is rather much more direct. When Interest Rates rise, bond prices receives a decent decrease and vice versa. The logic and rationale on that are interest rates increase, the opportunity cost of holding a bond marginally decreases. This is because investors are able to comprehend a better yield by switching to other investments that have the higher interest rate.

A definite example is; a 10% bond is worth far more if interest rate decreases, the bondholder then receives a fixed rate of return relative to the market, which offers a low rate of return as the receiving end of the decrease in rates.

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Market Interest Hikes

Like bonds, market interest rate increases when prices on previously issued-income securities as traded in the market decline since potential investors are now more inclined to buy new securities that offer higher rates.

It is only by having lower selling prices that it can pass securities with lower rates become competitive with securities issued after market interest rates have turned higher.

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Aussie Employment Rate Stutters, USD Weakens Against Gold

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Australian employment rate posted disappointing figures for jobs data after Fed’s expected hike in the interest rate with the Bank of Japan policy review ahead. Recent news revealed that the BOJ will be releasing a new and up to date policy views around noon Japan time.

Employment change figures in February showed an incremental drop of about 6,400, missing an expected gain of at least 16,000 with the unemployment rate ranging from somewhere in between 5.9 percent from 5.7 percent. The quarterly underemployment was still at 8.6 percent; according to Australian Bureau of Statistics “The underemployment rate is still at a historically high level for Australia, but has been relatively unchanged over the past two years”

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USD/JPY

The new policy review set by the Bank of Japan, the yen was down 0.10 percent at 113.28. The AUD/USD was also trading a tad lower; it is down by 0.18 percent at 0.7696. On the other hand, GBP/USD is currently trading at 0.05 percent to 100.31 opening the Thursday market.

While the U.S. dollar index at the morning market is trading heftily against a basket of currencies, losing momentum by at least 0.05 percent to 100.31. The whole market is expecting somewhere around the figures of 0.25 percent for the upcoming Federal Reserve Open Market Committee or FOMC.

FOMC noted that The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal fund’s rate; the federal fund’s rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal fund’s rate will depend on the economic outlook as informed by incoming data,”

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USD Versus Fed’s Hike

The greenback slips by more than 1 percent overnight, while earlier trades on Thursday morning showed it losing 1.13 percent. The Federal Reserve’s recent actions to increase the interest rates by 0.25 percent a 0.75-1 percent range.

The greenback continues to lose momentum; metals are having a tremendous run in the past days. The gold out of all the metals increased by 2 percent or $24.10 to 1,224.90 an ounce, according to analysts from Accendo Markets “Gold has been a clear winner from the U.S. dollar’s sharp selloff following the Fed’s rate hike, as the precious metal halts its downtrend to post fresh 2-week highs. In an unusual bullish move for the non-yielding safe haven asset after a rate hike, this can be entirely attributed to the aforementioned USD weakness,”

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Investing Dictionary #1: Debt Ceiling

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The term debt ceiling is constructed under the Second Liberty Bond Act of 1971, this means ceiling a number of bonds the United States can issue. The Liberty Bond is a kind of bond that is issued solely by the U.S. government during the World War 1. These Liberty Bonds were introduced as a means of financing the war effort in Europe.

Debt Ceiling and Why It Matters?

As of 2011, the debt ceiling was set at $14.3 trillion. Debt Ceiling is also known as the debt limit or statuary debt limit. The President then, before the debt ceiling was created, has the free reign of the country’s finances! The debt ceiling mainly was used to make the President fiscally responsible for everything that was happening financially by that time, over time the ceiling was set higher and higher by year it almost reached its limits.

When in an instance that the limit is reached, the United States would be in default; they would be lowering their credit rating and increasing the cost of its debt. Some worst showdowns that reached the limit have led the government to shutdowns. The conflict that is normal existence between the White House and the Congress; they argue whether or not the debt ceiling is to be used as a leverage to push budgetary agendas.

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1995 Conundrum

Looking back to 1995, the debt ceiling was used as a negotiating tool to increase the spending cuts. This was all devised by then-House Speaker Newt Gingrich, a part of the republican congress. Some instance like, President Clinton refused to increase the maximum cap of the debt ceiling, which the lead to a total shutdown of the government. The White House together with the Congress, after a very long discussion, had made the appeal on a balanced budget with modest spending cuts and tax increases.

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Obama Faces Same Dilemma Last ‘11

The most recent president Barack Obama has faced the same issue last 2011, the Republicans that are part of the Congress argued for deficit reductions in order to approve an increase in debt ceiling. It was that time that the U.S. Treasury debt was stripped of its triple-A rating.

The most recent government shutdown was around 2013, it was down for a good 16 days after conservative republicans attempted to defund the Affordable Care Act by leveraging the debt ceiling. It was eventually led to the suspension of the debt limit when the Treasury estimated to run out of money!

Trade12Basics is a daily updated blog about the happenings in the stock market, financial realms, and the world economy. It is also a place to find basics in trading and other sorts of tutorials that you can add to your knowledge. Subscribe to further educate yourself about the field that you are to partake in. Trade12Basics  is here for you