Part 1: Compounding interest – understanding the basics by looking atthe evolution of computer memory

Overview
What qualities would you look for in an ideal employee? Dependability, always works hard 24 hours per day seven days a week, no time off, only needs initial guidance toward becoming self sufficient, gets better over time, eventually pays you to be your employee. All of these qualities are found by making your money work for you as the ideal employee by using compounding interest. Compounding is a key investor tool that most accredited investors know well and use to their advantage whenever possible to increase wealth. This article will begin a series on compounding. To view the next article in this series on compounding, click on: "Visualizing the compounding effect."

When compounding is your enemy
In my last article series, I wrote about credit card debt and how they are designed to maximize compounding interest paid by the debtor to the credit card companies. The article describes how making minimum payments on a $2,000 purchase can end up costing you $8,183.46 over 26 years of payments at 19.99% interest with $6,183.46 of that being interest paid to the credit card company. I guarantee the credit card companies fully understand the strength of compounding interest and how it adds to their profits. Now lets learn how compounding interest can work for you and not against you as it does with credit cards and other loans.

A simple analogy for understanding compounding
Lets first look at a simple example you may all have heard – computer memory. When I started college in 1980, I can remember 4k memory cards were the thing. That means the memory card had 4,000 transistors to retain memory. Then they came out with 8k memory. When 16k memory came out, we thought that was amazing. We thought no one would need more than that in a desktop computer - remember the TRS-80 computer, also known as the “trash 80?” The computer companies didn’t stop, and went on to create an astounding 32k, then 64k - remember the Commodore 64?, 128k, 256k, 512k, 1 meg, 2 meg, 4 meg, 8 meg, 16 meg, 32 meg, 64 meg, 128 meg, 256 meg, 512 meg, 1 gig, 2 gig, and now you can buy a 4 gigabyte memory card for less than $100. A 4 gig memory card has 4 billion transistors! So, in the course of less than 30 years, we have increased memory on computer chips from 4,000 transistors to over 4 billion. That is an 18 fold increase. What if these were dollars instead of memory transistors? Would you like to have those types of returns on your investment over 30 years?

Disclaimer
In actuality, the actual number of transistors does not come out in even thousands. The industry has used rounding to the nearest thousands, millions, and now billions as a way to more easily label the memory size. I will carry on with the rounded numbers for simplicity.

Visualizing compounding over time
Look closely at the above memory growth pattern. Did you notice that while the memory chip size doubled between chips, the number of transistors grew exponentially over the 30 years? From 4k to 8k, the transistors increased by 4,000. From 8k to 16k, the transistors increased by 8,000. From 16k to 32k, the transistors increased by 16,000. Therefore, when you look at the transistor increases between chips you see the following pattern:

Old chip	New chip	# Increase in Transistors
4k	8k	4,000
8k	16k	8,000
16k	32k	16,000
32k	64k	32,000
64k	128k	64,000
128k	256k	128,000
256k	512k	256,000
512k	1 meg	512,000
1 meg	2 meg	1,000,000
2 meg	4 meg	2,000,000
4 meg	8 meg	4,000,000
8 meg	16 meg	8,000,000
16 meg	32 meg	16,000,000
32 meg	64 meg	32,000,000
64 meg	128 meg	64,000,000
128 meg	256 meg	128,000,000
256 meg	512 meg	256,000,000
512 meg	1 gig	512,000,000
1 gig	2 gig	1,000,000,000
2 gig	4 gig	2,000,000,000
4 gig	8 gig	4,000,000,000

Notice that doubling the number of memory transistors between the first two chips of 4k to 8k only increased the number of transistors by 4,000. However, doubling between 4 gig and 8 gig increased the number of transistors by 4,000,000,000. Both sets of chips were simply doubled from the previous version, but the number of transistors increased between the “double” was dramatically different after nearly 30 years of technological advances in the ability to shrink the size of each transistor. Had you stopped at any of the first five doubles, you would have never reached the tremendous compounding effect reached in the 30th year. This is very much true of compounding interest and compounding investments. The “interest” or compounding rate differs for each type of investment over time, but they all can work for you over time through the incredible power of compounding to increase your wealth.

Summary
Compounding is how to make money work for you as the ideal employee that never tires, never complains, always works, continues to get better, becomes self sufficient over time, and can end up paying you through your retirement years. View the next article in this series on compounding: "Visualizing the compounding effect."

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
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Unique features:
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Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
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Your feedback is wanted:
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Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

No article this week - enjoy this holiday time

Valued readers - there will be no article posted this week due to celebration of the holiday season. Enjoy the remaining days of 2008. Sincerely,
Ole Cram Sphere: Related Content

Understanding debt: Strategies for eliminating all your personal debt

Overview
In last week’s article, I discussed two strategies for reducing/eliminating credit card debt. These strategies involved turning credit card debt into a fixed payment loan and accelerating credit card debt payoff by paying an additional $5 each month over what was paid the previous month until that credit card debt is paid off. In this article I intend to look at ways of combining both strategies, along with additional strategies, to eliminate all your debt.

Before continuing, I wanted to reiterate that debt is not always a bad thing. As stated in the first article on “Understanding debt: The Credit Card Trap”, accredited investors have learned to use debt as one tool in their wealth building tool bag. The most successful accredited investors strive to learn everything they can about how debt works – how it can work for them and against them. Accredited investors understand when to use debt appropriately when considering various investments. They understand how compounding interest earned on investments is one of the best means of creating wealth and compounding interest paid on debt is usually one of the biggest enemies of creating wealth.

Most people don’t use debt as a means toward generating wealth, but instead get stuck in a trap of increasing debt. With unproductive debt, these people don’t have much chance of creating true net wealth. It is for this reason that I wanted to share my personal strategies toward eliminating debt. Once debt is eliminated, then you can consider using debt for short term needs and for wealth building purposes. Alternatively, you can consider building wealth without using debt – live debt free. Now before exploring debt elimination strategies, lets look at the various types of debt many consumers hold.

Typical debt held by consumers
Many consumers hold credit card debt, a car loan, furniture or electronics debt, department store debt, and home loans. Some debts are fixed with a set number of equal monthly payments (i.e. car and home loan), some have varying monthly payments (i.e. credit cards), some will delay requiring any initial payments for some period of time (i.e. furniture and electronics loans). The interest rate charged for these different types of loans can vary significantly with home and car loans usually being low while credit cards, furniture and electronics, and department store debts are usually very high. With all of these differences, it can be confusing knowing where to begin eliminating debt. I have a simple test that can help.

