In an increasing variety of markets, ranging from spread-betting on stocks and shares to more exotic futures and derivative markets, internet technology has made it possible for a growing number of day traders situated around the globe to bet on the markets via online platforms from the comfort of their own home or office. Even the previously off-limits currency markets, which will be explored in this article, can now be traded online by the individual investor, and there is a growing list of banks, brokers and specialist firms offering these services.
Until relatively recently the foreign exchange market was strictly the preserve of institutional investors and hedge funds. Large minimum transaction sizes and stringent financial requirements dictated that only the largest and most capitalised investors could make bets on the direction of the world's currencies. However, in order to make any meaningful profits from these 'over the counter' currency bets, traders and money managers would frequently have to place positions the equivalent of millions of dollars, putting the world of forex trading way out of the reach of individual investors unless they invested through a currency fund.
But all that began to change when the internet revolution of the late 1990s swept through the financial markets and radically altered the way in which trades were executed in most markets. When placing a trade on a company's share or on a futures contract became as simple as a couple of clicks on the mouse, suddenly, the traditional broker/client relationship was no longer a pre-requisite and some of the barriers that prevented many investors from taking part in the financial markets began to tumble.
This has had something of a democratising effect on the financial markets, and in the years that have followed a plethora of banks and brokerages have extended the range of their services to a new market by packaging up their online trading systems for the retail market, enabling the more modest investor to trade from their own computer screen - even on the previously out-of-reach currency markets.
By offering clients high levels of leverage the banks and brokers give the small foreign exchange trader the opportunity to make some impressive gains for relatively little outlay. Of course, it also gives them a chance to make some pretty impressive losses. Therefore, any foreign exchange virgins who are considering making their next fortune via an online trading platform must understand the implications of leverage and the risks associated with these types of margin account.
Whilst leverage ratios can vary, typically brokers offer levels of anything up to 100:1, (far in excess of the leverage even the most experienced institutional investment managers are permitted) enabling traders to buy or sell foreign currencies in 'lots' of US$100,000, (or whatever the base currency of the trade happens to be). It means that the trader only has to put down $1,000 as margin to control $100,000 in the market place. The rest is effectively borrowed from the broker or market maker. Without this degree of leverage, it would be almost impossible for smaller traders to make any worthwhile gains in the currency markets.
So, by way of illustration, suppose a trader anticipates a rise in the US dollar against the Swiss Franc and buys 1 'lot' ($100,000) of USD/CHF at 1.2950 (thus controlling CHF129,500.) As expected, the USD/CHF rate rises to 1.3050, meaning the trader now controls CHF130,500 so the trade is closed out with a profit of CHF1,000. When converted back into dollars by dividing this profit with the rate at which the position is closed, the trader has realised a gain of $766. Until recently many trading firms have required that clients maintain a minimum balance of $10,000 in their accounts to ensure adequate protection against sudden swings, putting forex trading out of the reach of those without HNWI status. However, it is now common for clients to open trading accounts with many firms for as little as $500, although minimum opening balances of $250 are not unheard of. For these 'mini' accounts, smaller lot sizes of $10,000 have been created, and leverage ratios are often as high as 200:1. Many firms consider such products are too risky to offer.
In spite of the inherent risks of the foreign exchange trading, one of the major bonuses of currency trading is the sheer volume and liquidity of the market place. It is estimated that the average daily volume of transactions in the global currency markets is in the order of $1.5 trillion. Therefore, in theory, traders should face little difficulty having their trades filled at their desired price. Also, the vast majority of online forex platforms offer commission-free trading, although bid/offer spreads may be somewhat wider than the big players are used to getting.
The trading interfaces themselves are not so different to those used by money managers, and the live prices displayed on the client's user interface are said to be the same as those shown on the terminals of professional currency traders. The systems also enable users to place a variety of different market orders that are standard in the industry, such as stop losses (advisable in the often volatile currency markets) and limit orders.
Most trading platforms are also packed with a variety of other features to help the trader formulate his or her strategy, including charts with basic technical analysis features, live news feeds and reporting tools permitting the user to analyse trading performance. Many firms have also incorporated chat rooms into their platforms enabling one to share tips and experiences with fellow traders or seek advice from a company broker or expert.
While the currency markets have the potential to make traders quick and substantial profits they can be a high risk financial instrument. An increasing level of regulatory supervision of the financial markets designed to prevent the mis-selling of unsuitable investment products means that opening an online trading account will require at least some degree of investment experience. This ranges from about six months upwards, although accounts aimed at the HNWI will often stipulate a minimum of two years' trading experience. Money laundering and fraud regulations also make it necessary for providers to ask for proof of identity, most commonly a passport.
quinta-feira, 24 de abril de 2008
segunda-feira, 21 de abril de 2008
The FHA Loan’s Comeback Tour
As far back as the Great Depression, Federal Housing Administration (FHA) loans have been helping Americans with poor credit buy homes. Recently lost in the shuffle of skyrocketing housing prices and a wave of subprime loans, the FHA loan is back.
The late 1990s and early 2000s were not good to the FHA loan, as its stringent guidelines and mortgage limits were pushed aside by the easier-to-obtain subprime loan. The subprime loans offered lax qualifications such as higher debt-to-income (DTI) ratios and no-money-down options. In addition, subprime loans did not have as many strings attached to them such as the strict appraisal process. For most people, the subprime loan was clearly the more attractive choice, and the FHA loan began to fade into oblivion.
Federal Housing Administration (FHA) loans may become more popularRecently, though, a steep rise in foreclosures and subprime lenders filing for bankruptcy has had a negative impact on the once popular subprime loan. As the subprime loans are disappearing, the old FHA loan is now making a comeback. Most people who were familiar with the FHA loan prior to its virtual disappearance might not realize that the program as it exists today is very different.
A 2005 revision to the less attractive FHA loan rules may help to rebuild the loan's popularity; FHA loans slipped to just 4 percent of all home loans in 2006 compared to 18 percent in 1990, according to Mortgage Foundation. Among the changes, the FHA raised mortgage limits to comply with today’s home prices and eliminated a number of picky cosmetic requirements that were a part of FHA appraisals, such as repairing cracked windows prior to closing.
FHA loans are currently available only to homes that fit under the specified mortgage limits. In high-cost areas such as New York and Los Angeles, there is a loan limit for single family homes of $362,790, while low-cost areas such as Iowa and Kentucky have a loan limit of $200,160, according to FHA.com. Mortgage limits vary by county within each state; consult FHA’s website for the lending limit in a specific county.
Property owners purposefully avoided FHA loan buyers in years past due to the tough requirements of the program, but FHA’s renewed popularity should force them to reconsider. Although requirements have been eased, it is important to know that some still exist. FHA’s list of items that must be repaired includes leaking or worn out roofs and structural issues, such as excessive foundation settlement, among other things. FHA appraisers can also mandate repairs for faulty electrical or plumbing systems, standing water against the home’s foundation and hazardous materials on the property.
While some of these repairs may be expensive or time-consuming, failure to comply with all of the issues checked by FHA appraisers will automatically eliminate a property from consideration for an FHA loan. Investors whose properties fit within local FHA mortgage limits should take full stock of all of their property's issues, as it is very possible that some FHA loan endorsed buyers will come calling.
Although FHA loans do not offer the financial flexibility that was promised by the subprime loan, they still allow individuals to receive financing of up to 97 percent, according to FHA.com.
As FHA loans pick up the market share left by the fall of subprime loans, investors with qualifying properties should be sure to maintain them at least at the FHA minimum requirements, in order to ensure their properties won’t fail when willing buyers are at the doorstep.
The late 1990s and early 2000s were not good to the FHA loan, as its stringent guidelines and mortgage limits were pushed aside by the easier-to-obtain subprime loan. The subprime loans offered lax qualifications such as higher debt-to-income (DTI) ratios and no-money-down options. In addition, subprime loans did not have as many strings attached to them such as the strict appraisal process. For most people, the subprime loan was clearly the more attractive choice, and the FHA loan began to fade into oblivion.
Federal Housing Administration (FHA) loans may become more popularRecently, though, a steep rise in foreclosures and subprime lenders filing for bankruptcy has had a negative impact on the once popular subprime loan. As the subprime loans are disappearing, the old FHA loan is now making a comeback. Most people who were familiar with the FHA loan prior to its virtual disappearance might not realize that the program as it exists today is very different.
A 2005 revision to the less attractive FHA loan rules may help to rebuild the loan's popularity; FHA loans slipped to just 4 percent of all home loans in 2006 compared to 18 percent in 1990, according to Mortgage Foundation. Among the changes, the FHA raised mortgage limits to comply with today’s home prices and eliminated a number of picky cosmetic requirements that were a part of FHA appraisals, such as repairing cracked windows prior to closing.
FHA loans are currently available only to homes that fit under the specified mortgage limits. In high-cost areas such as New York and Los Angeles, there is a loan limit for single family homes of $362,790, while low-cost areas such as Iowa and Kentucky have a loan limit of $200,160, according to FHA.com. Mortgage limits vary by county within each state; consult FHA’s website for the lending limit in a specific county.
Property owners purposefully avoided FHA loan buyers in years past due to the tough requirements of the program, but FHA’s renewed popularity should force them to reconsider. Although requirements have been eased, it is important to know that some still exist. FHA’s list of items that must be repaired includes leaking or worn out roofs and structural issues, such as excessive foundation settlement, among other things. FHA appraisers can also mandate repairs for faulty electrical or plumbing systems, standing water against the home’s foundation and hazardous materials on the property.
While some of these repairs may be expensive or time-consuming, failure to comply with all of the issues checked by FHA appraisers will automatically eliminate a property from consideration for an FHA loan. Investors whose properties fit within local FHA mortgage limits should take full stock of all of their property's issues, as it is very possible that some FHA loan endorsed buyers will come calling.
Although FHA loans do not offer the financial flexibility that was promised by the subprime loan, they still allow individuals to receive financing of up to 97 percent, according to FHA.com.
As FHA loans pick up the market share left by the fall of subprime loans, investors with qualifying properties should be sure to maintain them at least at the FHA minimum requirements, in order to ensure their properties won’t fail when willing buyers are at the doorstep.
Virgin Money Manages Friend and Family Lending
Many have, at some point in their lives, either heard or uttered similar words. Asking family or friends for money can be awkward, and “loans” that are never repaid can destroy relationships. But Virgin Money aims to manage private loans and help keep relationships from turning ugly.
Though it has officially been under the Virgin umbrella since just last October, CircleLending—as it was originally known—has been operating for six years and has helped customers do more than $200 million in loans, according to the company’s website.
CircleLending was founded by Asheesh Advani. While working at the World Bank and studying worldwide markets for informal capital, he discovered that there was a large amount of friend and family lending happening in North America, and that these loans had extremely high default rates averaging more than 14 percent, according to Helen Payne Watt, director of content for Virgin Money.
Formerly CircleLending, the service has managed over $200 million in loans“[Advani] realized that with a simple application of documents and servicing to those loans, basically giving it the structure that a bank would give it, that you could dramatically reduce the default rates,” Watt said. “Give it the credibility and structure [of a bank], but continue with the flexibility of the friends and family style.”
Before Advani created CircleLending, the options for those handling friend and family loans were few. An attorney can document the loan and an accountant can handle the servicing and reporting, or a promissory note can be printed and the lender can try to handle repayment, Watt said. “But...we’re the only business that can do the entire package for you. And we do it with customer support the whole way along.”
The people involved decide on the final terms of the loan, but Virgin Money can educate and guide them through the process. Virgin Money is there to inform individuals about tax laws, minimum and maximum interest rates and offer guidance and suggestions based on what has worked for others in the past, Watt said.
These services do have a fee. The initial price for setting up a real estate loan through Virgin Money is anywhere from $249 to $2,299, with services ranging from documentation to managing payments, handling the title search and creating an escrow account. Full Servicing—documentation and management of electronic payments—costs $699. Processing fees start at $9 per payment.
The idea is that, when managed correctly, loans between family and friends can ultimately benefit both the borrower and the lender.
Borrowing
When receiving a loan from friends or family, borrowers are likely to get a much better rate than they would on a traditional bank loan.
“Interest rates tend to correlate really closely to the closeness of the relationship,” Watt said. “So, if it’s a parent [and] child, you’ll have someone with a lower interest rate. You’ll even have zero percent in some cases. But if the relationship becomes more distant—say in a seller financing transaction, where you just have a real estate investor who’s turning properties and financing the borrowers as they come through—you’ll get higher rates.”
The national average rate on traditional mortgages is 6.35 percent for a 30-year fixed rate mortgage and 5.9 percent for a 15-year fixed rate mortgage, according to HSH Associates Financial Publishers.
In contrast, the average rate for a mortgage between family members managed by Virgin Money is 5.25 percent, according to Watt. Over long-term loans, rates lowered by even 0.5 or 1 percent can ultimately save thousands of dollars. The average rate on Virgin Money’s non-family mortgages is 7.5 percent, Watt said.
Another benefit for those choosing to borrow from friends and family is that, in cutting out the middleman, a great deal of time and stress can be saved. Traditional mortgage loans can take anywhere from seven to 30 days to process and close because they require credit checks, title searches and physical appraisals of the property before final approval is granted. This is not the case when the money comes from someone the borrower knows.
“When there are loans between individuals who know each other, there’s no application process, there’s no filling out of forms, there’s no credit check. All that is [satisfied] based on the relationship,” Watt said.
Payment plans can be established that meet the borrower’s specific needs. For example, if the borrower works in a seasonal industry, such as tourism, payments can be adjusted seasonally to reflect his or her cash flow, Watt said. And if a borrower comes upon hard times, it’s much simpler to go to the lender and receive a temporary deferral if there is a relationship. Lenders can opt to defer payments, move a particular payment to the end of the term or forgive it altogether, according to Virgin Money’s website. This allows for flexibility that is not possible when dealing with a bank or credit card company.
Automatic payments allow family members to not discuss loans unless necessary“Banks will foreclose on the property but parents will tend to restructure,” Watt said. “When you have a family relationship involved, the lenders tend to do as much as they can to avoid foreclosure, whereas you don’t have that incentive from a bank or a mortgage company.”
Borrowers can pay their lenders automatically with electronic payments through Virgin Money. With the entire process handled by a neutral third party, borrower and lender don’t even have to talk about the loan if they choose not to.
Lending
For those who may be thinking about lending to a family member, friend or acquaintance, conducting the transaction through Virgin Money can provide some much-needed security. It’s even possible that lending money to a friend in need could be more profitable than putting the same money into other investments.
The average return on certificates of deposit (CDs) is 4.33 percent for one-year CDs and 4.31 percent for five-year CDs, according to BankRate.com. 10-year Treasury Bonds are yielding 4.4 percent, according to CNN Money. In contrast, the average rate for a mortgage loan between family members through Virgin Money is 5.25 percent, with rates between non-family members averaging 7.5 percent, according to Watt. The rates for business and personal loans are in a range similar to the 5.25 percent and 7.5 percent rates for mortgages between family members and between non-family members, respectively, Watt said. Even at the lower family loan amount, the rate is still almost a full percentage point above the average rate for CDs.
And, with the added security Virgin Money offers, lenders can feel good about helping out a family member, friend or acquaintance while also feeling that their investment is safer than it would be if sealed by only a handshake. The default rate for loans through Virgin Money is approximately 5 percent, while the default rate on mortgages is between 0.5 and 1 percent, according to Watt.
“Our mortgages tend to be comparable to long-term fixed rate mortgages, as opposed to short term (ARM) mortgages,” Watt said.
Of course, though Virgin Money can help mitigate the stress caused by lending, there is still the possibility that the deal could go sour. Deciding what to do in the event the loan goes into default is up to the lender.
“It’s up to the lender...how they want to enforce the promissory note, which will have the clauses in it about default,” Watt said. “If they want us to go ahead and proceed with collections, we are able to work with a partner to send out a series of collection notices on behalf of the lender.”
When dealing with friends or family, lenders may feel reluctant to proceed with collections, but Virgin Money can work with both borrower and lender to restructure the loan so that it gets repaid.
Those interested in managing private loans through Virgin Money can contact them by phone or through their website. There may be special deals available for investors who choose to manage multiple loans, according to Watt. The company is also looking to expand their business loan offering into multiple products for business investors, Watt said.
Though it has officially been under the Virgin umbrella since just last October, CircleLending—as it was originally known—has been operating for six years and has helped customers do more than $200 million in loans, according to the company’s website.
