Margin Call Meaning – What It Is, Causes & How to Handle One

Margins are a commonly used tool among investors, especially those who take part in day trading. Margins allow traders to increase their buying power with borrowed funds using a mix of their own money and loans from their brokers in a process known as margin trading.

Although margin loans provide an opportunity for substantially larger gains, there’s also potential for substantially larger losses should things go in the wrong direction.

Margin traders also have to worry about the dreaded margin call, which takes place when their account value falls below minimum margin requirements, which could ultimately lead to forced liquidation within their portfolios.

What is a margin call and how does it work? Read on to learn about margin calls and your options should one happen to you.

What Is a Margin Call?

Traders who use margins must maintain a minimum margin requirement, or a minimum amount of value in unborrowed cash and equities in their accounts. This requirement ensures the brokers aren’t left holding the bag on bad trades should things go wrong.

Maintenance margin requirements vary from one brokerage to another, but the minimum requirement will be at least 25% — a requirement set by both the New York Stock Exchange and the Financial Industry Regulatory Authority (FINRA). However, some brokers charge as much as 40% of the amount you borrow.

What’s all of this mean?

When trading on margins, traders take out margin loans to cover a percentage of the value of the securities they are purchasing. For example, you might use $5,000 of your own money and $5,000 of the broker’s money through a margin loan to purchase stock, giving you a total of $10,000 in stock.

In this example, $5,000 of the investment is not your money — it’s borrowed from your broker.

Now imagine your $10,000 investment dropped to $6,250. At this price, after subtracting the $5,000 you borrowed, your personal equity in the investment is down to $1,250.

Because $1,250 represents 25% of the $5,000 margin loan, if the price falls below this point, a margin call would be triggered because the trader’s equity in the investment would fall below the 25% margin requirement threshold.

Pro tip: David and Tom Gardener are two of the best stock pickers. Their Motley Fool Stock Advisor recommendations have increased 563% compared to just 131.1% for the S&P 500. If you would have invested in Netflix when they first recommended the company, your investment would be up more than 21,000%. Learn more about Motley Fool Stock Advisor.

Types of Margin Calls

There are two different types of margin calls traders should consider before trading on margins. They include:

Maintenance Margin Calls

Maintenance margin calls take place when the account value falls below the minimum margin requirement with the broker. This is the type of margin call that’s described above. Each broker has a different minimum margin requirement, but the floor for this requirement is 25% of the borrowed amount that you must maintain in your account.

Federal Margin Calls

Federal margin calls are a bit different. While a maintenance-related call has to do with an investment that has already been placed, a federal margin call — often referred to as a fed call — takes place when a margin trade is being initiated.

According to the United States Federal Reserve’s regulation T, margin trades can be placed using a maximum of 50% borrowed money. This is known as the initial margin requirement. For example, if you’re planning on buying $10,000 worth of stock in a margin trade, you’ll have to have at least $5,000 of your own money to put up for that trade.

If you attempt to make a margin trade without having the 50% required to appease the Federal Reserve, a federal margin call will take place, which will lead to one of two outcomes:

  1. The Trade Will Be Blocked. With most brokers, if you attempt to make a margin trade without meeting the initial margin requirement, the trade will be blocked and cancelled, and you’ll have to set up another trade within the parameters set forth by regulation T.
  2. Other Securities Liquidated. In some cases, your broker may force the liquidation of other securities in your portfolio to free up the cash needed to make the trade viable.

Either way, the outcome isn’t what investors want.


How to Calculate at What Price a Margin Call Takes Place

Most traders would prefer taking a loss to triggering a margin call. After all, when a margin call is triggered, it means the loss on the investment was so large that it made the trade fall below the minimum requirements.

Most traders calculate at what price a margin call would take place, giving them a baseline of where to close the trade before prices decline to that point.

To determine at what price a margin would happen, follow this formula:

((Margin Loan Amount X Minimum Margin Requirement) + Margin Loan Amount) ÷ Number of Shares = Call Price

For example, let’s say your brokerage firm has a maintenance margin requirement of 30%. You want to buy $10,000 worth of stock with $5,000 of your own money and a $5,000 loan. The stock is worth $50 per share at the moment, meaning that you’ll purchase 200 shares.

Plugging these figures into the formula above would result in the following:

(($5,000 X 0.30) + $5,000) / 200 = $32.50

In this example, if the price of the stock you purchased for $50 per share fell to a market value of $32.50 per share, a call would be triggered, forcing the trader to respond.

Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.


What Are Your Options When You Get a Margin Call?

When you log into your brokerage account and see that a call has taken place, it may be a bit overwhelming. The good news is that you have three options to consider to remedy the situation before a forced liquidation takes place:

  1. Deposit Additional Funds. The best option is to deposit additional cash into your margin account to bring the cash and equity value of the account up to the minimum requirements. Of course, this only works if you have additional money outside the account that you can afford to add.
  2. Deposit Securities. The minimum requirements take both cash and the value of securities into account. If you have securities held elsewhere, you can deposit those securities into your margin account to bring the total value of the account up to the minimum requirement.
  3. Liquidate Stock. Finally, you have the option to liquidate shares of stock within your account, using the funds generated through the liquidation to bring your account value back up to par with minimum requirements.

