Financial Scams

We here at SuccessfulYoungInvestor.com  do not want our readers to be had by any form of financial scam, so we figured we could go over a few of the most common ones.

Federal agents arrested Bernard Madoff on Thursday and charged him with what may be the biggest scam in Wall Street history. The list of wealthy victims includes Elie Wiesel, Steven Spielberg, and the Gift of Life Foundation. News reports are referring to Madoff’s fraud as a “Ponzi scheme.” What makes a scheme a Ponzi?

Short-term returns are paid out with cash from new investors. The scheme is named after Charles Ponzi, an Italian immigrant who swindled thousands of New Englanders in the early 1920s. Ponzi claimed he’d found a weakness in the postal system (wherein he’d send agents to buy international postal-reply coupons in Italy on the cheap, exchange them for U.S. stamps at a higher value, then sell them) and promised his investors a 50 percent return in 45 days or a 100 percent profit in twice that time. Initially, Ponzi suckered his friends, who spread the word; then he hired agents to find new investors, creating a frenzy. In one spectacular three-hour period, he took in $1 million, and he averaged $200,000 per day in new investments. For a short time he lived in luxury, buying a mansion in Lexington, Mass., but about six months in, the Boston Post started running stories questioning Ponzi’s strategy. He was arrested shortly thereafter.

Madoff’s scam worked a little differently. Peter J. Henning argued in the New York Times that it deserves its own moniker since Madoff 1) preyed exclusively on very wealthy investors and 2) offered steady returns of 10 percent a year rather than a quick, spectacular gain. Still, Madoff seems to have financed his scam in the same basic manner as Ponzi.

A pyramid scheme functions like a peer-to-peer version of a Ponzi scheme. Instead of funneling payments to a single person—such as Ponzi or Madoff—investors pass the money among themselves. Each new participant must recruit several others to perpetuate the scheme. Eventually, the pyramid collapses because it gets harder and harder to find fresh blood. As this clever SEC chart demonstrates, a pyramid scheme that starts with six people will, after 11 levels, require more members than the U.S. population and, after 13 levels, more than the world population. Albania learned this the hard way. In the mid-’90s, about two-thirds of the population invested in a series of government-endorsed pyramid schemes. When the schemes failed, Albanians took to the streets and more than 2,000 people died in the ensuing riots.

Lots of schemes are stock-market specific. There’s the pump and dump, in which the perpetrator boosts the price of a stock through false or exaggerated statements, then sells his position at an artificially inflated level. And front-running, in which a broker buys himself shares of a stock right before his brokerage buys a much larger block of shares (or recommends the stock as a good prospect). In the jitney game, brokers trade a stock back and forth to give the impression that it’s a hot commodity. Bucket shop is a common term for a brokerage that defrauds its customers, usually by selling worthless or highly speculative stocks that it wants to offload. In Season 2 of The Sopranos, Christopher runs a bucket shop, selling phony stocks to senior citizens then pocketing the cash.

Thank You,

SuccessfulYoungInvestor.com

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Recession?

Following Japan and the Eurozone, the United States is officially in recession. The National Bearau of Economic Research and its economists determined that in fact the United States is in recession and that it had been since December 2007 just after the housing bubble began to burst.

This announcement prompted Ben Bernanke and Henry Paulson to make statements regarding the response of the FED and Treasury in America’s recession. Ben Bernanke wouldn’t rule out a rate cut but said that they could only do so much. He favored government programs, the recent TARP program and insuring transactions to lower interest rates. Henry Paulson mostly agreed but traders are still pricing in a cut next FED meeting.

Traders smashed the US markets today after a lower open in Asia and the NBER report surfaced. The major indices were all off by more than 7% with the Dow down 7.7% and the NASDAQ and S&P500 down 7.95 and 7.93% respectively. Even though the markets tanked in the final hour, there is some good news to what could have been a horrible day.

Thank You,

SuccessfulYoungInvestor.com

Is a Roth IRA the Right Choice For You?

Here at SuccessfulYoungInvestor.com, we promote the idea of thinking ahead and planning for your future. One possible way to do this is through a Roth IRA, but is it right for you? Although the market environment has brightened a bit recently, the past year has obviously been a challenging one for investors. Amid such a difficult climate, your best bet is always to focus on what you can control and tune out what you can’t.