CircleLending was founded by Asheesh Advani. While working at the World Bank and studying worldwide markets for informal capital, he discovered that there was a large amount of friend and family lending happening in North America, and that these loans had extremely high default rates averaging more than 14 percent, according to Helen Payne Watt, director of content for Virgin Money.
Formerly CircleLending, the service has managed over $200 million in loans“[Advani] realized that with a simple application of documents and servicing to those loans, basically giving it the structure that a bank would give it, that you could dramatically reduce the default rates,” Watt said. “Give it the credibility and structure [of a bank], but continue with the flexibility of the friends and family style.”
Before Advani created CircleLending, the options for those handling friend and family loans were few. An attorney can document the loan and an accountant can handle the servicing and reporting, or a promissory note can be printed and the lender can try to handle repayment, Watt said. “But...we’re the only business that can do the entire package for you. And we do it with customer support the whole way along.”
The people involved decide on the final terms of the loan, but Virgin Money can educate and guide them through the process. Virgin Money is there to inform individuals about tax laws, minimum and maximum interest rates and offer guidance and suggestions based on what has worked for others in the past, Watt said.
These services do have a fee. The initial price for setting up a real estate loan through Virgin Money is anywhere from $249 to $2,299, with services ranging from documentation to managing payments, handling the title search and creating an escrow account. Full Servicing—documentation and management of electronic payments—costs $699. Processing fees start at $9 per payment.
The idea is that, when managed correctly, loans between family and friends can ultimately benefit both the borrower and the lender.
Borrowing
When receiving a loan from friends or family, borrowers are likely to get a much better rate than they would on a traditional bank loan.
“Interest rates tend to correlate really closely to the closeness of the relationship,” Watt said. “So, if it’s a parent [and] child, you’ll have someone with a lower interest rate. You’ll even have zero percent in some cases. But if the relationship becomes more distant—say in a seller financing transaction, where you just have a real estate investor who’s turning properties and financing the borrowers as they come through—you’ll get higher rates.”
The national average rate on traditional mortgages is 6.35 percent for a 30-year fixed rate mortgage and 5.9 percent for a 15-year fixed rate mortgage, according to HSH Associates Financial Publishers.
In contrast, the average rate for a mortgage between family members managed by Virgin Money is 5.25 percent, according to Watt. Over long-term loans, rates lowered by even 0.5 or 1 percent can ultimately save thousands of dollars. The average rate on Virgin Money’s non-family mortgages is 7.5 percent, Watt said.
Another benefit for those choosing to borrow from friends and family is that, in cutting out the middleman, a great deal of time and stress can be saved. Traditional mortgage loans can take anywhere from seven to 30 days to process and close because they require credit checks, title searches and physical appraisals of the property before final approval is granted. This is not the case when the money comes from someone the borrower knows.
“When there are loans between individuals who know each other, there’s no application process, there’s no filling out of forms, there’s no credit check. All that is [satisfied] based on the relationship,” Watt said.
Payment plans can be established that meet the borrower’s specific needs. For example, if the borrower works in a seasonal industry, such as tourism, payments can be adjusted seasonally to reflect his or her cash flow, Watt said. And if a borrower comes upon hard times, it’s much simpler to go to the lender and receive a temporary deferral if there is a relationship. Lenders can opt to defer payments, move a particular payment to the end of the term or forgive it altogether, according to Virgin Money’s website. This allows for flexibility that is not possible when dealing with a bank or credit card company.
Automatic payments allow family members to not discuss loans unless necessary“Banks will foreclose on the property but parents will tend to restructure,” Watt said. “When you have a family relationship involved, the lenders tend to do as much as they can to avoid foreclosure, whereas you don’t have that incentive from a bank or a mortgage company.”
Borrowers can pay their lenders automatically with electronic payments through Virgin Money. With the entire process handled by a neutral third party, borrower and lender don’t even have to talk about the loan if they choose not to.
Lending
For those who may be thinking about lending to a family member, friend or acquaintance, conducting the transaction through Virgin Money can provide some much-needed security. It’s even possible that lending money to a friend in need could be more profitable than putting the same money into other investments.
The average return on certificates of deposit (CDs) is 4.33 percent for one-year CDs and 4.31 percent for five-year CDs, according to BankRate.com. 10-year Treasury Bonds are yielding 4.4 percent, according to CNN Money. In contrast, the average rate for a mortgage loan between family members through Virgin Money is 5.25 percent, with rates between non-family members averaging 7.5 percent, according to Watt. The rates for business and personal loans are in a range similar to the 5.25 percent and 7.5 percent rates for mortgages between family members and between non-family members, respectively, Watt said. Even at the lower family loan amount, the rate is still almost a full percentage point above the average rate for CDs.
And, with the added security Virgin Money offers, lenders can feel good about helping out a family member, friend or acquaintance while also feeling that their investment is safer than it would be if sealed by only a handshake. The default rate for loans through Virgin Money is approximately 5 percent, while the default rate on mortgages is between 0.5 and 1 percent, according to Watt.
“Our mortgages tend to be comparable to long-term fixed rate mortgages, as opposed to short term (ARM) mortgages,” Watt said.
Of course, though Virgin Money can help mitigate the stress caused by lending, there is still the possibility that the deal could go sour. Deciding what to do in the event the loan goes into default is up to the lender.
“It’s up to the lender...how they want to enforce the promissory note, which will have the clauses in it about default,” Watt said. “If they want us to go ahead and proceed with collections, we are able to work with a partner to send out a series of collection notices on behalf of the lender.”
When dealing with friends or family, lenders may feel reluctant to proceed with collections, but Virgin Money can work with both borrower and lender to restructure the loan so that it gets repaid.
Those interested in managing private loans through Virgin Money can contact them by phone or through their website. There may be special deals available for investors who choose to manage multiple loans, according to Watt. The company is also looking to expand their business loan offering into multiple products for business investors, Watt said.
Zopa U.S. Website Launched
Zopa, a U.K.-based peer-to-peer lending company, launched its U.S. website Tuesday, offering certificates of deposit (CDs) with a twist to help charitable U.S. investors earn money while giving back to others.
“Last year Americans donated $295 billion to charity,” Douglas Dolton, global CEO of Zopa, said. “And what we saw was a way for investors to be able to invest their money safely with a great rate of return, but still satisfy that need that we clearly have as Americans to share our money with other people.”
Zopa’s U.S. website will differ slightly from other U.S. peer-to-peer lending websites, such as Prosper and Lending Club, by offering CDs to partially fund the loans. (For more information, see our articles on Prosper peer-to-peer lending and Lending Club.) The CDs will assist Zopa’s loan borrowers in part, and investors’ money will be safely insured up to $100,000 by the National Credit Union Association, an organization similar to the FDIC.
The CDs will be handled by several U.S. credit unions, including First Tech Credit Union and USA Federal Credit Union, though Dolton said he expects to significantly expand the credit union network. Zopa only offers one-year terms for their CDs, and interest rates are capped at 5.1 percent.
“My experience in the financial services business is that you cannot continuously be the highest rate in the market,” Dolton said. “We intentionally did not set out to have the highest rate in the market. We intended to have a sustainable attractive rate.”
The front page of the U.S. Zopa websiteTo invest in a Zopa CD, investors must choose a borrower then adjust the rate they earn on their CD, sending their chosen borrower all or part of the interest earned. Investors who choose to receive the maximum interest rate on their CD will help borrowers less, while those who choose a lower interest rate will help borrowers more. Once the interest rate is calculated, it becomes a simple reduction in the net monthly loan payment that a borrower needs to pay.
“If a community church has an underprivileged student who’s going to school and all those members of the church opens up a $500 CD and take 3 percent...you can actually reduce the payments to $0,” Dolton said.
“From an investor perspective, it’s absolutely amazing to be able to get an insured guaranteed rate of return and still be able to help somebody," Dolton said. "We call it the loan that can make payments for you.”
If a borrower defaults on a loan, it does not affect the return from the CD, Dolton said. “The loans are made by the credit unions, so that individual credit union would bear that loss,” he said. “We have underwritten them in a very safe and consistent manner across the board, so we are expecting to see fairly even performance across all of the credit unions.”
Borrowers are required to have a minimum FICO credit score of 640, and neither borrowers nor lenders pay any fees, though borrowers who are slow to send in payments may be subject to late fees.
Investors have to register at one of the six credit unions that partner with Zopa to invest in the CDs. This offers higher visibility and expanded membership for the credit unions, according to The Wall Street Journal.
Zopa also recently launched a site in Italy. Its original U.K. site, launched in March 2005, now has 180,000 registered members.
A password-protected test version of the U.S. website was opened earlier this month to a select group to allow a pilot run of the lending program.
“As the world’s first peer-to-peer, and now the world’s first global peer-to-peer lending operation, we think it really is about the connection between people,” Dolton said. “That’s what our values are all about: people, community, innovation and integrity.”
Interested investors can visit Zopa's website to learn more.
“Last year Americans donated $295 billion to charity,” Douglas Dolton, global CEO of Zopa, said. “And what we saw was a way for investors to be able to invest their money safely with a great rate of return, but still satisfy that need that we clearly have as Americans to share our money with other people.”
Zopa’s U.S. website will differ slightly from other U.S. peer-to-peer lending websites, such as Prosper and Lending Club, by offering CDs to partially fund the loans. (For more information, see our articles on Prosper peer-to-peer lending and Lending Club.) The CDs will assist Zopa’s loan borrowers in part, and investors’ money will be safely insured up to $100,000 by the National Credit Union Association, an organization similar to the FDIC.
The CDs will be handled by several U.S. credit unions, including First Tech Credit Union and USA Federal Credit Union, though Dolton said he expects to significantly expand the credit union network. Zopa only offers one-year terms for their CDs, and interest rates are capped at 5.1 percent.
“My experience in the financial services business is that you cannot continuously be the highest rate in the market,” Dolton said. “We intentionally did not set out to have the highest rate in the market. We intended to have a sustainable attractive rate.”
The front page of the U.S. Zopa websiteTo invest in a Zopa CD, investors must choose a borrower then adjust the rate they earn on their CD, sending their chosen borrower all or part of the interest earned. Investors who choose to receive the maximum interest rate on their CD will help borrowers less, while those who choose a lower interest rate will help borrowers more. Once the interest rate is calculated, it becomes a simple reduction in the net monthly loan payment that a borrower needs to pay.
“If a community church has an underprivileged student who’s going to school and all those members of the church opens up a $500 CD and take 3 percent...you can actually reduce the payments to $0,” Dolton said.
“From an investor perspective, it’s absolutely amazing to be able to get an insured guaranteed rate of return and still be able to help somebody," Dolton said. "We call it the loan that can make payments for you.”
If a borrower defaults on a loan, it does not affect the return from the CD, Dolton said. “The loans are made by the credit unions, so that individual credit union would bear that loss,” he said. “We have underwritten them in a very safe and consistent manner across the board, so we are expecting to see fairly even performance across all of the credit unions.”
Borrowers are required to have a minimum FICO credit score of 640, and neither borrowers nor lenders pay any fees, though borrowers who are slow to send in payments may be subject to late fees.
Investors have to register at one of the six credit unions that partner with Zopa to invest in the CDs. This offers higher visibility and expanded membership for the credit unions, according to The Wall Street Journal.
Zopa also recently launched a site in Italy. Its original U.K. site, launched in March 2005, now has 180,000 registered members.
A password-protected test version of the U.S. website was opened earlier this month to a select group to allow a pilot run of the lending program.
“As the world’s first peer-to-peer, and now the world’s first global peer-to-peer lending operation, we think it really is about the connection between people,” Dolton said. “That’s what our values are all about: people, community, innovation and integrity.”
Interested investors can visit Zopa's website to learn more.
Prosper: Peer-to-Peer Lending
It is common knowledge that banks make huge profits on the margin between the interest rates they charge borrowers and the rates they offer to savings account holders.
The sheer size of these institutions allows them to easily diversify among a huge pool of borrowers and account holders, and they have historically had a monopoly on the lending market. Prosper.com, the first major person-to-person lending service in the U.S., intends to change all that by connecting small-time lenders directly with borrowers.
Many investors were intrigued by the idea of replacing banks in the lending equation. “It was a very interesting idea to me,” Kevin Gillett, a Prosper lender and the author of , said. “I love the idea of cutting the banks out of the picture.”
Prosper “basically allows me to be the bank, which I really like,” said a Prosper lender who goes by the user name of Technologyguy and
Prosper has the advantage of independence from the stock market, “so even if it can’t blow the doors off returns that you might see hyped up about it, if it can return 10 to 12 percent and be orthogonal to the stock market, I think that alone is enough of a reason to invest in it,” Gillett said. Prosper is creating a “completely different asset class,” he said.
On Prosper, the process begins when a borrower posts a loan application that includes a requested dollar amount, maximum interest rate and other credit and personal information. Lenders can then bid on the loan in an auction-style format until the loan is fully funded or the auction time runs out, much like eBay.
Prosper requires just a $50 minimum bid on any single loan, so lenders can diversify their funds across many different loans. A standard $5,000 loan application may end up funded by 100 different lenders. “It’s important that you diversify your loan portfolio, although you clearly would rather find 20 great loans than 70 good ones,” Gillett said.
Certain financial information in a borrower’s application is verified by Prosper, such as credit history, homeowner status and whether the borrower holds a bank account.
Prosper gives each borrower a credit grade based on his or her Experian credit score. Much of the rest of the information contained in a loan application is personal information provided directly by the borrower, with no verification from Prosper.
Lenders vary in the ways they deal with that personal information. Some try to eliminate it completely from consideration and focus solely on the numbers. Technologyguy, for example, disables all images from the site and avoids reading personal information because he doesn’t “want to be subconsciously swayed by a cute smile or a slick writer.”
Some lenders use the personal information as a way to weed out undesirable borrowers. “The personal information that they give is not something I ever use as a mechanism for deciding to bid on a loan,” Gillett said. “What I use it for is a mechanism to not bid on a loan.” When reading borrower listings, Gillett looks for “inconsistencies or any other red flag that might cause me to think they wouldn’t pay.”
It seems that every lender who pays even a little attention to personal stories favors certain types of borrowers over others. Gillett, for example, is drawn to people who are starting a second business while maintaining a steady day job.
A Prosper lender who goes by the name of Ms. Ava said she prefers to lend to those who “have enough money to pay their bills” and who “just need this extra money for a particular situation,” such as a taxi driver wanting to buy his own cab or a truck driver wanting to add a second vehicle. She also likes borrowers who are consolidating debt.
The main attraction for lenders is the loan’s interest rate; lenders typically seek a high interest rate for the amount of risk the borrower presents. Prosper helps lenders analyze risk levels by providing default rate statistics from Experian for the various credit grades.
Gillett believes that many Prosper borrowers “are not capable of getting loans at other places,” and therefore Prosper’s default rates “are higher than average, for say the Experian data. But it’s unclear what they actually are.”
Comprehensive data on Prosper’s average default rates is not yet available because Prosper is a year-old company offering three-year amortized loans. Prosper makes a wealth of data available on its marketplace performance page, and lenders can elect to receive daily e-mails with the latest statistics.
Gillett carefully analyzes that information and frequently adjusts his lending strategy accordingly. “I’m trying to be cautious and follow what’s going on and track how I’m doing and understand the marketplace,” he said.
Most of Prosper’s 11,500 lenders are seeing competitive returns so far, according to Eric’s Credit Community, a website that analyzes the official data released by Prosper. After adjustments for default risk, 75 percent of all Prosper lenders are seeing a return of more than 10 percent, and 98 percent of lenders are achieving more than 6 percent.
Diversification increases results; of the borrowers with more than 25 loans, 81 percent are seeing returns of more than 10 percent, and 99 percent are achieving more than 6 percent.
Activity on Prosper is reflected in a borrower’s credit history, so borrowers who wish to maintain or improve their credit have an automatic incentive to stay current on their Prosper loans. Borrowers who already have good credit are in high demand.
“The numbers speak for themselves,” Ms. Ava said. “If a person has a history of paying their bills, there’s no reason to think they’re not going to continue that history.” However, borrowers with good credit do not generally offer very competitive returns; their interest rates are bid down quickly at auction.
Prosper also introduces a social networking concept intended to motivate borrowers to make their payments on time. Borrowers and lenders can join groups on Prosper. A group leader founds and organizes the group and may choose to take a cut of the group’s loans.
Ms. Ava became a group leader for what she calls “selfish” reasons; she wanted more direct access to borrowers and their information than she had as a lender. Many borrowers are willing to share information with their group leaders that they would not otherwise share with lenders.