How to Respond to a Margin Call

Returning to the example above, you know that a margin call will be triggered if the price of the stock falls below $32.50. For this example, let’s say the value of the stock fell to $30 per share. That means the current value of your 200 shares works out to $6,000. However, a call triggers as soon as the value of the investment falls below $6,500, meaning that the margin call is for $500.

At this point, you can choose one of three options:

Deposit Funds

First, you can choose to deposit at least $500 into your account to bring the account’s value after the margin loan back up to $1,500, or 30% of the total value of the margin loan. This requires adding $500 of new cash into your account, but you don’t need to move or sell any shares.

Deposit Shares of Stock

You also have the option to deposit shares of stock into your account. Say you have another brokerage account where you own $500 worth of stock. By transferring those shares into your margin account, you’ll bring its total value above the minimum margin requirement, bringing your account back into good standing.

Liquidate

Finally, you have the option to liquidate a portion or all of your holdings in the margin trade. Through the liquidation of a portion of your holdings in the investment, you can balance out the minimum requirement and eradicate the issue altogether.

For example, you could choose to liquidate 100 of your 200 shares, the sale of which would result in $3,000 cash at the current share price. These funds would be used to pay back $3,000 of the $5,000 margin loan.

You’re left with $3,000 worth of stock — $1,000 of your own money and $2,000 left of the margin loan — still invested. Your remaining $1,000 holdings are 50% of the remaining $2,000 loan — more than enough to cover your minimum requirement. However, you’ll have realized a substantial loss.


Final Word

A margin call is nothing that any trader wants to deal with, but if you make the decision to use margins, it will always be a possibility. While margins can expand profitability, they can also result in larger losses, and investors who use them need to consider the extent of these potential losses before getting involved.

Nonetheless, if the risk is worth the reward for you, and you end up with a margin call, don’t panic. Instead, consider which of the three possible remedies to use to bring your account back in line with requirements.

Moreover, if you’re going to trade on margins, treat the trade like any other loan and make sure that you never borrow more money than you can afford to return. In doing so, if and when a margin call does take place, you’ll have the ability to cover the cost if you decide to stay in the investment and await a recovery.

Source: moneycrashers.com

Reasons Many People Stay in Debt

Why People Stay in DebtWhy People Stay in DebtDebts are sometimes inevitable in life. For most people, it would be next to impossible to own a home, a car, pay bills or even get an education without credit. Federal Bank of New York released a report that put household debt and credit at $13.29 trillion in the second quarter of 2018.

Do people end up repaying all these debts? Unfortunately no; many people are up to their necks in debt and quite a large number of them are doing nothing towards repayment. There are numerous reasons why many people stay in debt. Here are several:

Living Beyond Means

This simply means that you are spending more than you are bringing in. If what you are earning cannot comfortably cater for house and car payments, insurance, other fixed costs and house expenses, then you cannot afford that kind of a lifestyle. It is even worse if you freely use your credit cards to pay for what your income cannot support. What happens is that debts start accumulating and accruing interest month after month and before you know it, you are swimming in debt with no way to escape.

Spending Without a Budget

According to a recent study, only 41% Americans use a budget. This means that most people cannot track their spending habits leave alone plan for the future. Without a budget and with several credit cards at your disposal, it is easy to spend your money uncontrollably and end up depending on credit as you wait for the next pay. The repeated cycle leads to failed repayments which consequently increases the outstanding debts.

Job Loss or Reduced Income

Having a job gives you the confidence to use credit knowing that your income is able to cover the repayments. Should you unexpectedly lose the job, it becomes impossible to make your repayments which may also attract additional interests and penalty fees. Even if you end-up getting another job, it is possible that your credit card debts will have soared to levels that you may no longer sustain. Similarly, a pay-cut or reduced income may also make you lag behind on your repayments leading to accrued debts.

Unwillingness to Sacrifice

If you are deep in debt and you still fight to maintain the same life style, chances are that you will never repay your debts or worse still, they will keep increasing. The ability or inability to save for debt repayments may depend on your willingness to forego a few things like holidays, cable, birthday gifts, a big house and a luxurious car among others. The question is; are you willing to make the sacrifice?

Struggling to Keep up Appearances

It is just human nature to want to fit into certain statuses set by the society, family, friends etc. In an effort to fit, you may end up spending beyond what you can sustain with your income. Unfortunately, the demands may keep going higher and higher and unless you can tell yourself to stop, you will be up to your neck in debt within no time. The fact that you are keeping up appearances means that things are not good financially in the first place so unless you win a lottery or come into some huge cash, you will stay in debt for a long time.

Financial Illiteracy

In a quest to understand how financially literate the world is, people were asked 4 simple questions regarding risk, inflation and interest. Out of 150,000 adults from over 140 countries, only a third could answer 3 out of the 4 questions correctly. If you have no idea of how credit works, you keep on making mistakes that will increase your debts in the long run. Such include; late repayments, carelessly requesting for credit top-ups, and falling for the wrong lines of credit among others. This also comes with the inability to manage the credit hence leading to heaps upon heaps of debts.

Final Take

While it is normal for people to find themselves in debt at some point or another, not all of them end up paying. The reasons why many people stay in debt range from genuine ones to outright selfish ones. Debt accumulates little by little and before you know it, you are too debt ridden to do anything about it. On the other hand, with proper planning, a little sacrifice and commitment, it is possible to disentangle yourself from the debt cycle one step at a time.