In the category of what you can control, at least in part, are your investment costs, and that includes the tax costs associated with your portfolio. Not only does it pay to consider the current tax treatment of your investments, but it’s also worthwhile to think about what tax rates and your own tax position might be like in the future. Because I think it’s a good bet that tax rates will go up in the coming years, and I say this not because of the election but because of the staggering demands on our government’s coffers. It makes sense to brace your portfolio for that possibility.  

Roth IRAs, to which you contribute aftertax dollars but enjoy tax-free withdrawals, are one way to hedge against the possibility of higher taxes. Roth 401(k)s, which are growing in popularity, also allow you to take the tax hit now rather than later. If you fit the profile of someone who could benefit from a Roth 401(k), you owe it to yourself to understand how this vehicle works and whether it could make sense for you.

Check Roth IRAs out further here.

Thank You,

SuccessfulYoungInvestor.com

Have a Great Interview!!!

Everybody needs to get that investment capital from somewhere. So for all of those Successful Young Investors that are on the job hunt, we here at SuccessfulYoungInvestor.com have put together a little agenda for your interview process.

Okay so you are interviewing for your dream job, and you nail each and every one of the questions you are asked. All is going well, and then the person interviewing you asks, “So, do you have any questions for me?”

You stare sheepishly at your shoes. Seconds tick by… forever lost to eternity. You draw a blank and mutter something about the length of your lunch break. Ouch, suddenly you getting the position is no longer such a sure thing.

Want to avoid such an embarrassing Faux pas? Want to knock your interviewer’s socks off with quick, consequential queries? Before that big interview, prepare a list of questions that demonstrate your knowledge of the company and interest in the position. Some good topics to cover include:

The position’s history 
Asking about why the position is vacant can provide insight into the company and the potential for advancement. Good questions include:

What happened to the last person who held this job?

What were the major strengths and weaknesses of the last person who held this job?

What types of skills do you NOT already have on board that you’re looking to fill with a new hire? 

The company

Asking about the company, especially company goals and market positioning can demonstrate that you see “the big picture.” It will also give the interviewer a sense that you are looking to commit for the long term and want to get involved with a company that will succeed. Good questions include:

What do you see ahead for your company in the next five years?

How do you see the future for this industry?

What do you consider to be your firm’s most important assets?

What can you tell me about your new product or plans for growth?

How do you rate your competition? 

The department 
Asking about your department’s workers and role in the company can help you understand more about the company’s culture and hierarchy. We suggest asking:

How does your department fit the structure?

What are the career paths in this department?

What have been the department’s successes in the last couple of years?

How do you view the department? 

What do you feel is this department’s biggest opportunity for growth?

 
The job’s responsibilities 
To avoid any confusion later on, it pays to gain a solid understanding of the position. Be careful not to come across as ignorant of the basic requirements of the job. If in doubt, ask something else. If the job you are applying for is requires multiple interviews, it is typically better to ask these questions on the second interview. Good questions include:

What would you consider to be the most important aspects of this job?

What are the skills and attributes you value most for someone being hired for this position?

Where have successful employees previously in this position progressed to within the company?

Could you describe a typical day or week in this position? The typical client or customer I would be dealing with? 
 
The expectations 
Asking about expectations will help you decide if the job is truly right for you, and will give you the opportunity to talk about how your unique skills can best meet the company’s needs. Good questions include:

What are the most immediate challenges of the position that need to be addressed in the first 90 days?

What are the performance expectations of this position over the first 12 months? 

Some general pointers for asking questions:

Do not ask too many questions; limit yourself to one or two questions that will make you look smart and capable.

Try not to sound scripted; put any questions you ask into your own authentic voice. Do not use words you would not use in your everyday business conversations.

Be prepared. Even though you are only going to ask one or two questions, still have a couple backup ones ready. If the interviewer has answered your question before you even asked it, you will have another ready.

Play it by ear. Look around the office and take note of any awards or items the interviewer has put out. If the interviewer has taken the time to decorate the office with it, He or she is probably proud of it. People love to talk about their accomplishments, so feel free to ask about that certificate of merit signed by the CEO of the company, especially if you can tie in one of your preexisting questions. It is important to note, though, personal questions may not be welcome, so it is best to wait to ask about that picture on the interviewer’s desk of a Hawaiian vacation until after you get the job.

Finally, the last question you should ask is: “What are the next steps in the interview process?”

Thank You,

SuccessfulYoungInvestor.com

One Day Left…

We here at SuccessfulYoungInvestor.com just want to remind everybody the importance of participating in the democratic process. The outcome of tomorrow’s election will effect each and every one of us, not only politically, but also economically speaking. So please, get out there tomorrow and VOTE!!!

