Financial reform legislation, though long overdue, has the chance to send what has been a robust stock market recovery into bear market.  While the two party system works to discuss new legislation, all parties are ignoring a very important function of the derivatives market.

How Derivatives Work

Think of derivatives like a giant insurance marketplace where one person can bet against another person to hedge their own individual endeavors.  For this example, we’ll use two people, Jim and Joe.  Jim owns a small farm, and should the weather fail to produce enough rain his crop is in danger.  Joe, on the other hand, is a speculator, and thinks (for whatever reason) the amount of rain this year will be adequate for Joe’s farm.  The two agree to make a bet for $100, the amount of money Jim stands to lose if his crop turns out poor.

They work out the agreement, and Jim puts up $10 of collateral.  If the weather isn’t adequate for farming, Jim will receive $100.  If it turns out to be an excellent summer, Jim will have lost his $10 to Joe.  In either case, Jim will make $100 either way.  Either his farm will prove to be resilient and earn him $100, or Jim will pay him $100 if the weather isn’t good enough for his crops to grow.

Why People Hate Derivatives

One of the biggest faults with derivatives is that there is no actual product trading hands.  In fact, nothing but a minute amount of money is every exchanged until expiration, and one party has to make good on its loss.  You see, big banks and financial firms bet huge amounts of money amongst each other on all kinds of speculative investments.  At the same time, they also put up very small amounts of collateral, usually a few percentage points of the total bet.

Why Reform Matters

Current measures to reform the financial markets involve a hefty amount of derivatives regulation.  One of the key pieces of all legislation is to increase the amount of money firms have to put up as collateral when making bets.  So, rather than put up $1 on a $100 wager, firms would have to put up three, four, even as much as ten times that amount.  The reform bills are retroactive, so they’ll have to put up even more money for bets they’ve already made.

Why it REALLY Matters

No one really knows how much the derivatives market is worth but most suggest it is worth anywhere from $50-$600 trillion.  So, should investors have to put up more than just a few percentage points on their outstanding bets, they’re going to need a LOT of money.  Tons, and tons more than they currently have.  So, where are they going to get it?  The companies that make these bets, and there are many, will have to borrow or issue stock to come up with the money.

The problem is that in this post-credit crunch world there is very little available capital, and it would cost significant amounts of money to borrow enough to cover bets both in the past and present.  Should these reform bills pass, corporate debt yields will skyrocket, stocks will tank as they are diluted, and who knows how many firms might go bankrupt trying to keep up with new regulation.  So many variables, so few answers.

Today the Federal Reserve voted again to keep interest rates the central bank charges commercial banks at a record low, prompting investors and analysts alike to question whether or not the FED is actually concerned with monetary policy.  The move, which keeps rates at 0-.25% is the lowest ever, and many believe we may see the longest time in history that rates have been kept at 1% or below.The Federal Reserve rate is paramount to any economic recovery.  

The domestic economy which derives 70% of its productivity from consumption needs low rates to generate demand for consumer products.  A 0-.25% rate means that prime rates sit at roughly 3.5%, low enough for most consumers to spend money on virtually everything.

The only problem is that for the most part, few have been willing to spend.  An economy so dependent on consumption needs strong spending to fuel job creation and even more spending.  The endless cycle of wealth has seemingly come to a standstill with few willing to act, and even fewer willing to speculate with business expansion.  No jobs = No Money, No Money = No Jobs.

Although the Federal Reserve failed to act in this 9-1 vote, many expect the FED will have to raise rates this summer in response to higher energy prices and general inflation.  Since US energy demand is largely displaced by foreign producers, higher oil prices mean a widening trade deficit and even more fiscal problems for a country already fighting to stay even.

Also, since nearly every good and service requires transportation in at least one stage of production, higher energy prices mean higher prices for virtually every product, domestic or imported.

In another move to try and save the economy the Federal Reserve has cut it’s key interest rate to 1%. Some analysts are already calling for a move that might cut the rate to 0% in the not so distant future.

That’s right a 0% rate could be near. What does that mean for you? Well eventually savings rates would have to go down, but your ability to loan money would be better. Which for some, could be a nice relief given the recent credit squeeze that has created the need for the Fed to act in this way.

A 0% rate could signal what everyone is fearing. Deflation, little to no economic growth and the need for the Fed to act drastically to bring the US back to it’s feet after a credit crisis has nearly toppled the largest banks in the world.