Source: creditabsolute.com

How I used SkyMiles to upgrade my Paris flight from coach to Delta One – The Points Guy


How I upgraded to Delta One on a flight to Paris — The Points Guy


Advertiser Disclosure


Many of the credit card offers that appear on the website are from credit card companies from which ThePointsGuy.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This site does not include all credit card companies or all available credit card offers. Please view our advertising policy page for more information.

Editorial Note: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Source: thepointsguy.com

9 Things the Coronavirus Is Making Obsolete

Man holding restaurant menu
Diego Cervo / Shutterstock.com

Change is constant. Millions of Americans have been vaccinated against COVID-19, and infection rates have plunged. But even if everyone got vaccinated tomorrow, it’s unlikely the world would ever slip back into all of its old habits and ways.

From plexiglass separators in stores to no-contact food delivery, many of the changes that have come our way are likely to stick around permanently. And other societal shifts mean that certain things to which we’ve become accustomed are likely to join pay phones and parking meters on the slow but sure march to obsolescence.

Here’s a look at some familiar parts of life that the coronavirus pandemic is slowly pushing to the sidelines.

1. Traditional movie theater experience

Monkey Business Images / Money Talks News

Hollywood’s magical movie palaces, with their armrest-jostling and sticky floors, now seem like something out of germ-filled horror movies. Will we ever again chomp popcorn while sitting haunch-to-paunch with strangers in a crowded cinema?

Major chains like AMC Theatres have narrowly dodged bankruptcy after extended closures during the pandemic. In the meantime, moviegoers have flocked to home streaming services such as Hulu and Amazon Prime Video, where the concessions require no cash and the bathroom breaks are unlimited.

The final curtain may not be falling on the movie-theater experience, but a second, more subdued act seems to be waiting in the wings. If you’re interested in exploring affordable alternatives to the silver screen, check out “13 Streaming TV Services That Cost $20 a Month — or Less.”

2. Reusable restaurant menus

Man ordering from a digital restaurant menu
Pond Saksit / Shutterstock.com

Whether they’re plastic laminated one-sheets or those enormous books handed out by fine-dining establishments, reusable restaurant menus may soon be as outmoded as aspic salads.

They’ve never exactly been a clean option: Previous patrons dirty up menus with soda spills, cough and sneeze on them, and even lick their fingers to turn the pages. No wonder the Centers for Disease Control and Prevention recommends disposable or digital menus going forward.

Whatever type of menu you find in your hands the next time you eat out, heed “8 Ways Restaurant Menus Trick You Into Overspending.”

3. Snow days

Studio Peace / Shutterstock.com

Kids who grew up in wintery climates — chiming in for Minnesota over here — know very well the blissful gift of a snow day, when school is canceled due to blizzardy weather or frigid temperatures. Time to pull the covers up over your head, go back to sleep and, later on, indulge in video games, trash TV and snacks.

But now that nearly every school in the nation has had to figure out how to teach classes online, weather cancellations seem unlikely, as schools can just switch to virtual learning for a day and have kids use computers for homework, not games. Those beloved snow days may be melting away for good.

4. Print magazines

VGstockstudio / Shutterstock.com

The print-magazine industry has been slipping for years, with many publications reducing their annual issue count, and others becoming digital-only.

And with fewer magazines to flip through, there are also fewer places to do so. The CDC recommends that dental offices, for example, no longer offer shared print magazines for patients to flip through, since they can’t be easily disinfected.

If you’re interested in switching to digital titles, check out “4 Ways to Read Magazines for Free or Cheap.”

5. Buffets

Buffet food at a restaurant
suriyachan / Shutterstock.com

Ah, all-you-can-eat buffets, the big eater’s friend. But this method of meal delivery is fraught with issues. Besides the food sitting under heat lamps and on steam tables, quickly getting cold, we now must worry about forking up fried noodles that everyone in the restaurant has sniffed and coughed over.

It’s no wonder that the buffet restaurants Souplantation and Sweet Tomatoes (of the Garden Fresh Restaurants chain) were among the early casualties of the pandemic, as we reported in “11 Restaurants That Filed for Bankruptcy Amid COVID-19.”

6. Birthday candles

Woman blowing out candles on a birthday cake
Lucky Business / Shutterstock.com

It’s an iconic image of celebration: kids and adults alike pursing their lips and puffing away at flaming candles atop a birthday cake. But blowing out the candles means blowing spit and aerosolized germs onto a dessert that people are about to eat and out into the room around you.

7. In-person voting

A close-up picture of a mail-in ballot for an election
Svanblar / Shutterstock.com

Some states, including my own home state of Washington, moved to all-mail-in voting years ago and never looked back. Rather than leave work early to stand in line with strangers, often in inclement weather, voting by mail happens on a voter’s own individual schedule.

Voters also have time to research candidates and issues before filling out their ballots and popping them in the mail, later tracking their ballots online to ensure they were received.

According to The New York Times, a record number of Americans were able to vote by mail in 2020, and while some states still require in-person voting, a sea change is happening here.

8. Crowded elevators

Masked woman alone in an elevator
New Africa / Shutterstock.com

Think of how jammed an office elevator can get during those inevitable work rush hours. The Centers for Disease Control has issued guidance for employers, urging businesses to limit how many people can use an elevator at the same time — as well as to add floor decals to space passengers out and encourage mask-wearing.

And if you dread that awkward elevator small talk, you’re in luck: The CDC also advises elevator users to minimize chatting. The good news: No more annoying elevator pitches?

