How Share Buybacks Work

Understanding how share buybacks work for a company

Share buybacks, also known as share repurchases, occur when a company purchases its shares from the market to reduce the number of shares in circulation. It’s misunderstood by many investors, as they don’t know how share buybacks work and why a company would even need to initiate a buyback. They fail to understand that share buybacks can be extremely lucrative for a company when initiated for the right reasons.

They are designed to reward existing shareholders and provide them with more value for their money. When the number of shares in circulation drops, the price per share will increase, and that will mean shareholders will have more profits if they sell those shares in the market. This article will look at share buybacks, including their purpose and whether they are good news for investors.

What Are Share Buybacks?

When a company decides to repurchase its shares, it is known as a share repurchase or a share buyback. There may be several reasons why a company would opt to buy back its shares, which may include the following:

  • It feels the current shares are undervalued
  • It wants to reward existing shareholders
  • It wants to improve key metrics
  • It wants to increase share price

The number of shares in circulation decreases when a company buys back its shares, which will mean fewer shares in the market. The result is an increase in share value or price, and that will mean existing shareholders will have a chance to earn more profit if they sell those shares.

The most common reason for a share buyback is that the company feels its current shares are undervalued in the market. Therefore, it will buy back all of its shares in the market, which will create demand for the shares. When there are fewer shares in the market, it will raise the value of the shares even if it is temporary.

Are Share Repurchases Beneficial?

Share repurchases have been criticized by economists who claim that it is an artificial method for increasing share prices and an accounting trick used by CEOs to boost their earnings per share numbers. However, when done right, share repurchases can be incredibly beneficial to a company. It helps them reduce the number of shares in existence and ensures that the share price doesn’t drop below the margin the company has set.

Even though companies who engage in share buybacks are looked at with skepticism, they are only doing that to survive when you look at the bigger picture. They may be better suited to spend their money on hiring new talent or research and development, but share repurchases also provide them with a solution to their problems.

Pros and Cons of Dividend Stocks Investing

Everything you should know about dividend stocks investing

It is a well-established fact that dividend stock payments offer you one of the best investment options for your portfolio. However, like all investments, it has its pros and cons. You should carefully weigh them before making any investments so that you get a well-balanced portfolio at the end of the day. To make things easier for you, we will be sharing the pros and cons of dividend stocks investing. Here is what you need to know:

Pros of Dividend Stocks Investing

The best part about investing in dividend stocks is that you will get stable returns on your investment for a long time. Hence, many investors are choosing to invest in dividend stocks. Here are some of the pros of dividend stock investing:

  • You get a combination of capital appreciation and steady income from dividend stocks.
  • You can take advantage of higher bank savings from dividend stocks than you would get from U.S. Treasury securities.
  • The stock price is stabilized through dividends, and it ensures the price doesn’t drop when the market conditions aren’t favorable.
  • Companies that offer the best long-term investment options have the highest paying dividend stocks.
  • They are the best choice for retirees since it provides them with stable income and ensures capital appreciation in times of inflation.
  • There are also tax advantages with dividend income. Qualified dividends have lower tax rates, and dividends from stocks in a retirement plan are tax-deferred.

When you look at the many positives, you stand to gain from dividend payouts; it makes sense why you would want to invest in dividend stocks.

Cons of Dividend Stock Investing

Even though dividend stocks provide you with numerous benefits and are great for your investment portfolio, there are times when they can be negative as well. Therefore, we will share the cons of dividend stock investing to give you a better idea. These are as follows:

  • Compared to pure growth stocks, you may not get a lot of capital appreciation from dividend stocks.
  • The payouts from dividends are never guaranteed; if there is a cancellation or reduction of a dividend, the stock price will fall drastically.
  • Dividend stocks fluctuate wildly based on interest rates, and if interest rates increase, the stock price will fall.
  • If you come across a dividend payment that is excessively high, it could mean that the company is about to experience financial trouble.

These were some of the main negatives you could come across when investing in dividend stocks. When you look at the complete picture, the pros outnumber the negatives, which is why dividend stock investing is on the rise these days.

What Is Risk Management in Investing?

hing you should know about risk management in investing

Millions of people invest to grow and preserve their wealth. It has become second-nature to most people, and with the right investments, you can fund your retirement, increase your assets, meet your future financial goals, and pay for your kid’s higher education. However, investing does come with risks, and you must be careful with your investments as you can lose money just as quickly as you make it.

