Monthly Archives: May 2009

Preferred Stock

May 8, 2009 By in Basic Concepts, Preferred Stock Tags: , , , , , , , Leave a comment

What it is…

Preferred stock, sometimes called preference stock, is a type of equity (ownership interest) in a company.  Holders of preferred stock have at least one extra feature, sometimes called a “preference,” that holders of common stock don’t have.  As a practical matter, however, unless the preferreds are convertible into common, US investors regard preferred stock as fixed income (debt), not equity.  (This ignores the fact that preferreds are perpetual securities (they have no ending date), unlike virtually all fixed income, where the borrower is required to return the principal to the lender after a specified period of time.) Continue reading →

Do stock splits mean anything?

May 6, 2009 By in Stock Splits Tags: , , , , , Leave a comment

The short answer:  in the US, no; elsewhere, probably.

What a stock split is

In a stock split, a company issues new shares to existing shareholders, in proportion to their pre-split holdings.  In a two-for-one split, for example, each holder of one share receives one new share, so that he then holds two.  His ownership interest in the company is unchanged, however.  The value of his share total remains unchanged, as well.  In the case we are talking about, on the day the stock begins trading ex the split, it typically opens at roughly half the price of the pre-split stock.  (A stock dividend is basically the same as a split, although the terminology and the bookkeeping may be a little different.) Continue reading →

ETFs vs Mutual Funds (II) index funds

May 6, 2009 By in Basic Concepts, ETFs Vs. Mutual Funds, Uncategorized Tags: , , , , , , Leave a comment

Two starting comments

Why are there so many different index products, under the S&P, FT, Dow Jones, MSCI…brands, that do basically the same thing?  Index-tracking is a commodity product.  Given a certain level of technical competence in design, to make sure that the returns are in line with the appropriate index, one product is basically the same as another.  Having slightly different benchmarks with slightly different constituents, requiring slightly different holdings in the ETF/mutual fund, raises the costs for an institutional investor to switch from one provider to another.  So it takes the edge off what would otherwise be brutal price competition.

Does an S&P 500 index product have 500 stocks in it?  Maybe, maybe not.  The ETF/fund prospectus will say for sure, but all that’s usually required is that the product have a basket of stocks in it that tracks the appropriate index with a high degree of accuracy.  It’s much easier to handle inflows and outflows if you don’t have to deal with the most illiquid stocks in the index.

The ETF/fund websites should have charts or other information about “tracking error.” i.e. how closely the index product mimics its index. Continue reading →

Asian Economic Development Model–Hong Kong

May 5, 2009 By in Asian economic development, economics, Hong Kong Tags: , , , Leave a comment

What’s unusual about Hong Kong’s decision to peg its currency to the US dollar in 1983 is that this was a political decision, rather than an economic one.  So Hong Kong’s subsequent development is both economically and politically influenced.

Background

In 1839 and again in 1856, Great Britain invaded China to force Beijing not to ban the trade in opium,  which Britain supplied from India and which was a key factor in its economic health.

At the end of the First Opium War, Britain also compelled China to give up Hong Kong Island; at the end of the Second Opium War, China was forced to give up Kowloon, a narrow strip of the mainland directly opposite Hong Kong Island, as well.  In 1898, Britain obtained a 99-year lease on the New Territories, a tract about 10x the size of Hong Kong Island, consisting of land surrounding Kowloon and a number of adjacent islands, including Lantau Island (where today’s Hong Kong airport and Disneyland stand).  These three areas comprised the Crown Colony of Hong Kong. Continue reading →

Exchange Traded Funds (ETFs) vs. Mutual Funds (I)

May 3, 2009 By in Basic Concepts, ETFs Vs. Mutual Funds Tags: , , , , , Leave a comment

Large institutions, like pension funds, and very wealthy private individuals may be able to hire professional money managers directly.  But most of us deal with our money managers through intermediaries.   For a long time  investors had basically one choice, a mutual fund.  For about the past ten years, however, another alternative has been available, the exchange traded fund (ETF).

One topic, three posts

I’m going to talk about ETF vs. mutual fund in three posts.  This one, the first, will talk about the general structure and features of each.  The second will talk about index funds vs. index ETFs, including how both deal with international stocks.  The third will cover actively managed funds vs. actively managed ETFs.

Note that I’ll be talking about funds incorporated in the US. Details will be slightly different in other jurisdictions.   Also, when I say “mutual fund” I mean no-load open-ended mutual funds.  I’ll talk briefly about load mutual funds and closed-end mutual funds/ETFs in part III.

Here goes: Continue reading →