Shares: Buying Price Doesn't Matter

Shares, and when to buy them. This is a short discussion piece about my views on when a person should buy a set of shares. 

Shares Inspiration

Recently, I have been doing a lot of reading about famous investors, what they can teach us, and consequently the best ways to invest. I've read about the greats of Sir John Templeton, George Soros, Warren Buffett, Charlie Munger, Benjamin Graham, Phillip Fisher, and Peter Lynch. Whilst all the investors differed in their particular investing styles there did appear to be a few trends in investment strategy and personality. Since I have previously looked at the attributes of great investors, I will focus this post on the pattern that emerges from these great investors on when to buy a share.

When to buy a share

There was one interesting truth about the price at which many of these investors bought their shares. It seems clear to me that current price is not a determinant of whether to buy or not for many of these great investors.

But how can price not matter?!

What seemed to matter more than current price was where the price was going to move. The movement of the share price is determined in the long run by the fundamentals of the business:
  • Are profits increasing year on year
  • Is the business growing in terms of turnover
  • Does the management have a longterm strategy
  • How tied up are the managements interest into the business
  • Are dividends increasing year on year
Picture from freedigitalphotos.net
If the answer to all these questions (and there are many other considerations - feel free to include them in the comments below if you have any other ideas) is positive and you have left room for a margin of error then it should not matter whether you wait for the price to fall a few extra pence to a lower level before buying. You certainly aren't in the investment for the short term (or you shouldn't be) so it shouldn't matter. Most great investments hold shares in a particular company for roughly 5 or more years. If you wait too long for the price to reach a certain level you might miss the boat altogether.

LESSON: You can't time the market, so don't try

The conclusion is simple. Once you've found what looks like a great business and a wonderful investment opportunity don't wait too long to act or you'll miss the boat.

Warren Buffett once said:
It is better to buy a great company at a fair price than buy a fair company at a great price.
Keep that in mind, next time you try to time the market. I know I will.

What other aspects should an investor consider when looking at the business? Does buying price matter to you?


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What car to buy?

Advice needed on buying a new car. Below I will specify my needs for a new car and I want to see what information is out there from my knowledgeable readers.
Dear Reader,
I have a confession to make. I know little to nothing about cars. I need a new car and I need some help choosing it. In this post I'm going to lay out my needs for a new car and I urge you, if you have any car knowledge, to help me out. 
Kind regards and thanks,
Mr. Moneybanks

New Car Needs

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There are several things that I need my new car for. I am moving to a busy area in London and will be squeezing this car into spaces on the road. Furthermore, I may be using this car for work  (as an auditor) which may take me all over London. Thus ideally it needs to have a small engine to avoid congestion charge. It also needs to look quite professional. Another reason why it needs to have a small engine is for fuel economy reasons. I will be stretching my finances with the move to London so any savings that I can make in the car department would be awesome. I may also be travelling back to my parents home in Leeds every now and again and so the car needs to comfortably survive on the motorway. As a quick recap:

  • Small engine
  • Smallish car
  • Professional/ sexy looking
  • Sporty looking (think porche! - I wish)
  • Cheep to run
  • Able to run comfortably for a few hours on the motorway

New Car Requirements

I am very happy with buying a used car. I have had a used fiat punto for the last 5 years and it has been great. I have an absolute maximum budget of £6,000. For longevity I figure that the car needs to be no more than 4 years old and clocked up no more than 40,000 miles. To try to keep future costs down I don't really want to be driving anything with an engine bigger than 1.6 litres or else the insurance will shoot up. The colour isn't such a big issue for me. Just think: dark colours (silver, black, blue etc). I will be coming back to Leeds to pick it up so ideally the car needs to be able to get to Leeds. Obviously, this is not essential as I can pick up cars near London aswell.
  • Used Car
  • Under £6,000
  • Less than 4 years old
  • Under 40,000 miles
  • No more than a 1.6 litre engine (insurance purposes)
  • Dark colours
  • Sourced near Leeds
Ideas thus far consisted of second hand smart car roadsters, toyota roadster (such a cool car - I won't hear anything bad said about it!) and mazda RX8 and the mazda MX5. Please let me know if you have any better ideas. Feel free to post links to cars found in the comments section.