Conventional methodology for prioritizing debt for elimination
Many financial advisors like to prioritize debt elimination based solely on ranking those debts with the highest interest rate to be paid first. The rank continues from debts with the highest interest rate down to debts with the lowest interest rate to be paid last. This is a good strategy, but personally I like to consider something I’ve made up (it may have been made up elsewhere but this is what I use) called the net debt payment to debt ratio.

Net debt payment to debt ratio
A quick way to prioritize which debt to eliminate first is by comparing the ratio of net debt payment to debt balance for each. This is a simple ratio to help determine those debts where the current monthly payment has the highest impact toward paying off debt. We’ll now look at how to determine this ratio for all of your debts.

For each of your debts, look at a recent bill to see what amount of the last payment went toward paying off the debt. I’ll call this the net debt payment since much of your monthly payment may go toward things other than paying down the debt. Now create a table in Excel or other spreadsheet software with five columns – Name of debt, current balance owed, Net debt payment, Net debt payment to debt ratio, # monthly payments remaining (if applicable), monthly interest rate (divide yearly by 12 months). Put a calculation in the Net debt payment to debt ratio column that divides the net payment column value by the total debt for each item. Set the format of that column to be a percentage. Once completed for all debts, then look for those debts with the highest ratio. Those are your top candidates for elimination. However, you should consider other factors in helping determine your prioritized list.

Other factors to consider when prioritizing debt for elimination
You also need to consider the interest rate being charged since debts with high interest rates are taking a lot money each month just to pay interest and not toward paying down the debt. Look at the number of payments left as well. Irregardless of what interest rate is being paid, if you only have a few months of payments left, it makes sense to focus on paying those debts off first so the associated monthly payment can be added to the next debt’s monthly payment.

Take your prioritization spreadsheet a step further by adding weights
This part takes some knowledge of calculations within Excel. If you are not comfortable doing that, ask someone you know who is. If that fails, then do these calculations by hand on paper for each of your debts.

Add weights against each of the three measures described so far – 1) the net debt payment to debt ration, 2) the monthly interest rate, 3) and the number of payments remaining. For each of these three measures, you need to determine which one is the most important, second important, and least important. Then within each measure, you need to determine what values are most important to least important. The easiest way to do this is to rank each of these factors, say from 1 to 10 where 1 is good and 10 is bad. Then multiply the results together to get an overall value for each debt. This overall value can then be compared between each debt to prioritize those debts that should be eliminated first. Based on 1 being good and 10 being bad for each measure, the overall weights would then mean to first eliminate those with the lowest resulting overall number and work your way to those with the highest overall number for elimination last. This is a bit too complex for this article, however, I may expound on specific measures and values in a future article. For now, I wanted to present the idea for your consideration to open your mind beyond only looking at debts with the highest interest rate for first elimination. For the rest of this article, lets assume we have decided to use the highest interest rate methodology for debt elimination. That typically means credit cards and some other debts like furniture, jewelry, electronics, and department store debts are the highest interest debts. We would then focus on reducing those debts first.

Remember from the previous two articles that many of these types of debts are designed to extend the debt out as long as possible. This is done by lowering the minimum payment each month so less is paid toward debt and more toward interest. These debts can take well over 25 years to pay off if you only make the minimum payment each month. As stated earlier, in last week’s article I provided two strategies to greatly accelerate payoff of these types of debts by using two strategies – 1.) continue paying the same payment monthly for each card which turns them into fixed payment loans or 2.) accelerate payments by adding an additional $5 each month over what was paid in the previous month. You can actually combine both of these strategies to eliminate all of your credit card and other high interest debts.

Using a combination of both strategies to pay off all your credit card debts
It would be nice if you could afford to use the accelerated payment strategy #2 on all of your high interest debts. However, you may not be able to afford this strategy on all of your high interest credit card and other debts at the same time. But, you should be able use strategy 1 of continuing to make the same payment each month on all cards while implementing the accelerated payment strategy #2 on one card to get it paid off sooner. Once you get this card paid off, then there is a third strategy to start in combination with the other two.

Strategy #3: Apply paid off debt payments to the next priority debt
Once you pay off a high interest debt, then apply the same monthly payment that was going toward the paid off debt toward your next priority debt. All the while when the first debt was being paid off using the accelerated strategy #2, this next debt was also being paid off sooner, but not as fast, using strategy #1. By the time the first debt is paid off, this second priority debt will have been reduced as well. Now, with the addition of all payments from the first debt to this second debt, the associated debt balance will be eliminated much quicker. In addition, strategy #2 should now be applied to this debt since it is now your first priority for pay off.

Example
Let’s reflect a second on what is going on here with an example. Assume our first priority debt is a 19.99% credit card with a $2,000 balance. We will use strategy #2 accelerated payments on this debt. Assume the second priority debt is another 19.99% credit card with a $2,000 balance. We will use the fixed payment strategy #1 on this second priority debt.

In last week’s article, we discussed what the monthly payments would be under and resulting acceleration of pay off using either strategy #1 or strategy #2. From this discussion, we know our monthly payment for the second priority debt (and all other credit card debts) using strategy #1 is $40 each month. For our first priority debt using strategy #2, the monthly payment will initially be $40 while it accelerates up to $160 per month after 25 months (just over 2 years). When this first debt is paid off, then the associated $160 strategy #2 payment will be added to the ongoing $40 strategy #2 payment currently being made on the second debt for a new combined $200 monthly payment. Next month the payment will be $205 since this second priority debt now becomes our first priority debt for payoff. Continue applying strategy #2 accelerated payoff on this debt until it is paid, then apply the strategy to the next debt to assume 1st priority position.

Continuing our debt elimination plan using the combination of strategies
As you pay off your first priority debt using strategy #2 acceleration, then combine all previous strategy 1 payments onto the next priority debt. Continue this process until all of your high interest debts are paid. By the time you get to your third or fourth debt being eliminated, you will have a significant monthly payment being applied to the next priority debt. Always applying strategy #2 dramatically accelerates the process of eliminating all of your debts by simply adding $5 more each month toward paying off debt. As mentioned last week, this only increases your monthly payments by $60 each year over the previous year’s payments. After five years of paying down debts, this would be an additional $300 being applied that month ($60 x 5 years). After 10 years, it is an additional $600 being applied that month. These payments are being fully applied toward debt reduction and not toward interest. This is in addition to the increasing reduction of debt being created using strategy #1 on all remaining debts. You can eventually get to paying off your car and home much quicker than planned.