Thank You,

SuccessfulYoungInvestor.com

What Does the Failing Economy Mean to Students?

We here at SuccessfulYoungInvestor.com recently received a contributed article that we would like to share with everyone. It was written by a conserned college student over the financial crisis for his school’s newspaper:

I’m sure most students have heard about the financial crisis that has pummeled the stock market to multiyear lows and that has made individuals stop spending and secure their savings. It has even led Barack Obama to bill this as “The worst financial crisis since the great depression.”

If you haven’t spent your free time watching market news on CNBC’s “Closing Bell” with hot/gorgeous/beautiful news anchor Maria Bartiromo, or if you have but you just paid attention to her and not what she was saying then here’s a short recap of what’s going on with our economy. A housing boom had been going on for several years up until about a year ago when the housing “bubble” inevitably burst causing homes prices to plummet and the financial crisis that our economy is in now. Banks and mortgage lenders are suffering and this has led to the fall of many prominent banks that were once thought to be infallible. Merrill Lynch & Co was sold to Bank of America, and Lehman Brothers Holdings, Inc. filed for bankruptcy in what became the biggest bankruptcy in American history. Other bank and mortgage lending failures include Bear Stearns, Inc, Freddie Mac and Fannie Mae, and AIG.

I’m sure you’re asking yourself what does this mean to me and why do I care about what is happening on Wall Street?

Here is why: Unemployment Rate, it’s up to a staggering 6.1% as of September and represents a 5-year high. Just for comparison, this time last year it was at a much lower rate of 4.3%. For the college student this is an important and scary statistic. Unemployment rates just don’t repair over night; it takes years to correct itself. So for the graduating college student all the way down to even students graduating from 2-3 years from now jobs will be hard to come by. Some people just don’t realize this or just don’t want to accept it, but it is something that comes and goes with economic cycles. With rarely any job openings, competitiveness is at an all time high and UT student Josh Zakheim realizes this, “I’m going to have to work a lot harder in school now and maybe even study a less competitive major to compensate. I definitely feel like there’s a lot more pressure on me now,” he says.

Unfortunately forecasts have the unemployment rate rising at least another point within 8 months. I’m sure you thought that this financial crisis would have no affect on you as a college student but as you can tell it surely does. The economic crisis has a domino effect from Wall Street all the way to your dorm. Don’t let this crisis pass over you or anyone else for that matter. Discuss it and encourage other to do so as well!

Thank You,

Contributed by Justin Bostwick,

SuccessfulYoungInvestor.com

Will YAHOO! Sell to Microsoft?

Last year, a member of the SuccessfulYoungInvestor.com team was taking a very close look into the Yahoo Microsoft proposed deal, and it seems as if we might see a round two.

Yahoo! announced another mass layoff of 1,500 employees on Tuesday. It seems that these layoffs stem from Yahoo being down 64% for the third quarter profits 2008.

Last year Yahoo declined Microsoft’s offer of $47.5 billion, much to their stockholders dismay. It was speculated that if the deal went through the value of a stockholders share would have nearly doubled. But is just didn’t happen…

However, there is more speculation that perhaps another deal may soon be on the table.

Microsoft has been trying extremely hard to get into the “Internet” business. This would further breach the gap between the two heavy weights Microsoft and Google. Right now Microsoft produces Internet explorer, which has a majority control of the market with 70%. However, Google has just released Google Chrome, it’s own web browser, which has received pretty good reviews.

By having Microsoft take over Yahoo, they will not only be able to challenge Google in the search engine business, but also try to move in on their web marketing turf. Right now Google dominates the “internet marketing” field, but Microsoft feels as if they would be able to compete.

These bad times for Yahoo, might turn out to be another opportunity for Microsoft to move on in. All we can do now is wait around and see if another deal gets put on the table….

Thank You,

SuccessfulYoungInvestor.com

Roaring Monday

Well, we here at SuccessfulYoungInvestor.com have been patiently waiting for some good news to report on, and we finally got it! Wall Street bounced back after its worst week ever and experienced the largest single day stock rally since the Great Depression. The Dow Jones industrials soared to a 936 point gain, but is this permanent, and why did it happen?

Many investors have been caught saying that stocks are literally on sale right now, but is that really why this jump occured? The surge came as executives from leading banks were summoned by the Bush administration to Washington to work out a plan to get loans, the lifeblood of the economy, moving again. And it followed signals that European governments would put nearly $2 trillion on the line to protect their own banks.

