The Cost of Equity (COE) is the minimum rate of return shareholders require for their investment in common stock of a corporation. This expected future return to the investor consists of both capital gains (share price appreciation) and dividends. The cost of equity formula helps investors determine the cost of capital which equates the current share price with the discounted value of future dividends from the company in perpetuity. The cost of equity is an input of the Weighted Average Cost of Capital (WACC) to calculate the real cost of capital for a firm using account debt and equity funding.

The formula for the cost of equity can be written as:

The data needed to perform the calculation is often included in the company’s financial reports. Investors may also obtain the information through various online sources or through financial analysts.

The cost of equity measure provides investors with a relatively simple way to monitor the status of their investment and helps ensure that investment in those shares continues to be a sound strategy.

For individual investors, the COE also reflects the opportunity cost of investment and will differ among companies due to varying levels of risk. A higher cost of equity indicates a higher level of risk. Investors should expect a higher rate of return to compensate for an elevated level of risk.

There are a number of other ways to estimate the cost of equity, including the Capital Asset Pricing Model (CAPM).

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

The effective annual interest rate refers to the rate of interest when compounding is applied more than once per year. The effective annual interest rate is used to annualize the interest rate after taking into account the effects of compounding. The concept of an effective annual interest rate is important for anyone who carries debt that compounds more than once a year to understand.

The nominal or “stated” interest rate is the periodic interest rate multiplied by the number of periods per year. You cannot compare nominal interest rates unless they have the same compounding period and a nominal rate is not fully defined without its compounding frequency. The effective annual interest rate enables borrowers and investors to effectively compare loans or investments.

This calculator enables you to arrive at the effective annual interest rate either by inputting the periodic or the nominal interest rate. The calculator assumes monthly compounding.

The formula for the effective annual interest rate can be written as:

Where:

i = nominal annual rate of interest
n= number of compounding periods in one year

Because the effective annual interest rate accounts for compounding, it is usually higher than the stated or nominal annual interest rate. The effective annual interest rate calculation is useful to evaluate the real return on an investment or the real interest rate to be paid on a loan.

A nominal interest rate of 5% with monthly compounding is equal to an effective annual interest rate of 5.12%. 5% is credited annually as 5%/12 = 0.5% each month. After a year, the initial capital increases by the factor (1+0.005)12.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Mutual fund fees and expenses refer to those charges investors of mutual funds incur associated with the fund’s advisory fees, marketing fees and transaction and distributions costs. These costs are passed from the mutual fund company to its investors and have a negative impact on overall investment performance. The higher a fund’s costs, the greater the return the fund must achieve to beat market indexes and benchmarks.

A mutual fund expense ratio (MER) is a measure of the cost associated with running a mutual fund. Specifically, it is the percentage investors pay in fees to the mutual fund company for the operation and management of the fund (excluding sales charges). The expense ratio can vary greatly among mutual funds with the fee investors pay for the management and advisory of the fund serving as the largest component. Among actively-managed funds, the average expense ratio is about 1.25%.

The other costs associated with mutual fund investing are the loads and redemption fees.

While every fund passes its operating expenses on to its investors, some funds also levy “shareholder fees” directly on the investors whenever they buy or sell shares of the fund.

Loads: A sales load is the percentage a fund charges for the purchase or sale of shares. Depending on the fund, these charges might be incurred at time of purchase (front-end), when shares are sold (back-end). No-load funds are mutual funds that do not charge any type of sales load.

Transaction Fees: The transaction fees associated with a mutual fund include purchase and redemption fees to defray the costs associated with investors buying and selling shares. Unlike loads, which are paid to brokers, these fees are paid directly to the fund.

Management Fees: Management fees are paid to the fund’s advisor for providing professional portfolio management. Management fees may also include other administrative types of services associated with running the fund.

12B-1 Fees: 12b-1 fees are assessed for the sales and marketing expenses of the fund. 12B-1 fees cannot exceed 0.75% of the average net assets of the fund for a given year or 0.25% for no-load funds.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Most financial experts will tell you that one of the first and most important ways to take control of your financial life is to get a handle on your credit card debt. The high finance charges associated with credit card debt can put a real strain on your personal finances and keep you from achieving your goals and dreams. For many people, excessive credit card debt comes about not from one large purchase, but through many smaller purchases over a long period of time. You can apply this same principle and the tips below to work your way out of this debt.

The average credit card debt is currently estimated at over $5,000 per household. At an interest rate of 18%, this translates into a $150 monthly minimum payment. Paying just the monthly minimum on this level of debt and interest rate would mean paying about $2,000 in interest by the time the debt is paid off. Given this, it’s easy to see why minimizing or (ideally) eliminating your credit card debt is one of the best financial moves you can make.

Even if you don’t think you have extra money to start paying down your credit card debt, there are immediate steps you can take toward achieving this worthwhile goal.

