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Watch Out for Facebook IPO Scams

Tom Drake — Mon, 30 Apr 2012 09:00:40 +0000

One of the most highly anticipated IPOs of the year promises to be the Facebook IPO. From the moment that Mark Zuckerberg let it be known that Facebook would become a publicly held company, investors have been debating the true value of Facebook, and anxious consumers are wondering if they can get a bit of the action.

With so much hype surrounding the Facebook IPO (hype that only seems to be heightened by snags in the process, and the resulting delays), a number of consumers are vulnerable to Facebook IPO scams. You need to be alert for this, since it presents an opportunity that seems to be a legit way to get in on the ground floor of the Facebook IPO.

How IPO Scams Work

For the most part, shares of pre-IPO companies are offered to insiders associated with the company already (employees, venture capitalists, founders, officers, etc.). That doesn’t stop scammers, though. These scams claim that you can buy pre-IPO shares of Facebook — and the scammer may even claim to be an investor, or an insider. You are offered the chance to buy in, and promised untold riches when Facebook goes public and the price skyrockets. Thousands of dollars in profit — instantly!

The problem, of course, is that someone with actual inside knowledge of Facebook (or any company for that matter), isn’t likely to offer these soon-to-be-valuable shares with just any person on the Internet. People with real access to pre-IPO Facebook shares are likely to cut their actual family members and friends in before sending some random person an email. Indeed, such an insider is likely to hang on to the shares until after the IPO.

Anytime someone — especially someone you don’t actually know — sends you an email offering you the chance to take advantage of an opportunity, you need to be suspicious. Most of the time, these scammers just plan to take your money and run. They might make a show of providing you with “evidence” of returns on paper, but eventually the fraudster will take off, leaving you empty-handed.

Stay Vigilant about Scams

You always need to be on the lookout for scams online. Facebook isn’t the first company name to be used in order to scam consumers out of hard-earned cash. Plenty of other anticipated IPOs are preceded by scams claiming an insider track to shares. Some scammers might even settle on just allowing you access to lesser-known IPOs, or even ask for your money to invest in a variety of promising, low-profile IPOs that will bear fruit in a few months.

The allure of instant riches can be a powerful factor in getting you to turn over your money. And, of course, these scams are meant to sound plausible, encouraging you to sign up by using jargon, and insisting that it’s possible to get pre-IPO shares at a fraction of their value. Even though you might hesitate, it seems like a solid opportunity, and you probably want it to be true.

No matter the “investment opportunity”, it’s important to be on your guard. Remember: If it sounds too good to be true, it probably is.

Watch Out for Facebook IPO Scams originally appeared on Canadian Finance Blog on April 30, 2012.

The Market Isn’t On Sale… Yet

Nelson Smith — Thu, 11 Aug 2011 09:00:57 +0000

It’s Monday night as I write this post, and I, like many of you, have watched thousands of dollars evaporate from our investment accounts over the past couple weeks. The worst of all came on Monday, with the S&P 500 down 6.66%, causing every market pundit to make the same bad joke about the devil making the market go down. Watching market coverage is like watching a train wreck. You want to look away, but you just can’t pry your eyes away from the carnage. This is not a fun time to be an investor.

As what happens every time the markets sell off, all the financial talking heads start telling about how the market is on sale. You buy steak when it’s on sale, so why wouldn’t you buy stocks when they’re on sale too? After all, the goal of every investor is to buy low and sell high, so buying during market dips would be a good thing, right? Then all there’s left to do is to hold until the stock market inevitably goes back up.

If it’s so easy, why doesn’t everyone do it?

As I write this, the S&P 500 is at 1119 and change. Just two weeks ago the S&P 500 traded above 1340. A 16% percent decline in just 2 weeks is a pretty steep sell off, especially in such a short period of time. But what if the market was overvalued at 1340? How do we tell if the market is overvalued anyway?

Trying to figure out the fair value of the market is incredibly complex. Various market participants have different motivations, all of which affect the valuation of the whole market. Some people invest only in dividend stocks. Others chase high growth names with little in actual earnings but loads of potential. And still others try to buy contrarian stocks with cloudy futures but strong balance sheets. Things like interest rates and general economic sentiment play an important role as well. The point of all this? Since no two investors are exactly alike, attempting to figure out a fair value for the whole stock market is just too complicated for us mere mortals.