Ms. Ava believes that groups make a person “feel doubly responsible to pay back the loan,” because they don’t want to let the group down. Groups receive starred ratings on a scale of 1 to 5, with 5 being the highest rating.
The quality of groups varies, and the ways in which group leaders verify member information vary widely as well. Ms. Ava said some groups are “totally automatic…the computer does everything.” She conducts interviews with her group applicants and screens them carefully, and she immediately calls any member who misses a payment.
Since the quality of group leaders can vary, some lenders are skeptical of groups. Gillett does not believe that many group leaders “perform the actions that would actually be worth more than what Prosper already provides.” He said he would be influenced by group membership only in cases where the group leader bids on the loan.
Prosper recently introduced an endorsement feature to allow borrowers and lenders to link to friends and family members on Prosper. Friends and family can write endorsements on a borrower’s loan posting, but Technologyguy and Gillett are both skeptical of that feature. They each noted that they would rather see a feature where lenders could receive notifications when their own friends and other trusted lenders placed bids on loans.
Technologyguy said he would like to see Prosper provide interest on money that sits in a lender’s Prosper account. Right now, he said, he receives no interest on funds that are not invested, and “the money sits around for a long time when it’s being transferred from your bank account into Prosper.”
He said after finding and bidding on a loan, it can take up to yet another month before the loan is fully funded, verified and active. Since the money receives no interest during those waiting periods, “it really cuts into the amount of gains that you can make.”
Lenders have the option of bidding manually or automatically through a standing order. Technologyguy said he uses manual bidding 95 percent of the time because he wants to get his money into a loan as quickly as possible to minimize the time it sits in his Prosper account without earning interest.
“Standing orders are good for a different reason,” he said. Some of the best loans get funded very quickly, and “if you don’t have a standing order ready and you’re not logged into Prosper, then you miss out on that opportunity.”
Gillett has relied mainly on standing orders and only recently began to experiment with manual bidding. He said recent changes in Prosper have made standing orders less effective. The problem, he said, is with loans that are not autofunding, which means that “as soon as they’re 100 percent funded, they continue to have the auction open and the bids continue to come in” and the interest rates get driven down.
Gillett said his standing orders “would fire and my money would be tied up in this loan that started off at a great interest rate and then by the time the loan actually closed, I was bid out of the interest rate.”
Manual bidders can search through loans by hand, but Prosper also has “a nice system for saving searches,” Technologyguy said. He uses saved searches to sort through loan opportunities on Prosper. When Gillett’s standing orders became less effective, he began using a saved search, which “is effectively a standing order that doesn’t actually bid,” he said.
In order for standing orders to become effective once again, Gillett said Prosper would need to add “time remaining criteria” in the standing orders.
“eBay has taught us all that the optimal auction strategy is to show up at the last two minutes and outbid everybody and win the listing,” Gillett said. “You weren’t in the loan early, no one knows you’re coming, and…that way, you get the best interest rate possible.”
“The time remaining criteria would allow my standing order to basically act as I’m acting in a manual bid, which is to say, watching the interest rates, watching the loans, and then when the loan gets within 30 minutes of the end of its auction, then to have the standing order fire,” Gillett said. Such a system “is absolutely necessary if you’re going to be a standing order bidder these days,” he said.
Lenders with multiple standing orders face special challenges, Gillett said. He uses five standing orders that build a bid ladder, but “they fire in completely random order and I have no control over the order that they fire in.”
Rather than bidding at the most attractive interest rate first, the orders fire randomly. “So I’d like a little bit more transparent control over when the standing orders fire,” he said.
Overall, Gillett and Technologyguy are positive about Prosper and its future. Gillett would “like to think that my Prosper account would continue to grow and at some point it would always be 5 percent of my portfolio,” or even 5 to 10 percent, he said.
“If I could buy stock in the company,” Technologyguy said, “I would.” He said he considers Prosper “an ideal business.”
The sheer size of these institutions allows them to easily diversify among a huge pool of borrowers and account holders, and they have historically had a monopoly on the lending market. Prosper.com, the first major person-to-person lending service in the U.S., intends to change all that by connecting small-time lenders directly with borrowers.
Many investors were intrigued by the idea of replacing banks in the lending equation. “It was a very interesting idea to me,” Kevin Gillett, a Prosper lender and the author of , said. “I love the idea of cutting the banks out of the picture.”
Prosper “basically allows me to be the bank, which I really like,” said a Prosper lender who goes by the user name of Technologyguy and
Prosper has the advantage of independence from the stock market, “so even if it can’t blow the doors off returns that you might see hyped up about it, if it can return 10 to 12 percent and be orthogonal to the stock market, I think that alone is enough of a reason to invest in it,” Gillett said. Prosper is creating a “completely different asset class,” he said.
On Prosper, the process begins when a borrower posts a loan application that includes a requested dollar amount, maximum interest rate and other credit and personal information. Lenders can then bid on the loan in an auction-style format until the loan is fully funded or the auction time runs out, much like eBay.
Prosper requires just a $50 minimum bid on any single loan, so lenders can diversify their funds across many different loans. A standard $5,000 loan application may end up funded by 100 different lenders. “It’s important that you diversify your loan portfolio, although you clearly would rather find 20 great loans than 70 good ones,” Gillett said.
Certain financial information in a borrower’s application is verified by Prosper, such as credit history, homeowner status and whether the borrower holds a bank account.
Prosper gives each borrower a credit grade based on his or her Experian credit score. Much of the rest of the information contained in a loan application is personal information provided directly by the borrower, with no verification from Prosper.
Lenders vary in the ways they deal with that personal information. Some try to eliminate it completely from consideration and focus solely on the numbers. Technologyguy, for example, disables all images from the site and avoids reading personal information because he doesn’t “want to be subconsciously swayed by a cute smile or a slick writer.”
Some lenders use the personal information as a way to weed out undesirable borrowers. “The personal information that they give is not something I ever use as a mechanism for deciding to bid on a loan,” Gillett said. “What I use it for is a mechanism to not bid on a loan.” When reading borrower listings, Gillett looks for “inconsistencies or any other red flag that might cause me to think they wouldn’t pay.”
It seems that every lender who pays even a little attention to personal stories favors certain types of borrowers over others. Gillett, for example, is drawn to people who are starting a second business while maintaining a steady day job.
A Prosper lender who goes by the name of Ms. Ava said she prefers to lend to those who “have enough money to pay their bills” and who “just need this extra money for a particular situation,” such as a taxi driver wanting to buy his own cab or a truck driver wanting to add a second vehicle. She also likes borrowers who are consolidating debt.
The main attraction for lenders is the loan’s interest rate; lenders typically seek a high interest rate for the amount of risk the borrower presents. Prosper helps lenders analyze risk levels by providing default rate statistics from Experian for the various credit grades.
Gillett believes that many Prosper borrowers “are not capable of getting loans at other places,” and therefore Prosper’s default rates “are higher than average, for say the Experian data. But it’s unclear what they actually are.”
Comprehensive data on Prosper’s average default rates is not yet available because Prosper is a year-old company offering three-year amortized loans. Prosper makes a wealth of data available on its marketplace performance page, and lenders can elect to receive daily e-mails with the latest statistics.
Gillett carefully analyzes that information and frequently adjusts his lending strategy accordingly. “I’m trying to be cautious and follow what’s going on and track how I’m doing and understand the marketplace,” he said.
Most of Prosper’s 11,500 lenders are seeing competitive returns so far, according to Eric’s Credit Community, a website that analyzes the official data released by Prosper. After adjustments for default risk, 75 percent of all Prosper lenders are seeing a return of more than 10 percent, and 98 percent of lenders are achieving more than 6 percent.
Diversification increases results; of the borrowers with more than 25 loans, 81 percent are seeing returns of more than 10 percent, and 99 percent are achieving more than 6 percent.
Activity on Prosper is reflected in a borrower’s credit history, so borrowers who wish to maintain or improve their credit have an automatic incentive to stay current on their Prosper loans. Borrowers who already have good credit are in high demand.
“The numbers speak for themselves,” Ms. Ava said. “If a person has a history of paying their bills, there’s no reason to think they’re not going to continue that history.” However, borrowers with good credit do not generally offer very competitive returns; their interest rates are bid down quickly at auction.
Prosper also introduces a social networking concept intended to motivate borrowers to make their payments on time. Borrowers and lenders can join groups on Prosper. A group leader founds and organizes the group and may choose to take a cut of the group’s loans.
Ms. Ava became a group leader for what she calls “selfish” reasons; she wanted more direct access to borrowers and their information than she had as a lender. Many borrowers are willing to share information with their group leaders that they would not otherwise share with lenders.
Ms. Ava believes that groups make a person “feel doubly responsible to pay back the loan,” because they don’t want to let the group down. Groups receive starred ratings on a scale of 1 to 5, with 5 being the highest rating.
The quality of groups varies, and the ways in which group leaders verify member information vary widely as well. Ms. Ava said some groups are “totally automatic…the computer does everything.” She conducts interviews with her group applicants and screens them carefully, and she immediately calls any member who misses a payment.
Since the quality of group leaders can vary, some lenders are skeptical of groups. Gillett does not believe that many group leaders “perform the actions that would actually be worth more than what Prosper already provides.” He said he would be influenced by group membership only in cases where the group leader bids on the loan.
Prosper recently introduced an endorsement feature to allow borrowers and lenders to link to friends and family members on Prosper. Friends and family can write endorsements on a borrower’s loan posting, but Technologyguy and Gillett are both skeptical of that feature. They each noted that they would rather see a feature where lenders could receive notifications when their own friends and other trusted lenders placed bids on loans.
Technologyguy said he would like to see Prosper provide interest on money that sits in a lender’s Prosper account. Right now, he said, he receives no interest on funds that are not invested, and “the money sits around for a long time when it’s being transferred from your bank account into Prosper.”
He said after finding and bidding on a loan, it can take up to yet another month before the loan is fully funded, verified and active. Since the money receives no interest during those waiting periods, “it really cuts into the amount of gains that you can make.”
Lenders have the option of bidding manually or automatically through a standing order. Technologyguy said he uses manual bidding 95 percent of the time because he wants to get his money into a loan as quickly as possible to minimize the time it sits in his Prosper account without earning interest.
“Standing orders are good for a different reason,” he said. Some of the best loans get funded very quickly, and “if you don’t have a standing order ready and you’re not logged into Prosper, then you miss out on that opportunity.”
Gillett has relied mainly on standing orders and only recently began to experiment with manual bidding. He said recent changes in Prosper have made standing orders less effective. The problem, he said, is with loans that are not autofunding, which means that “as soon as they’re 100 percent funded, they continue to have the auction open and the bids continue to come in” and the interest rates get driven down.
Gillett said his standing orders “would fire and my money would be tied up in this loan that started off at a great interest rate and then by the time the loan actually closed, I was bid out of the interest rate.”
Manual bidders can search through loans by hand, but Prosper also has “a nice system for saving searches,” Technologyguy said. He uses saved searches to sort through loan opportunities on Prosper. When Gillett’s standing orders became less effective, he began using a saved search, which “is effectively a standing order that doesn’t actually bid,” he said.
In order for standing orders to become effective once again, Gillett said Prosper would need to add “time remaining criteria” in the standing orders.
“eBay has taught us all that the optimal auction strategy is to show up at the last two minutes and outbid everybody and win the listing,” Gillett said. “You weren’t in the loan early, no one knows you’re coming, and…that way, you get the best interest rate possible.”
“The time remaining criteria would allow my standing order to basically act as I’m acting in a manual bid, which is to say, watching the interest rates, watching the loans, and then when the loan gets within 30 minutes of the end of its auction, then to have the standing order fire,” Gillett said. Such a system “is absolutely necessary if you’re going to be a standing order bidder these days,” he said.
Lenders with multiple standing orders face special challenges, Gillett said. He uses five standing orders that build a bid ladder, but “they fire in completely random order and I have no control over the order that they fire in.”
Rather than bidding at the most attractive interest rate first, the orders fire randomly. “So I’d like a little bit more transparent control over when the standing orders fire,” he said.
Overall, Gillett and Technologyguy are positive about Prosper and its future. Gillett would “like to think that my Prosper account would continue to grow and at some point it would always be 5 percent of my portfolio,” or even 5 to 10 percent, he said.
“If I could buy stock in the company,” Technologyguy said, “I would.” He said he considers Prosper “an ideal business.”
sábado, 19 de abril de 2008
Investment Myths
The foreign exchange market is one of the most popular markets for speculation, due to its enormous size, liquidity and tendency for currencies to move in strong trends. Presumably, these characteristics would enable traders to have tremendous success. However, success has been limited mainly for the reasons described below. Many traders come with false expectations of the profit potential and lack the discipline required for trading. Short-term trading is not an amateur's game and is usually not the path for quick riches. Though currencies may seem exotic or less familiar than traditional markets (i.e. equities, futures, etc.), the rules of finance and simple logic are not suspended. One cannot hope to make extraordinary gains without taking extraordinary risks. A trading strategy that involves taking a high degree of risk means suffering inconsistent trading performance and often suffering large losses. Trading currencies is not easy (if it was, everyone would already be a millionaire), and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process. The most enticing aspect of trading currencies is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot ($100,000) of currency only requires $1,000 as a minimum margin deposit, it does not mean that a trader with $10,000 in his account should easily be able to trade 10 lots or even 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1,000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves (take a position that is too big for their portfolio), and as a consequence, often end up forced to exit a position at the wrong time. If an account value is $10,000 and the trader places a trade for 1 lot, he is in effect, leveraging himself 10 to 1, which is a very significant level of leverage. Most professional money managers are not allowed to leverage even this high. Trading in small increments on the account will allow the trader to endure many losing trades without experiencing large monetary losses.
quinta-feira, 17 de abril de 2008
Microfinance Institution Reviews
Although it is widely recognized that microfinance alone will not end poverty, it is a vital step in that direction. Microfinance institutions, also known as MFIs, offer financial services to underserved, impoverished communities.
Previously, entrepreneurs seeking loans in these communities had to provide collateral to borrow from unlicensed lenders at inequitably high interest rates. A number of factors, including high administrative costs relative to small loans and small returns, had kept banks from setting up shop in impoverished communities when surer profits were to be had elsewhere.
The lack of an efficient financial services industry has held back many would-be entrepreneurs with viable business plans from realizing their own potential. Women, in particular, have been excluded as loan candidates in developing communities. The lending practices of many emerging microfinance institutions, such as the Grameen Bank of Bangladesh, have given people living in extreme poverty the opportunity to realize their potential in the business community.
But the benefits of establishing microfinance institutions go beyond microcredit services alone. Services offered by microfinance institutions include savings accounts, insurance, health care and personal development. When Muhammad Yunus, founder of the Grameen Bank of Bangladesh, saw the vast amount of latent human capital possessed by people living in impoverished communities, he realized these people had the potential to help themselves if given access to the benefits of efficient financial markets, particularly access to credit. What resulted was a new approach to solving the problem of widespread systemic poverty. Despite the formidable challenges involved in transforming impoverished communities, Yunus and others have proved that it can work.
Microfinance institutions also provide insurance and health care servicesBy reaching out to those people living in extreme poverty, Yunus was able to determine their concerns and interests. This understanding made it possible to arrange services in a way that made sense for each community. In his book Banker for the Poor, Yunus referred to some of the benefactors of his innovative banking practices. “When I visit center meetings, not only in Bangladesh but all over the world, in countries as diverse as Malaysia, the Philippines, South Africa, and the United States, I realize how resilient and creative human beings can be when given the chance.”
There are pros and cons for both for-profit and non-profit organizations. Some people are more comfortable with a non-profit because they are turned off by the idea of making a profit by helping impoverished people. In most cases, non-profits can provide for loans issued at lower rates than for-profits can.
Fostering strong, efficient financial markets is important in enabling communities to sustain economic growth. This is more likely to occur when profits are sought by microfinance institutions.
Start-up costs are significant and microfinance institutions often need help from non-profit organizations in getting off the ground, but the long-term success of any microfinance institution lies in its ability to attain profitability. They do not eliminate the need for charitable contributions any more than they promise to eradicate poverty. Instead, profitable microfinance institutions supplement existing non-profit charities by accessing far more capital than charity alone can gather.
Many of the organizations that support the establishment of microfinance institutions, such as The Grameen Foundation and Accion, are non-profit, but it is through their support that many microfinance institutions manage to achieve profitability. This profitability leads to greater access to capital and greater access to loan candidates.