Every investor should know about the risks of investment, and they must have a risk management strategy in place before they invest. Each investment carries risk, which means when some investments are great for others, they may not work out well for others. We will share what you should know to understand the risks of investing.

Risk Management in Investing

Every investment carries some form of risk. Some investments are less risky than others, while others may carry a higher risk level. You need to ensure you understand how much risk you are willing to take on any investment. That will determine your entire investment strategy and will be the main factor in play when you are thinking about maximizing your investments.

For instance, you decide to invest in company A because of their fantastic product. You review the company’s financial statement and determine the company’s stock price will go up in the coming months. Hence, if you buy stock in the company, there is a good chance that the stock price goes up and you make money on your investment. However, it could also happen that the stock price goes down in value due to the product’s poor performance.

The possibility that the stock price will go down is your investment’s risk assessment. Most assets don’t carry any risk at all, while some assets are riddled with risk. When you are investing, determine the level of risk of any investment so that you are prepared to handle the consequences of your investment.

Remember, you will not stand to make much money when you invest in low-risk investments. If the investment is riskier, there are greater chances of you earning a lot of money. However, keep in mind that you also stand to lose a lot of money.

Conclusion

It would help if you carried out a proper risk assessment of all your investments before choosing to throw your money at them. An intelligent investor always knows how much risk they are willing to handle, which is good money management. Therefore, you must manage your risk when investing and understand how risky an investment is before investing your money.

It will ensure you don’t jeopardize your financial future and make investments that will provide you with great returns in the short and long-term.

3 Ways Diversification Can Go Bad for Investors

The many downsides of diversification for investors

Even though diversification is the way to go for investors looking to achieve profits from their investments, it can all go very wrong. You must be smart with your investments when you are diversifying because your returns from the investments will depend on which asset classes you have backed heavily at the end of the day.

Young investors who are keen to diversify their investment portfolios can make mistakes, and we will highlight some of them here. That will allow you to have complete knowledge of what not to do when making investments and the different ways diversification can go wrong for investors. Here is what you need to know about diversification:

1. Investing in the Wrong Time

The first thing you must ensure when investing is that it is the right time for you. That means you must be in the right frame of mind and emotionally and financially sound to make investments. You will need to take risks, but you can make disastrous decisions when you are not thinking clearly. Even diversification can’t help you if you invest in the wrong stocks, commodities, or bonds. You need to understand the stock market and rely on investments that will offer you returns in the long term.

If you get emotional and are only looking for short-term investments, you will be disappointed. You will miss the big picture and make rash decisions with your investments, which is the opposite of what you must do. You know that you have to diversify your investments, but if it is at the wrong time, you will not get the results you want from them.

2. Avoiding Investing in Different Asset Classes

When investors are new to diversification, they want to play it safe and not have too many different investments. That could be a big mistake because you could end up with similar investments if you don’t broaden your investment net. That defeats the purpose of diversification because you want your investments to be different from one another.

When playing it safe, investors could avoid some asset classes entirely as they don’t understand them completely. Therefore, they don’t capitalize by investing in them and only invest in familiar stocks. If you don’t take risks when investing, diversification may not help you.

3. There is No Script for Investments

The biggest problem you could face with diversification is that all of your investments could fail at the same time. There no script for investments, which means you can’t predict if there is an economic crunch and the stock market, bonds, and commodities all fail at the same time. Even if you have diversified your portfolio, it will not work in your favor because everything will lose value.

That is a real possibility you must consider when making investments, and if the market conditions are taking a turn for the worse, you should hold back your investments. Even though diversification holds the key to protecting your investments, you can’t do much if everything goes down in value.

How to Invest $10,000

How to make the most of your $10,000 investment

Saving up cash for short-term spending and emergencies is a vital part of your finances, but for long-term goals, you can grow your money by a lot if you choose to invest it. When you cash to spend that you don’t need for your emergency fund or savings, investing the rest is a good idea. An excellent sum to invest would be $10,000, and savings accounts often provide low-interest rates and little growth opportunity compared with bonds, stocks, and other investments.

Depending on your goals and needs, any of the options we have listed below will offer you the best way to invest 10,000 dollars.