The best we can do is look at the market’s price to earnings ratio (abbreviated p/e) and compare it to historical values. From there we have a rough idea of whether the stock market is cheap or expensive, or somewhere in between. We know the market’s price (that’s 1119) and this site gives us the earnings for all the companies in the index. The most recent measure of S&P 500 earnings is 82.13. Divide the two figures and we get a current S&P 500 p/e ratio of 13.6.

Does a p/e ratio of 13.6 represent a good value? Well, sort of. From a historical perspective, it’s around an average value. I tried to find more precise numbers, but my ~~crack research~~ 93 second Google search turned up empty. That means that if you were to pick a random time in history to buy the market, chances are you’d pick a market that’s at the same value as it is now. That’s okay, but it’s hardly buying low.

The last time the market traded at 1119 was back in… August 2010. If you were even more patient during that market sell-off, you could have bought the S&P 500 at levels comfortably below 1100. The index bottomed at around 1050 during the month. Many of the same economic headwinds plagued the economy then. S&P earnings were… about the same. How many people were clamouring about a market sale back then? If you weren’t positive a year ago, why are you positive now?

I’m not saying that you shouldn’t buy stocks at these levels. There are all sorts of stocks that look compelling at these prices. The market as a whole though, just looks okay. Traders are increasingly concerned by all sorts of things. There’s an increased risk of a brand new recession. European government debts are a mess. The United States needed a real solution for their debt problem, and they failed to deliver. Unemployment in the U.S. continues to be stubbornly high. Companies are sitting on mountains of cash on their balance sheets, since they can’t find places to invest it. There’s all these headwinds, and you’re going to back up the truck to pick up equities?

By the time this gets published, the market could be well on its way to recovery, and all the doom and gloom from the previous paragraph may seem unimportant. You might have missed the boat on buying this correction altogether. I seriously doubt it though. Rather than load up early into the correction, nibble a bit. Buy a little this week and a little next. Stay patient and keep buying as long as the market is going down. And please, don’t sell anything. That’s just silly.

I’ll leave you with one thought about the fallacy of looking at the p/e ratio of the S&P 500. At the end of 2008 when the S&P 500 was trading at 903, guess what the p/e ratio was? The index earned 65.39, giving us a ratio of… 13.8. You’d be sitting quite well if you would have bought then, even after the recent market crash. Valuing the market is hard, that’s why you shouldn’t invest all your cash at once.

The Market Isn’t On Sale… Yet originally appeared on Canadian Finance Blog on August 11, 2011.

Will Future Returns Suck?

Nelson Smith — Thu, 21 Jul 2011 09:00:44 +0000

Last week, CFB staff writer Robb Engen entertained and enlightened us all with a post on retirement, and specifically how young people should focus on making good financial decisions rather than spending all their time thinking about retirement. This is a good article that’s worth a few minutes of your time if you haven’t already read it. Oh, you have? Fine then, moving on.

Robb makes some assumptions in his post about future stock market returns. I’ll let him explain further:

Investment returns are expected to be lower in the long term. No longer do we see projections of 12-15% returns.

He goes on to predict a 6% return will be the norm going forward.

I’m curious as to why this is. Robb is echoing (ha, see what I did there?) the sentiment of many different investment professionals. The Euro zone is crumbling! Greece is a mess! The United States is printing money like crazy! Commodity prices are close to record highs! The world is ending! I’m running out of exclamation points! No wonder most of the investment community is calling for lower returns going forward. The future doesn’t exactly look rosy, that’s for sure.

Before we get too excited about all this, let’s take a look at S&P 500 performance over a few selected periods of time, data taken from Money Chimp:

1871-2010	8.92%
1929-2010	9.18%
1946-2010	10.66%
1987-2008	8.67%
1980-2010	11.39%

I’m sure some of the more astute readers can figure out why I picked the dates I did. The dates I picked are the years of some of the greatest economic disasters of the past 100 years. Stock markets famously crashed in both the 1929 stock market crash and then again in 1987. The American economy suffered from high unemployment and a crippling national debt after World War 2. (Sound familiar?) Inflation was a horrible problem in the early 1980s. The point is, the market has always found a way to bounce back from adversity. Why wouldn’t it do it again?