Non-profits provide microfinanciers with more access to capital and loan candidates“[W]hile programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment, their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. More and more microfinance institution managers have come to understand that sustainability is a precursor to reaching exponentially greater numbers of clients," according to MicrofinanceGateway.org.
Microfinance institutions first began to establish themselves with the help of big players and big money. With the growing popularity of microfinance and socially responsible investing, there came demand for a way to get involved as an individual investor.
By utilizing the networking power of the Internet, many organizations have made it possible for an individual to contribute to the growth of microfinance institutions, and provided the option to make loans to individual entrepreneurs from the comfort of a personal computer. On many websites, payments can be made with a credit card using PayPal, by mail or by phone.
Combining the sustainability of microfinance with the existing popularity of contributing from one individual to another seems to be a good match. Giving money away often has only a one-time benefit. Lending money at a fair price—the interest rate—can perpetuate benefits because lenders may choose to reinvest interest earned as well as the principal. Web-based organizations such as MicroPlace and Kiva have furthered access to loan monies for microfinance banks by catering to individual contributors. In investigating some of the organizations offering these services, here are three that are well established.
MicroPlace: A socially responsible brokerage specializing in microfinance investments, MicroPlace offers convenience for the individual investor through offering securities and the opportunity to earn returns—typically 1.5 to 3 percent—on their investments. MicroPlace is a registered broker-dealer with the SEC. The website offers some good information about what they do, convenient payment options and a wide range of regions throughout the world to choose from. While MicroPlace is a for-profit organization, most of the loans are made at low interest rates through non-profits such as Calvert and Oikocredit. This would appeal to the investor who is more inclined towards charitable yet sustainable investments.
Accion: There is an extensive amount of information available describing the work they do not just for individual investors but also for microfinance institutions. Accion, which boasts more than 30 years of success in microfinance, aims to help establish microfinance institutions to the point where they can be self-sufficient. Accion has a proven track record as a non-profit organization with roots in South America offering opportunities throughout the world. Accion has begun to market housing microfinance.
Microfinance improves business and infrastructure in target areasKiva: Another user-friendly platform that caters to the individual investor who may want a story to go along with their contribution. Individuals can choose a business to loan to and track the progress of that business over time. Kiva lists the microfinance institutions for each loan so individuals can choose to place their investment through a microfinance institution in the risk category they are satisfied with. Kiva has a wealth of information on their activities, including statistics for variables such as delinquency rate, default rate and other relevant figures across five differently-rated categories. Investors even have the option to purchase gift certificates and spread the word about microfinance.
FINCA International (Foundation for International Community Assistance): FINCA places both donations and investments to facilitate “Village Banking” groups. This strategy utilizes the strength of community by grouping people with similar interests in order to support each individual. Village Banking groups are able to collectively insure loans borrowed by individuals without needing to provide collateral. The website offers a number of ways to get involved. Tax-deductible donations can be made on a one-time basis or as a recurring gift. FINCA does not offer a person-to-person lending program, but with a high loan repayment rate and proven success in microfinance, benefactors can be sure that donations will help the working poor. Sponsors may also choose to make bequests through the Planned Giving Program.
In developed nations, part of what makes economies strong is local ownership of small business and thus the vested interest people have in their own communities. The growth of microfinance institutions is making this a reality for impoverished communities throughout the world. To find a microfinance organization or to learn more about microfinance, see a search engine that rates them and offers information on the various microfinance institutions. Two of the larger such search engines are MicrofinanceGateway.org and MixMarket.org.
The previously published version of this story contained errors about the status of MicroPlace as a for-profit organization and as a broker-dealer registered with the SEC.
Previously, entrepreneurs seeking loans in these communities had to provide collateral to borrow from unlicensed lenders at inequitably high interest rates. A number of factors, including high administrative costs relative to small loans and small returns, had kept banks from setting up shop in impoverished communities when surer profits were to be had elsewhere.
The lack of an efficient financial services industry has held back many would-be entrepreneurs with viable business plans from realizing their own potential. Women, in particular, have been excluded as loan candidates in developing communities. The lending practices of many emerging microfinance institutions, such as the Grameen Bank of Bangladesh, have given people living in extreme poverty the opportunity to realize their potential in the business community.
But the benefits of establishing microfinance institutions go beyond microcredit services alone. Services offered by microfinance institutions include savings accounts, insurance, health care and personal development. When Muhammad Yunus, founder of the Grameen Bank of Bangladesh, saw the vast amount of latent human capital possessed by people living in impoverished communities, he realized these people had the potential to help themselves if given access to the benefits of efficient financial markets, particularly access to credit. What resulted was a new approach to solving the problem of widespread systemic poverty. Despite the formidable challenges involved in transforming impoverished communities, Yunus and others have proved that it can work.
Microfinance institutions also provide insurance and health care servicesBy reaching out to those people living in extreme poverty, Yunus was able to determine their concerns and interests. This understanding made it possible to arrange services in a way that made sense for each community. In his book Banker for the Poor, Yunus referred to some of the benefactors of his innovative banking practices. “When I visit center meetings, not only in Bangladesh but all over the world, in countries as diverse as Malaysia, the Philippines, South Africa, and the United States, I realize how resilient and creative human beings can be when given the chance.”
There are pros and cons for both for-profit and non-profit organizations. Some people are more comfortable with a non-profit because they are turned off by the idea of making a profit by helping impoverished people. In most cases, non-profits can provide for loans issued at lower rates than for-profits can.
Fostering strong, efficient financial markets is important in enabling communities to sustain economic growth. This is more likely to occur when profits are sought by microfinance institutions.
Start-up costs are significant and microfinance institutions often need help from non-profit organizations in getting off the ground, but the long-term success of any microfinance institution lies in its ability to attain profitability. They do not eliminate the need for charitable contributions any more than they promise to eradicate poverty. Instead, profitable microfinance institutions supplement existing non-profit charities by accessing far more capital than charity alone can gather.
Many of the organizations that support the establishment of microfinance institutions, such as The Grameen Foundation and Accion, are non-profit, but it is through their support that many microfinance institutions manage to achieve profitability. This profitability leads to greater access to capital and greater access to loan candidates.
Non-profits provide microfinanciers with more access to capital and loan candidates“[W]hile programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment, their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. More and more microfinance institution managers have come to understand that sustainability is a precursor to reaching exponentially greater numbers of clients," according to MicrofinanceGateway.org.
Microfinance institutions first began to establish themselves with the help of big players and big money. With the growing popularity of microfinance and socially responsible investing, there came demand for a way to get involved as an individual investor.
By utilizing the networking power of the Internet, many organizations have made it possible for an individual to contribute to the growth of microfinance institutions, and provided the option to make loans to individual entrepreneurs from the comfort of a personal computer. On many websites, payments can be made with a credit card using PayPal, by mail or by phone.
Combining the sustainability of microfinance with the existing popularity of contributing from one individual to another seems to be a good match. Giving money away often has only a one-time benefit. Lending money at a fair price—the interest rate—can perpetuate benefits because lenders may choose to reinvest interest earned as well as the principal. Web-based organizations such as MicroPlace and Kiva have furthered access to loan monies for microfinance banks by catering to individual contributors. In investigating some of the organizations offering these services, here are three that are well established.
MicroPlace: A socially responsible brokerage specializing in microfinance investments, MicroPlace offers convenience for the individual investor through offering securities and the opportunity to earn returns—typically 1.5 to 3 percent—on their investments. MicroPlace is a registered broker-dealer with the SEC. The website offers some good information about what they do, convenient payment options and a wide range of regions throughout the world to choose from. While MicroPlace is a for-profit organization, most of the loans are made at low interest rates through non-profits such as Calvert and Oikocredit. This would appeal to the investor who is more inclined towards charitable yet sustainable investments.
Accion: There is an extensive amount of information available describing the work they do not just for individual investors but also for microfinance institutions. Accion, which boasts more than 30 years of success in microfinance, aims to help establish microfinance institutions to the point where they can be self-sufficient. Accion has a proven track record as a non-profit organization with roots in South America offering opportunities throughout the world. Accion has begun to market housing microfinance.
Microfinance improves business and infrastructure in target areasKiva: Another user-friendly platform that caters to the individual investor who may want a story to go along with their contribution. Individuals can choose a business to loan to and track the progress of that business over time. Kiva lists the microfinance institutions for each loan so individuals can choose to place their investment through a microfinance institution in the risk category they are satisfied with. Kiva has a wealth of information on their activities, including statistics for variables such as delinquency rate, default rate and other relevant figures across five differently-rated categories. Investors even have the option to purchase gift certificates and spread the word about microfinance.
FINCA International (Foundation for International Community Assistance): FINCA places both donations and investments to facilitate “Village Banking” groups. This strategy utilizes the strength of community by grouping people with similar interests in order to support each individual. Village Banking groups are able to collectively insure loans borrowed by individuals without needing to provide collateral. The website offers a number of ways to get involved. Tax-deductible donations can be made on a one-time basis or as a recurring gift. FINCA does not offer a person-to-person lending program, but with a high loan repayment rate and proven success in microfinance, benefactors can be sure that donations will help the working poor. Sponsors may also choose to make bequests through the Planned Giving Program.
In developed nations, part of what makes economies strong is local ownership of small business and thus the vested interest people have in their own communities. The growth of microfinance institutions is making this a reality for impoverished communities throughout the world. To find a microfinance organization or to learn more about microfinance, see a search engine that rates them and offers information on the various microfinance institutions. Two of the larger such search engines are MicrofinanceGateway.org and MixMarket.org.
The previously published version of this story contained errors about the status of MicroPlace as a for-profit organization and as a broker-dealer registered with the SEC.
Nicaragua Real Estate
When people travel to a foreign country like Nicargaua, real estate is typically not at the front of their mind. Very few can say that they have leased a property for business after visiting for just three days, but that’s just what Charles Southwell did nine years ago. Southwell is an investor and real estate developer who lived and worked in Costa Rica for years; he went on a trip to Nicaragua with a friend nine years ago. “Within a matter of 72 hours, I had leased a building for business and basically decided to move here,” Southwell, who now owns the RE/MAX Granada franchise in Nicaragua, said. “I could feel the opportunity.”
Owning oceanfront property on a sunny beach or a period home in an historic city are distant dreams for many people. Such properties seem beyond reach in most areas but are surprisingly affordable in Nicaragua. Nicaragua real estate is beginning to attract global attention because of its rare combination of stunning beauty, which includes long stretches of ocean beaches and cities featuring colonial architecture, and a low cost and high quality of living.
“We enjoy a lot more time because we’re able to afford help here in certain aspects of our living,” Jeff Finch, a real estate developer who moved from Virginia to Nicaragua, said. “We have two housekeepers. We have a gentleman and all he does is take care of our landscaping, he’s kind of our handyman. We also have a pool keeper and a nanny. They’ve become extended members of our family.” Finch pays each of his employees between $100 and $150 per month.
Other luxuries are bargain priced in Nicaragua as well. A high quality meal can cost as little as $10 per person; suites at luxury hotels can be had for $120 per night. Finch and his family pay about $12 per doctor visit and less than $5 per prescription. With prices such as these, it is easy to see why Nicaragua is growing in popularity as a vacation, investment and even retirement destination.
Simple geography is another reason many investors are turning to Nicaragua. “To get here from the States, it’s easy,” Southwell said. “It’s a pretty viable destination for somebody that lives in the States or Canada. It’s turned into quite a tourist mecca, and it has huge investment potential.”
Some, including Southwell, have drawn comparisons between Nicaragua and Costa Rica. Only a decade or two ago, Costa Rica was a poor, beautiful Central American country with limited infrastructure. The country made a conscious effort to market itself as a tourist destination and an inexpensive place to do business, bringing Intel, Microsoft and GE into the country.
The influx of businesses boosted employment, which led to the creation of a larger middle class in Costa Rica. “The countries that build the middle class are the countries that have long-term success, and that’s what’s happening here,” Finch said of Nicaragua.
Costa Rica now has a per capita GDP of $12,000, behind only the U.S. and Canada in the western hemisphere, and nearly $2,000 more than the worldwide average of $10,000, according to the CIA World Factbook. Costa Rica’s success has largely been the result of a stable democracy and investor-friendly policies.
Nicaragua is undertaking a similar effort to secure foreign investments and businesses by offering foreigners property rights equal to residents and granting substantial tax breaks and deferrals for tourism-related expenses.
“Law 306 was passed during the last 20 years for tourism investment incentive,” attorney Byron Mejia said. Mejia is a native Nicaraguan who spent 20 years working as an attorney for American Express in Miami. Mejia moved back to Nicaragua 10 years ago and has been specializing in real estate law there ever since.
“Specifically, they have 10 different categories of tourism-related projects in which the government gives tax incentives,” he said. “For example, if you want to establish a hotel or a bed and breakfast, they give you free import duties, you only pay 20 percent on your income tax, you pay no sales tax, and you pay no property tax.”
Nicaragua’s young population could also help lure foreign investments. Nicaragua’s median age is 20.9, and 96.9 percent of Nicaraguans are under 64, according to the CIA World Factbook. Nicaragua’s high percentage of young people means that it has a large population of workers available.
“The education system is booming ahead, and there’s going to be a really nice employment pool available here in the next five years,” Southwell said. “I think you’re going to have a really good opportunity to employ service industries, not to mention textiles and the tourism industry.”
Nicaragua has made great strides in recent years in shrugging off the perception many people have that it is a volatile and unsafe country. Still, many potential investors remain on the sidelines because they view Nicaragua as riddled with poverty and political unrest. According to Southwell, that’s just not true.
“It’s one of the safest countries in the hemisphere,” he said. “They really, really are kind, gentle people. They’ve been through hell and back. They want peace, they want prosperity.”
Though Nicaragua is the largest country in Central America, it is a poor country, with a per capita GDP of $3,000, according to the CIA World Factbook. It is the second-poorest country in the western hemisphere, trailing only Haiti. Its poverty was largely caused by the twentieth century’s political turmoil, suppression and revolution. This tumultuous environment left Nicaragua’s infrastructure badly damaged.
Many Americans are only aware of Nicaragua because of the Iran-Contra Affair, a political scandal from the 1980s. The Reagan Administration sold arms to Iran and used those profits to fund guerilla forces, called Contras, who were opposed to the leftist Nicaraguan revolutionaries, called Sandinistas.
Daniel Ortega was one of the leading Sandinistas in Nicaragua in the 1970s and 1980s; he served as president from 1985 to 1990, and was re-elected in November 2006 for another five-year term, much to the chagrin of many observers. They fear Ortega will revert to the leftist leanings he displayed in his past, which could hinder Nicaragua’s development and economic growth by alienating potential investors and causing the bustling tourism industry to grind to a halt.
Such a regression is not likely, according to Southwell. “Having been involved personally with the Sandinistas over the years—I lease two buildings from them and I know Daniel [Ortega] personally—I know that he’s probably going to be more interested in his legacy than in any of the things he was [interested in] in his leftist past,” he said.
Southwell is not alone in his optimism that Nicaragua is on the path toward stabilization and growth. “I don’t think they [the Sandinistas] want to go back to the past,” Mejia said. “We already had our civil war, and now it’s time to move the country forward.”
Concerns about private property rights, especially for foreigners, are keeping many investors at bay. During Ortega’s previous term, some private property was seized, leaving many wary about purchasing real estate in Nicaragua. That shouldn’t be too much of a concern anymore, according to Mejia. He has specific advice for investors concerned about title issues.
“What is advisable today is to stay away from municipal property, temporary titles or agrarian reformed titles, because even private banks do not make loans to these types of titles,” Mejia said.
Kevin Fleming, who moved to Nicaragua two years ago, is a real estate developer from Vancouver, Canada. He agreed that private property seizure is a thing of the past. “Daniel Ortega has gone on record many times as saying the days of stealing from the rich and giving to the poor, those days are gone. All that did was create poverty,” Fleming said.
Ortega has acknowledged that he must change his ways in order to help Nicaragua recover from its civil war and fulfill its potential. His efforts will be buoyed by two key economic events of 2005.
The G8—a coalition of the world’s seven leading industrial nations and Russia—granted foreign debt relief to Nicaragua in 2005. There are strings attached: in exchange for the relief, Nicaragua must strive to eradicate poverty, be forthcoming with the government’s finances, achieve political stability and support human rights.