1. Choose Between Investing Types

When you have decided how you want to invest your $10,000, the best decision you can make is to put your money in a passive investment plan or actively manage your portfolio. There are pros and cons to each option. Passive investing is the best option for most investors as it gives you long-term rewards.

·        Hands-On Investing

Also known as active investing, it includes picking single stocks or trying out riskier assets such as options.

·        Hands-Off Investing

Also known as passive investing, it involves picking a portfolio of exchange-traded funds or mutual funds or handing over your investment portfolio to a wealth manager or robo advisor.

2. Decide Your Goals

You want to make money when you are investing, but you should have specific goals. Most brokerages tend to categorize investment goals along the lines of:

·        Capital Preservation

This is the goal of growing your money with the least amount of risk. If your investment goal is capital preservation, you may not achieve higher growth to avoid potential losses.

·        Investment Growth

This investment goal is when someone is willing to take on more risk to earn more. Most young investors choose this type of investment plan.

·        Speculation

This goal is all about growing your money while taking significant risks. When you get involved with high-risk investments, you also risk higher losses.

3. Maximize the Potential of Your Retirement Fund

If you have a 401(k), it should be the first place you should invest in, allowing you to double your revenue instantly. You can increase your 401(k) contribution, and you can make a one-time contribution to take advantage of the tax advantages of a 401(k) plan.

·        Max Out an IRA

If you still want to invest for your retirement and are taking the full 401(k) match, the IRA is the next best place to invest. You can fund an IRA with either pre-tax with a traditional IRA or after-tax with a Roth IRA. Most IRA investors have long-term plans and get the best returns on their investments.

Conclusion

A sum of 10,000 dollars is significant, and you can quickly dip your feet in the investment market and take advantage of any number of investments. However, make sure that you understand your investment goals to benefit fully from your investments.

Should You Invest in Bonds?

How and why you should invest in bonds

When investing in any fund or bond, you should first do your research and understand the risks involved along with the expected returns. The question most people ask themselves is whether investing in bonds is a worthy investment. The conventional wisdom among investors is that you should always have some form of bond in your investment portfolio. Those who are close to retirement may want to invest in government bonds instead of the stock market, as they are less volatile and have a set return rate.

When interest rates are low, you would be wise to invest in government bonds due to their inverse relationship. The price of bonds will rise when the Federal Reserve lowers the rates, which would mean that you end up profiting from your investments. You may have some reservations about investing in bonds because you will not get a high return on your investment.

When the Federal Reserve lowers the interest rates, investors are attracted towards the fixed bond rates, and the opposite will happen if the Federal Reserve raises the rates. Bonds will become cheaper as fewer people will be interested in investing in them. However, when the interest rates are low, having bonds in your investment portfolio instead of other assets can serve you well. That’s because bonds will yield a zero today, and you should know that you can’t retire on a zero-yield.

How Inflation Has Impacted Bonds

You must take inflation into account when considering whether you should invest in bonds. The Federal Reserve has already printed more money in the current decade than in the past century. When you combine the balance sheet’s expansion with the rising inflation, you get a recipe for disaster. If you have invested in bonds, you will be among the investors who have taken advantage of the market conditions. The current bond yields are at their lowest levels, and it is estimated that they won’t move lower in the coming years.

That means the interest rates willnot go any lower, which means the value of your bonds will remain stable over the long-term. However, this doesn’t mean that bonds are not a worthy investment to think about these days. They are an excellent option when you want to protect against market volatility, but you shouldn’t place all your eggs in one basket.

Conclusion

If you are great at managing your investment portfolio, you should know that bonds make for an excellent long-term investment. However, you must take the current economic situation into account when you decide to invest in bonds. That’s because bonds may not offer you the yield that you expect. So, keep that in mind when you are choosing to invest in bonds.

How and Why You Should Invest in Foreign Stocks

Learn all about investing in foreign stocks right here

Even though there is a wide variety of investment options in the US stock market, you can further diversify your portfolio by investing in foreign stocks. You can give your portfolio exposure to different markets with these types of investments, particularly in sectors where companies in the US have stagnated. Before you decide to invest in foreign stocks, you must understand all the risks and the steps you must take before investing in them. Read on to learn more about foreign stocks and how you can add them to your portfolio.

What Are Foreign Investments?