Managing your credit card use
All of these strategies assume you are not increasing the debt on your credit cards during the debt elimination process. Pay for items with cash, or be sure to add an additional payment each month to cover any new purchases made so no new debt carries over into the next month.

Once you have all credit cards paid off, then use them as accredited investors do. They use these cards for short term purchases to take advantage of investment opportunities as they present themselves. Then be sure to pay off the card fully each month or as soon as possible when cash becomes available from whatever the short term investment opportunity was. Don’t let yourself slip back into the habit of accessing your credit without having a plan. In fact, I would create a plan that explains when your card will be used, how long you will carry the debt, and how you will pay it off. Take it further by having a plan for each type of debt. An example would be the opportunity to buy some investment (perhaps a quality artwork at auction) and then a plan on how you will liquidate another investment to pay off the debt and when you will carry out this payoff.

Summary
Remember, you need to be in control of your debts and have a keen understanding of how to use it to your benefit before becoming an astute accredited investor.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
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An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion. MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
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Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors. This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding debt: Two strategies for eliminating credit card debt

Overview
In last week’s article, I described the trap set by credit card issuers to create a great source of long term income by keeping card users in debt for many years. This type of debt is designed to entice card users to only pay a very low monthly payment for easy access to borrowed funds. If the card user only pays the low minimum monthly payment, they could end up paying more than 25 years on the associated debt before paying off the card. That assumes no further debt is added onto the card balance. Each month most of the payment is interest income to the card issuer and very little goes toward reducing the debt. That is the trap set by card issuers. This article will describe two strategies for reducing and eliminating this debt. Before presenting the strategies, we need to revisit last week’s description on what credit card debt really costs.

Disclaimer
Throughout this article, I quote numbers that come from a crude credit card payment calculator I created using Microsoft Excel. The numbers may not be exactly accurate, but they are close enough to illustrate my points being made.

Revisiting last week’s discussion on the long term cost of a credit card purchase
I showed how a $2,000 TV purchased on credit could cost you a total of $8,183.46 by paying only the minimum payment for 26 years, giving the card issuer $6,183.46 in interest. That also assumes you don’t make any more purchases on your credit card to add to the debt, and it assumes the interest rate stays at 19.99% over the 26 years. I also showed how a fixed payment loan for the same interest rate and $2,000 in debt only costs the borrower $2,636.54 in interest over a 10 year loan. Both forms of loans start with about the same monthly payment of $40. The main difference between the two is the credit card monthly payment goes down each month since it is tied to a percent of the remaining balance while the fixed payment loan always stays the same each month. Therefore, the credit card debt is interest focused while the fixed payment loan is debt reduction focused. Over time, more of the fixed payment goes to paying off debt while the credit card monthly payment is designed to always continue paying the least amount toward reducing the debt. One thing credit card users may not be aware of is that they can turn a credit card debt into a fixed payment debt.

One debt reduction strategy: Make a credit card debt act like a fixed payment loan
One debt reduction strategy I like to teach is to continue making the same payment each month on your credit cards (assuming no new debts have been added onto the card). Don’t pay the decreasing minimum monthly payment each month. Instead, continue paying the same amount you paid last month. What this does is turn your debt into a fixed payment loan. As you continue making the same payment, more and more of the monthly payment will go toward paying off debt and less toward interest. Assuming the interest rate on your card does not change, then your credit card debt would be paid around the same time as an equivalent fixed payment loan, 10 years in the case of the examples provided in last week’s article. You will then be rid of all your credit card debts if this strategy is used on each one with no additional debts added on.

Another debt reduction strategy: A small incremental increase in monthly payments dramatically reduces debt
Another twist on the previous strategy is to increase your monthly payments by an additional $5 each month over what you paid the previous month. This means skipping one meal out per month to get the additional $5. If your payment is $40 this month, next month make a $45 payment. The month after that, make a $50 payment. After continuing this for a year, your payment would grow to $100 each month which is the consistent $40 monthly payment plus an additional $60 (12 months x $5 extra each month or $60). Consider that all of this additional $60 is going toward paying down the debt and none of it toward interest since interest is covered within the consistent $40 portion of the payment.

This debt reduction strategy dramatically accelerates payoff of the balance and also dramatically reduces the amount of total interest being sent to the credit card company. If this strategy were used for the same $2,000 credit card debt, the total loan would be paid off in only 26 months (2 years and 2 months) with only a total of $584.41 being paid in interest and total payments totaling $2,584.41 for the $2,000 TV (see last week’s article). This compares to total payments of $8,183.46 when paying only minimum credit card payments for 26 years or total payments of $4,636.54 for a 10 year fixed loan. You can see the dramatic difference a small incremental amount each month can make for the total cost of the TV and the time to pay off the associated debt.

Next week’s continuation
In next week's article, I will show how to combine both strategies to accelerate paying all your credit cards off. I’ll also show how to move beyond paying off your credit cards to paying off all your debts using these strategies and one more strategy. Come back next week.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
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An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features...
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
- - - - - - - - - -

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding debt: The Credit Card Trap

Overview
Accredited investors understand how to use debt in their favor to achieve wealth. They have a keen understanding of how compounding of interest can work for them (with investments) and against them (with debt). These investors understand that credit card debt can be one of the worst types of debt if not paid off quickly. This type of debt is designed to extract the most amount of money over the longest period of time possible from the card owner. An astute investor would only use this type of debt for short term opportunities with the intent of paying off the card as soon as possible (likely in a month or two) to prevent overpaying for the item the funds were borrowed for. Lets now look at an example to illustrate how bad credit cards are for long term debt.

Long term cost of credit card debt
Assume you went to an electronics store and saw the price tag of $2,000 on a very nice large TV that would go perfectly with your high def entertainment center. What would you do to get that TV today if you didn’t have the money? Would you tell the clerk “I will make monthly payments to you totaling $8,183.46 over 26 years if you let me have that TV today?” Would that be a good option? Is a $2,000 TV worth $8,183.46 in long term debt? Consider also that you are making a monthly payment on this debt for 26 years that takes away cash that you could have been using for other purposes all that time while paying the credit card company over four times what the TV initially cost. You lose out in two ways: 1.) the loss of monthly cash flow due to the monthly minimum credit card payment that initially starts at $40 per month payment and decreases over the 26 years, and 2.) the loss of $6,183.46 ($8,183.46 total paid - $2,000 actual cost of the TV) that could have been invested to make money rather than be paid to the credit card company.