Stop Using Credit Cards: The first step is to “stop the bleeding”. It is critical that you start by curbing your credit card spending. Use cash or debit cards as much as possible.

Transfer Your Balance to a Lower Interest Rate Card: There is no reason to be paying 18% or more when you could move your balance to a card that offers 10% or less. You should first ask your current card issuer for a lower rate. If you have consistently paid your bills on time, they should be willing to work with you on this. If not, shop around for a better rate. Making the same monthly payment on a lower interest rate will save you interest expense and get you out of debt faster.

Leverage Your Savings: If your savings are earning anything less than the interest rate you’re paying on credit cards, you will get a better return by applying that money toward credit card debt. It’s a risk-free way to achieve a high rate of return.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Pivot points are technical indicators used to predict the support and resistance levels and to offer cues for trade execution. Pivot point calculations are derived from previous day trading prices and can help traders spot key levels that, when broken, may indicate a breakout (prices passing through areas of support or resistance toward new highs or lows). Many technical traders start their trading day by putting support and resistance lines are in place then watching for securities to strike those entry points. Pivot point strategies are used in a variety of markets, including individual stocks, bonds, commodities, futures contracts, and foreign exchange.

Pivot point trading is based on the tendency of securities to “trade between the lines” and seeks to leverage reversals in trends. Pivot points are used as price-based indicators to represent points of rotation and are derived using the high, low, and closing prices from the previous trading day. The following are the most commonly calculated in using pivot points:

• Central pivot point
• First level of support
• First level of resistance
• Second level of support
• Second level of resistance

The pivot point itself represents the primary point of support/resistance, meaning the largest price movement is anticipated to occur at this price point. The other points of support and resistance, while less significant, can still trigger considerable price actions.

Pivot Points can provide traders with exact entry and exit points and can be used in two ways:

• If the pivot point is broken in an upward move, the market is seen as bullish
• If the pivot point is broker in a downward move, the market is seen as bearish

In determining entry and exit points, the trader might choose to place a limit order if the price breaks through resistance or a stop-loss order if a price breaks through support.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

In finance, Fibonacci analysis, or the “Golden Ratio”, forms the basis of a popular approach to technical analysis. The idea behind Fibonacci analysis is that the price movements of market-traded securities demonstrate relationships to Fibonacci numbers, which start with 0 and form a sequence by summing the previous two numbers in the series. For investors, the importance lies not in the actual numbers in the series, but the ratios between the numbers in the series.

Fibonacci numbers were introduced in 1202 in Leonardo Fibonacci’s (Leonardo da Pisa) book Liber abaci. The Fibonacci number sequence and its applications still fascinate many people today. Fibonacci numbers are those in the following sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987…

The numbers starts with 0 and continue in sequence by adding the previous two numbers in the series. The differences between these numbers are known as Fibonacci Ratios and, for traders, these ratios can be used to help identify possible price support and resistance levels.

To use the calculator below, enter the market high and the market low and click the Update button.

In Fibonacci analysis it is the ratios they offer and their indications for support and resistance that benefit the technical investor. Fibonacci ratios are calculated within the Fibonacci series numbers. The most commonly used ratios for traders are .382%, .50%, .618%, 1.00%, 1.272% and 1.618%.

Fibonacci Retracement: A retracement refers to a reversal in the movement of a stock’s price. After a price move from a low to a high, that price will have a tendency to correct or retrace. The percentage of the correction can be .382%, .50%, .618% or even 100% (while 50% is not a Fibonacci ratio it can be extremely useful for traders). Technical investors will look for buying opportunities based on pullbacks when the market is trending up. A Fibonacci tool can help the investor identify the percentage figure as potential price support in deciding whether to take a long position on the stock.

Fibonacci Extension: Extensions are used in reference to all retracements that exceed 100%. The most widely used extensions levels are 161.8%, 261.8% and 423.6%. Technicians use these levels to target pullbacks and place “stops”.

Fibonacci Projection: Projections are used to determine potential price objectives and identify turning points in trends. Fibonacci Projections are used to estimate where the current price move may end.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

A Systematic Withdrawal Plan (SWP) is a service provided by mutual funds to offer specific payment amounts to shareholders at defined time intervals. A common way to set up a systematic withdrawal plan would be for the investor to deposit a lump sum of money and make arrange for withdrawals on a monthly, quarterly, semi-annually or annual basis. A systematic withdrawal plan is often used to fund expenses for retirees, but the plan can also be used for other purposes. In fact, systematic withdrawal plans have seen increased popularity among those investors who are looking for consistent cash flows from their investments.

The primary benefit of a systematic withdrawal plan is in providing the investor with the money they need when they need it. SWPs can also offer tax advantages. As opposed to taking a lump sum payment, spreading the income out across multiple intervals can lower the total tax bill. In making periodic withdrawals of fixed amounts, SWPs can also help to protect investors against market fluctuations.