Also, Nicaragua signed the Central American Free Trade Agreement (CATFA). Since signing CAFTA, which strengthened Nicaragua’s relationships with its Central American neighbors and the U.S., Nicaragua has exported 33 percent more goods to the U.S. than before. These events have allowed Nicaragua to grow its economy, and along with it, its infrastructure.
The biggest hurdle Nicaragua faces is updating its infrastructure. The country is devoting a lot of money and effort to improving infrastructure, particularly in areas most frequented by tourists.
“The airport in Managua has been rebuilt; it’s brand new. We have several ports in the Pacific that have been rebuilt and are ready to go,” Mejia said. “And it’s my understanding that there are plans of improving the inner roads of the country for production purposes.”
Few medical facilities are up to U.S. standards, but a state-of-the-art facility was recently opened along the Masaya Highway, which runs between two major cities: Managua and Granada. Managua, the capital, has better medical resources than most of the country. In addition, Managua’s airport is now one of the nicest in Central America, thanks to a recent $50 million overhaul.
Still, only one in four roads in Nicaragua is paved, and public transportation is substandard. The rainy season—from May to October—renders many roads useless. The government is focusing its building and repair efforts on the roads most often traveled by tourists, which is expected to boost tourism and create new investment opportunities.
Access to technology is also improving. “Now it is normal to see farmers riding on their horses on the backroads of the country with a cell phone on their hip,” Fleming said.
Technological development has made living and working in Nicaragua easier for Southwell than Costa Rica ever was. “Here, you can go down to the corner and get a cell phone, you’ve got three Internet companies to choose from—I mean, it’s just a lot easier to get things done here,” he said.
Electricity is sometimes spotty, but it is steadily improving. “The power used to go out here four to six hours a day, almost every day, before Daniel Ortega got elected,” Finch said. “Since he’s been elected, I can think of maybe three days that the power went out for maybe one or two hours. That’s because they’re building new substations.”
The new substations are only one component of the growth of Nicaragua’s energy infrastructure. Energy is undergoing a surge in development and investment popularity. “The government is promoting a lot of investment in energy,” Mejia said. “We are rich in rivers, volcanoes and other sources of energy revenue, such as wind power, solar power, geothermal power and hydroelectric power. Laws are being renewed to give investors sufficient incentive to invest in these types of energy products.”
The excitement and energy surrounding Nicaragua will grow as more people become aware of its potential. The right pieces seem to be in place for Nicaragua to catch up with its neighbors. A continued focus on building up infrastructure, combined with aggressive incentive and property rights laws to attract foreign investors, should provide a bright future for Nicaragua if the political climate remains stable.
From its natural beauty to its historical architecture, Nicaragua real estate has a lot to offer; if Nicaragua can capitalize on its potential, investors could see significant returns.
Owning oceanfront property on a sunny beach or a period home in an historic city are distant dreams for many people. Such properties seem beyond reach in most areas but are surprisingly affordable in Nicaragua. Nicaragua real estate is beginning to attract global attention because of its rare combination of stunning beauty, which includes long stretches of ocean beaches and cities featuring colonial architecture, and a low cost and high quality of living.
“We enjoy a lot more time because we’re able to afford help here in certain aspects of our living,” Jeff Finch, a real estate developer who moved from Virginia to Nicaragua, said. “We have two housekeepers. We have a gentleman and all he does is take care of our landscaping, he’s kind of our handyman. We also have a pool keeper and a nanny. They’ve become extended members of our family.” Finch pays each of his employees between $100 and $150 per month.
Other luxuries are bargain priced in Nicaragua as well. A high quality meal can cost as little as $10 per person; suites at luxury hotels can be had for $120 per night. Finch and his family pay about $12 per doctor visit and less than $5 per prescription. With prices such as these, it is easy to see why Nicaragua is growing in popularity as a vacation, investment and even retirement destination.
Simple geography is another reason many investors are turning to Nicaragua. “To get here from the States, it’s easy,” Southwell said. “It’s a pretty viable destination for somebody that lives in the States or Canada. It’s turned into quite a tourist mecca, and it has huge investment potential.”
Some, including Southwell, have drawn comparisons between Nicaragua and Costa Rica. Only a decade or two ago, Costa Rica was a poor, beautiful Central American country with limited infrastructure. The country made a conscious effort to market itself as a tourist destination and an inexpensive place to do business, bringing Intel, Microsoft and GE into the country.
The influx of businesses boosted employment, which led to the creation of a larger middle class in Costa Rica. “The countries that build the middle class are the countries that have long-term success, and that’s what’s happening here,” Finch said of Nicaragua.
Costa Rica now has a per capita GDP of $12,000, behind only the U.S. and Canada in the western hemisphere, and nearly $2,000 more than the worldwide average of $10,000, according to the CIA World Factbook. Costa Rica’s success has largely been the result of a stable democracy and investor-friendly policies.
Nicaragua is undertaking a similar effort to secure foreign investments and businesses by offering foreigners property rights equal to residents and granting substantial tax breaks and deferrals for tourism-related expenses.
“Law 306 was passed during the last 20 years for tourism investment incentive,” attorney Byron Mejia said. Mejia is a native Nicaraguan who spent 20 years working as an attorney for American Express in Miami. Mejia moved back to Nicaragua 10 years ago and has been specializing in real estate law there ever since.
“Specifically, they have 10 different categories of tourism-related projects in which the government gives tax incentives,” he said. “For example, if you want to establish a hotel or a bed and breakfast, they give you free import duties, you only pay 20 percent on your income tax, you pay no sales tax, and you pay no property tax.”
Nicaragua’s young population could also help lure foreign investments. Nicaragua’s median age is 20.9, and 96.9 percent of Nicaraguans are under 64, according to the CIA World Factbook. Nicaragua’s high percentage of young people means that it has a large population of workers available.
“The education system is booming ahead, and there’s going to be a really nice employment pool available here in the next five years,” Southwell said. “I think you’re going to have a really good opportunity to employ service industries, not to mention textiles and the tourism industry.”
Nicaragua has made great strides in recent years in shrugging off the perception many people have that it is a volatile and unsafe country. Still, many potential investors remain on the sidelines because they view Nicaragua as riddled with poverty and political unrest. According to Southwell, that’s just not true.
“It’s one of the safest countries in the hemisphere,” he said. “They really, really are kind, gentle people. They’ve been through hell and back. They want peace, they want prosperity.”
Though Nicaragua is the largest country in Central America, it is a poor country, with a per capita GDP of $3,000, according to the CIA World Factbook. It is the second-poorest country in the western hemisphere, trailing only Haiti. Its poverty was largely caused by the twentieth century’s political turmoil, suppression and revolution. This tumultuous environment left Nicaragua’s infrastructure badly damaged.
Many Americans are only aware of Nicaragua because of the Iran-Contra Affair, a political scandal from the 1980s. The Reagan Administration sold arms to Iran and used those profits to fund guerilla forces, called Contras, who were opposed to the leftist Nicaraguan revolutionaries, called Sandinistas.
Daniel Ortega was one of the leading Sandinistas in Nicaragua in the 1970s and 1980s; he served as president from 1985 to 1990, and was re-elected in November 2006 for another five-year term, much to the chagrin of many observers. They fear Ortega will revert to the leftist leanings he displayed in his past, which could hinder Nicaragua’s development and economic growth by alienating potential investors and causing the bustling tourism industry to grind to a halt.
Such a regression is not likely, according to Southwell. “Having been involved personally with the Sandinistas over the years—I lease two buildings from them and I know Daniel [Ortega] personally—I know that he’s probably going to be more interested in his legacy than in any of the things he was [interested in] in his leftist past,” he said.
Southwell is not alone in his optimism that Nicaragua is on the path toward stabilization and growth. “I don’t think they [the Sandinistas] want to go back to the past,” Mejia said. “We already had our civil war, and now it’s time to move the country forward.”
Concerns about private property rights, especially for foreigners, are keeping many investors at bay. During Ortega’s previous term, some private property was seized, leaving many wary about purchasing real estate in Nicaragua. That shouldn’t be too much of a concern anymore, according to Mejia. He has specific advice for investors concerned about title issues.
“What is advisable today is to stay away from municipal property, temporary titles or agrarian reformed titles, because even private banks do not make loans to these types of titles,” Mejia said.
Kevin Fleming, who moved to Nicaragua two years ago, is a real estate developer from Vancouver, Canada. He agreed that private property seizure is a thing of the past. “Daniel Ortega has gone on record many times as saying the days of stealing from the rich and giving to the poor, those days are gone. All that did was create poverty,” Fleming said.
Ortega has acknowledged that he must change his ways in order to help Nicaragua recover from its civil war and fulfill its potential. His efforts will be buoyed by two key economic events of 2005.
The G8—a coalition of the world’s seven leading industrial nations and Russia—granted foreign debt relief to Nicaragua in 2005. There are strings attached: in exchange for the relief, Nicaragua must strive to eradicate poverty, be forthcoming with the government’s finances, achieve political stability and support human rights.
Also, Nicaragua signed the Central American Free Trade Agreement (CATFA). Since signing CAFTA, which strengthened Nicaragua’s relationships with its Central American neighbors and the U.S., Nicaragua has exported 33 percent more goods to the U.S. than before. These events have allowed Nicaragua to grow its economy, and along with it, its infrastructure.
The biggest hurdle Nicaragua faces is updating its infrastructure. The country is devoting a lot of money and effort to improving infrastructure, particularly in areas most frequented by tourists.
“The airport in Managua has been rebuilt; it’s brand new. We have several ports in the Pacific that have been rebuilt and are ready to go,” Mejia said. “And it’s my understanding that there are plans of improving the inner roads of the country for production purposes.”
Few medical facilities are up to U.S. standards, but a state-of-the-art facility was recently opened along the Masaya Highway, which runs between two major cities: Managua and Granada. Managua, the capital, has better medical resources than most of the country. In addition, Managua’s airport is now one of the nicest in Central America, thanks to a recent $50 million overhaul.
Still, only one in four roads in Nicaragua is paved, and public transportation is substandard. The rainy season—from May to October—renders many roads useless. The government is focusing its building and repair efforts on the roads most often traveled by tourists, which is expected to boost tourism and create new investment opportunities.
Access to technology is also improving. “Now it is normal to see farmers riding on their horses on the backroads of the country with a cell phone on their hip,” Fleming said.
Technological development has made living and working in Nicaragua easier for Southwell than Costa Rica ever was. “Here, you can go down to the corner and get a cell phone, you’ve got three Internet companies to choose from—I mean, it’s just a lot easier to get things done here,” he said.
Electricity is sometimes spotty, but it is steadily improving. “The power used to go out here four to six hours a day, almost every day, before Daniel Ortega got elected,” Finch said. “Since he’s been elected, I can think of maybe three days that the power went out for maybe one or two hours. That’s because they’re building new substations.”
The new substations are only one component of the growth of Nicaragua’s energy infrastructure. Energy is undergoing a surge in development and investment popularity. “The government is promoting a lot of investment in energy,” Mejia said. “We are rich in rivers, volcanoes and other sources of energy revenue, such as wind power, solar power, geothermal power and hydroelectric power. Laws are being renewed to give investors sufficient incentive to invest in these types of energy products.”
The excitement and energy surrounding Nicaragua will grow as more people become aware of its potential. The right pieces seem to be in place for Nicaragua to catch up with its neighbors. A continued focus on building up infrastructure, combined with aggressive incentive and property rights laws to attract foreign investors, should provide a bright future for Nicaragua if the political climate remains stable.
From its natural beauty to its historical architecture, Nicaragua real estate has a lot to offer; if Nicaragua can capitalize on its potential, investors could see significant returns.
Investing in Palladium
Precious metal enthusiasts who have invested in platinum might also be interested in investing in palladium, platinum’s less-expensive cousin. The silvery-white metal palladium, like platinum, is a platinum group metal; discovered in 1803 by William Hyde Wollaston, it was named after the asteroid Pallas that had been discovered the year before. Although “palladium” references the Pallas Athena, the Greek goddess of wisdom, investors will need to determine for themselves if a palladium investment is a wise opportunity.
Palladium price swings
Palladium has a variety of uses. The oxidation-resistant metal is most commonly used in the manufacturing of car exhaust systems, and like platinum, reacts in a manner that combats pollutants. Palladium is also used as an alloy in jewelry, especially in the production of white gold. Palladium may increase in popularity among jewelers and jewelry buyers, as its prices tend to be much lower than that of platinum jewelry.
Another notable feature is palladium’s ability to soak up huge volumes of hydrogen, which has become a focus for cold fusion and fuel cell research, according to PalladiumDealer.com.
Although solid demand for palladium is apparent, palladium supply is much less predictable.
Palladium and platinum are both among the world’s scarcest metals, according to PalladiumDealer.com. Furthermore, frequent production and supply problems in the two major sources of platinum and palladium—Russia and South Africa—add to volatility in the metals’ markets, according to the CMI Gold & Silver dealer website. More than half of the world’s annual supply comes from Russia alone, which has routinely withheld supplies of palladium from world markets for its own political and economic gain, according to the website for broker company Superior Gold Group.
The Canadian mint has been producing palladium bullion coins since 2005Supply disruptions can potentially result in extreme price swings for palladium, as evidenced by the panic that occurred in early 2001 among auto manufacturers.
“[Because of] supply disruptions and a resulting panic by auto manufacturers (most notably, Ford Motor Co.), the price of palladium reached an all-time high of nearly $1,100 an ounce, approximately the same price as platinum at the time,” according to the Superior Gold Group website.
The price spike nearly crushed investor demand, according to CMI Gold & Silver; however, palladium prices dropped back to $200 per ounce by the end of that year and investment demand has since returned.
In the past five years, prices have fluctuated from less than $200 per ounce in March 2003 to $579 at the end of February 2008, according to Kitco.com.
Recent prices are still significantly higher than what they were five years ago. Palladium's spot price closed at $453 per ounce on March 25, according to Kitco.com
Prices for platinum, however, are significantly high in comparison. Five years ago, platinum sold for more than $600 per ounce, and a recent spike in the past month drove prices up to $2,276 per ounce.
The platinum spot price closed at $1980 per ounce on March 25, according to Kitco.com.
Investing in palladium
There is no consensus about the wisdom of investing in palladium. For instance, palladium was named the “best investment among precious metals” in 2007, according to an article in The International Herald Tribune last May. But CMI Gold & Silver rarely recommends investments in palladium or platinum because “it is difficult—if not impossible—to anticipate the next bombshell to be dropped on the palladium or platinum market,” according to the website.
Because of the exposure that results from the metal’s market volatility, investors who are interested in buying palladium should try to buy when it is trading at or below its 200-day moving average, according to the CMI Gold & Silver website.
When palladium or platinum trade at double the price of gold, it is also recommended that investors consider trading palladium or platinum for gold or silver, according to the website.
Investors can purchase palladium in the form of bullion bars or coins.
For bullion bars, CMI recommends that investors buy Credit Suisse or PAMP one-ounce bullion bars, which contain 99.95 percent palladium, the industry standard for palladium bullion bars sold into the investment market. Credit Suisse and PAMP are two of the best-known precious metal names in Europe.
While palladium bullion has been around for some time, palladium coins are a relatively new phenomenon. In 2005, the Royal Canadian Mint (RCM) began striking palladium Maple Leaf coins, according to the CMI Gold & Silver website. Each coin contains one ounce of 99.95 percent of pure palladium and can be used as $50 legal tender in Canada; spending palladium coins, however, is not recommended, as it will almost certainly result in major losses on investment.
Generally, palladium coins carry lower premiums than palladium bullion bars. Investors who are interested in purchasing palladium coins should consider buying palladium Maple Leaf coins dated 2005, which may achieve collector status.
“The first run of Palladium Maple Leaf coins were limited to 40,000 and were dated 2005 (minted early November 2005). This means that 2005-dated Palladium Maple Leaf coins probably will turn out to be a small mintage relative to years during which the coins will be minted for twelve months,” according to the CMI Gold & Silver website. “Therein lies a unique opportunity for the palladium investment community.”
Palladium price swings
Palladium has a variety of uses. The oxidation-resistant metal is most commonly used in the manufacturing of car exhaust systems, and like platinum, reacts in a manner that combats pollutants. Palladium is also used as an alloy in jewelry, especially in the production of white gold. Palladium may increase in popularity among jewelers and jewelry buyers, as its prices tend to be much lower than that of platinum jewelry.
Another notable feature is palladium’s ability to soak up huge volumes of hydrogen, which has become a focus for cold fusion and fuel cell research, according to PalladiumDealer.com.