9. Handshakes

Woman in mask giving peace sign
Denis Andricic / Shutterstock.com

The CDC still recommends that those who are unvaccinated limit gestures that promote close contact — skipping handshakes, hugs and even elbow bumps.

Hugs, at least among close family members who share germ circles anyway, will likely never go out of style. But handshakes with almost everyone can be replaced with waves, verbal greetings and even peace signs or Mr. Spock’s Vulcan salute.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

What You Need to Know Before You Move to Massachusetts

When it comes to the New England region, Massachusetts is the most populous state. Home to prestigious schools, many historic sites, and booming businesses, this coastal state has become the sixth-most popular destination for foreign travelers. The Bay State is bordered by the Atlantic Ocean, and the states of Connecticut, Rhode Island, New Hampshire, Vermont, and New York. Great for urbanites and nature lovers alike, Massachusetts has a variety of different communities and regions.

Boston SkylineBoston Skyline

Housing Trends in Massachusetts

Since Massachusetts is a popular state, you’ll want to get on board with home scouting quickly. One of the most prominent housing trends in Massachusetts is the lack of supply. This shortage has created a surge on home prices according to a recent statement by the Eric Berman, director at the Massachusetts Association of Realtors. In fact, there were fewer than 10,000 single-family homes for sale in December and January in Massachusetts, compared to 38,000 in September 2006.

A Seller’s Market

Yes, it’s a seller’s market in Massachusetts. Here’s the lowdown. Although single-family home sales in January were slightly down — 1.2 percent — compared with the same period last year, the median price jumped 4 percent to $369,000, per the Massachusetts Association of Realtors. For condominiums, the median price increased more than 6 percent to $355,000 for the month of January, though sales fell by about 7 percent.

Why the price hikes? It’s due in part to the lack of available land for new construction. Also, in some of the more affluent areas, people seem to be staying put in favor of remodeling or adding extra space. Together, these decisions may limit housing supply – at least in some areas – for first-time buyers and moderate budgets.

Renting in and Around Massachusetts

Should you rent instead? If the idea of buying appeals to you but you just can’t pull it off, renting may be an option. The average rent for an apartment in Boston is $3,001, a 3% increase compared to $2,925 in 2017. For this price, you may get – on average – 815 to 986 square feet.

But other cities may be more reasonable. As of May 2018, the average rent for an apartment in Springfield was $1,061 which is a 0.94% increase from last year when the average rent was $1051, and a 1.23% increase from April 2018 when the average rent was $1048. Naturally, you need to factor in your location needs and maximum tolerance for commuting.

Primary Housing Styles in Massachusetts

With a history of settlement since the Pilgrims in 1620, New England boasts a spectrum of architectural styles that are older and more varied than in any other part of the country. One of these, not surprisingly, is the Cape Cod. It is one of America’s oldest home styles and has a very cozy feel. Other popular styles include an easy-living ranch and a country-style with a wrap-around porch.

Harvard SquareHarvard Square

Multi-Faceted Massachusetts

Massachusetts has something to offer whether you prefer the beach or big city bustle. Here are a few places to keep in mind when you are ready to put down some roots. What is your neighborhood style?

  • The Quainter Side of MA: To experience the quainter side of Massachusetts, you may want to head about an hour’s drive north of Boston to the seaside town of Rockport for, yes, rocky beaches, seagulls, and probably a lobster roll. Marblehead, a town of about 20,000 people, is less than an hour north of Boston and is often called the birthplace of the American Navy. Its known for its yachting, sailing, kayaking, etc.
  • Mountain Hip: Great Barrington has a Railroad Street, the Guthrie Center, eateries and folk music with some skiing close by if you like winter sports.
  • Outdoor Adventure: 90 miles of the Appalachian Trail runs through Massachusetts, so get your hiking boots and head out for a long-distance or day hike. Or walk the Freedom Trail, a 2.5-mile, brick-lined route that leads you to 16 historically significant sites in Boston.
  • Way Cool: Three of Boston’s neighborhoods get high marks for cool and are cited by the Boston Globe: (1) Jamaica Plain as “edgy cool,” (2) Allston – Brighton as well-educated and “up-and-coming,” and (3) Davis Square for trendy, walkable, and “prime hipness.”
  • Charmed I’m Sure: Massachusetts really turns up the charm in Cambridge. A classic university town, here you can find cobblestone streets, musicians busking, street vendor artists and small cafes. Harvard Square in the center is always action filled and great for people watching.
  • Great Day for a Swim: Woods Hole in southern Cape Cod could make for a perfect day at the beach. This area shows off a great bike path along the coast leading to Falmouth, golden beaches, aquariums devoted to marine biology, shops, and the ferry to Martha’s Vineyard. Provincetown, aka P-town, is another Cape Cod city that attracts events like the International Film Festival, a strong LGBTQ community, art galleries, and craft stores.
  • High Crime: North Adams, Fall River, and Brockton are areas to watch for. You can also check current FBI stats to help you determine whether to pass through or put down roots.
  • Tech-Savvy: Cambridge is home to MIT – Massachusetts Institute of Technology so there’s potential recruiter heaven. According to Built in Boston, there are 50 start-ups to watch over the next year, as Boston’s tech sector flourishes and venture capital firms pour money into edtech, fintech, and healthtech.