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

How to Finance a Business

Raising finance in economic times such as these is a difficult task. In this article I outline in simple terms six methods for raising the sort of finance needed to get your business the support it needs.

The Entrepreneurial Economic Engine

In difficult economic times such as this, jobs are scarce. With unemployment rising, many of us are not as secure in our occupation as we used to believe. One way to bypass the risk of being made redundant is to take the plunge and start your own business. Entrepreneurs are the backbone to every economy and are the engine of progress. We've all got ideas, and some of us have ideas that are actually feasible (mine: instead of sun glasses we use sun-contact lenses - no more panda eyes!). One of the major stepping stones to starting a business is obviously finance. How do you finance your business if you have little or no savings?
Picture from freedigitalphotos.net

Raising Finance

  1. Family and Friends: the safest and least pressured method of finance. Obviously there is no need for a credit check with family and friends. Ideally you would need to have a contract written by a solicitor to cover all circumstances. Just a little warning: relationships may be strained if there are problems paying back the money. Make sure you are able to pay the money back on time.
  2. External Investment: these are wealthy individuals, angel investors (investing clubs) or venture capital firms looking to gain equity in start-ups (think Dragon's Den). Obviously you will be forced to give up a portion of your business and thus a share of future profits for the funding. However you may also gain a business partner and mentor.
  3. Debt Finance: Duncan Bannatyne (Dragon on the BBC program Dragon's Den) is famous for financing one of his early business venture's with £30,000 of credit card debt. He was that confident that he could pay the money back before he would be charged interest that he was happy to take on that level of high interest debt. Of course this sort of financing relies on your confidence to be able to pay back the funds and can sleep at night knowing you have that level of debt.
  4. Bank Loans: This is one of the most typical forms of finance. You need a good credit rating nowadays to be able to take a loan from the bank. Furthermore you will need to demonstrate a good business model and may have to put up your own house, or other assets as collateral.
  5. Factoring and Invoice Discounting: Let us say that you've started your business and have taken orders but are having cashflow problems. Factoring involves selling invoices to a third party debt factoring company to release fast cash against your sales ledger. Of course this sort of financing is not free money. You firm will be subject to a credit check and a review of your financial situation. You will pay a discount charge, a little like an interest charge. This could be anywhere between 1.5-3% above base-rate. You will also pay a management fee, usually 0.75-2.5% of turnover.
  6. Revenues: Obviously the ideal situation is to fund development in a business through revenue. This of course assumes that the business was able to be set up in the first place. Either this method or funding through family and friends is always preferable over debt of any form.
Readers, are there any other methods for gaining finance in your business that I have not covered here?

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

What is the Euro Crisis?

The Euro Crisis: What is it, how did we get there and what's the solution? This article reveals my opinions on the Euro Crisis. Feel free to comment below and argue with by view point.

What is the Euro Crisis?


The Euro crisis refers to the problem amongst the Euro zone countries and their extremely high levels of Government Debt. High debt in itself is not the problem. The problem is the doubt cast on these governments to service such high debt to GDP ratios. This has resulted in a down grading of Government debt in many of these Euro zone countries. This makes it even harder for countries within the Euro to borrow to help balance their budgets and to service the current levels of debt. This in turn may lead to many of the Euro zone countries defaulting on their debts. The main countries to worry about are Portugal, Ireland, Italy, Greece, and Spain, affectionately and collectively termed the PIIGS.

Picture from freedigitalphotos.net

How did we reach this Euro Crisis?


The Euro Crisis came about as a result of may factors. I have identified two key problem areas. The first is that being in the Euro means that the PIIGS have little or no control over it's own interest rate. Interest rates for the Euro zone are set in Brussels and assume a one-size-fits all policy. The lack of control over a countries own monetary policy meant that it had one less tool with which to control the economy. Some countries will want high interest rates to slow their economy down as inflation creeps in and others want low interest rates to speed their economy up as they risk recession. Without that level of control, countries have to rely more and more on their tax and spending to control the economy. The problem with that is that if a country runs a deficit (spends more than it earns) and the economy is facing slow growth, in order to speed up the economy, it takes on debt to finance that deficit. This means that debt payments increase. Now that is generally not a problem when the economy is growing but when in 2007 recession struck, deficits increased and countries needed to borrow more and more money in order to restart the economy. This then developed into the Euro Crisis as regulators start to question a countries ability to ever pay back it's debts.