So what do you do with our money? Well, we might suggest paying off debt and saving a little more in a CD or savings account. Locking into rates now before they go too low and you get nothing in return for allowing a bank to keep your hard earned cash to loan out.

But that’s just some of things you can do. Nothing is fail safe these days, except maybe sticking it under the matress.

With the worldwide credit crisis in full swing it can be hard to find a car loan to get that car you need to get around. When we were asked to review the UK based Credit Plus Car Finance site we didn’t even hesitate. We feel as though we need to get out the word out about any loans possible since it has been so difficult for people to get a loan period!

Car Loans have been some of the most difficult to get, so we’ve heard, mainly due to the fact that the car loses value so quickly and banks are having a hard time recouping any type of principle from a car loan. These types of loans, even if given to non-subprime loan applicants can be risky and banks just don’t want to do them.

In the UK if you need a car loan you need to shop around and Credit Plus is a site that makes it extremely easy to do just that, shop around for a loan. You are able to quickly compare loans, look through a database of cars that are available and then put the two together and get a great car and a great car finance right from your home. That way you don’t have to waste all the gas driving around looking for that car.

For those of you following the mortgage crisis that has enveloped America and the rest of the world you’re probably all talking about those subprime mortgages and the people who have them. Some of you may even know someone who has one and has defaulted on their mortgage causing them to sell far below their current house value or even foreclose.

What you may not know is that the subprime mortgages are mortgages whose interest rate is below federal prime level (although this may be the case in some mortgages) it usually means that mortgages were given to people who couldn’t qualify under normal terms. Maybe their credit score was bad, so they were given a rate to get them through the next 3 to 5 years, called an ARM. Once they got on their feet, got their credit back to normal they could get a fixed rate afford their house.

Problem is, these borrowers weren’t given a financial education to go along with this borrowing that took place. Whose fault is that? Who knows.

Most traditional mortgages require you to put 20% down to cover the bank in case they have to foreclose. The bank then has at least 20% as an asset to cover any sudden downswing in the housing market. These subprimers were able to get loans for both the 20% down and the 80% remaining by paying a small fee called mortgage insurance. These insurance rates, usually enough to deter borrowers from going 80/20 loan routes were lowered and allowed risky credit apps.

The list goes on about what was wrong with this lending. But the bottom line is that subprime doesn’t mean just below prime rate, usually it means people with risky credit scores getting in way over their heads.

Exchange traded funds (ETFs) are all the rage right now and chances are you’ve already put your money in one or two of them. Maybe a Spider or a commodity focused fund that you trade from your E-Trade account? Well if you aren’t already in ETFs you might want to think about adding one of these investment vehicles to your personal finance plan in the near future.

Defining ETFs

Exchange traded funds or ETFs are actually a type of index tracking fund. They are basically listed funds and they are traded in the same manner that you would trade single equities. Exchange traded funds regularly track the stock index value as well as the market climate. These are good investment if you would like to invest in liquid funds that can be easily bought or sold. What usually attracts investors to ETFs is the fact that this investment opens the door to more options. You can, in effect, create a diversified portfolio of personal finance investments.

Since these trade funds constantly monitor market changes, your risk is significantly reduced. Traders in ETFs are usually investing in funds that are performing well in the market.

An Edge over Mutual Funds

So, what are the advantages of investing in exchange traded funds? Is this better than mutual funds? Traders generally consider ETFs as slightly better than mutual funds. Mutual funds can be saturated. It may start with a good performance but it could reach a period where it will not perform as well as you would want it to. On the other hand, ETFs are constantly and regularly tracking the market. The investment, therefore, is dynamic. It will continue to perform well and it will continue to reduce your personal finance risks.

What is glaringly obvious when it comes to credit cards is that debts from these cards differ from the traditional consumer debts. Some people allege that in the first place, credit card companies prey on the vulnerabilities of consumers. It’s like waving a red flag right on the face of a bull. Credit card debts can really produce a huge blow on your personal finance.

Is credit card debt really bad?

Yes, it is. This type of debt can be such a huge headache. You can say that most Americans see credit card debts as headaches. Once consumers have fallen prey to the attraction of convenience of having a credit card, it becomes quite hard to dig themselves out of the pit once they are in debt. There are people who tend to pay off the minimum requirement but ignore the rest of their debts. They, in effect, create bigger debt.