Disclaimer
Throughout this article, I am going to quote numbers that come from a crude credit card payment calculator I created using Microsoft Excel. The numbers may not be exactly accurate, but they are close enough to illustrate my points being made.

Credit cards are very profitable
Ever wonder why you get so many “you have been approved for” letters in the mail about some new credit card? Also, many of the same companies send out letters repeatedly to you. How can they afford to do this to so many people repeatedly? They can afford it because credit cards are VERY profitable for people who make their payments faithfully. In fact, people of questionable credit are even sought by come companies since they can charge higher interest rates due to the higher risk. If these people make their payments at the higher interest rate to try and build or repair their credit history, then the company really has a profitable situation. Faithful payers for very high interest loans are the ultimate money machine for these companies.

How credit card debt works
Most of us are used to a fixed rate loan where you borrow a set amount at some interest rate to be paid back over a period of time resulting in a flat monthly payment. Each month, more of the principle is paid off while the interest charged on this decrease also decreases. Eventually toward the end of the loan, most of the payment goes toward the principle and very little goes toward interest. In my own terminology, I call this a principle focused loan since the purpose of the loan is to increase the amount paid toward principle as the loan matures. This type of loan is in the interest of the borrower since the goal is to get the loan paid as fast as possible without giving too much toward interest.

On the other hand, the purpose of credit card debt is to keep from paying toward the principle and increase the amount of money paid toward interest. Every month the credit card company changes the minimum payment due to be a set percentage of the remaining debt balance, usually 2 to 3 percent of the balance due. As the balance is paid off, the minimum payment decreases. Therefore, since the payment due continually decreases as the balance decreases, it takes many years before the payment would get you to zero. All the while, most of the payment each month goes toward interest and very little toward the principle (pay down of the debt). I call this an interest focused loan. This type of loan is in the interest of the lender or credit card company since the goal is to continue receiving the largest amount of interest payments from the borrower for as long as possible. It is not in the best interest of the credit card company to get these loans paid off since their income from interest would then stop.

Example to illustrate the perpetual interest payment structure of credit card debt
Continuing the $2,000 TV purchase example earlier, assume the credit card has an annual 19.99% interest rate and a minimum payment percentage of 2% and a absolute minimum payment of $20.

In your first month, the minimum payment would be 2% of $2,000 or $40 with $33.32 of that going to interest (monthly portion of annual 19.99% interest rate on the $2,000 balance due). By the beginning of the fifth year, your monthly minimum payment would be $32.83 with $27.35 going toward interest and a balance due of $1,641.58. Over that five year period, you would only have paid $358.42 toward debt while paying $1,786.74 of total interest. Your total payments would be $2,145.16, which is already more than the $2,000 TV and you still owe another $1,641.58 before the debt is paid off. After the 10th year, your monthly minimum payment would be $25.80 with $21.49 going toward interest and a balance due of $1,290.02. Over that ten year period, you would only have paid $709.98 toward debt while paying $3,539.29 of total interest. Your total payments made over the five years would be $4,249.27, which is over twice the $2,000 TV price. In addition, you still owe $1,290.02, which means you have not even paid off half of the $2,000 initially borrowed for the TV at the end of 10 years. The bank has made $3,539.29 in interest from you and will still get at least another $1,290.02 should you pay the balance in full. They know you are unlikely to pay the balance due so they can look forward to getting much more money from you for an additional 16 years!

Compare with a fixed rate loan
Now consider a fixed rate loan for the $2,000 at the same 19.99% annual interest rate over a 10 year period. In this case, the monthly payment would be a set $38.64 for the full 10 years. Lets now make comparison’s with the above credit card example. After the fifth year, the monthly $38.64 payment would send $24.30 to interest and $14.34 to principle. Total interest paid would be $1,776.95 as compared with $1,786.74 using credit card minimum payments. However, the remaining balance due on this fixed rate loan is $1,458.68 verses $1,641.58 for credit card debt. The difference becomes much more pronounced after 10 years. At that time, the loan is paid off. Total interest paid is $2,636.54 with this loan verses $3,539.29 using credit card minimum payments. In addition, you still owe $1,290.02 on the credit card where the fixed rate loan is paid off. The bank made a total of $2,636.54 from you on the fixed rate loan, but will make $6,183.46 in interest from you using minimum payments on the credit card.

Don’t blame the credit card issuer
Remember, it is your choice to make the minimum payment or to pay off the balance due. If you continue making minimum payments, then don’t blame the credit card company for “ripping you off”. They are in the business of making money in a free enterprise capitalistic economy. As long as people continue making minimum payments, this is a valid way to generate income for these companies.

Next week’s continuation
In next week's article I describe two strategies to accelerate paying off your credit card debts. In two weeks I'll talk about applying these two strategies and another strategy to elilminate all of your debts.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.

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An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and MORE visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

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Your feedback is wanted: Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors. This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

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Stocks: Understanding the use of margins

Overview
Buying stock on margin is a way of leveraging your available investment cash to buy more stock than cash alone would buy. The hope is that the stock price will continue going up so the investor gains from appreciation of additional stocks purchased on margin than the lessor amount would have bought with cash alone. This can be great when the stock price goes up. However, when the price goes down, margined stock will work very quickly against you. We’ll cover more about buying stock on margin, along with the pros and cons.

Buying stock on margin
For qualified investors, many brokers offer the option of buying stock “on margin” by borrowing funds from the broker to pay for part of the purchase. Not all stocks are marginable and those that are maginable vary in the amount of margin authorized. Typically these stocks have a 50% margin requirement, which means you only need 50% of the stock price in cash to buy a share of stock. Another way of thinking about this is to say you can buy twice the number of stock shares than cash alone could buy. Some highly risky stocks have a higher margin requirement, meaning a higher percentage of cash is required to purchase a share of stock. In any case, a monthly interest will be charged for all borrowed funds until these funds are paid back.