The second major problem is of course the incessant spending of countries. Even today at the height of this Euro Crisis, many countries are still running budget deficits including the UK (a deficit of about £126bn for 2011-12 --> REMEMBER: that's just the deficit, don't get me started on the size of the debt). It just seems to be logical to me that an obviously bad way to get out of debt is not to keep adding to it!

What's the solution to the Euro Crisis?


The solution to the Euro Crisis is obvious, although not easy. We need to address the two problems I outlined above.

To solve the first problem the Euro zone needs to go one of two ways. The poor solution is greater integration of the Euro countries with aligned politics and a fiscal union. However, it is my belief that countries will always differ for fundamental reasons such as culture and language and so many of the problems we face today shall remain. Instead, a better solution is for the Euro to break up and return to being a trading union. Yes, there will be a lot of pain along the way as countries will have to readjust to new currencies and businesses to the new climate but in the end we will be out of this mess. At least we will get away from this current stalemate of tinkering here and there whilst debts continue to increase.

The second is that countries need real austerity. 'But we're in austerity now!' some of you will claim. My response to this is that the problem is simple. We are spending too much. People can complain all they want when the government tinkers with this tax and that benefit but at the end of the day we are spending way too much! Spending needs to be slashed in all areas and borrowing cut to zero. I wouldn't touch taxation unless the government planned to reduce taxation. This is because taxation affects people's incentives to work. Any more tax may increase unemployment above its high levels.

Yes it's all very radical. I know this. However, desperate times call for desperate measures and in my opinion Governments in Europe have got it wrong for now. They have clearly tried and failed to sort the crisis over the last 5 years. It is time for a radical change.

Readers, what do you think the solution to the Euro Crisis is? So you agree with my view?


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Credit



The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.


This article is the twelfth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Credit

Picture from freedigitalphotos.net
Credit is a less obvious, more unusual form of financial product. Credit is an agreement between two parties, where one party provides finance to the other party under the agreement that the second will eventually repay the first the full amount with interest.

There are various methods of gaining credit. These can be through a credit card, personal loan, overdraft facility, mortgage, buying something 'on credit', payday loans, or borrowing off a friend.

I include credit as a financial product as it is the main form of financing for many people in the UK today. It is the case that when some people want money they look for income in the long term through investments. When other people want money they only want it now. This means that if that particular person wanted a new car, but didn't have the money then they would buy it on credit through a contract with the dealer or on a credit card.

Credit cards charge a variety of interest for the privilege of borrowing money based on your credit rating. Typical APR (Annual Percentage Rate) can range from as low as 6.95% ranging up to 45% (a quick comparison was taken on 06/07/12 and so things may have changed since then).

Advantage

Disadvantages

  • You pay interest on the credit taken out with that particular economic agent
  • It is not an investment by any means

Overall conclusion

Sometimes a credit card it useful. However for the majority of people credit is a financial product used to get things now that they would otherwise have to wait for. In general these are not beneficial financial products as they do little in the way of building wealth.

Score: 2


Advice: Never ever invest on credit. That is just stupid. Only invest what you can afford to lose. Only use credit where absolutely NECESSARY. In fact I would add that a person should try to lead a life whereby they use as little debt as possible.

Readers, what are your feelings on taking on debt in general? Do any of you believe that I should be more willing to take on debt or do you agree with me and find debt to be quite evil!?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Tracker Funds


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.


This article is the eleventh in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Tracker Funds

Picture from freedigitalphotos.net
A tracker fund, also known as an index tracker is a cheap and simple investment tool that copies the progress of an index such as the stock market or a particular industry within a stock market.

The index is made up from the averages of all its constituent companies share prices. Thus an index tracker or a tracker fund holds shares in the various companies in that index in the same proportion as that index. Thus a FTSE100 Tracker Fund attempts to mimic the performance of the FTSE100 index. For example if the FTSE100 is at 5000 and rises to 5500 in that day then that is a 10% rise in the FTSE100. The tracker fund will also rise by 10% as it holds shares in the all the companies in the FTSE100 in the same proportions as the FTSE100.