Yes, I realize the American economy has all sorts of problems right now. Their deficit is out of control and needs to be reigned in. That much is obvious. I’m going to go out on a limb and say that they find a way to get things under control. The crisis will be averted, just like every other crisis in history. The sun will rise again and the economy will keep chugging along.

We are in a small window of history. Just like the crazy bullish people of the late 1990s, I think the average investor is letting pessimism cloud their judgment a little. The financial crisis is still fresh in everybody’s mind. The American economy continues to suffer setbacks impeding recovery. It’s not a rosy picture out there, and I’m as guilty as anyone in being a little bearish. Stock market investors are generally not very good at looking at the long term.

The stock market is said to be a leading indicator. If you look at previous recessions, the stock market typically starts to go up a few months before the recession is over. The market looks at improving economic news and likes it, hence the increase in value. The stock market will also decline before a recession is official. The market is quite good at predicting what’ll happen in the short term. It’s really bad at predicting what’ll happen in the long term.

Predicting long term economic trends is hard. Who knows what new technology will even come out in the next decade, let alone the next half century. All I know is that it’s coming, it will be awesome, and that I will spend money on it. It’s okay though, because I’ll keep getting returns in the 8-10% range without even trying, thanks to broad market equity ETFs.

Looking back at our table, I’d like to focus on one period of time, from 1987 to 2008. In between those two years we had a massive stock market crash, (October 1987) a savings and loan crisis, (late 1980s-early 1990s) a subsequent recession, (1990-91) a large sell-off in real estate, (early to mid 1990s in both Canada and U.S.) a huge tech bubble, that said bubble bursting, 9-11, the bursting of the U.S. real estate bubble, and perhaps the worst credit crisis in history. A lot of stuff happened. Most of it was bad for investors.

Buying at the beginning of 1987 and selling at the end of 2008 means an investor bought high and sold low. And yet the market still returned over 8%. The market has done it for the last 100 years. I’m confident it’ll do it again. I’m willing to admit I don’t know squat, but I do know that.

Will Future Returns Suck? originally appeared on Canadian Finance Blog on July 21, 2011.

How Stock Options Work?

Robb Engen — Tue, 19 Apr 2011 09:00:06 +0000

A friend of mine was recently offered some company stock options and wanted to know more about how stock options worked. Stock options are becoming more commonly used as incentives for all company employees, not just the corporate executives. Company stock options often have a complicated contract that explains the various scenarios on how to exercise these options. My friend wasn’t sure if he was being given the stock as a bonus, or if he had to purchase the stock in order to reap the benefits.

Let’s start with an explanation of what stock options are:

Employee stock options give you the right to buy a specific number of shares of your company’s stock during a time and at a price that is specified by your employer. Companies make stock options available for several reasons:

They want to attract and retain great employees.
They want their employees to feel like owners of the business (think WestJet).
They want to hire skilled workers by offering compensation that goes beyond a salary. This is especially true in start-up companies that want to retain as much cash as possible.

Benefits of Stock Options

The price that the company sets on the stock (called the strike price) is discounted and is usually the market price of the stock at the time the employee is given the options. Since those options cannot be exercised for some time, the hope is that the price of the shares will go up so that selling them later at a higher market price will yield a profit. Unless the company goes out of business or doesn’t perform well, offering stock options is a good way to motivate employees to accept jobs and stay on. These stock options promise potential cash or stock in addition to salary.

To help you understand how this might work, let’s look at an example. Say your company gives or grants its employees options to buy 100 shares of stock at $10 per share. The employees can exercise the options starting July 1^st, 2012. On July 1^st, 2012 the market value of the stock is $15. Here are the choices for the employee:

Convert all of the options to stock, buy it at $10 per share, and hold it with the idea of selling it in the future for a capital gain.
Convert the options to stock, buy it at $10 per share, then turn around and sell all the stock after a waiting period specified in the options’ contract. If an employee sells those 100 shares, they would gain $5 per share, or $500 in profit.
Sell some of the stock after the waiting period and keep some to sell later. Again, the employee has to buy the stock at $10 per share first.