Consider an example of buying stock on margin
For all examples, the cost of trading stock will be ignored. For this example, Joe investor has $1,000 cash available to buy stock in XYZ corporation. Shares of XYZ stock are trading at $10 per share. In this case, Joe can buy 100 shares of XYZ stock for his $1,000 ($10 per share x 100 shares = $1,000). Now assume that XYZ stock is a marginable stock with a 50% margin requirement. This means each $10 share of stock can be purchased with $5 in cash and the other $5 borrowed from the broker ($5 cash + $5 borrowed = $10 purchase price of a share). Now Joe only needs $500 for the same 100 shares since he borrows the other $500 from the broker to make up the full $1,000 needed to purchase the 100 shares. Alternatively, Joe could use his full $1,000 cash to buy twice the number of shares on margin. In this case, 200 shares at $10 requires $2,000 for the purchase. Joe uses $1,000 of his cash and borrows the other $1,000 for the margin purchase. In both cases, Joe has used leverage to control twice the number of shares that cash alone would purchase.

Why use margin?
As we’ve seen, buying stock on margin allows you to use less cash to purchase stock. If an investor determines there is a strong possibility the stock price will go up, the investor can chose to buy twice the number of shares (for 50% marginable stock) for the same amount of money. The investor then benefits from price increases on twice the number of shares. However, there is now a higher risk of loss if the share price should go in the opposite direction.

An example of margin leverage working in the investor’s favor
Continuing the previous example, Joe purchases 200 shares of XYZ stock (a 50% margin requirement stock) for $1,000 cash. The stock goes from $10 to $15 per share, a 50% price increase. Joe now has $5 profit in 200 shares of stock for a total profit of $1,000. Joe has a $1,000 gain on his original $1,000 cash, a 100% increase. Joe has doubled his money from a 50% increase in stock price. Leveraging with margin has allowed him to have twice the percentage of return than the stock price increased by.

Alternatively, if Joe had used his $1,000 cash to buy only 100 shares without margin, then he would have a $5 profit on 100 shares for a total profit of $500. He then has a $500 gain on his original $1,000 cash, a 50% increase. His investments have increased the same percentage as the stock price increased.

What can go wrong?
The danger in using margin is you now have a much higher risk exposure to loss than using cash. If the stock price drops with stocks purchased on margin, your loss will increase at a much faster rate. At some point, the broker will issue a “margin call” when the value of the stock goes down enough to require you to put additional money into your account to bring the percentage of cash back to 50%, or whatever margin level your stock is at. Lets look at an example.

An example of margin leverage working against the investor
Continuing the previous example, Joe bought 200 shares of XYZ stock with 50% margin for $1,000. Remember that Joe used $1,000 cash and borrowed $1,000 on margin for the $2,000 purchase of 200 shares at $10. Therefore, he is at 50% margin. Now assume the price goes from $10 per share to $8 per share. In this case, the total value of the stock is now $8 x 200 or $1,600. Joe still owes $1,000 against this $1,600 total value so he would only get $600 cash by selling all of the stock today. This means his margin level or ratio of cash to the total value is now at a 37.5% ($600 cash remaining divided by $1,600 current value = 37.5%). Typically a broker will ask for more cash when the ratio gets to 30% to bring the ratio back to 50%.

Notice that the $1,000 owed does not change, but the portion of cash remaining decreases as the price decreases. Now consider what happens if the price quickly drops by 50% from $10 to $5 per share. The total value of the 200 shares is $5 x 200 or $1,000, which is the same as the $1,000 still owed. Now there is no cash left since the sale of all 200 shares would go directly toward paying off the $1,000 debt (assuming interest owed is ignored). Joe has just wiped out all of his investment cash. He will be asked to put in another $1,000 to bring the margin level back to 50% ($1,000 cash and $1,000 debt) or be forced to sell some or all of the stock until enough of the debt is paid back to bring the ratio back to 50% (perhaps sell 100 shares at $5 to pay off $500 of the $1,000 debt).

Consider an even more severe case where the price drops quickly to zero (perhaps the company goes bankrupt and all stock shares are wiped out by bankruptcy). In this case, the investor lost all of the initial $1,000 investment funds and now owes $1,000 borrowed on margin for a total $2,000 loss. Had Joe purchased only 100 shares with cash, he would only be out the $1,000. Using margin two buy twice the stock also caused him to have double the loss.
In any case, you can see that rapid drops in price can really work against the investor who uses margin.

Strategies
Personally, I only use margin for a few situations:
1. I might use margin when all my technical analysis of the recent stock buying and selling patterns (trends, volume, stochastics, MACD, and other indicators) indicate a strong probability of price increase in the very near future. I’ll buy twice the stock for the same investment funds to hopefully catch the increase and then either sell enough stock to pay off the margin and keep the rest or I’ll sell out before the stock drops again.
2. I might use margin against a stock already in my portfolio (borrow money against a stock I have) to purchase another stock or option. Again, I want to do this on short term moves to quickly pay off the debt.
3. I need to have enough cash or assets in my account to short a stock. Brokers usually require assets in an account before letting you short stock. See a previous article on shorting stock.
4. When I need a short term loan for other personal uses. Say I need $1,000 for car repairs. If there is marginable stock in my account, I could borrow the $1,000 against these stocks to pay for the repair. Then I’ll pay the debt off as soon as possible.

Summary
The use of margin is another tool that can help an investor manage his or her investment portfolio. However, recently we’ve seen articles about top managers of companies being forced to sell their shares of stocks due to margin calls (Wall Street Journal aticle on top managers losing shares to margin, New York Times article on Chesapeake CEO being forced to sell all of his shares of the company, and many others).

Using margin smartly can help increase returns, but the investor must be very careful since it can also magnify losses very quickly.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:

Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and MORE visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

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Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

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Psychology of trading – how pros count on emotional amateurs

Overview:
Emotions are very hard to keep in check when trading investments including stocks, commodities, and real estate. It takes most professional investors years of investment experience before they learn to trade using a system vice using purely emotions. Taking the emotional element out allows the trader to use repetition of entry and exit point criteria for more consistency in results. Trading on emotions, as most amateur investors do, usually provides no consistency of entry and exit points resulting most of the time in more losses than wins over time. This article will explore how many pros count on these emotional traders when making buy and sell decisions. I’ll be using examples that focus on stock investing, but you could just as well have this article talk about investing in anything.

Greed and fear are part of our culture:
Think about when you were a kid. When you saw your friend with a newer bike or neater toy, you wanted one too. That was greed and envy at work – wanting more than you have. Also think about when you had something really nice like a new cool bike that you knew others wanted. Most likely you had a chain to lock the bike up when parked. When at home, you kept it in the house or garage. That was fear at work – the fear of loss. All our lives, we have been conditioned by advertisement and other influences to want more than we have and to fear losing what we do have. When trading investments, these emotions usually work against you, but do play right into the hands of professional traders.