Many investors assume that only Washington bureaucrats get involved in foreign stocks, but foreign investments are something you can add to your portfolio. In general, foreign investments are made when you buy assets and stocks in other countries and outside the United States’ stock market. We will focus on foreign investments in the stock market, but you can also purchase government bonds, corporate bonds, and foreign currencies.

Each investment comes with its risks, and you must understand how the risk affects your overall portfolio to take advantage of it. Most investors in the United States consider investments in foreign countries to be less risky. So, when investing in foreign stocks, the trick is to find the right asset allocation or balance between your investments in the US and the foreign market.

Steps to Invest in Foreign Stocks

Investing in foreign stocks makes a lot of sense as apart from diversifying your portfolio, you can also make substantial profits if you are smart. So, if you’re ready to get started, here are the steps you should follow to invest in foreign stocks:

1) Open a Brokerage Account

The first thing you’ll need is to open up a brokerage account. You will get the chance to buy mutual funds, international stocks, and exchange-traded funds on the US market from most brokers, but not all brokerages will give you the option to purchase stock directly on a foreign exchange.

2) Fund Your Account

Make sure you have plenty of dollars in the bank to fund your investments. You must have the cash to invest because investing in foreign stocks can be expensive. So be prepared to have the cash you can spare and won’t need in the immediate future for funding your account.

3) Decide How to Invest

You can invest in different ways in foreign stocks, which we will discuss later. Research about the performance history, fund’s makeup, and stock fundaments first.

4) Enter Your Trade Order

Once you feel that you’re ready to buy foreign stocks, the next step would be to enter your trade with the brokerage to start investing in foreign stocks.

Conclusion

That’s all you need to know to invest in foreign stocks. The information shared above will give you a fair idea of why you should invest in foreign stocks and how you should go about your investments.

Pros and Cons of Short-Term Investing and Long-Term Investing

The advantages and disadvantages of short-term and long-term investing

If you want to become a seasoned investor, you will need to learn about whether you will find the most profit from short-term investments or long-term investments. There are pros and cons of each type of investment, and you should know them beforehand to benefit from your investments. You’ll need to determine your financial goals. You especially need to know what you’re saving and investing for, and the amount you are looking for. If you’re saving for your kid’s college, you’ll obviously want to have a different amount than if you were only saving for your retirement.

Short-Term Investing

You must employ a different strategy if you plan on using your savings in a few years. The best strategy here is to buy stocks, who have been predicted to offer massive earnings in a short time. That’s known as growth investing. Strategies for short-term investing include putting your money in a savings account or investing in a peer-to-peer lender.

Pros:

Low-Risk

Short-term investing is generally low-risk, depending on what type of investment you choose to make, mainly because these investments have less time to be impacted by a drop in interest rates or markets.

High Liquidity

It’s easier to withdraw your funds whenever you need them, as the money isn’t stuck in an account for long periods.

Cons:

Higher Tax Bill

You’ll have to pay more taxes, depending on the investment, if you leave the investment in an account for the long term.

Low Returns

You’re not going to get a massive return on your investment since the money hasn’t been invested for a long time.

Long-Term Investing

Long-term investing is also called buy-and-hold investing and is the main choice for people looking to save money for retirement. You know that you’re investing for the long term, and the strategy employed here takes into account buying stocks and holding them for years in the hope that they will be worth more in the future.

Pros:

Less Stressful

Longer investments don’t cause you a lot of stress, as you’re not constantly checking the markets and worried about the ups and downs.

Less Risky

When you hold on to stocks for the long term, you have more time to recover from any dips that have affected the stock market.

Cons:

Less Control

You’re not likely to see your money for a long time, as it has been invested for the long term, so you have less control over it.

Patience Required

You’ll need to be very patient to see the returns of your long-term investment, and it is not ideal for people looking for short-term gains.

The Profit Secrets of Insider Trading

Learn how to profit from and take advantage of insider trading

In the modern world today, investors have an abundance of advanced tools at their disposal designed to help them with investment decisions and financial analysis. However, one thing that is overlooked most often is evaluating the patterns of insider trading. With this, we’re not referring to illegal insider trading activities, but we are focusing on legitimate transactions made by insiders or corporate executives.