Vesting Period

Whatever choice an employee makes, the options must be converted to stock, which brings us to another aspect of stock options: the vesting period. In the example above, employees could exercise their options and buy all 100 shares at once if they wanted to. Usually a company will spread out the vesting period over three, five or even 10 years, and let employees buy shares according to a schedule. Here’s how that might work:

You get options on 100 shares of stock in your company.
The vesting period for your options is spread out over four years, with one-fourth vested the first year, one-fourth vested the second, one-fourth vested the third, and one-fourth vested the fourth year.
This means you can buy 25 shares at the strike price the first year, then 25 shares each year after until you’re fully vested in the fourth year.

Remember that each year you can buy 25 shares of stock at a discount, then keep it or sell it at the current market value of the stock. And each year hopefully the stock price continues to rise.

What Else Is There To Know?

It’s important to know that stock options always have an expiration date. You can exercise your stock options starting on a certain date and ending on a certain date. If you don’t exercise the options within that period, you lose them. And if you are leaving a company, you can only exercise your vested options; you will lose any future vesting.

A privately held company establishes the strike price on each share of its stock by assigning a price that is related to the internal value of the share. This is established by the company’s board of directors through a vote.

Stock options do have some risk, and they are not always better than cash compensation if the company is not successful. But they are becoming increasingly more popular in certain industries as an incentive to attract and retain their employees.

How Stock Options Work? originally appeared on Canadian Finance Blog on April 19, 2011.

Are You A Bull Or Bear When It Comes To Dividend Stocks?

Jim Yih — Tue, 14 Dec 2010 10:00:45 +0000

For the past few years, it seems everyone loves dividend stocks. Dividend stocks and dividend mutual funds seem to be such a standard staple when it comes to investing and when you look at the past long term performance, one can argue the popularity is justified.

Reasons for dividend stocks

For past 20 years I have been a strong advocate of dividend stocks because they include some of the biggest, most stable companies. Companies that pay dividends means they make profits and as a conservative investor, I have always been a believer that if you invest in a company, the safest thing to invest in is a company that has consistent profits. I consider dividend paying stocks a core holding in an investment strategy I have preached for quite some time – CORE and EXPLORE.

I asked Dan Bortolotti, The Canadian Couch Potato about some of his favourite dividend investments and he referred me to this great article on Choosing a Dividend ETF.

Two reasons to be cautious

Despite the strong long-term track record of dividend paying investments, there might be a couple of short term reasons for caution:

The herd is big. I’ve always tended to be a bit of a contrarian. When everyone is interested in the same thing, it always concerns me. My research has always led me to believe that chasing performance is the worst investment strategy to practice. It’s easy for me to be contrarian on something cyclical like Gold which is a hot topic today but dividend stocks have been such a sound long-term investment that most people don’t look at it as a trend. The popularity still scares me and makes me wonder if dividend stocks are overvalued and a cycle is ready for change.
Valuations. You can have a great investment but if the valuations are high, then you can still overpay for good investments. When there are more buyers than seller then the price tends to go up and this popularity can make good sound investments overvalued.

I’m not smart enough to predict the future of the markets. When everyone is strumming the same tune, I tend to be a little skeptical. This is a tough issue for me because history and fundamentals will suggest that dividend-paying stocks will always be good core holdings in a portfolio.

Long term, I will still bet on dividends as a solid core holding but in the short term, I wonder if it is a good time to take some profits off the table. It may be a good time to rebalance the portfolio especially for many buy and hold investors. I’ve seen a number of people where the dividend equity part of their portfolio has grown to be a large significant holding. Emotional thinking says to keep your winners and sell your losers. Logical thinking suggests that you do the opposite.

I can’t help but wonder if growth stocks will become the next trend again like it was in the 1990’s? Some might argue that this trend has it already started with the emerging market rebound. I believe everything goes in cycles but when will those cycles happen is really tough to predict.

When predicting the future, I’ve been both right and wrong. I’d love to hear your thoughts about dividend investments and your successes and failures.