Greed and fear work against trading investments:
When looking for stocks to invest in, amateurs will many times look at stocks that are rising fast and think the stock has to continue going up. Greed kicks in and they buy into the stock when the price has already risen significantly thinking something along the lines of “the price doubled in the past week so I just need to get in to double my money and then I’ll get out”. You know the rest of the story. Right after buying the stock, the price drops quickly. At this point, fear kicks in. The investor may feel he or she needs to keep holding onto the stock until it comes back to the purchase price to get out at break even. Some of these investors will let greed kick in again and buy more shares of the stock at the lower price. As the stock continues to drop, the investor gets more nervous. Many of these investors are 100% invested, meaning they put all of their money into stocks (or whatever they are investing in) at all time. Therefore, when the price drops even further, they begin to panic. Many times the stock eventually drops so far that these fearful investors give up hope in the stock and sell in a panic to prevent further loss.

What happens next? Again, I bet you know – the stock rises quickly. Now the investor is in a quandary. They lost so much money on the stock that their greed kicks in to make up the loss buy buying back into the stock “just long enough to get back to break even”. Some times this works, but many times it does not as the stock again may take another dramatic fall in price even further than when the investor bought in the second time. Again the investor eventually panic sells at another large loss. This cycle may repeat itself several times or even with other stocks as the investor looks for another fast rising stock to get in and make up the loss from the first stock with.

Doing this over time almost always ends up with the investor losing all of his or her available investment funds unless they are lucky enough to have a wife that eventually says “you will stop now! No more!”!!! Thank God for conservative wives to save us for utter ruin!!! Ha! Sorry, just had to get a little of my own past experiences during my amateur trading years into this article!

Pros count on the panic both ways – buying and selling:
If you watch these “high flying” stocks for a while, you will see they trade in wide price ranges. Also, you will notice that the volume of trades is usually highest at the point when the price changes direction (either up or down) from the direction it was going previously. Those high volume price change days are key trading days of greed (must buy since it is surely going higher) and panic (must sell to cut my losses). On those days, the pros are doing the opposite of what the amateurs are doing. When the price does dramatic drops that force the amateurs to panic sell, the pros are buying which usually drives the price back up again. As it rises, the pros are selling all along to get out before the amateurs buy in bulk. When the price gets high enough, the pros start selling in much large numbers that overwhelm whatever purchases the amateurs are doing. Therefore, the price start dropping. The amateurs panic as the price drops and sell all the way down.

Another tactic used by many pro traders is to short sell the stock when prices are high to drive it down (see a previous article where I cover short selling in detail). When the price gets low enough, these short sellers must buy back the stock. Therefore they are motivated to cause those high volume dramatic drop in price days when amateurs panic and sell out their shares. The short sellers are able to find stocks to buy back at these low panic prices to close out their short position. It is important that you understand this is only one of many tactics used by professional traders to help influence the price of stocks that works against emotional traders.

Professional traders use a system to determine buy and sell points:
Their system may include emotions as a guide, but most use data, facts, trends, trading patters, and other measurable information to trigger buy and sell points for investments. Personally, I like to first look at stochastic trends and the MACD to look for these key days of panic selling and greed buying to determine when I will either get in or out of a stock. I’ll also look at many other data to confirm my initial look at the stock. All of this information goes into my particular trading system to let me know when I should buy or sell a stock (or whatever investment I’m using a system on). Most professionals are also using a system that tells them when to buy or sell a stock. It is important to understand as an amateur that you are entering a market where there are many professionals that are also buying and selling using a system. It is important for you to educate yourself on all of the available decision supporting data to come up with a system of your own that works for you. Don’t forget to consider systems that make you money when the stock goes down, not just when it goes up. Making money both when the stock goes down and when it goes up will help your long term success as a trader.

Consistency of trading rules gives the best probability of success:
Consistently applying your system over time by taking out the emotions will give you the best long term success in most markets. However, in todays extremely volatile market where prices can change by very large percentages on a daily basis, it is very hard to apply a consistent system. It may make the most sense in those situations to wait out the market until it stabilizes before starting up your system again. This is so hard for many people since they get greedy and feel they must enter the market at the lowest price to get the largest potential gain when the market recovers on an upward trend again. Continually trying to buy into the lowest price in todays market conditions has repeatedly shown that we have not yet reached the low price. You end up getting in at a high price and getting out at another low price, repeating your larger and larger losses long the way. It is then tempting to continue trying for fear of not being able to make up those losses if you miss out on getting into a recovering market too late after prices have already increased. That is why the consistent use of a system without emotions in normal market conditions is so important to prevent rash buy and sell decisions.

So much more to learn:
This article was only meant to be a very top level overview of how psychology plays in the trading of investments. I will cover various specifics in future articles that I hope continue educating you on being a successful investor based on my own experiences and hard lessons. I certainly don’t claim to have reached the completely unemotional state, far from it. After all I am human, but always learning and applying those lessons in continually improving my system as markets change.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding stocks: When the business ATM stops working

Overview:
In last week’s article I wrote about how a corporation can raise funds by issuing stocks for sale to investors – sort of like an ATM without the requirement to have funds in the account first. This article continues that discussion by addressing the question of what happens when the ATM breaks – the company can’t raise funds from the sale of stock?

Lets look at what is currently happening to General Motors
If you do a stock symbol lookup for General Motors on any of the financial websites, you will find many preferred stocks as well as the common stock “GM”. Many of the very large DOW listed companies have issued preferred and common stocks over the years to pay for things like new factories and/or tools to produce new products. Selling preferred stock gives the needed funds without diluting existing common shares. GM is no exception. When its stock was trading at over $50 per share five years ago, it could have sold 10 million new shares of stock at $50 per share to gain nearly $500 million in funding for some new project. Today, the stock is less than $5 per share. They would have to sell 100 million shares of stock to generate the same $500 million. However, since they are on the brink of bankruptcy, there are very few investors who would buy those shares in a public offering. Therefore, GM is no longer able to raise much needed funds through offering of stock to prevent filing for bankruptcy. This is why they are now asking the government to provide a bailout of some kind for enough funds to stay in business. In a sense, their ATM is now broken.