Tracker funds tend to be relatively cheap because unlike a managed fund there is no need for buying and selling various shares within the fund. That is because once the index tracker has been set up initially, unless there are big changes within the index (e.g. a company is downgraded out of the index and so a manager would need to sell all those shares in that company) then very little activity needs to go on in the fund. Hence very few costs and that means very little excuse to be charging customers a whole lot.

Advantage

  • Cheap
  • Captures stock market performance
  • Can utilize investment ISAs

Disadvantages

  • Does not capture the dividends made by a company
  • High level of risk as you are exposed to the stock markets
  • Value of indices can go down

Overall conclusion

An essential part of any investors portfolio. For many investors this is the rock of their portfolio and they dabble in individual shares with excess disposable income.

Score: 9


Advice: I myself do not hold any index funds. However, when I have the capital I shall be investing in a FTSE All-Share Tracker Fund. I am told that this is the best way to get exposure to as many companies as possible, giving you huge opportunities for diversification as this encompasses 600 companies. 

Readers, are Tracker Funds really the ultimate investment (as I keep hearing)?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Bonds


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the tenth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Bonds

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We have partially covered Bonds already in this series when we looked at Treasury Bills and Gilts. Both were types of Government Bonds. In general Bonds are loans. When an individual purchases a Bond from a bank/ financial organisation they are essentially loaning the money to that institution.

Interest is paid depending on the terms of the Bond. It could be paid every month, quarterly, annually or at the end of the investment term. The size of the interest depends on the term of the Bond and the amount invested. At the maturity date the Bond pays out the original principle (amount originally invested in the loan).

Some Bonds have what is called a floating rate. This means that the interest paid by the Bond is determined by market conditions.

There are many different types of Bonds on offer. You will need to go to a bank to see which one suits your capital and your needs. Bonds can also be traded.

Advantage

  • Can Utilize ISAs
  • Fairly risk free investment - the principle and interest will always be paid unless your buy a floating rate Bond

Disadvantages

  • Not huge returns. Bigger returns are found in shares
  • Inflation can erode the principle

Overall conclusion

Bonds in principle seem to be quite good but I can't understand why an individual wouldn't just put their money into a higher rate savings account.

Score: 7


Advice: If an individual particularly wanted Bonds I'd point them towards higher rate savings accounts, especially if they were thinking of utilizing their ISAs.

Readers, thoughts? Opinions? Are any of you 'Big Bond Lovers'? Love a bit of Bonding?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Treasury Bills


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the ninth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Treasury Bills (or Gilts in the UK)

Picture from freedigitalphotos.net
Many governments need to borrow money to service debt requirements. A treasury bill or gilt is the type of bond that is issued to allow the government to do this. Today the government has an outstanding stock of gilts measuring well over £1,000 billion.

Gilts in the UK are considered the safest type of investments. The UK government has never defaulted in its debts in all its existence (apart from once in 1672 but don't tell anyone!). As a reward for that standard of borrowing the UK government has a AAA credit rating, as issued by the credit rating agencies (that is the highest you can get!). As a mark of the UK government's creditworthiness, some investors are willing to purchase 50 year gilts; such is the confidence in the UK government's ability to honour their debts (we can all learn from such creditworthiness!)The typical maturity of UK gilts is roughly 14 years.


How do Gilts Work?

Gilts are bought when issued for the nominal amount and is held until a specified redemption rate (up to 50 years later in most cases). Interest is paid every year, twice a year, plus you will receive the nominal amount originally invested at the end of the term. Currently interest rates are between 0.5% up to 3% ranging from a 1 year gilt to a 30 year gilt. As you can see, the government has an incentive to inflate away debt. Thus the fact that people still invest demonstrate's investors trust that the UK Government will try to control inflation. Gilts are bought through brokers or indirectly though funds.