Are You A Bull Or Bear When It Comes To Dividend Stocks? originally appeared on Canadian Finance Blog on December 14, 2010.

What Are Capital Gains?

Tom Drake — Mon, 22 Nov 2010 10:00:39 +0000

We’ve already answered the questions, what is a stock? and what are dividends? But maybe you’re wondering, what are capital gains? Well, at some point you will want to sell your stock, hopefully for a profit.

Capital gains result when you sell an investment for more than you bought it for. Likewise with a capital loss, which is simply selling an investment for less than you originally paid. With multiple purchases and commissions paid, you will also need to calculate your adjusted cost base to accurately work out the capital gain or capital loss.

Note that it’s American tax information in the infographic. In Canada, 50% of your capital gains are taxed at your marginal tax rate. While you can claim capital losses at this same rate, you can also carry them forward indefinitely (or back three years) to offset any future (or previous) capital gains.

This infographic created by Mint answers the question, what are capital gains? You’ll want to stop by next Monday for a special post about Mint. (click image to enlarge)

Mint.com Personal Finance Software

What Are Capital Gains? originally appeared on Canadian Finance Blog on November 22, 2010.

What Are Dividends?

Tom Drake — Mon, 15 Nov 2010 10:00:29 +0000

Last week we answered the question, what is a stock? This week, lets look at one of the biggest benefits of owning stocks; getting paid a dividend. So what are dividends? Dividends are a portion of a company’s earnings that are distributed to shareholders.

Dividends are paid as a dollar amount per share, so if you own 100 shares in a company and they pay a $0.25 dividend per share (DPS) each quarter, in one year you will have received $100. If the shares were bought at $15, for a total price of $1,500, then the dividend yield would be 6.6%.

Dividends play a major part in the Smith Manoeuvre, where you can make more (after tax) than the cost of the interest on your home equity line of credit (after tax deduction). This can help to pay off your mortgage sooner and convert your debt to a tax deductible investment loan.

Watch out for any dividend funds that may not be adding what you would expect to your portfolio. Some fund managers may use practically any other form of investment to try to increase their gains. Some of this is due to the need for the fund manager to attempt a larger gain to outperform the relatively high Management Expense ratio (MER) on these funds.

This infographic created by Mint answers the question, what are dividends? Check back the next next Monday for the third investing infographic from Mint. (click image to enlarge)

Mint.com Personal Finance Software

What Are Dividends? originally appeared on Canadian Finance Blog on November 15, 2010.

What Is A Stock?

Tom Drake — Mon, 08 Nov 2010 10:00:45 +0000

Many Canadians are investing in stocks through mutual funds, possibly chosen by their advisor. Even if you don’t invest directly in stocks, it’s still important to know what a stock really is.

Stocks represent individual shares in a company. When you buy a stock, you now own a fraction of that business. When the business achieves a profit, any earnings not retained by the company will be paid out to shareholders in the form of dividends. You can also profit when selling the stock at a higher price than you originally paid; creating a capital gain.

This infographic created by Mint answers the question, what is a stock? Check back the next two Mondays for more investing infographics from Mint. (click image to enlarge)

Personal Finance Software – Mint.com

What Is A Stock? originally appeared on Canadian Finance Blog on November 8, 2010.

10 Canadian Stocks To Keep An Eye On

Guest — Thu, 20 May 2010 09:00:55 +0000

If you are just beginning to invest in Canadian stocks and are unsure of where to start, this article will hopefully give you a little insight on what is out there. These are some “hot” stocks that are topping the charts. Always remember to do your own research with each company before investing. Under no circumstances should this article be construed as investment advice.

Yamana Gold (AUY) Yamana Gold is a Canadian-based producer of gold with compelling gold production, exploration properties, and land locations in Argentina, Brazil, Chile, Colombia, and Mexico. Yamana plans to maintain building on the foundation through existing and operating mine expansions and the progression of new mines. Yamana is the lowest cost cash producer in the industry, and committed to managing capital expenditures, operating costs, and trying to keep costs down.