It seems that modern Massachusetts is also somewhat of a global leader in biotech, engineering, higher education, finance, and maritime trade. Perhaps this is why Forbes ranks Boston #30 in its list of Best Places for Business and Careers and #77 in job growth.

Find Your Perfect Home in Massachusetts

We can help you find your perfect home in Massachusetts. Whether it is to rent or buy, start your search on Homes.com today!


Rana Waxman parlays years of work experience in several fields into web content creation aligned with client needs. Rana’s versatile voice is supported by a zest for research, a passion for photography, and desire to provide clients with a purposeful presence online. In her non-writing hours, Rana is a happy yogini, constant walker, avid reader, and sometimes swimmer.

Source: homes.com

Fear Grows About Luxury Condo Real Estate Bubble

With great fanfare, construction started in 2014 on the Ritz-Carlton Residences, Miami Beach, a luxury condominium project in Miami. Designed by famed Italian architect Piero Lissoni, it is expected to contain 111 high-end condominiums residences and 15 stand-alone villas, but the project has been mired in construction delays and controversy. Three lawsuits have been filed against the project. The plaintiffs claim that they placed a down payment for a luxury condo, and the contract said the work would be completed by June 30, 2017. Work still continues on the project.

Condo BuildingCondo Building

The Glut of Luxury Condos

The Ritz-Carlton Residences, Miami Beach project is one of many projects that entered the luxury condominium market after the real estate crash. Fueled by a growing demand, Miami, New York, Chicago and other large cities have seen a boom in the construction of inner-city residential towers, especially in the high-end market. New York City saw nearly 30,000 units constructed in 2017. Construction is at a level not seen since the 1980s. Miami has over three years worth of inventory on the market as 70 condo towers with 7,112 units have been completed in Miami-Dade County since 2011.

The huge increase in the number of luxury condominiums has formed a glut in the market and created an oversupply.

“The high-end condo market, such as 432 Park (in New York City), is not selling as well and as fast as the developers wish,” said Maria Wall, a realtor at the Corcoran Group.

The same is true for San Francisco. The high-tech boom super-charged the real estate market, and developers have broken ground on numerous luxury condominiums projects. But the market is saturated with new units.

“The luxury condo market segment is now the weakest segment of the San Francisco market,” Paragon Chief Market Analyst and Vice President of Business Development Patrick Carlisle said. “If more new projects continue to come on the market before existing inventory is sold and without a corresponding increase in demand, the market can only become softer.”

Reduced Demand

Adding to the troubled market is the decline in demand. International buyers have been a key segment for the luxury condo market, but the high value of the dollar is hurting the buying power of international clients. The drop in oil prices has also reduced the demand for luxury residences among wealthy people from Russia and the Middle East, who had been buying many of the high-end units.

“In the wake of some extremely high-ticket purchases that took place with Russian buyers, there was an anticipation that it would be a deeper market for us,” said Frederick Peters, chief executive at a Manhattan real estate company.

Besides the decline in international buyers, places like New York are dealing with the repercussions of tax reform that passed at the end of 2017. The new tax laws limits deduction for state property taxes. That has made some buyers, especially in the high-end market, skittish.

Financing has also become a problem. The Miami Association of Realtors reported that only a small fraction of condo buildings in Miami have been able to get access to Federal Housing Administration loans.

Condo InteriorCondo Interior

Worries About a Bubble

The change in the luxury condominium market has started to raise concerns among economists, and people within the real estate industry. Janet Yellon, former Federal Reserve chair, warned last year that the prices for some commercial projects, which include luxury condominiums, were valued too high.

“Now, is that a bubble or is too high?” she said. “And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

The Federal Reserve has been working to tighten credit for commercial projects since 2015 when it issued a warning to banks about commercial real estate bank loans. The central bank was concerned about lax limitations on commercial real estate loans, and it outlined a series of steps it wanted commercial lenders to make. The move has made it more difficult to finance commercial developments.

Buyers Market

The reduced demand and glutted market are having a direct impact on the luxury condominium market. In early 2018, real estate sales declined 25% year-over-year in Manhattan. The decline was especially noticeable in the luxury condominium market. Prices fell 15% and sales were down 24%. Units are staying on the market for an average of a year and a half, a sharp increase.

“The next couple of years will be all about price discovery,” said Jonathan Miller, president of Miller Samuel.

Even while the market has shown signs of weakness, developers are continuing to build. It can take years to build a high-rise tower so many of these projects won’t be completed anytime soon. That means the number of luxury condominium units on the market is only going to increase, fueling the chances of a bubble.

“The onslaught of high-end development in Manhattan and Brooklyn shows no signs of slowing down,” said StreetEasy senior economist Grant Long.

Cash-strapped developers in Miami are now asking for a 50% deposit on some new condo project. That is more than twice the national average. The move puts more pressure on the market.

Buyers are also able to negotiate with sellers and developers on the price of a condominium. The huge glut has created a buyers’ market, and unlike the single-family residential market, buyers are in the driver’s seat.

“For deals to happen, the sellers are traveling a lot further to meet the buyer in price than they were a year ago,” Miller said. “That’s a good thing in the long run. It’s a sign of the market adjusting.”


James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.

Source: homes.com

8 Reasons to Invest in Exchange Traded Funds (ETFs) Over Index Mutual Funds

How should you go about investing?

Investing in individual stocks gives you the most control, but for newcomers and even intermediate investors, this idea poses a challenge. Each stock needs to be well-researched and chosen for specific characteristics.