Advantage

  • No capital loss
  • Extremely secure - the UK government has never defaulted
  • You can utilize ISAs
  • Potential to index link the bonds

Disadvantages

  • The income from gilt interest payments is taxable
  • Inflation erodes over time
  • Not accessible until the term is completed
  • Higher rates of interest can be found elsewhere

Overall conclusion

Gilts are a very safe secure investment. It is surprising that more of us in the UK don't buy gilts. Maybe it is because the rate on gilts are so low at the moment due to the extreme creditworthiness and popularity of the gilts with big investors and funds.

Score: 8


Advice: A portion of your investments should be in a creditworthy governments treasury bills. They are safe and secure investments. Be sure to utilize your ISAs.

Readers, what proportion of your wealth do you think should be in gilts?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Options


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the eighth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Options

Options are the ultimate investment tool if you want total freedom with your investments. They allow for a lot of flexibility in terms of the investors preference for risk, reward, liquidity and patience. Options allow those that invest in them to be as speculative or strategic as they like.

Much like CFD trading, an option is a binding contract that states that the investor can buy or sell an underlying asset (e.g. foreign exchange, stock indicies, property prices etc) at a particular price on or before a certain state previously agreed upon in the contract. If you let the expiration date pass then the option becomes worthless and you lose the money used to pay for the option

Options are some of the most complicated financial products that I shall be covering in this series and are definitely the most risky. Counter to that risk are huge scope for huge profits. Due to the high levels of risk I would urge the vast majority of investors to steer clear and those who do fully understand them to only use risk capital that they can afford to lose.

Advantage

  • There is scope for big returns, that could potentially be multiple times bigger than the capital invested
  • You aren't required to have any particular minimum level of capital required, but you should only use what you can afford to lose

Disadvantages

  • There is scope for big loses
  • High levels of risk
  • None of the money is covered by the Government or any other financial body
  • Most options trading platforms will charge a commission

Overall conclusion

This financial product is not for the majority of people, and is in many circles considered outright gambling, but nonetheless people should know about them as it is one of the main way a lot of hedge funds and corporations make such huge profits.

Score: 5


Advice: Steer clear. I've had an experience with a similar product and my feelings are that unless you're a professional with top of the range statistical modelling software then this product is not for you.

Readers, I can't think that anyone will disagree with my last piece of advice but feel free to criticize or simply agree in the comments box below. Has anyone else had a good/ bad experience with options and has a lesson to share?



Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Financial Products Series: Certificate of Deposit


The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the seventh in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Certificate of Deposit (Treasury Deposits in the UK)

Picture from freedigitalphotos.net

Simply a certificate of Deposit is a place to hold money in between investments. It is a fixed term (typically a month or longer), fixed interest contract taken out with the Governing Bank of a particular country (Bank of England in the UK). You can purchase Certificates of Deposit through most local banks. Certificates of Deposit can accommodate the majority of currencies. The term and interest rate of the agreement depend on the amount the investor wishes to deposit: 
  • Minimum investment is £10,000 or more for a 6 month term
  • £50,000 or more is required for a one month term
  • For terms shorter than one month the investor would need substantially more money invested
CARE: Some banks will automatically reinvest your Certificate of Deposit when it reaches the end of its term unless you specify otherwise. Make sure that you understand all the nuances of your investment.

Advantages 

  • Similar to savings accounts in that they are insured and are thus guaranteed. This product is fairly riskless
  • Rates of interest are higher than savings accounts

Disadvantages

  • Rates are below that of the stockmarket
  • Require relatively high minimum amounts (£10,000 or higher)
  • Highly illiquid asset as you cannot withdraw early from the agreed term

Overall conclusion

In my opinion these products are better than other forms of savings accounts that are connected to banks, assuming you have enough money to invest in a Certificate of Deposit, and assuming that you do not need to touch your savings for long periods of time. 

Score: 7


Advice: The longer the term of the Certificate of Deposit contract, the higher the rates of return. If you can afford not to touch your money for long periods of time (say 10 years) then you can earn decent rates of return on your investments. If you can't then this financial product is probably too illiquid for many.

Readers, some personal finance bloggers are big fans of the Certificate of Deposit (eg Financial Samurai). I have my doubts about the liquidity of Certificates of Deposit and its relatively smaller rates of return when compared to shares. What are your thoughts on the subject? 



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Disclaimer

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