A good strategy to employ when investing is to always know the company inside out before you even think about becoming a part-owner. Any investor who is diligent should completely understand every aspect of the operations of a company, which includes its suppliers, customers, potential weaknesses, and competitive advantages. However, no matter how many hours you spend on researching and studying a company, you still won’t know a company as well as its top executives. That’s because these corporate insiders have access to private sales data and are involved in all major operations of the company.

Why It’s Important to Analyze Insider Trading Before Investing

Corporate insiders have the same goals as an investor when they are investing in the shares of their company, as they want to buy low and sell high. That’s why it’s important to keep an eye on insider trading happening within a company, as it provides important clues about the performance of a company.

Market research has found that analyzing insider trading patterns can give you important clues about the performance of a stock. Numerous studies have shown this by reviewing years of stock price data and found that price movements that were going up are always followed by strong insider buying.

Insider Trading Patterns Can Predict Future Share Price Movements

Even though you can get many clues from insider trading activity, it still doesn’t provide you with enough information to predict future share price movements. That’s because most times, insider trades don’t offer any predictive value. However, investors should consider the behavior of insiders of the company, as their sale and purchase patterns do offer strong predictive value.

That’s why it is important for investors to fully understand how to analyze the trading activity of insiders, and they can do that by looking at the following factors:

When you carefully consider all of these trading factors, you get the complete picture of insider trading taking place in a company. These give you insights into the stock prices and how company executives view their long-term performance in the market.

Is Share Buyback Better for You As An Investor or Dividend Payment?

The difference between share buybacks and dividend payments and which is better

There are two main ways companies can return spare cash to shareholders. One’s through a share buyback, and the other one is as a dividend. However, what are those two things, what’s the difference, and more importantly, what do they mean for you as an investor? Below, we cover all of these topics to break down the jargon and get to the heart of what buybacks and dividends mean for you.

What Are Dividends?

Dividends are cash payments to shareholders. “Ordinary” dividends are usually paid twice a year, after interim and final results. That means shareholders should get a steady source of income. Because dividends are at a manager’s discretion, they’re not guaranteed and can vary in size.

How Does It Affect You?

If you’re looking to use dividend payments as an income, you might want to look at a company’s dividend yield. The yield is the annual dividend payment as a percentage of its current share price. So, if a company’s share price is 100p, and it has paid a dividend of 6p in the past year, the dividend yield is 6%. Yields are usually calculated using last year’s dividend. This means they aren’t a reliable guide to the income you’ll get in the future, as there’s no guarantee last year’s payment will be repeated this year.

As an investor, dividends provide flexibility in that you can choose what you do with the cash. You could:

  • Reinvest to buy more shares in the company
  • Buy shares in another company
  • Use it as an income

You’re taxed on dividends when you hold shares outside an ISA and a SIPP, so receiving a higher payment and then reinvesting it back into the company might not be in your best interests. Remember, tax rules can change, and benefits depend on your individual circumstances.

What Are Share Buybacks?

A share buyback is when a company uses its extra cash to buy its own shares and usually cancels them.

How Does It Affect You?

A buyback means you’ll own the same number of shares, but because there are fewer shares in existence, the value of your shares should rise, all else being equal. You’ve got a bigger slice of the same pie. Remember, all investments can fall as well as rise, so investors might get less back than they invest.

Ideally, a share buyback will take place when the company’s management thinks the shares are undervalued. This is one half of the basic “buy low, sell high” mantra. If the company plays its cards right, this can be great for investors. A well-executed share buyback can save shareholders having to pick the right time to reinvest a dividend payment. However, there’s always the chance of the management buying back the shares at the wrong time. Generally, share buybacks can:

  • Give a positive signal that the company thinks its shares are worth more than they’re trading at but remember this won’t always be the case.
  • Increase the value of existing shares.
  • Cut out the middle man. If you reinvest your dividends, a share buyback does it for you, saving you dealing charges.

A company is under no obligation as far as share buybacks go. In most cases, it can stop repurchasing shares whenever it wants. They aren’t committed to dividend payments either, but the management will typically think about stopping a buyback before cutting the dividend.

Conclusion

There’s no clear winner in the buybacks vs. dividends debate, as both are good news for investors. However, it’s important to remember their differences. The key takeaway is that dividends are better for income, while buybacks are more geared towards capital growth. Whatever your circumstances, understanding the differences means you can choose what’s right for your investment goals.