If you’re building a diversified portfolio, researching a host of individual stocks can be incredibly time-consuming. That simply won’t work for most.

Many investors look to investment vehicles like exchange-traded funds (ETFs) and mutual funds as a way to solve the problem. Both types of funds provide access to a highly diversified portfolio with a single investment, taking much of the research and legwork out of the process. But ETFs have a distinct advantage over mutual funds.

What Are Mutual Funds?

Mutual funds are a managed portfolio investment that pools investment dollars from a large group of investors and invests according to the strategy outlined in the fund’s prospectus. When gains or dividends are enjoyed, each participant in the fund shares in the returns based on their share ownership.

In general, mutual funds are actively managed, following investment strategies designed to produce significant growth in the search of alpha — in other words, looking to beat average market returns.

In many cases, these funds will have a strategy of using high-risk derivative investments to multiply the results of a benchmark index. For example, the fund’s strategy may be to use derivatives to return twice the performance of the Dow Jones Industrial Average or S&P 500 index.

Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up, you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals. Learn more about Vanguard Personal Advisor Services.


What Are Exchange-Traded Funds?

Exchange-traded funds, or ETFs, are also bucket investments that pool money from a large group of individual investors, and then invest in various assets based on the strategy outlined in the prospectus. As the fund generates returns, they are shared by all investors based on the number of shares they hold.

As the name of these funds suggests, ETF shares are traded on stock market exchanges like the New York Stock Exchange or Nasdaq, which differs from mutual funds.

Another major difference between these two types of funds is that the vast majority of ETFs are passively managed, meaning the portfolios essentially run themselves without a fund manager actively buying and selling, which greatly reduces cost. In fact, according to Forbes, only about 2% of ETFs are actively managed.

One of the most common forms of these funds is known as the index ETF, often referred to as index funds. These investment portfolios are composed of all the stocks listed on a major market index in an attempt to replicate the returns in a sector or the whole market.

Very little trading actually occurs inside index funds because their positions only change when stocks are added or removed from the underlying index for the fund — unlike mutual funds, which could make several changes to their holdings in a single trading day.


Why You Should Invest in ETFs Over Mutual Funds

Although the potential to generate gains at a rate that doubles or even triples what you see from major market indexes is an exciting idea, there are some major drawbacks to chasing alpha and significant benefits to taking a more measured approach with ETFs.

1. Reduced Risk

Any fund you invest in will clearly lay out its investment objectives and its investment strategy in its prospectus. Paying close attention to the strategies employed by mutual funds, you’ll generally find that there’s significant risk involved, whereas the opposite is generally true for ETFs.

ETF investors are looking for a long-term, relatively stable opportunity to build wealth. These fund shares don’t promise outsize returns. In fact, they often work to mirror the returns the market generates, and those reasonable expectations come with a more reasonable risk profile.

2. Mutual Funds Don’t Always Generate Outsize Gains

When you consider buying mutual fund shares, you may think you’re going to make out like a bandit. Who doesn’t want to beat the market? But beating the market is incredibly difficult, even for mutual fund managers.

According to Vanguard, only about 18% of active mutual fund managers beat their underlying benchmark over a 15-year period. That means in 82% of the cases, investments that simply kept pace with the market would have outperformed their higher-cost, actively traded peers.

The reality of actively traded funds gets worse when you look at the 18% of overachievers in more detail. 97% of the managers that actually did beat the market had at least five years of underperformance in that 15-year period, with more than 60% having seven or more years missing market averages.

What the prospectus may say, what you think your returns will be, and reality are often very different.

3. Transaction Flexibility

ETF shares are easy to access and often just as easy to offload when it’s time to exit your position. That’s because these funds are exchange-traded, available to investors of all stripes to buy and sell on the Nasdaq, NYSE, and other exchanges, both big and small.

Access to mutual funds is very different. Although these funds are available through a few different methods, they aren’t traded on the open exchanges, making it more difficult to buy and sell shares. In order to purchase these funds, you will need to go directly through the fund manager.

Sure, some brokerages and other services offer access to them, but they’ll also generally charge an additional fee for placing your orders.

4. Lower Cost

No matter which way you choose to go, there will be fees involved. After all, someone has to create the fund and manage it, making sure that it follows the plan outlined in the prospectus. That person or team needs to be paid for their work, and their salaries aren’t cheap. Not to mention the cost of making the trades themselves.

These expenses are outlined in a fund’s expense ratio, which shows the overall cost of ownership as a percentage of the investment’s value on an annual basis.

ETFs trade minimally, often holding investments for the long haul, reducing the transaction fees associated with the investment and helping to generate low expense ratios. Another factor that leads to a lower expense ratio is the reduced management fees as a result of not having to actively trade day to day.

Mutual funds have teams of traders and analysts that need to be paid, while passively managed ETFs don’t. As a result, ETFs naturally become the low-cost alternative to actively managed funds.

5. Tax Advantages

Returns from investing are taxed in different ways depending on how they’re generated. Returns generated from an investment held for less than one year are taxed like ordinary income.

Profits generated from investments held for more than one year are charged capital gains taxes, which can be significantly lower than your income tax rate, depending on your tax bracket and the amount of capital gains generated.

Because mutual funds are actively traded, their returns tend to fall under the less-than-one-year category. Returns from investments held in these funds are generally taxed at your standard income tax rate, which can be expensive for high-income earners.