Bell Canada (BCE) Bell Canada is one of the largest communication businesses in the industry. They provide consumers with all of their communication needs. Some of the services they offer are wireless communication, high-speed Internet, telephone service, and VOIP (voice over IP), to name a few. In 2009 the dividend increased 3 times, by a total of 19%. Bell Canada is one of the most productive dividend yield stocks in Canada right now.

Gold Corp (GG) Goldcorp is a low costing and fast developing gold producer. They are targeting low political risk countries throughout the Americas. Goldcorp has over 10,000 employees worldwide, and their headquarters is located in Vancouver. Gold is considered a safe bet when times are tough, and there is also a finite amount of gold available.

Magna (MGA) Magna is a leader in global supplies of advanced automotive components. They have also been ranked as the world’s fourth automobile parts supplier. This company shows a solid growth track record, since they have has 24 years straight of increased sales.

Manulife Financial (MFC) This leader of financial services have customers stretching over 22 countries. They provide financial protection and wealth management to individuals, as well as groups. Some of the services include: long-term care services, pensions, annuities, health and group life insurance, and of course banking.

Pengrowth (PGH) Pengrowth Energy Trust has a focus on low risk and low cost opportunities. They are an oil and gas functioning company with some conventional and some unconventional assets. The plan for the future for this company is to create oil and natural gas, as well as coalbed methane.

Canadian National Railway (CNI) Canadian National Railway plays a large role in transporting commodities. This includes importing energy from the US and exporting of timber and metal. The freight and transporting industry is crucial for the economy, and as time goes on you will see nothing but good things come from this company.

Toronto-Dominion Bank (TD) This company is a high profit, low risk, and stable company to look into right now. Even though, some say that financial investments are hit or miss. TD posts solid growth and earning time after time.

Cameco Corp (CCJ) Cameco Corp is the world’s largest, and low costing uranium producer. Over 20% of the world supply comes from Cameco. With global warming on the rise, emission-free nuclear power is welcomed.

FNX Mining (FNX) This company deals mostly with copper and nickel mining and has returned almost 4300% over the past 10 years. FNX doesn’t only produce and explore copper and nickel, but also, gold, cobalt, and platinum. As of March 2010, they announced that they were going to be merging with Quadra Mining, located in Vancouver.

You now have a starting point to begin your journey. Do research and read about any company that you are thinking about investing in. Good luck!

Bio: Melissa Tamura writes about online degrees for Zen College life, and recently ranked the best online colleges. The author owns stock in PGH and AUY.

10 Canadian Stocks To Keep An Eye On originally appeared on Canadian Finance Blog on May 20, 2010.

Book Review – Stocks For The Long Run

Tom Drake — Wed, 28 Oct 2009 09:00:45 +0000

Stocks For The Long Run, written by Jeremy J. Siegel, is a great book that as the name suggests, promotes the superior return of stocks over an extended period of time. The very first chart in the book shows the nominal returns of stocks, bonds, bills and gold from 1802 to 2006. While obviously we can’t count on a 200 year investment horizon, the graph is very convincing. Stocks outperform all other indexes by a wide margin, even The Great Depression is only a slight dip on a upward trend.

When I got to the second chapter on risk, return and portfolio allocation, I realized that this book is very similar to another great title that I’ve reviewed previously, The Four Pillars of Investing. While these books do have a similar take on the same subject, both are worth the read if you’re investing on your own.

Chapter 9 was one of my favorites, where Siegel points out the importance of certain criteria when selecting stocks, including the first two things I look at; price-to-earnings (P-E) ratio and dividend yield. While he cautions that no strategy will always outperform the market, these are great metrics on which to judge the value of a stock.

There are two chapters, that while important reads, I found were slightly contradictory to the theme of the book. The first discusses timing business cycles and another looks into calendar anomalies such as the January Effect.

If you’ve already read The Four Pillars of Investing, Stocks For the Long Run is a worthwhile read as it will reinforce the same historical lessons and the value of a diverse portfolio of index funds, held for the long term.

I’ll be giving away a copy of Stocks For The Long Run in the first half of November as one of the prizes for a few lucky readers! If you want to be the first to find out about the giveaway, sign up for the RSS feed or email subscription.

Book Review – Stocks For The Long Run originally appeared on Canadian Finance Blog on October 28, 2009.