Although solid demand for palladium is apparent, palladium supply is much less predictable.
Palladium and platinum are both among the world’s scarcest metals, according to PalladiumDealer.com. Furthermore, frequent production and supply problems in the two major sources of platinum and palladium—Russia and South Africa—add to volatility in the metals’ markets, according to the CMI Gold & Silver dealer website. More than half of the world’s annual supply comes from Russia alone, which has routinely withheld supplies of palladium from world markets for its own political and economic gain, according to the website for broker company Superior Gold Group.
The Canadian mint has been producing palladium bullion coins since 2005Supply disruptions can potentially result in extreme price swings for palladium, as evidenced by the panic that occurred in early 2001 among auto manufacturers.
“[Because of] supply disruptions and a resulting panic by auto manufacturers (most notably, Ford Motor Co.), the price of palladium reached an all-time high of nearly $1,100 an ounce, approximately the same price as platinum at the time,” according to the Superior Gold Group website.
The price spike nearly crushed investor demand, according to CMI Gold & Silver; however, palladium prices dropped back to $200 per ounce by the end of that year and investment demand has since returned.
In the past five years, prices have fluctuated from less than $200 per ounce in March 2003 to $579 at the end of February 2008, according to Kitco.com.
Recent prices are still significantly higher than what they were five years ago. Palladium's spot price closed at $453 per ounce on March 25, according to Kitco.com
Prices for platinum, however, are significantly high in comparison. Five years ago, platinum sold for more than $600 per ounce, and a recent spike in the past month drove prices up to $2,276 per ounce.
The platinum spot price closed at $1980 per ounce on March 25, according to Kitco.com.
Investing in palladium
There is no consensus about the wisdom of investing in palladium. For instance, palladium was named the “best investment among precious metals” in 2007, according to an article in The International Herald Tribune last May. But CMI Gold & Silver rarely recommends investments in palladium or platinum because “it is difficult—if not impossible—to anticipate the next bombshell to be dropped on the palladium or platinum market,” according to the website.
Because of the exposure that results from the metal’s market volatility, investors who are interested in buying palladium should try to buy when it is trading at or below its 200-day moving average, according to the CMI Gold & Silver website.
When palladium or platinum trade at double the price of gold, it is also recommended that investors consider trading palladium or platinum for gold or silver, according to the website.
Investors can purchase palladium in the form of bullion bars or coins.
For bullion bars, CMI recommends that investors buy Credit Suisse or PAMP one-ounce bullion bars, which contain 99.95 percent palladium, the industry standard for palladium bullion bars sold into the investment market. Credit Suisse and PAMP are two of the best-known precious metal names in Europe.
While palladium bullion has been around for some time, palladium coins are a relatively new phenomenon. In 2005, the Royal Canadian Mint (RCM) began striking palladium Maple Leaf coins, according to the CMI Gold & Silver website. Each coin contains one ounce of 99.95 percent of pure palladium and can be used as $50 legal tender in Canada; spending palladium coins, however, is not recommended, as it will almost certainly result in major losses on investment.
Generally, palladium coins carry lower premiums than palladium bullion bars. Investors who are interested in purchasing palladium coins should consider buying palladium Maple Leaf coins dated 2005, which may achieve collector status.
“The first run of Palladium Maple Leaf coins were limited to 40,000 and were dated 2005 (minted early November 2005). This means that 2005-dated Palladium Maple Leaf coins probably will turn out to be a small mintage relative to years during which the coins will be minted for twelve months,” according to the CMI Gold & Silver website. “Therein lies a unique opportunity for the palladium investment community.”
Africa Tourism: Growth and Opportunity
Second only to Asia in both population and size, the continent of Africa is an amalgamation of countries, people, places and some of the world’s most unique geography. However, Africa remains the world’s poorest continent and still suffers from widespread disease, corrupt government and slavery. Hardly the ideal tourist destination—or so one would think.
Tourism has become the world’s single largest industry, according to the United Nations World Tourism Organization (UNWTO); in 2006, world tourism receipts exceeded $700 billion. The act of finding emerging tourist destinations has become big business and tourism can bring great benefit to nations in need. A number of Africa's 53 countries are beginning to feel what destinations such as China, Vietnam and Montenegro have already: the light of being a tourist destination shed upon them.
Camel treks in the Sahara are now a popular tourist activityAfrica’s tourism grew by nearly 10 percent in 2005, outpacing the world average of 5.5 percent, according to a report by the UNWTO. Mozambique and Kenya were the fastest-growing tourist destinations that year. In 2006 the UNWTO reported continued tourism growth of 10.6 percent, with a forecast of 4 percent growth in 2007.
Kenya attracted almost one million tourists in 2006 and received $857 million in tourism revenue that year. Kenya has already implemented a plan for success by setting aside 10 percent of the country for wildlife and biodiversity creation, according to Now Public, a news blog. Some 11 percent of Kenya’s workforce is employed by the tourism industry.
There is some disparity in the numbers that should be recognized for Africa as a whole. Much of the recent tourism growth has been in sub-Saharan Africa, which is the lower three quarters of the continent, south of the Sahara Desert. Based on UNWTO world tourism receipts numbers, sub-Saharan Africa received $14.5 billion—more than twice as much as the $7 billion received by North Africa.
While people are beginning to realize Africa is a major destination, there are still a number of issues which require immediate attention in order for the continent's many countries to be traversed safely. A 2004 publication by UNWTO about Africa looked at some of these problems, namely safe air travel, to help improve tourism and tourist safety. The UNWTO has been working closely with African officials to improve the continent as a viable tourism destination by protecting those visiting, as well as the continent's inhabitants and ecosystems.
Tanzania's increasing stability may draw more tourismImproving infrastructure and appealing to a more diverse tourism audience are just a couple of things Africa will have to do in order to continue its growth. Europe, its neighbor to the north, still leads the world in tourist visits at 443 million in 2005, half of that year’s total amount. While European tourism has continued to grow slowly, Africa’s explosive growth rate could be a sign of good things to come.
Some African countries have been exemplary in their efforts to curb internal strife and emerge as popular tourist destinations. Ethiopia, which was named by Frommer’s as a top 10 travel destination in 2007, worked through political issues and widespread famine to create necessary infrastructure for travelers. Tanzania has also become a more stable destination that promotes safety in order to attract tourists, according to Now Public.
Although some key issues, namely in the vein of safety, continue to hurt some destinations in Africa, change is coming and Africa’s growth in the world tourism market has been a sign of improvement. The UNWTO expects Africa’s tourism growth to continue, as it works to make the continent an improved destination for a wider range of tourists.
Tourism has become the world’s single largest industry, according to the United Nations World Tourism Organization (UNWTO); in 2006, world tourism receipts exceeded $700 billion. The act of finding emerging tourist destinations has become big business and tourism can bring great benefit to nations in need. A number of Africa's 53 countries are beginning to feel what destinations such as China, Vietnam and Montenegro have already: the light of being a tourist destination shed upon them.
Camel treks in the Sahara are now a popular tourist activityAfrica’s tourism grew by nearly 10 percent in 2005, outpacing the world average of 5.5 percent, according to a report by the UNWTO. Mozambique and Kenya were the fastest-growing tourist destinations that year. In 2006 the UNWTO reported continued tourism growth of 10.6 percent, with a forecast of 4 percent growth in 2007.
Kenya attracted almost one million tourists in 2006 and received $857 million in tourism revenue that year. Kenya has already implemented a plan for success by setting aside 10 percent of the country for wildlife and biodiversity creation, according to Now Public, a news blog. Some 11 percent of Kenya’s workforce is employed by the tourism industry.
There is some disparity in the numbers that should be recognized for Africa as a whole. Much of the recent tourism growth has been in sub-Saharan Africa, which is the lower three quarters of the continent, south of the Sahara Desert. Based on UNWTO world tourism receipts numbers, sub-Saharan Africa received $14.5 billion—more than twice as much as the $7 billion received by North Africa.
While people are beginning to realize Africa is a major destination, there are still a number of issues which require immediate attention in order for the continent's many countries to be traversed safely. A 2004 publication by UNWTO about Africa looked at some of these problems, namely safe air travel, to help improve tourism and tourist safety. The UNWTO has been working closely with African officials to improve the continent as a viable tourism destination by protecting those visiting, as well as the continent's inhabitants and ecosystems.
Tanzania's increasing stability may draw more tourismImproving infrastructure and appealing to a more diverse tourism audience are just a couple of things Africa will have to do in order to continue its growth. Europe, its neighbor to the north, still leads the world in tourist visits at 443 million in 2005, half of that year’s total amount. While European tourism has continued to grow slowly, Africa’s explosive growth rate could be a sign of good things to come.
Some African countries have been exemplary in their efforts to curb internal strife and emerge as popular tourist destinations. Ethiopia, which was named by Frommer’s as a top 10 travel destination in 2007, worked through political issues and widespread famine to create necessary infrastructure for travelers. Tanzania has also become a more stable destination that promotes safety in order to attract tourists, according to Now Public.
Although some key issues, namely in the vein of safety, continue to hurt some destinations in Africa, change is coming and Africa’s growth in the world tourism market has been a sign of improvement. The UNWTO expects Africa’s tourism growth to continue, as it works to make the continent an improved destination for a wider range of tourists.
The Infinite Banking Concept: Be Your Own Bank
You probably don’t sit around calculating how much interest you pay to banks and other lenders each year, but chances are you have financed large purchases, such as homes, education, cars and major appliances.
The interest paid on these items can add up to hundreds of thousands of dollars, perhaps more, in the course of a lifetime. People often have to decide how much money to allocate for their retirement and how much to paying down current debt.
But what if it were possible for people to save for retirement in a vehicle that allowed them to finance their life in a way that provided advantages over borrowing from a bank or lender?
The interest you pay to banks can add upThat is exactly what R. Nelson Nash had in mind when he pioneered the Infinite Banking Concept. In essence, Infinite Banking, and other similar systems adapted from Nash’s original idea, involves paying into a whole life insurance policy with an insurance company that allows policy holders to take loans collateralized on their individual policies.
How the Infinite Banking Concept works
Infinite Banking and other individualized banking systems rely on participating whole life insurance policies, which build up equity and pay dividends. Policy holders pay premiums—which vary based on the amount of the death benefit chosen, along with other factors, such as the age and health of the policy holder—into a whole life insurance policy for a period of five to seven years and let the policy increase in value. This is known as the capitalization phase.
“Generally, we try to fund most of the money into it in the first five years,” Tom McDermott, president of Asset Protectors & Advisors Group, said. “The longer you can allow it to accumulate, obviously, the more you can pull out for retirement savings, the more you can pull out for larger items.”
After the capitalization phase, the policy becomes self-supporting; the returns on the policy at that point will be enough to cover the premiums. The annual dividends are based on how well the insurance company did that year. Insurance companies must invest the premiums received “in order to produce the benefits that are promised,” Nash wrote.
Through the use of a paid-up additions rider, policy holders benefit from having their dividends reinvested into their policy, thus increasing the value of their policy and subsequent death benefit.
Policy holders are able to borrow up to 100 percent of the cash value of their whole life policy at any time with no tax penalties. A policy holder “outranks every potential borrower in access to the money that must be lent,” Nash wrote.
With this structure in place, policy holders are able to essentially act as their own personal bankers. They can loan themselves money from their own life insurance policies, and the interest payments go back to their own accounts.
People who participate in individualized banking are able to borrow money from—and repay—themselves when financing major purchases, rather than relying on and paying interest to banks and other outside lenders.
“Your average American family is not saving money...at the same time, they’re spending approximately 34.5 cents on every dollar in interest to finance their lifestyle through banks and different finance companies,” David Kane, president of the benefits division at York International, said.
By depositing cash into a life insurance policy rather than using it for a major purchase, investors retain the ability to earn interest on that cash. Further, by borrowing from their own life insurance policy, they avoid having to spend that 34.5 cents per dollar on outside financing, and can instead pay that to their own policy.
The borrowed money can be used to finance any purchase, whether or not a lender would typically grant a loan for it. The policy holder, as banker, gets to set the loan requirements.
“You are totally and completely independent from all other sources of financing,” Rebecca Rice, owner of Rebecca Rice & Associates, said. “You have control of your own banking system and you’re able to control the amount of money that goes into your bank.”
Policy holders must make sure that they pay back any loans they take out. If they don’t, the system of growing the policy’s value will fail.
People who follow through on utilizing the insurance policy as a bank are able to supercharge the returns guaranteed by the policy while financing things they would have financed anyway. The difference is that all the interest payments go back to the policy, not to a bank or other lender.
“The Infinite Bank is really like a complete financial system. It will provide money for your lifestyle, for your retirement and for your heirs,” Kane said. “It works well in all phases of wealth.”
The advantages
Perhaps the most obvious advantage of the Infinite Banking Concept is that it offers life insurance coverage—something most people need anyway. Life insurance is a low risk investment; there are guaranteed returns, and life insurance companies are noted for their longevity.
There are also tax benefits. “In a properly structured life insurance program, if you borrow the money out of the policy, the proceeds are tax free,” McDermott said. “As long as you don’t lapse the policy, no taxes are due. When the death benefit is paid, it is paid income tax free, minus the withdrawals. We structure these programs so that the income stream is tax free through age 100 and the policy has a no lapse provision in it so as not to generate a taxable event.”
In addition to providing capital for borrowing, policies can also provide a stream of retirement income for policy holders. There are no age limits on policy withdrawals.
“This is the front of the wave for retirement planning,” McDermott said. “Setting up something like an Infinite Banking plan...allows you to save for retirement planning and [know] exactly what your tax exposure is going to be when you start pulling the money out. And if you pull it out correctly, you’re going to have zero tax exposure.”
Insurance policies are also safe from exposure to litigation and creditors. “Insurance policies are protected from...taxes, creditors, litigation, things like that,” Steve Sappington, co-founder and registered principal of TWM Group, LLC, said. “We have, for example, a lot of doctors who use this Infinite Banking Concept...because it shelters assets.”
In addition to being safe, individualized banking is flexible. Policy holders can borrow money and use it for purchases for which financing is usually hard to come by, such as foreign real estate. Policy holders can even become lenders themselves, borrowing money to lend it to other people in order to earn further interest.
People who use the Infinite Banking Concept can use their policy in a variety of ways without turning any money over to a bank or other lender at any time. “It’s really phenomenal,” Rice said.
The disadvantages
Still, it is by no means a perfect system. It typically takes several years for policies to grow to the point that the returns equal the costs of the premium, and for there to be a significant enough value in the policy to warrant borrowing from it.
The initial stages of individualized banking are analogous to starting a small business; there are a few years where money is spent before any money comes in. In addition, policy holders must be dedicated to building up the value of their policies.
“Just plan on really funding that policy well for seven years, then you’re going to be able to do some really nice things as a result from that,” Sappington said. He compared the initial stages to a jet taking off. A jet uses a lot of fuel to take off but becomes much more efficient after the initial surge of fuel use.
In addition to building up their policies, policy holders must be dedicated to paying back loans, though there is certainly more flexibility involved, since policy holders are paying themselves back. If unforeseen circumstances arise, policy holders can change their repayment schedule as necessary, rather than worrying about foreclosure, repossession or damaged credit. However, failing to pay back loans will diminish the effectiveness and efficiency of the system.
People who want to use the Infinite Banking Concept will need someone familiar with it to help them set it up, and not all insurance brokers are aware of the system.
Those interested in Infinite Banking will need to do research to make informed decisions. Fees, commissions and the percentage of the premium that goes toward building the account’s value vary by company, and there are many ways to structure whole life policies.
The interest paid on these items can add up to hundreds of thousands of dollars, perhaps more, in the course of a lifetime. People often have to decide how much money to allocate for their retirement and how much to paying down current debt.
But what if it were possible for people to save for retirement in a vehicle that allowed them to finance their life in a way that provided advantages over borrowing from a bank or lender?
The interest you pay to banks can add upThat is exactly what R. Nelson Nash had in mind when he pioneered the Infinite Banking Concept. In essence, Infinite Banking, and other similar systems adapted from Nash’s original idea, involves paying into a whole life insurance policy with an insurance company that allows policy holders to take loans collateralized on their individual policies.
How the Infinite Banking Concept works
Infinite Banking and other individualized banking systems rely on participating whole life insurance policies, which build up equity and pay dividends. Policy holders pay premiums—which vary based on the amount of the death benefit chosen, along with other factors, such as the age and health of the policy holder—into a whole life insurance policy for a period of five to seven years and let the policy increase in value. This is known as the capitalization phase.