Credit card debts tend to grown into huge proportions when people avoid paying off their full credit card debt each month. The interest and charges grow along with the bloating principal debt. These debts practically devour your finances. You would be left with a completely messy personal finance. In some cases people have had to declare bankruptcy because of this debt.

Your credit card debt will ultimately affect your credit score and that will make it much more difficult for you to access loans in the future. Chances are you will end up only being able to get loans at higher interest rates.

Paying Off the Debts

If you find yourself practically buried under these kinds of debts, you should carefully consider all your options. Study how you can get out of your debts. It is important that you learn how the industry works. Most of the time, it works to your disadvantage. Consider getting some professional help and guidance on how to pay off all your credit card debts.

If you are into trading and investing, you would know what diversification in investment is. Investors are encouraged to diversify their investment portfolio. This is a good personal finance decision that will in many ways protect you against losses on investments. It is fairly easy for some investors to place their money on hot assets while others require a more cautious approach.

So what is diversification?

When people speak of diversification, they generally refer to the act or process of placing investments on various types of assets in different proportions. When you are making an investment, you generally consider various factors like your tolerance for risks, personal finance goals and time map.

Diversification, by itself, is not an assurance or a guarantee against risks and potential losses. However, this approach helps in significantly alleviating or minimizing the risks from speculative investments. You can offset the loss from one investment with the gain in another.

Now, why should you diversify?

Diversification is not only advisable, it must be mandatory if you are an investor. If you would like to ensure your money’s safety, you need to diversify.

There are various reasons why you should diversify. First off, diversification is a way to ensure a long-term investment return. It is a good way to maintain your long term investments. You minimize the risks on volatile investments and undervalued assets. You can say that the when you diversify you minimized your risk exposure level. You also temper the volatility of hot asset investments as well as the unpredictability of the market. With diversification, you can offset your losses, participate in the upside of some investments and mitigate the downside on other investments.

You however need to be careful with the investments you are diversifying into. Seek the advice of a trained profession when making any kind of diversification decisions.

You have probably heard of bonds and have at one time or another considered restructuring your personal finance by including bond investment. There are, however, several kinds of bonds. One of these kinds includes the junk bonds.

Introduction to Junk Bonds

When you speak of junk bonds, you generally refer to bonds that are high-yield. These are the bonds that graded below the general investment rating. The risk is significantly higher when you invest in junk bonds. You may placed your personal finance state is dire jeopardy with these high risk investment. If you are confident, however, that you can take on these types of bonds, then junk bond investment may not be such a bad thing. Experienced investors have always been attracted to junk bonds because despite its high risk, the return is equally high as well.

The Risks in Junk Bonds

Generally, there are two kinds of financial risks in junk bonds. When you invest in these bonds, you place your money in interest rate risk and you also place yourself at credit risk. The value of the bonds generally changes with its interest rate in the market. This places your investment vulnerable to market changes. Now, since bonds are actually loans, when you place your investment in junk bonds, you put yourself at a higher risk that you will not get paid for your loan.

Despite these risks, junk bonds remain in the market. However, because of these risks, they do not sell as well as they could in the market. It is therefore important that you take extreme care when investing in junk Bonds. You must be sure you can do without the money involved in the investment and are patient enough for the bond to be paid up or sold. Get as much information as you can before deciding.

If you are thinking about of saving money, a savings account would definitely come in the picture. If truth be told, saving your money in a savings account is probably the easies way to get your money to work to your advantage. For most people a savings account is the first bank account they will have in their life.

Starting a Savings Account Online

A savings account would allow you to earn money in addition to what you already have stored as your savings. Admittedly, the amount of money you might earn may not be as big as you want it to be, but you will be earning money from the interest in your savings. This is really great especially when you are trying to save money or funds.

With the advent of the Internet, you can now save your money online. One great thing about savings account online is that it could do wonders for your personal finances. Even more so, online savings account can be access anytime.

Opening an Online Savings Account

You can open a savings account with any online virtual bank. This is because most banks have an online presence where customers can have access and do business. There are also many online banks that are available. The important thing about choosing your online bank is checking for the FDIC logo. This means that the Federal Deposit Insurance Corporation has insured the bank for $100,000. So, basically, as long as you know you can trust the online or virtual bank you’ve chosen you really can open your account in any FDIC-credited virtual bank. It does not matter which bank as long as you are assured of insurance coverage in case of loss of your money. The minute that you have deposited money in your online bank, you’d feel great about saving money but still having access to it anytime.