SWPs can be particularly appealing to individuals who do not have a fixed pension or government plan secured as retirement income. Theses individuals can rely on continuous distributions from their own savings and investments to provide the cash flow needed for retirement. It is also worth noting that SWP distributions can be changed at any time to accommodate changing cash flow needs.

Capital Retention Systematic Withdrawal Plan (CRSWP): These plans operate with the goal of protecting invested capital (through proper diversification) while maintaining fixed rates of payment.

Capital Depletion Systematic Withdrawal Plans (CDSWP): Under this type of SWP, the income provided to the investor is not pre-set. Instead, payments are made on both principal and accrued income by a pre-determined date.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

A Real Estate Investment Trust (REIT) is an investment vehicle where a corporation is formed to investment in various types of real estate such as office buildings, shopping centers, hotels, or other types of real estate related assets. REITs enable their investors to directly participate in the ownership or funding of real estate ventures while enjoying significant tax advantages.

REITs can be generally divided into three types:

Equity REITS: Seek to make money for investors through rents collected via real estate ownership. This is the most common type of REIT.

Mortgage REITS: Set up to provide financing to the owners and developers of real estate. They may also invest in financial instruments that are backed by real estate mortgages.

Hybrid REITS: Hybrids offer a combination of equity and mortgage characteristics.

The benefits of investing in REITs can include:

Professional Management: REITs are professionally managed, enabling investors to leverage the expertise outside of their own skill set.

High Yield: Most investors in REITs are looking for income. REITs are known to deliver high annual yields, often up to 7%.

Avoiding Double Taxation: Tax advantages allow for greater returns.

Liquidity: Unlike real estate investment, REITs offer investors the opportunity to sell the security fairly quickly should the need to liquidate the investment arise.

To qualify as an REIT and enjoy the tax benefits, the organization must be managed by a board of directors and offer fully transferable shares. The REIT must distribute at least 90% of its taxable income to its investors annually and invest at least 75% of its assets in real estate. An REIT is also required to produce a minimum of 75% of its gross income from mortgage or property investing.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. The LIBOR is fixed on a daily basis by the British Bankers’ Association and serves as a widely used short-term interest rate benchmark. LIBOR is designed to indicate the cost of borrowing between the world’s largest and most reputable banks and given London’s financial prominence, LIBOR applies to all major currencies, including the Pound Sterling, the U.S. Dollar, the Japanese Yen, and the Swiss Franc.

Every morning at 11:00am London time, a department of the British Bankers Association determines LIBOR by averaging the inter-bank interest rates offered by its members. To perform the calculations, data from sixteen banking organizations is used based on interbank rates. The data from these organizations is combined and averaged to arrive at the daily LIBOR rate. The calculations for LIBOR are for periods as short as overnight and as long as one year.

LIBOR not only provides information regarding the cost of borrowing, it actually influences it. All around the world, LIBOR is used to provide the basis for other interest rates.

Some of the areas of personal finance that LIBOR may impact include:

• Corporate Loans
• Mortgage Loans
• Automobile Loans
• Student Loans

Most adjustable rate mortgages and credit card interest rates are tied to LIBOR. As rates change, a higher LIBOR will increase the monthly payment.

LIBOR and the US Prime Rate both represent benchmark interest rates and both rates are used as references rates for a variety of lending transactions. One of the primary differences between the two is that where LIBOR is a floating rate (fluctuating constantly) the U.S. Prime Rate is a fixed rate, typically remaining unchanged for long periods of time. Where LIBOR is used by banks, the Prime Rate is used by consumers, representing the most attractive rates banks offer to their customers.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Qualifying ratios are a set of ratios used by lenders to compare a borrower’s income to their proposed monthly mortgage expense. Lenders use these guidelines to determine the credit-worthiness of potential home buyers, taking into consideration all monthly housing expenses including the mortgage principal, interest payments, homeowner’s insurance and property taxes. Depending on the property, other applicable fees may include homeowner, condominium or other expenses. By comparing the borrower’s housing and debt ratios, lenders are able to work within a rough guideline as they determine whether or not to grant mortgage approvals.

In evaluating the borrower’s housing and debt ratios, the rule-of thumb many lenders adhere to is expressed as 28/36, where:

• The borrower’s housing expense should not be greater than 28% of their gross monthly income
• The borrower’s housing expense plus their long-term debt should not be greater than 36% of their gross monthly income

If the buyer’s credentials fall outside of these guidelines, they may still approval mortgage approval if other factors are strong, such as the size of the down payment, job stability, and savings.

It’s also worth noting that qualifying ratios can vary depending on the lender, the proposed loan program, and current market conditions.

As a mortgage borrower, it can be a good idea to evaluate the ratios yourself to determine whether the house payment you are considering may present a financial risk. While the climate has changed considerably in recent months, lenders may still tempt you with programs that may not be in your best interest. As a buyer, it is important to know the risks associated with excessive mortgage debt and to choose wisely among lenders. You will definitely want to contact more than one lender in order to compare available programs and their associated rates and terms.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.