Magnify GMs situation with many fallen stocks of today
You can find many GMs out there today. Many stock prices have been driven down severely during the recent stock market drop to fractions of their previous highs. As a result, these companies are not able to sell stocks to raise funds. Many companies are scrambling to redefine their business model. Some are using layoffs, selling off assets, receiving “bailouts”, finding big pocket investors, rethinking their products/services, going bankrupt, or taking other tough actions.

Summary
I find this a very interesting time and am keenly interested in how this all plays out. It seems to me that we are in the middle of another shift in business and economic fundamentals. Businesses and governments around the world are trying to define the new economic and business models that will work globally as they work to come out of the current crisis. Eventually new models will be defined and institutionalized. Changes will be made by businesses, governments, and people. Change means opportunity for those who can see the direction things are moving and are able to get ahead of the curve. Never be afraid of change, use it to your advantage and be a leader who arrives before others even start their change.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding stocks: an ATM for business funds

Overview of stocks:
Stocks are issued by a corporation to spread ownership of that corporation proportionally to those who own the shares. Usually a corporation will issue shares of stock to investors who purchase the stocks at a set price, usually during a public offering. In this way, a corporation with strong revenues/earnings or prospects of strong revenues/earnings can generate working capital by selling shares of stock. Thus the simple analogy of selling stocks acting similar to an ATM machine for businesses to get access to working capital funds.

Two types of stocks – common and preferred.
Corporations can offer two types of stocks to investors – common and preferred. Both have their pros and cons. Generally, common stock owners have voting rights on Corporate matters while preferred stocks do not, however, preferred stocks usually pay a defined high dividend and are first to get paid before common shares. There are variations to these two types of stocks including convertible preferred which can be traded for a certain number of common shares at a set price on a future date

What are additional pros and cons of each stock type?
Here are some general comparisons between common and preferred stocks:

- Common stock holders share a percentage ownership of the corporation and therefore a share of the corporation’s earnings. For this reason, the price of a stock usually increases as earnings grow. As a quick example, if there are 1 million common shares issued by the corporation and it earns $1 million in earnings, then each share of stock represents ownership of $1 in earnings. If the same corporation later earns $5 million in earnings, then each share of stock represents $5 in earnings. For this reason, you would expect to pay more for the stock when it represents $5 in earnings than when it used to represent only $1 in earnings.

- Common stock tend to increase and decrease in value as the underlying corporation’s earnings increase or decrease for the reasons explained above. For this reason, they are more risky that preferred stock. However, they can also experience much more increase in price for corporations that have strong earnings growth over time.

- Preferred stock is not as susceptible to variation in corporate earnings since they are guaranteed a set dividend payment first before common share holders can receive a dividend. For this reason, there is less risk for preferred stock owners and the stock price does not tend to fluctuate as much unless the corporation is losing money and in danger of paying the preferred dividend. Also, if the preferred stock has a future option to transfer into common shares, then those preferred stock prices do tend to more closely follow the price changes in the underlying common stock price while continuing to pay the set preferred dividend until converted to common stock.

- If the corporation sells more shares of common stock to the public, then this is considered a dilution of the existing stock owner’s percentage of ownership in the corporation. As an example, if the consider the same situation described above where the corporation has $1 million in earnings, if there are now another additional 1 million shares of stock issued (sold to the public), then there will be a total of 2 million shares representing a proportional ownership in the same $1 million earnings. In that case, each share of stock represents only 50 cents ($1 million in earnings divided by 2 million shares of common stock). In that case, the price of each common stock usually goes down when new shares are issued to the public in large quantities.

- Continuing the above thought, there are situations where issuing new common shares to the public actually increases the price of existing common stock. If the corporation is going to use the resulting funds from the sale of the new stock to further expand business and do other proactive things that will result in increased business and growth, then the fact that the corporation is able to generate these new funds quickly from the sale of stock and use those funds for growth can cause investors to want to buy more stock. The increased demand then can result in an increase in stock price, even though there could be a significant increase in the number of shares that dilutes ownership. Consider the situation mentioned earlier where the corporation first earned $1 million and later grew to earning $5 million for the same 1 million in common stocks. Assume the corporation sells another 1 million shares of stock at $10 each resulting in a total of $10 million in new funds to use for investment in growth (new plants, new products or services, perhaps purchase of a competitor, etc.). The result could mean the corporation grows from $1 million in earnings to $100 million in earnings over the same time period it would have only earned $5 million in earnings without the $10 million in new funds for investment in growth. If investors see this huge potential for new growth, they may want to pay more for these stocks, even with the large increase in new common stock shares being issued.

- Preferred stock owners usually have no vote in corporate matters since they don’t have any ownership in the corporation, only rights to a set dividend. For this reason, many corporations desire to sell preferred stock instead of common stock. The existing common stock owners do not have their percentage of ownership diluted while the corporation has access to the resulting funds from the sale of preferred stock to use for business needs. However, they are then on the hook to pay a high dividend to these preferred stock owners. Many corporations therefore issue these stocks with the right to buy them back in the future. In that case, they no longer need to pay the dividends.

Issuing stocks can be very expensive to the corporation.
There are many laws and regulations that must be followed very closely by corporations when they issue (sell) stocks to the public. For this reason, most of these corporations use firms that specialize in issuing stocks. These firms will take care of the legal aspects as well as marketing the stock to perspective investors. Also, these investors usually have to be accredited investors since the Securities and Exchange Commission (S.E.C.) assumes only accredited investors can understand the risks involved and have access to enough excess risk capital to use for investing in these types of offerings.

Summary:
Offering stock for sale to the public is a great way for a corporation to quickly get access to working capital funds to pay off debts, buy out competitors, invest for growth perhaps in developing and/or deploying new products or services, or to use for other business needs. As mentioned before, this can seem like a ATM for cash since it looks like the corporation simply prints stock certificates on paper and sells it to the public for cash. For companies with a strong future outlook, that is not too far from the truth. Sharing ownership in strong and growing companies is the root of capitalism and free enterprise at its best.

Next article in the series:
Next week, the next article will cover what happens when corporations are not able to sell stocks to raise funds - their ATM is broken.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Options: Understanding leaps – controlling the level of risk toward buying (or selling) a stock

Continuing the series on options:
This is another in a series on understanding options. Previously I wrote about put options and call options (click on each to read the previous articles). I also wrote an article last week on using puts to limit losses when owning a stock that is going down. This article describes leap options, also known as leaps. Leaps allow you to buy a stock at a fraction of the cost and still benefit from the same rise (using a call option leap) or fall (using a put option leap) in price.