“Generally, we try to fund most of the money into it in the first five years,” Tom McDermott, president of Asset Protectors & Advisors Group, said. “The longer you can allow it to accumulate, obviously, the more you can pull out for retirement savings, the more you can pull out for larger items.”
After the capitalization phase, the policy becomes self-supporting; the returns on the policy at that point will be enough to cover the premiums. The annual dividends are based on how well the insurance company did that year. Insurance companies must invest the premiums received “in order to produce the benefits that are promised,” Nash wrote.
Through the use of a paid-up additions rider, policy holders benefit from having their dividends reinvested into their policy, thus increasing the value of their policy and subsequent death benefit.
Policy holders are able to borrow up to 100 percent of the cash value of their whole life policy at any time with no tax penalties. A policy holder “outranks every potential borrower in access to the money that must be lent,” Nash wrote.
With this structure in place, policy holders are able to essentially act as their own personal bankers. They can loan themselves money from their own life insurance policies, and the interest payments go back to their own accounts.
People who participate in individualized banking are able to borrow money from—and repay—themselves when financing major purchases, rather than relying on and paying interest to banks and other outside lenders.
“Your average American family is not saving money...at the same time, they’re spending approximately 34.5 cents on every dollar in interest to finance their lifestyle through banks and different finance companies,” David Kane, president of the benefits division at York International, said.
By depositing cash into a life insurance policy rather than using it for a major purchase, investors retain the ability to earn interest on that cash. Further, by borrowing from their own life insurance policy, they avoid having to spend that 34.5 cents per dollar on outside financing, and can instead pay that to their own policy.
The borrowed money can be used to finance any purchase, whether or not a lender would typically grant a loan for it. The policy holder, as banker, gets to set the loan requirements.
“You are totally and completely independent from all other sources of financing,” Rebecca Rice, owner of Rebecca Rice & Associates, said. “You have control of your own banking system and you’re able to control the amount of money that goes into your bank.”
Policy holders must make sure that they pay back any loans they take out. If they don’t, the system of growing the policy’s value will fail.
People who follow through on utilizing the insurance policy as a bank are able to supercharge the returns guaranteed by the policy while financing things they would have financed anyway. The difference is that all the interest payments go back to the policy, not to a bank or other lender.
“The Infinite Bank is really like a complete financial system. It will provide money for your lifestyle, for your retirement and for your heirs,” Kane said. “It works well in all phases of wealth.”
The advantages
Perhaps the most obvious advantage of the Infinite Banking Concept is that it offers life insurance coverage—something most people need anyway. Life insurance is a low risk investment; there are guaranteed returns, and life insurance companies are noted for their longevity.
There are also tax benefits. “In a properly structured life insurance program, if you borrow the money out of the policy, the proceeds are tax free,” McDermott said. “As long as you don’t lapse the policy, no taxes are due. When the death benefit is paid, it is paid income tax free, minus the withdrawals. We structure these programs so that the income stream is tax free through age 100 and the policy has a no lapse provision in it so as not to generate a taxable event.”
In addition to providing capital for borrowing, policies can also provide a stream of retirement income for policy holders. There are no age limits on policy withdrawals.
“This is the front of the wave for retirement planning,” McDermott said. “Setting up something like an Infinite Banking plan...allows you to save for retirement planning and [know] exactly what your tax exposure is going to be when you start pulling the money out. And if you pull it out correctly, you’re going to have zero tax exposure.”
Insurance policies are also safe from exposure to litigation and creditors. “Insurance policies are protected from...taxes, creditors, litigation, things like that,” Steve Sappington, co-founder and registered principal of TWM Group, LLC, said. “We have, for example, a lot of doctors who use this Infinite Banking Concept...because it shelters assets.”
In addition to being safe, individualized banking is flexible. Policy holders can borrow money and use it for purchases for which financing is usually hard to come by, such as foreign real estate. Policy holders can even become lenders themselves, borrowing money to lend it to other people in order to earn further interest.
People who use the Infinite Banking Concept can use their policy in a variety of ways without turning any money over to a bank or other lender at any time. “It’s really phenomenal,” Rice said.
The disadvantages
Still, it is by no means a perfect system. It typically takes several years for policies to grow to the point that the returns equal the costs of the premium, and for there to be a significant enough value in the policy to warrant borrowing from it.
The initial stages of individualized banking are analogous to starting a small business; there are a few years where money is spent before any money comes in. In addition, policy holders must be dedicated to building up the value of their policies.
“Just plan on really funding that policy well for seven years, then you’re going to be able to do some really nice things as a result from that,” Sappington said. He compared the initial stages to a jet taking off. A jet uses a lot of fuel to take off but becomes much more efficient after the initial surge of fuel use.
In addition to building up their policies, policy holders must be dedicated to paying back loans, though there is certainly more flexibility involved, since policy holders are paying themselves back. If unforeseen circumstances arise, policy holders can change their repayment schedule as necessary, rather than worrying about foreclosure, repossession or damaged credit. However, failing to pay back loans will diminish the effectiveness and efficiency of the system.
People who want to use the Infinite Banking Concept will need someone familiar with it to help them set it up, and not all insurance brokers are aware of the system.
Those interested in Infinite Banking will need to do research to make informed decisions. Fees, commissions and the percentage of the premium that goes toward building the account’s value vary by company, and there are many ways to structure whole life policies.
Italian Real Estate: È Bello
With its beautiful countryside and Mediterranean getaways, Italy has long been a favorite vacation destination with travelers across the world. The country’s popularity with tourists could make Italian real estate a prime opportunity for investors.
Italy is located in Southern Europe, where it juts out into the Mediterranean Sea. The country shares borders with Austria, France, San Marino, Slovenia and Switzerland. Italy occupies a total of 301,230 square kilometers, making it just slightly larger than the U.S. state of Arizona (295,260 square kilometers). The peninsula is home to an estimated 58,147,733 people as of July 2007, according to the CIA World Factbook.
Both rural and urban properties in Italy have potential for profitWhy Italian real estate?
“Italy's exquisite cultural patrimony, evocative countryside and ‘made in Italy’ craftsmanship all combine to preserve the value of Italian real property,” Donald J. Carroll, Esq.—special counsel to and member of Pirola Pennuto Zei & Associati in Rome and vice co-chair of the ABA Committee on International Investment in Real Estate—said in an e-mail interview.
The flourishing tourist industry in Italy provides a strong potential rental market for investors looking to buy overseas. In 2006, Italy ranked fifth on the World Tourism Organization’s list of top tourist destinations, with 41.1 million international arrivals. Southern Italy, in particular, has been of great interest to vacationers. Homes and apartments along the coast or in the relaxed country settings that tourists favor have the potential to provide substantial rental income.
“Among Europe’s main destinations, Italy was by far the best performer in 2006, after a number of weaker years. Arrivals were up 12 percent, following an excellent winter season at the start of the year, thanks in part to Turin’s hosting of the Winter Olympics,” according to a World Tourism Organization report.
And U.S. investors don’t need to worry about restrictions on property ownership because of their citizenship status. Foreigners enjoy the same property rights as Italian citizens, according to Marco Pessi, a partner with McDermott Will & Emery located in the Rome office. The only difference is that foreign nationals must pay an 11 percent purchase registration tax once the sale has been completed, while Italian citizens need only pay a 4 percent tax.
The Italian real estate market
“After 10 years of significant run-up in prices in major markets and sought-after country properties, prices now have leveled,” according to Carroll. Properties in both rural and urban areas can prove profitable, though Property-Abroad.com states that properties in rural regions of Italy have been especially popular in recent years.
Apartments are a popular choice when purchasing property in one of the larger cities, such as Rome or Milan. Apartments in areas such as Sardinia, Venice, Sicily, Milan and Florence are all popular among foreign investors, according to Property-Abroad.com. For those looking to cash in on the tourist industry, Carroll said that areas such as Sicily, Puglia and Campania are particularly attractive for investment.
Cost varies by location. Prices in Milan range anywhere from €8,000 per square meter for a city apartment to €24,000 per square meter for a penthouse with luxuries such as a terrace and swimming pool, according to a report from real estate agents Immobiliare Terelli & Partners. In Sicily “[p]rices, which have been rising as much as 20 percent a year, still seem reasonable, especially to north Europeans but even to Italians from Milan and Turin,” according to The International Herald Tribune. “Country and town properties are available for as little as €60,000, though for a building of particular architectural interest the starting price is nearer €250,000.”
In upcoming years, “[f]ocus will be on adding value—refurbishing, renegotiation of lease contracts, etc.—to existing portfolios rather than on new investments as these will make more economic sense,” according to Carroll. Pessi, on the other hand, believes that the future of the property market is still too hard to predict in the wake of the subprime crisis. Investors would be wise to proceed with caution, keeping an eye on the market, and perhaps put more energy into upgrading and renting a few properties rather than purchasing an abundance of homes.
Purchasing Italian real estate
Once a property has been located, the first step is an agreement between the buyer and the seller, known as a Proposal to Purchase. This offer contains a specific timeframe in which the seller can accept the offer. The buyer pays a minimum deposit of 10 percent of the purchase price. The deposit can be higher than this, and it is not uncommon for the deposits to run up to 50 percent, according to Property-Abroad.com. The Proposal to Purchase is legally binding, according to “Investment in International Real Estate,” a Pirola Pennuto Zei & Associati publication. If the seller accepts, the buyer is obligated to complete the transaction and the deposit will be forfeit if the buyer withdraws.
“An alternative and recommended approach is to incorporate the terms of the Proposal to Purchase directly into the purchase and sales contract ensuring to allow a period in which the buyer has the right to carry out a full due diligence on the property and/or entity(ies) holding the property and the possibility of the buyer backing out should the due diligence point to there being some legal or tax problem associated with the property,” according to the publication.
Focusing on improving one property may be wiseThe Preliminary Contract of Sale formalizes the buyer’s and seller’s agreement. This document provides details about the property, the buyer, the seller, the price, and any other terms of the transaction.
The entire process is overseen by a notary. In addition to the typical duties associated with a notary, this person will conduct the title search to ensure that the property is clear of liens and other problems, according to Property-Abroad.com. The notary witnesses the closing of the sale.
Investors should, of course, carry out proper due diligence before agreeing to purchase any property. This is especially important when purchasing property in a country with unfamiliar laws and regulations.
“Italian laws are complex [and] there are important concerns that go beyond clean title,” Carroll said. “For instance, a buyer needs to be certain that prior works carried out on a property have been done with proper permits and are in compliance with zoning regulations and that rights of neighboring landowners are respected....[S]evere penalties exist for failure to fulfill the obligation to purchase once the P&S is entered in to."
After purchasing a home in Italy, investors can either try to sell for a profit, rent the property to some of the many tourists visiting Italy every year and/or use the property themselves as a vacation home. Many websites are available on which property owners can advertise foreign homes for sale or rent. Craigslist offers a section dedicated to Italy where advertisements are completely free of charge.
Italy is located in Southern Europe, where it juts out into the Mediterranean Sea. The country shares borders with Austria, France, San Marino, Slovenia and Switzerland. Italy occupies a total of 301,230 square kilometers, making it just slightly larger than the U.S. state of Arizona (295,260 square kilometers). The peninsula is home to an estimated 58,147,733 people as of July 2007, according to the CIA World Factbook.
Both rural and urban properties in Italy have potential for profitWhy Italian real estate?
“Italy's exquisite cultural patrimony, evocative countryside and ‘made in Italy’ craftsmanship all combine to preserve the value of Italian real property,” Donald J. Carroll, Esq.—special counsel to and member of Pirola Pennuto Zei & Associati in Rome and vice co-chair of the ABA Committee on International Investment in Real Estate—said in an e-mail interview.
The flourishing tourist industry in Italy provides a strong potential rental market for investors looking to buy overseas. In 2006, Italy ranked fifth on the World Tourism Organization’s list of top tourist destinations, with 41.1 million international arrivals. Southern Italy, in particular, has been of great interest to vacationers. Homes and apartments along the coast or in the relaxed country settings that tourists favor have the potential to provide substantial rental income.
“Among Europe’s main destinations, Italy was by far the best performer in 2006, after a number of weaker years. Arrivals were up 12 percent, following an excellent winter season at the start of the year, thanks in part to Turin’s hosting of the Winter Olympics,” according to a World Tourism Organization report.
And U.S. investors don’t need to worry about restrictions on property ownership because of their citizenship status. Foreigners enjoy the same property rights as Italian citizens, according to Marco Pessi, a partner with McDermott Will & Emery located in the Rome office. The only difference is that foreign nationals must pay an 11 percent purchase registration tax once the sale has been completed, while Italian citizens need only pay a 4 percent tax.
The Italian real estate market
“After 10 years of significant run-up in prices in major markets and sought-after country properties, prices now have leveled,” according to Carroll. Properties in both rural and urban areas can prove profitable, though Property-Abroad.com states that properties in rural regions of Italy have been especially popular in recent years.
Apartments are a popular choice when purchasing property in one of the larger cities, such as Rome or Milan. Apartments in areas such as Sardinia, Venice, Sicily, Milan and Florence are all popular among foreign investors, according to Property-Abroad.com. For those looking to cash in on the tourist industry, Carroll said that areas such as Sicily, Puglia and Campania are particularly attractive for investment.
Cost varies by location. Prices in Milan range anywhere from €8,000 per square meter for a city apartment to €24,000 per square meter for a penthouse with luxuries such as a terrace and swimming pool, according to a report from real estate agents Immobiliare Terelli & Partners. In Sicily “[p]rices, which have been rising as much as 20 percent a year, still seem reasonable, especially to north Europeans but even to Italians from Milan and Turin,” according to The International Herald Tribune. “Country and town properties are available for as little as €60,000, though for a building of particular architectural interest the starting price is nearer €250,000.”
In upcoming years, “[f]ocus will be on adding value—refurbishing, renegotiation of lease contracts, etc.—to existing portfolios rather than on new investments as these will make more economic sense,” according to Carroll. Pessi, on the other hand, believes that the future of the property market is still too hard to predict in the wake of the subprime crisis. Investors would be wise to proceed with caution, keeping an eye on the market, and perhaps put more energy into upgrading and renting a few properties rather than purchasing an abundance of homes.
Purchasing Italian real estate
Once a property has been located, the first step is an agreement between the buyer and the seller, known as a Proposal to Purchase. This offer contains a specific timeframe in which the seller can accept the offer. The buyer pays a minimum deposit of 10 percent of the purchase price. The deposit can be higher than this, and it is not uncommon for the deposits to run up to 50 percent, according to Property-Abroad.com. The Proposal to Purchase is legally binding, according to “Investment in International Real Estate,” a Pirola Pennuto Zei & Associati publication. If the seller accepts, the buyer is obligated to complete the transaction and the deposit will be forfeit if the buyer withdraws.
“An alternative and recommended approach is to incorporate the terms of the Proposal to Purchase directly into the purchase and sales contract ensuring to allow a period in which the buyer has the right to carry out a full due diligence on the property and/or entity(ies) holding the property and the possibility of the buyer backing out should the due diligence point to there being some legal or tax problem associated with the property,” according to the publication.
Focusing on improving one property may be wiseThe Preliminary Contract of Sale formalizes the buyer’s and seller’s agreement. This document provides details about the property, the buyer, the seller, the price, and any other terms of the transaction.
The entire process is overseen by a notary. In addition to the typical duties associated with a notary, this person will conduct the title search to ensure that the property is clear of liens and other problems, according to Property-Abroad.com. The notary witnesses the closing of the sale.
Investors should, of course, carry out proper due diligence before agreeing to purchase any property. This is especially important when purchasing property in a country with unfamiliar laws and regulations.
“Italian laws are complex [and] there are important concerns that go beyond clean title,” Carroll said. “For instance, a buyer needs to be certain that prior works carried out on a property have been done with proper permits and are in compliance with zoning regulations and that rights of neighboring landowners are respected....[S]evere penalties exist for failure to fulfill the obligation to purchase once the P&S is entered in to."
After purchasing a home in Italy, investors can either try to sell for a profit, rent the property to some of the many tourists visiting Italy every year and/or use the property themselves as a vacation home. Many websites are available on which property owners can advertise foreign homes for sale or rent. Craigslist offers a section dedicated to Italy where advertisements are completely free of charge.
One Interest Rate, 13 Economies
Shared euro interest rates may spell trouble for some European Union members that are unable to customize interest rates to boost or temper the country's individual economy. Spain, for example, is facing an impending economic crisis but is unable to lower interest rates to keep its economy moving forward and avoid a crash.