But how much did the Dow gain today??

The Dow gained more than 11 percent, its biggest one-day rally since 1933, and by points it shattered the previous record for a one day gain of 499, during the waning days of the dot com boom in 2000. It was able to break an eight day loosing streak of 2,400 points, which equates to 22%!

An 11% rally can be equated to about $1.2 trillion dollars in assests, which is a pretty astounding figure. Still a long way from a high of 14,165, closing at a decent 9,387 is sitting a lot better with investors than a figure in the 8,000’s.

This rally is coming off news that the Bush administration will be using $250 billion dollars to “invest” in United States banks. The plan calls for the government to initially buy shares of stock of the 9 largest U.S. banks such as, Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co, Bank of America Corp. and Morgan Stanley.

There has also been news that Europe will be following a similiar tactic of investment to restore confidence in the banking system. By placing $2 trillion dollars on the table, European officials believe that they can securely back banking operations and restore order in the chaos.

It is going to be interesting to see what will happen in the coming days.

Thank You,

SuccessfulYoungInvestor.com

Dow Plummets 679

We here at SuccessfulYoungInvestor.comare anxiously waiting for the day that we can begin to report GOOD news again, but until that day we will continue to diligently cover these bleak headlines. Today was the anniversary of the stock markets peak, but the markets did not seem to respect that one bit. Instead of optimism, the market was flooded with selling which ignited today’s horrific drop. The Dow Jones industrials went down a breathtaking 679 points.

So what does a 7% loss in the market equate to? Well, for one thing $872 billion dollars of capital was lost today. Yes, EIGHT-HUNDRED AND SEVENTY TWO BILLION!!! That it more than a hundred BILLION more than the rescue plan that has caused such a fuss. This was also the first time ever that the Dow has suffered a tripple digit loss for six days in a row, and the first time it has dropped bellow 9,000 since 2002.

It is very hard to believe that one year ago the Dow closed at an all time high of 14,164. Which means that in one year it has lost just about 39 percent of it’s value! This also means that just around $8.3 TRILLION dollars has been lost in a year. To put this into perspective, if this loss was a nation’s GDP, it would be the second largest in the world, and twice as much as Japan’s who would then be in third place!

As a short recap of this past month on the Dow:

*The average is down 2,338 points, or 21 percent, in the last four weeks, since the Lehman Brothers bankruptcy escalated a long-running credit crunch into a full-fledged crisis.

*The point decline Thursday was the third-worst in Dow history. The worst, 778 points, came less than two weeks ago.

*Of the last 19 trading days, there have been 11 triple-digit losses, including the unprecedented six straight. The six gains have all been triple digits, and only one of them was enough to make up the losses of the day before.

*The Dow now stands only about 1,300 points above its lowest close of the bear market that followed 9/11. In a market as volatile as this, that gap can be closed in a couple of trading days, or less.

Hopefully there will soon be some good news to report on!

Thank You,

SuccessfulYoungInvestor.com

Fear Grips Market

We here at SuccessfulYoungInvestor.com have been keeping a close eye on the market following the rescue plan. Today, the Dow Jones Industrial Average plunged below 10,000 for the first time since October 2004 and briefly exceeded a record point loss set only a week ago of 778. Clearly the markets are still struggling from this now global credit crunch.

As bad as a 370 point dip sounds, it was a big improvement over where the market stood only 75 minutes earlier.

Around 2:45 p.m. ET, the Dow was down 800 points. This easily exceeded its record single day point loss of 778 points, set only a week ago after the House of Representatives failed to approve a $700 billion rescue package for the nation’s financial system.  But what else happened today?

Well, oil hit an eight month low of $88 dollars, and the dollar reached a 13 month high in a surge against the euro. But why did the market end up 370 points down, instead of the possible 800?

It wasn’t clear what was able to pull the stocks back in the end. It seems there is some speculation that the interest rate will be cut by central banks around the world. This would certainly have a positive effect. Also, when watching CNBC there was talk that the Treasury Department would somehow support the commercial paper market. Commercial paper is short term IOUs issued by companies and actively traded. The commercial paper market has shrunk substantially in recent weeks as the credit crisis has worsened.

Even though it was better than finishing down 800 points, it still was another big dip in the market. Many individuals trying to guess where the bottom is going to be, and buy low and hopefully sell high, are once again frazzled by this strange and volatile market.

Thank You,

SuccessfulYoungInvestor.com