What is a leap?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock (click on the links above to learn more about call and put options). A leap is nothing more than a call or put option that has an exercise date many months or years into the future. It is a way to participate in a stock’s price move without paying full price to own the stock outright.

Critical things to know as an investor in leaps:
1) Leaps are exercised in the same way as call and put options since they are call and put options with a long timeframe before their exercise date. Therefore, each leap controls 100 shares of the underlying stock.

2) Leaps cost the most since the odds of reaching the exercise price over a long timeframe are greater, especially if the current stock price has a lot of variance.

3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.

Understanding the leverage associated with leaps:
If you are interested in owning shares of stock in a company, but either don’t have the funds to buy 100 shares or don’t want to risk those funds, leaps are a great investment vehicle to consider. Leaps let you participate in stock price changes over a long period of time without the risk of paying funds to buy 100 shares of the stock.

An example showing how a call leap option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1, 2008 the price of xyz corporation stock is trading at $50 per share. I decide to purchase a January 2010 call option with a $75 strike price that expires the third week of that month. This call is trading at $10 which means I pay $1,000 ($10 price x 100 shares of underlying stocks) to buy the call option.

By January 15, 2010, the price of xyz stock rises to $125 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $75 each for a total cost of $7,500 ($75 x 100). I can then sell these 100 shares of xyz stock on the market for $12,500 ($125 price x 100 shares of stock) and have just pocketed a $5,000 profit ($12,500 - $7,500 purchase cost). However, I paid $1,000 for the call option so my net is $5,000 - $1,000 = $4,000. This is a 400% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.

The leveraging comes from only paying $1,000 to get a $4,000 profit, which equates to a 400% return on investment. The alternative would have been to pay $5,000 on October 1, 2008 to buy 100 shares of stock and then selling them for $12,500 on January 15, 2010 for a profit of $7,500, which equates to only a 150% return on investment. If the stock has risen much more over the long period of time, then the return against the $1,000 purchase price of the leap would be even more dramatic since every $10 increase in the price of the stock equates to another 100% return on my investment in the option ($10 per stock x 100 shares is $1,000 increase in those stock verses the $1,000 investment in the leap).

What is the potential loss with a leap?
The main benefit of using a call option leaps to make money on stocks with rising prices instead of buying the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($1,000 in the above example). If the stock price never went higher than $75, then the call would expire worthless and the investor would loose the $1,000 investment. If I had bought the stock instead, my full $5,000 investment would have been at risk verses only $1,000 to buy the leap. Similarly, the use of a put option leap limits your investment loss only to the purchase of the leap.

The other benefit was the ability to participate in the increasing price of 100 shares of a $50 stock by only paying $10 per share through the leap to get the associated increase in value. I paid 1/5th of the stock price to control the same 100 shares of stocks over a long period of time.

Summary:
The use of a leap (call or put) is another way of making money when the stock price is going up or down over a long period of time without having to put the full amount of funds at risk that would be required to actually purchase and hold the stock. However, the price of leaps tend to be much higher than shorter term options due to the potential of a stock to reach the strike price over the longer period of time. Don’t invest too much on leaps in any one company. Diversify and use leaps as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Options: Using put options to insure stock from loss

Refresh understanding of a put option:
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. A previous article described what a put option is. As a summary, a put option forces someone to buy stock at a set price from the buyer of the put option if that option is exercised. The desire of a put holder who chooses to exercise the option is that the price has dropped. In this case, the put holder buys stock at the current lower market price and sells it at the higher put option price to the seller of the put. Read the previous article for more details.

Holding a stock can be very scary these days.
With all of the tremendous volatility in stock prices recently, it is no longer safe to hold stock of big strong companies long term. Who ever thought GM and other large corporate stocks would return to prices not seen since the 50’s and 60’s. That means fifty years of appreciation has evaporated in only a matter of weeks.

How can I insure my stock from large losses due to big price drops?
If you own the stock of a company where you are worried about the price dropping, put options can act like an insurance policy protecting you from loss. Since the put forces the seller of the put to buy stock at a set price, you can buy a put option that has an exercise price at or near the current market price for the stock. If the current market price drops through your put option exercise price, then it makes sense to exercise the put option forcing the put seller to buy your stock at the exercise price. Alternatively, you can sell the put option at a profit to someone else before the exercise date, allowing you to continue holding your stock. Either way, the put becomes more valuable as the stock price drops, which compensates you for the associated loss in price on the stock you continue to own.

An example showing how a put option protects you from the drop in price of your stock
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I own 100 shares of xyz corporation stock that has been going down in price lately. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November put option with a $45 strike price that expires the third week of November. This put is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the put option.

By November 15th, the price of xyz stock drops to $30 and I tell my broker to exercise the option. I then force the put seller to buy my 100 shares at $45 each for a total of $4,500 ($45 x 100). Since the stock was at $50 per share on October 1st and were sold for $45 per share on November 15th, I have limited my loss to only $5 per share ($50 October 1st price - $45 received per share = a $5 loss per share). My total loss for the 100 shares is $500 ($5 per share x 100 shares). Had I not purchased the $45 November put option, my loss would be a much higher $20 per share ($50 October 1st price - $30 November 15th price = a $20 per share loss). In that case, my loss would be $2,000 ($20 per share x 100 shares). Again, using the put option, I have limited my total loss to $500 instead of what would have been a $2,000 loss. If the stock price had dropped lower than $30 by November 15th, then the put option would have protected me from a much larger loss.

Why doesn’t every stock owner always buy put options for protection?
Put options cost money. The closer the exercise prices to current market prices, the more it will cost to buy the put option since the probability of the option “going into the money” is high. If you were to continually buy put options close to market prices, then the cost of all the put options you buy will themselves cumulatively act like a loss against your stock’s value. However, in uncertain times or before earnings or other news announcements where there is a strong possibility of bad news coming out on your stock, it may make very good sense to buy a put option. Another strategy could be to buy a way out of the money put option with a strike price far below current market prices. These type of put options will be very cheap, but you will have a much higher vulnerability to loss for the difference between current market prices and the much lower put option strike price. That strategy would be good for protection against a dramatic drop in stock price.

Summary:
The use of put options is one strategy used by seasoned, sophisticated, and some accredited investors to protect their portfolio of stocks against large price drops in uncertain situations. If you own stocks and worry about price drops, consider purchasing put options as a form of insurance protecting you from large losses.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Sphere: Related Content