Spurred by the euro's low interest rates, the Spanish property market has experienced rapid price appreciation in recent years. House prices in Spain have risen 14 percent in the last year, 57 percent in the last two years and 100 percent in the last five years, according to an August 2007 report by Halifax and European Central Bank.
Shared euro interest rates may cause economic difficulties for some European countriesSuch rapid growth is likely not sustainable for long, and problems with oversupply of inventory appear likely to cause a bust in the Spanish property market. The Finance Ministry announced that Spanish construction companies built 750,000 houses and apartments last year, more than France and Germany combined, while annual demand is running about 60 percent of that level, according to the International Herald Tribune.
Increasing interest rates will hurt demand for properties further, deterring investors and buyers. Most Spaniards have variable-rate home loans, and the euro interest rate increases have boosted defaults, according to Bloomberg.com.
In contrast, Germany's needs are quite different. German banks have been "extremely cautious and quite conservative" since Germany's reunification boom and bust, Julian Power of Berlin Capital Ltd. said. Because German lenders are more conservative, fixed-rate mortgages are more common and larger down payments are required. With less risky leverage and fixed rates, German property owners suffer less when interest rates rise.
Because Germany is the largest economy in Europe, it has the largest influence over the euro's interest rates. With a booming economy, Germany will benefit from increasing interest rates in an attempt to limit inflationary bubbles and slow the pace of growth.
Spain, on the other hand, would prefer rates be lowered in order to cushion its economy from an impending crash. Without the ability to control its interest rates, Spain has no way to restore balance to its economy and will remain helpless as its economy faces a probable recession.
When interest rates are shared between economies as dramatically different as Germany's and Spain's, there is no way to please everyone. And with 11 other countries and their needs factored into the mix, interest rate decisions become even more complicated; Austria, France, Finland, Ireland, Slovenia, Belgium, Greece, Italy, Luxembourg, the Netherlands and Portugal are other E.U. members that use the euro.
Other current and future E.U. members are also planning to shift over to the euro in coming years. Some non-E.U. countries also use the euro, which means their economies are also affected by euro monetary policy decisions even though they have no say in those decisions.
Each of these euro-based economies is unique and has its own needs, so it's hard to set interest rates that will benefit each country. Germany appears to be the pace setter for interest rates, so investors considering investments into euro-based economies will do well to consider the economy of that particular country and how it may be affected by interest rate decisions that will not be made for the sole benefit of that country.
Spurred by the euro's low interest rates, the Spanish property market has experienced rapid price appreciation in recent years. House prices in Spain have risen 14 percent in the last year, 57 percent in the last two years and 100 percent in the last five years, according to an August 2007 report by Halifax and European Central Bank.
Shared euro interest rates may cause economic difficulties for some European countriesSuch rapid growth is likely not sustainable for long, and problems with oversupply of inventory appear likely to cause a bust in the Spanish property market. The Finance Ministry announced that Spanish construction companies built 750,000 houses and apartments last year, more than France and Germany combined, while annual demand is running about 60 percent of that level, according to the International Herald Tribune.
Increasing interest rates will hurt demand for properties further, deterring investors and buyers. Most Spaniards have variable-rate home loans, and the euro interest rate increases have boosted defaults, according to Bloomberg.com.
In contrast, Germany's needs are quite different. German banks have been "extremely cautious and quite conservative" since Germany's reunification boom and bust, Julian Power of Berlin Capital Ltd. said. Because German lenders are more conservative, fixed-rate mortgages are more common and larger down payments are required. With less risky leverage and fixed rates, German property owners suffer less when interest rates rise.
Because Germany is the largest economy in Europe, it has the largest influence over the euro's interest rates. With a booming economy, Germany will benefit from increasing interest rates in an attempt to limit inflationary bubbles and slow the pace of growth.
Spain, on the other hand, would prefer rates be lowered in order to cushion its economy from an impending crash. Without the ability to control its interest rates, Spain has no way to restore balance to its economy and will remain helpless as its economy faces a probable recession.
When interest rates are shared between economies as dramatically different as Germany's and Spain's, there is no way to please everyone. And with 11 other countries and their needs factored into the mix, interest rate decisions become even more complicated; Austria, France, Finland, Ireland, Slovenia, Belgium, Greece, Italy, Luxembourg, the Netherlands and Portugal are other E.U. members that use the euro.
Other current and future E.U. members are also planning to shift over to the euro in coming years. Some non-E.U. countries also use the euro, which means their economies are also affected by euro monetary policy decisions even though they have no say in those decisions.
Each of these euro-based economies is unique and has its own needs, so it's hard to set interest rates that will benefit each country. Germany appears to be the pace setter for interest rates, so investors considering investments into euro-based economies will do well to consider the economy of that particular country and how it may be affected by interest rate decisions that will not be made for the sole benefit of that country.
Forex Investment Market
A lot of people are making good money on their equity positions here [in the U.S.]. But is that real money? Is that real value? If you take a look at what’s happening to the value of the U.S. dollar against some of the other major currencies...net overall you’re really not making that much. And that’s why sometimes you need to diversify into FX [foreign exchange],” Eugene Hawkin, chief operating officer of CMS Forex in New York City, said.
The foreign exchange market (also called forex or FX) is the largest asset class in the world, with a global trading volume of more than $2 trillion per day, Hawkin said. “It’s a market of both exchange and speculation on currency prices.”
The forex market is 10 to 15 times the size of the bond market and 50 times the size of the equities market, Richard Olsen, founder of Olsen Limited, a Zurich-based e-finance technology and service provider, and one of the founders of OANDA FX Trade, a retail foreign exchange dealer, said.
Despite its enormous size, the forex market has only recently become popular with retail investors, Hawkin said.
“Retail investors make up maybe 1 to 2 percent of the total volume traded on the market....The major players are large banks, multinational corporations, anyone from Toyota and Honda doing large transactions to both offset their currency exposures as well as actually transfer funds from continent to continent.”
Because the market is global, trades are happening 24 hours a day, seven days a week. Constant trading makes for a liquid, volatile market.
The forex market developed out of the need to exchange funds from currency to currency. While the U.S. dollar was pegged to the price of gold—until the late 1970s—and many other major currencies were pegged to the U.S. dollar, the market remained fairly stable. But “once the peg had been removed, currencies started moving against one another,” Hawkin said.
This opened up the opportunity for currency speculation. Today, “about 85 to 90 percent of all volume traded on the market is purely for speculative purposes,” Hawkin said.
Market Factors
One major market factor that impacts currency demand is interest rates. “Interest rates really create the basis for the supply and demand for different currencies,” Hawkin said. “When you see higher interest rates in a given currency, you see people moving money there, buying up that currency so they can invest and receive those higher interest earnings.”
Other factors include geopolitical events, such as wars and political crises, which also can “create fairly large currency moves,” Hawkin said.
Country economic indicators, political issues and natural disasters are all capable of affecting the forex market, forex investor James Cheong said.
Olsen said he has a different view on what causes currency moves. “I kind of don’t believe in the traditional arguments, where people say it’s political news, interest rates, etc. I think actually the true driving force of markets is people who get it wrong, that is, who are being forced out of positions,” he said.
For example, many investors who put money into yen, incorrectly speculating that it will rise, end up having to close out their positions and sell when it drops. “They’re suddenly sellers of yen against their own intent, and will drive the yen down even further,” Olsen said.
Benefits
Potential returns are one of the forex market’s biggest attractions. “Investors should focus on those markets that offer the biggest potential return....Foreign exchange offers by far the biggest return relative to other markets,” Olsen said.
Diversification is an obvious benefit to forex investing. Many investors are concentrated in an equities market that is “completely locked to what’s going on in a particular country,” Hawkin said.
“You could obviously go and diversify amongst multiple markets and multiple international exchanges, but that tends to be very difficult and not very cost effective for most retail investors,” he said.
Forex makes it easy for investors to invest into “essentially, the economies of any one of numerous countries,” Hawkin said.
See our investment key for more informationRetail brokers offer many efficient products that make forex trading simple and convenient; OANDA, for example, has a “very simple user interface where you just buy the currency, sell it again; it’s...kind of like going to the store, buying apples and selling the apples again,” Olsen said.
“Most of our clients trade online,” Hawkin said, although they can also trade by phone. Placing a trade can be “just as simple as hitting the ‘buy’ button on a certain currency.”
Because the market is so large, “you don’t have the same risks associated with FX as you do have with equities in terms of potential for fraud and market movement,” Hawkin said. “You buy currencies of predominantly stable large countries with pre-set economic policies.”
Risks
The foreign exchange market offers astounding amounts of leverage. Hawkin said his firm will give up to 400 to one leverage on smaller forex positions, in contrast with the 50 percent maximum margin leverage seen in equities markets.
Leverage “can magnify your profit potential and at the same time...it can also obviously magnify your losses,” Hawkin said. “It’s something we see a lot of traders forget.”
“I usually caution clients not to get carried away with the leverage. Yes, you see maybe average leverage of one to 100 or something in that rate, so essentially you only need to have 1 percent as margin, but you really shouldn’t be trading at those levels. Those are kind of the maximum levels where you should be going, and I think most professional traders would never trade so highly exposed,” he said.
Many newcomers to the market take advantage of leverage too aggressively without recognizing its dangers, Olsen said. Leveraged investors incur a loss when the market moves against them, and “the really dangerous thing about it is...this loss is deducted from his base capital, so as losses accumulate, his leverage de facto increases relative to the underlying capital...so it’s an exponential curve with a ratchet effect that can push him out of the market far faster than he expects,” he said.
These temptations make self discipline, patience and planning crucial qualities for a successful forex trader, Cheong said.
Getting Started
Investors who want to get started with forex trading can research it online, where there are many free educational resources available.
Forex trades can be made through futures accounts or money managers, for investors who already have those relationships established.
A variety of retail brokers are available specifically for forex trading. Many offer analysis tools, charts and other technology to support investors.
Online research will help to determine which broker is a good fit for the investor. Credibility, reputation and fees are the most important factors to consider.
Most retail forex brokers don’t charge commission for trades, Hawkin said. “Just like in any other market, there’s obviously a difference between the bid price and the ask price, which is known as the spread, and that’s really your only kind of transaction cost.”
That spread cost can vary widely; some brokers charge roughly 0.04 percent, while others charge as little as 0.01 percent. Although the difference may seem small, it can make a big impact on profits and is a crucial consideration in choosing a broker, Olsen said.
Although research is excellent for getting started, “practice is key,” Hawkin said.
Cheong said that new investors should practice with a virtual account before investing their money in the market.
Many firms offer free demo accounts so investors can simulate trading and get practice. Once the investor is comfortable with that, Hawkin said investing a small amount, perhaps $200, can be a good way “to learn a little bit about the market and just get the hang of it,” because “trading with real money...always changes things a little.”
The foreign exchange market (also called forex or FX) is the largest asset class in the world, with a global trading volume of more than $2 trillion per day, Hawkin said. “It’s a market of both exchange and speculation on currency prices.”
The forex market is 10 to 15 times the size of the bond market and 50 times the size of the equities market, Richard Olsen, founder of Olsen Limited, a Zurich-based e-finance technology and service provider, and one of the founders of OANDA FX Trade, a retail foreign exchange dealer, said.
Despite its enormous size, the forex market has only recently become popular with retail investors, Hawkin said.
“Retail investors make up maybe 1 to 2 percent of the total volume traded on the market....The major players are large banks, multinational corporations, anyone from Toyota and Honda doing large transactions to both offset their currency exposures as well as actually transfer funds from continent to continent.”
Because the market is global, trades are happening 24 hours a day, seven days a week. Constant trading makes for a liquid, volatile market.
The forex market developed out of the need to exchange funds from currency to currency. While the U.S. dollar was pegged to the price of gold—until the late 1970s—and many other major currencies were pegged to the U.S. dollar, the market remained fairly stable. But “once the peg had been removed, currencies started moving against one another,” Hawkin said.
This opened up the opportunity for currency speculation. Today, “about 85 to 90 percent of all volume traded on the market is purely for speculative purposes,” Hawkin said.
Market Factors
One major market factor that impacts currency demand is interest rates. “Interest rates really create the basis for the supply and demand for different currencies,” Hawkin said. “When you see higher interest rates in a given currency, you see people moving money there, buying up that currency so they can invest and receive those higher interest earnings.”
Other factors include geopolitical events, such as wars and political crises, which also can “create fairly large currency moves,” Hawkin said.
Country economic indicators, political issues and natural disasters are all capable of affecting the forex market, forex investor James Cheong said.
Olsen said he has a different view on what causes currency moves. “I kind of don’t believe in the traditional arguments, where people say it’s political news, interest rates, etc. I think actually the true driving force of markets is people who get it wrong, that is, who are being forced out of positions,” he said.
For example, many investors who put money into yen, incorrectly speculating that it will rise, end up having to close out their positions and sell when it drops. “They’re suddenly sellers of yen against their own intent, and will drive the yen down even further,” Olsen said.
Benefits
Potential returns are one of the forex market’s biggest attractions. “Investors should focus on those markets that offer the biggest potential return....Foreign exchange offers by far the biggest return relative to other markets,” Olsen said.
Diversification is an obvious benefit to forex investing. Many investors are concentrated in an equities market that is “completely locked to what’s going on in a particular country,” Hawkin said.
“You could obviously go and diversify amongst multiple markets and multiple international exchanges, but that tends to be very difficult and not very cost effective for most retail investors,” he said.
Forex makes it easy for investors to invest into “essentially, the economies of any one of numerous countries,” Hawkin said.
See our investment key for more informationRetail brokers offer many efficient products that make forex trading simple and convenient; OANDA, for example, has a “very simple user interface where you just buy the currency, sell it again; it’s...kind of like going to the store, buying apples and selling the apples again,” Olsen said.
“Most of our clients trade online,” Hawkin said, although they can also trade by phone. Placing a trade can be “just as simple as hitting the ‘buy’ button on a certain currency.”
Because the market is so large, “you don’t have the same risks associated with FX as you do have with equities in terms of potential for fraud and market movement,” Hawkin said. “You buy currencies of predominantly stable large countries with pre-set economic policies.”
Risks
The foreign exchange market offers astounding amounts of leverage. Hawkin said his firm will give up to 400 to one leverage on smaller forex positions, in contrast with the 50 percent maximum margin leverage seen in equities markets.
Leverage “can magnify your profit potential and at the same time...it can also obviously magnify your losses,” Hawkin said. “It’s something we see a lot of traders forget.”
“I usually caution clients not to get carried away with the leverage. Yes, you see maybe average leverage of one to 100 or something in that rate, so essentially you only need to have 1 percent as margin, but you really shouldn’t be trading at those levels. Those are kind of the maximum levels where you should be going, and I think most professional traders would never trade so highly exposed,” he said.
Many newcomers to the market take advantage of leverage too aggressively without recognizing its dangers, Olsen said. Leveraged investors incur a loss when the market moves against them, and “the really dangerous thing about it is...this loss is deducted from his base capital, so as losses accumulate, his leverage de facto increases relative to the underlying capital...so it’s an exponential curve with a ratchet effect that can push him out of the market far faster than he expects,” he said.
These temptations make self discipline, patience and planning crucial qualities for a successful forex trader, Cheong said.
Getting Started
Investors who want to get started with forex trading can research it online, where there are many free educational resources available.
Forex trades can be made through futures accounts or money managers, for investors who already have those relationships established.
A variety of retail brokers are available specifically for forex trading. Many offer analysis tools, charts and other technology to support investors.
Online research will help to determine which broker is a good fit for the investor. Credibility, reputation and fees are the most important factors to consider.
Most retail forex brokers don’t charge commission for trades, Hawkin said. “Just like in any other market, there’s obviously a difference between the bid price and the ask price, which is known as the spread, and that’s really your only kind of transaction cost.”
That spread cost can vary widely; some brokers charge roughly 0.04 percent, while others charge as little as 0.01 percent. Although the difference may seem small, it can make a big impact on profits and is a crucial consideration in choosing a broker, Olsen said.
Although research is excellent for getting started, “practice is key,” Hawkin said.
Cheong said that new investors should practice with a virtual account before investing their money in the market.
Many firms offer free demo accounts so investors can simulate trading and get practice. Once the investor is comfortable with that, Hawkin said investing a small amount, perhaps $200, can be a good way “to learn a little bit about the market and just get the hang of it,” because “trading with real money...always changes things a little.”
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