Delta Widget, Inc. has just made you a tender offer to buy back its shares of stock, which you bought from your broker a few years ago. The stock price hasn’t grown as expected and the tender offer is just slightly over market value. It’s tempting to take the offer. On the other hand, when Delta Widget buys its own stock back, there will be less stock outstanding, and that could help boost its price.

The dilemmas of investing - will they never cease?

To weave our way through this problem, let’s first examine the two ways a company can initiate a buyback program, or “stock repurchase agreement” as it’s often called. The first way is to make a tender offer to its shareholders. A “tender offer” is simply an offer to its current shareholders to “tender” (i.e., sell) some portion of their shares back to the company. The company states the number of shares it is willing to buy, at what price, and for what period of time. This is one way that is often used to buy back stock from smaller shareholders.

The second way is for the company to buy its own stock on the open market, at whatever market price the shares command. When the company announces this type of program, it will usually state the number of shares it offers to buy, and the length of time it will keep the offer open.

If Delta Widget, Inc. were to announce such a program, it might announce that it intends to buy back $50 million worth of its stock over a two-year period. Since the company doesn’t know what the price per share will be over the next two years, the repurchase program will be expressed as a dollar amount rather than a set number of shares.

Whatever method is used by a company, the real question is why the company wants to buy back its stock in the first place?

The answer to that question is rather simple. Let’s suppose that, before the buyback, Delta Widget had a market capitalization of $250 million, that it had 10 million shares outstanding, and that the market price per share was $25.00. Under this scenario, each share of stock would represent .0000001 of company ownership.

If the company spends $50 million to buy its shares back at $25 per share, it will be able to repurchase 2 million of its shares. That will leave 8 million shares outstanding. In that case, each outstanding share would then represent .000000125 of company ownership. Theoretically, the price per share would then be $31.25 (8 million x .000000125). Not a bad increase at all!

Naturally, not all companies are motivated to increase share value in this manner. Instead, a growing reason for repurchase plans is to reduce the number of shares outstanding, as opposed to increasing the price per share. Companies that have liberally doled out stock options to employees in the past, now find themselves offering buyback programs because the exercise of the stock options has increased the number of the company’s outstanding shares. An increased number of outstanding shares can adversely affect important ratios, like earnings per share and price/earnings (P/E), all of which can negatively impact share price.

A repurchase plan can also cause problems if a company overpays for its own stock. If natural market forces or a business downturn creates a decline in stock price, the company will not only have failed to increase stockholder value, but it also will have consumed much-needed capital, capital that could have been used for other business purposes.

In the final analysis, the evaluation of a stock buyback plan is nothing more than an evaluation of the company itself. If the company’s stock price is undervalued and buying back some stock will result in an overall reduction in the number of shares outstanding, then holding on to your shares could be a good bet. On the other hand, if it appears that company management is trying to manipulate the stock price to make the company appear better than it really is, then you should think about divorcing yourself from the company.

Glenn (”Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business.

He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network. Its web site is http://www.livingtrustnetwork.com.

Copyright 2006. Living Trust Network, LLC. All Rights Reserved

Many investors think that investing in mutual funds is free. What nonsense! Funds collect more than $50 billion a year in fees from investors. That is truly a ton of money. The first way you get hosed in a mutual fund is due to high fees charged. These fees can dramatically reduce your returns over time!

The way that these fees are deducted automatically from a fund’s returns makes them invisible because you never see an invoice or have to write a check. If you invest $10,000.00 in a domestic stock mutual fund with an expense ratio of 2% and a sales load of 3%, and let’s imagine that you get annual returns of 7.5% for twenty years, your money would almost triple to $27,508.00.

The bad news is that you would have lost $14,970 in fees and foregone earnings over the twenty years. Yikes…that really hurts! Why not just bypass the system and buy your own stocks as I teach finance students and home study investors?
These funds are also sold and managed on pure hype, short term trading, and with key information withheld from the public.

All of these factors I teach finance students and investors to avoid! The industry confuses investors by focusing on past performance, which should not be a factor to consider. Many mutual funds are able to cheat the public with excessive fees because investors don’t understand how these big costs destroy their profit. Mutual funds have no interest in educating investors because it is easier to hoodwink the ignorant!

Don’t put your trust in mutual funds unless they are fully indexed. Indexing means that the mutual fund simply uses a computer to buy and sell stocks in the mutual fund portfolio so as to mimic the composition of a major stock market index like the S&P 500. This means that there is no fund manager sucking out needless fees. A good example is the first fully indexed mutual fund called the Vanguard 500 (VFINX) which is also now the largest of its kind.