ETFs are tax-efficient.

The majority of ETFs hold stocks in their portfolios for long periods of time — often years or even decades. As a result, the majority of returns generated through these investments will be taxed at the capital gains rate, rather than the income tax rate, offering superior tax efficiency.

6. Full Investment Exposure

Mutual funds generally hold a percentage of their net asset value, or NAV, in cash in order to maintain enough funding to pay back any investors wishing to cash out. As a result, that portion of the fund’s assets isn’t getting any exposure to the potential gains the market has to provide.

Because ETFs are exchange-traded, shares are purchased and sold through a broker-dealer just like a stock. That means they are able to invest their full NAV, providing 100% exposure to the market for their investors.

7. No Minimum Investment Requirement

There’s no minimum investment required to purchase an ETF other than the price of a share itself, which generally ranges from tens of dollars to a few hundred dollars. As a result of the low cost associated with investing in these funds, they are far more popular than their actively traded counterparts.

When investing in mutual funds, you’ll typically be asked to make a minimum investment ranging from $500 to $5,000, with the average being around $2,500. That’s a significant chunk of change for a new investor just starting to build a portfolio.

8. Liquidity

Liquidity — how easy it is to turn your investment into cash when it’s time to sell shares — is a major factor that you should consider regardless of what you’re investing in.

ETFs are highly liquid investment vehicles that enjoy incredibly high demand. A quick look at the most popular ETFs by trading volume at the ETF Database shows some of these funds trade hands nearly 100 million times per day.

Mutual funds are also liquid, and you should be able to sell your shares at any time. That is, as long as everyone else isn’t cashing in on the fund at the same time.

Keep in mind that these funds hold a portion of their assets in cash to pay investors that want out. If a flood of investors decide to exit all at once and the fund doesn’t have enough cash on hand, you may find yourself waiting to access your money.


Final Word

Throughout history, humans have been in pursuit of more. The idea that you can have more than you do now is what drives you to get an education, work hard in your career, and make many of the investments you do in yourself and in the market.

Naturally, when you see a mutual fund that offers you the opportunity to generate a stronger return on your investment than an ETF, it seems like a no-brainer. Why wouldn’t you want the bigger return?

However, the promise of larger returns in the stock market, or in any area of investing, is generally a double-edged sword, where outsize profit potential is paired with outsize risk, and often cost.

Although there are some actively managed funds that have outpaced the market, these are rarities. Promises of outsize returns through these funds are broken more often than not, but the high cost associated with investing in them is always as described. All in all, passively managed ETFs are a better fit for most investors.

Source: moneycrashers.com

6 Reasons to Invest in Fixed-Income Securities Such as Bonds

For most, the stock market is synonymous with wealth. Images of fast cars, mansions, yachts, and beautiful people plaster computer screens explaining to beginners what they could have in the fast-money world of investing and trading. Many new investors believe the extravagant story surrounding the stock market and the fast money that lives within it.

But recall Aesop’s fable of “The Hare & the Tortoise.” The story captures the fascination humans have for the flashy, self-assured, charismatic personalities and our tendency to overlook those steady, responsible individuals who surround us each day.

Equity securities — or stocks and other instruments that allow you to purchase equity ownership of underlying securities — are the “hares” of the investment world. They draw us to them with the promise of an easy buck — a short ride to quick riches and a future full of mansions, exotic cars, and beautiful people. Life as a hare can be exciting, but it requires a strong stomach to handle the volatility and the frequent gaps between the promises and your results.

The vast majority of investors would be better served by regular investments in fixed-income securities — the “tortoises” of Wall Street. Debt investments are the foundations of great American fortunes. One of the richest people in the United States in his era, financial magnate Andrew Mellon reportedly said, “Gentlemen prefer bonds.”

Despite their lack of popularity with some investors, the global bond market is enormous, with more than $92 trillion of bonds, compared to $70 trillion of equity investments in 2016. Approximately $30 billion of corporate bonds are traded daily in the United States, with average interest rates between 3.66% and 4.71%, the lower rate being charged on corporate bonds with a Moody’s credit rating of Aaa and the higher being charged on bonds with the Baa credit rating.

Chief investment officer for the Gates Foundation and Bill Gates’ personal portfolio, Michael Larson, considers himself “an old-fashioned investor with a macro view,” according to GuruFocus. Larson believes his primary job to be asset allocation, and he maintains a significant percentage of the portfolios in fixed-income securities.

Reasons to Own Fixed-Income Securities

While investors who are seeking a regular monthly income generally rely on fixed-income investments, they are appropriate in nearly every investment portfolio due to the following:

1. Safety of Principal

Is investing in bonds safer than investing in stocks?

Unlike stocks, when you invest in a bond, you’re guaranteed to receive your initial investment back when the bond matures — plus interest — unless the borrower defaults. According to Standard and Poor’s (S&P), the default rate for investment-grade bonds worldwide between 1981 and 2016 averaged 0.06%. Speculative bonds during the same period had an average default rate of less than 5%. As a consequence, the vast majority of bond owners get 100% of their investment returned when the bond is due.

Sometimes what matters is not what you can make, but what you can keep.

Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up, you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals. Read our Vanguard Personal Advisor Services review.

2. Consistent Income

Bond owners receive a regular, predictable income in both good and bad economies. A legal contract between the business issuing the bonds and the purchasers of the bonds confirms and documents the interest rate and payment schedule, which secures timely and consistent payouts.