ABOUT THE AUTHOR: Dr. Scott Brown, Ph.D., a.k.a. “The Wallet Doctor”, is a successful futures trader, real estate investor, and stock investor. Dr. Brown holds a Ph.D. in finance from the University of South Carolina. His 1998 articles in Technical Analysis of Stocks and Commodities were prophetic in predicting an impending stock market crash. He has helped many people become profitable investors by teaching them to look out over many years to spot stocks that are low and primed for rise in the new bull market. His second article met with approval by Dr. Bob Shiller of Yale University. Dr. Shiller is the economist that Alan Greenspan most highly regards who coined the term “Irrational Exuberance.” In 1998 he shouted to the world to “get out” of the stock market but now he is shouting to everyone that it is time to “get in!” The Wallet Doctor is not only sought after for investment advice and coaching in stock investing but also in futures trading and real estate investing. Visit Dr. Brown’s site at http://www.BonanzaBase.com or sign up for his investment tips at http://www.WalletDoctor.com

The forex market is quickly becoming one of the most popular
markets for trading. Not only are the experienced traders
looking to this market to maximize their trading returns, but
many new, individual investors are now able to trade the Forex
market - just as they do stocks and futures.

More and more individuals are seeing Forex not only as a new way
to diversify their portfolio, but are also finding that it is
becoming the most profitable component of their investments. And
that’s because of the many advantages Forex offers over other
markets like stocks or commodities. Here’s what you will
typically see advertized about Forex:

- Unparallelled liquidity. It is the largest financial market in
the world by far. Almost $2 trillion being traded daily!

- Excellent leverage potential. Individual investors have access
to leverage of 100:1 and even 200:1

- No Commissions

- Low trading costs.

And yes, the Forex market really does offer all these
advantages. But the last two points above talk about costs, and
that’s what we’d like to focus on in this article.

Like any trading, there are costs involved, and, while these may
be much lower than they used to be, it is important to
understand what those are.

Let’s start by looking at stock trading, something that most of
us investors are pretty familiar with. When trading stocks, most
investors will have a trading account with a broker somewhere
and will have investment funds deposited in that account. The
broker will then execute the trades on behalf of the account
holder, and of course, in return for providing that service, the
broker will want to be compensated. With stocks, typically, the
broker will earn a commission for executing the trade. They will
charge either a fixed dollar amount per trade, or a dollar
amount per share, or (most commonly) a scaled commission based
on how big your trade is. And, they will charge it on both sides
of the transaction. That is to say, when you buy the stock you
get charged commission, AND then when you sell that same stock
you get charged another commission.

With Forex trading, the brokers constantly advertise “no
commission”. And, of course that’s true - except for a few
brokers, who do charge a commission similar to stocks. But also,
of course, the brokers aren’t performing their trading services
for free. They too make money.

The way they do that is by charging the investor a “spread”.
Simply put, the spread is the difference between the bid price
and the ask price for the currency being traded. The broker will
add this spread onto the price of the trade and keep it as their
fee for trading. So, while it isn’t a commission per se, it
behaves in practically the same way. It is just a little more
hidden.

The good news though is that typically this spread is only
charged on one side of the transaction. In other words, you
don’t pay the spread when you buy AND then again when you sell.
It is usually only charged on the “buy” side of the trades.

So the spread really is your primary cost of trading the Forex
and you should pay attention to the details of what the
different brokers offer.

The spreads offered can vary pretty dramatically from broker to
broker. And while it may not seem like much of a difference to
be trading with a 5 pip spread vs a 4 pip spread, it actually
can add up very quickly when you multiply it out by how many
trades you make and how much money you’re trading. Think about
it, 4 pips vs 5 pips is a difference of 25% on your trading
costs.

The other thing to recognize is that spreads can vary based on
what currencies you’re trading and what type of account you open.

Most brokers will give you different spreads for different
currencies. The most popular currency pairs like the EURUSD or
GBPUSD will typically have the lowest spreads, while currencies
that have less demand will likely be traded with higher spreads.
Be sure to think about what currencies you are most likely to be
trading and find out what your spreads will be for those
currencies.

Also, some brokers will offer different spreads for different
types of accounts. A mini account, for example, may be subject
to higher spreads than a full contract account.

And finally, because the spreads really are the difference
between bid prices and ask prices as determined by the free
market, it is important to recognize that they are not
“guaranteed”. Most brokers will tell you that there may be times
during periods of low demand, or very active trading when the
spreads widen and you will be charged that wider spread. These
do tend to be rarer situations because the volume in the Forex
market is so large and demand and supply are generally quite
predictable. But they do occur, especially with some of the
lesser traded currencies. So it’s important to be aware of that.

In summary then, when trading Forex, understand that the
“spread” is truly your most important consideration for trading
costs. Spreads can vary significantly between brokers, account
types and currencies traded. And small differences in the spread
can really add up to thousands of dollars in trading costs over
even just a few months. So be sure to consider carefully what
currencies you are going to be trading, how frequently, and in
what type of account and use those factors to help you decide
which broker can offer you the best trading costs and allow you
to keep more of your returns as net profits!