While some companies pay regular dividends — and many have a long history of doing so — the interest rate of investment-grade bonds is almost twice as much as the dividend rate for the average S&P 500 company, and can be similar to some high-dividend investments. According to MarketWatch, 82.6% of the S&P 500 companies paid a dividend with an average return of 1.87% in 2017, based on the closing equity price at the end of the year. In the same period, the Federal Reserve Bank of St. Louis reported an average interest rate of 3.51% for Aaa-rated bonds — the highest grade of long-term bonds. Issuers of lower-quality bonds are required to pay higher rates.

3. Reduced Volatility

The extent to which the price of a security changes over time compared to previous periods is known as volatility. Historically, bond volatility is significantly lower than stock volatility, since changes in a bond price are tied to market interest rates rather than investor emotions.

According to Forbes, the 30-day volatility for stocks over the past five years is 12% versus 2.8% for bonds over the same period. As a consequence, Gregg Fisher of the investment management firm Gerstein Fisher told the New York Times, “You own bonds to reduce volatility, not to earn a return.” Owning less-volatile bonds as a buffer can help you stick to your long-term plans and remain invested when stock prices drop.

4. Identified Return

Equity investment returns are the combined dividends and increase in value during the holding period — neither of which is guaranteed. Prices of common stock are influenced by factors beyond the investors’ control, including economic and sociological trends as well as investor confidence. As a consequence, planning equity investment returns is complicated, and the outcomes are uncertain.

On the other hand, the terms of interest payments for a bond are set by contract between the lender and the borrower with defined legal remedies in the event of a default. Also, a bond’s principal — its face value — is guaranteed to be returned to the bond’s owner at maturity. In other words, as a bondholder you know when and how much cash you will receive during the life of the bond, enabling you to plan for specific events such as retirement.

5. Liquidity

Liquidity is the ability to turn an asset into cash within a reasonable time and at a reasonable price. “Immediacy” is ultra liquidity — a state where there is always an equilibrium between buyers and sellers so that most transactions do not change the price of the asset. Bonds of public corporations and governments are generally liquid because their price is only affected by interest rate changes.

Allan Roth, Founder of the Wealth Logic Advisory Firm, told the New York Times, “Bonds provide liquidity and courage when stocks are falling.” Nevertheless, the American Association of Individual Investors warns that there are many different bond markets and types of investors in the bond market, so some bonds and bond markets may be more liquid than others.

6. Tax Advantages

The interest received from investing in municipal bonds — bonds issued by a state, city, or local government — is exempt from federal income tax. Also, the interest on municipal bonds issued within the owner’s state of residence is usually free from state or local taxes. Moreover, those in higher tax brackets can significantly benefit from investing in municipal bonds.

Although the interest exemption remains intact following the passage of the Tax Cuts and Jobs Act of 2017, The Bond Buyer predicts lower volumes in municipal financings due to the elimination of advance refunding and the potential loss of state funds due to lower property tax revenues. The combination of stable demand for municipal bonds and lower supply may stimulate a rise in bond prices and lower yields.


A Portfolio Approach for Fixed-Income Investment

Financial professionals know that the most successful approach to investment success is diversification and balance in a portfolio:

  • A portfolio of equities might produce the greatest return over a period but is extremely volatile. A report in Atlantic magazine notes that 401(k)s and IRAs lost $2.4 trillion in value in the last half of 2008, dropping as much as 25%. Many people planning to retire were forced to keep working or scale back their retirement plans as a consequence.
  • A portfolio consisting solely of fixed-income securities, while avoiding the losses of the market like we experienced in 2008, provides security at the cost of performance. A study by The Balance indicated that equities consistently outperformed bonds over the three-, five-, and 10-year periods ending on September 30, 2014. Christine Benz of Morningstar predicts that equities will earn 8% to 10% and half that amount for bonds over the next 20 to 30 years.

A common way to approach allocation of fixed-income investments is to consider your age. For example, if you are 33 years old, 33% of your investing dollars should be stored in these relatively stable investments, leaving 77% of your investment portfolio available for higher-return investments like traditional stocks.

As you age, your tolerance for risk will reduce due to a shortened time horizon that will allow for less of a recovery should things go wrong. As a result, increasing your allocation to fixed-income investments as you age will help to properly balance exposure to the larger gains provided by investments in stocks with the insurance provided by investments in bonds and other fixed-income securities.


Final Word

The decision to invest in bonds or equities should not be a question of “either/or,” but “both/and.” Each security has its place in a portfolio, ideally reducing risk without significantly affecting returns. When thinking about your portfolio mix, consider the lesson of another Aesop fable, “The Lion and the Boar,” about the two beasts struggling over who was to drink first at the well. During their ferocious battle, they spied a committee of vultures happily anticipating their next meal. The two antagonists subsequently decided that working together was a better outcome for both, since neither knew who might survive the battle.

According to Zacks, the fixed-income market is huge, with more than $40 trillion being owed through fixed-income securities in the United States. There is a fixed-income security for every need with a market of different types, issuers, terms, maturities, securities, and options. For those who might be reluctant to buy bonds in lieu of equities, one outcome is certain — you will sleep much easier in bear markets with at least some bonds in your portfolio.

Do you have bonds in your portfolio? Will you add bonds in the future?

Source: moneycrashers.com