The Basics of Investing Made Simple

When you're ready to start investing and/or trading the first thing you will need to do is open an account. The first step is to decide on a brokerage firm. There are three different levels of brokerage firms.

Full-service brokers
Discount brokers
Online brokers

Full-service brokers charge higher commissions, but offer more services. They are the preferred broker for people who don't have the time or the desire to do their own research and place their own trades.

Discount brokers charge lower commissions, but have fewer services to offer. They do not offer personalized investing advice. They are preferred by people that like to do their own research and place their own trades.

Online brokers are similar to discount brokers except they offer no brick and mortar locations (Web access only).

Next you will need to decide on what type of account you want to open. Here are a few types of accounts:

Cash
Cash & Margin
Cash, Margin & Option

Cash Account: This is the most common account. Securities (Stocks, ETFs, and Mutual Funds) must be paid in full at time of purchase.

Cash & Margin: To trade on margin you have to request margin approval. The broker will lend you a portion of the purchase price. The loan is collateralized by the securities and cash. If the value of the stock drops by a pre-determined amount, you will be asked to deposit more cash or sell a portion of the stock.

Cash, Margin & Option: To trade options you have to request options approval. Options strategies will also require margin. An option contract is a financial derivative bought by one party (option holder) and sold by another party (option writer). Completing an options agreement will require more information than for a cash account.

Here are the typical questions on most options agreements:

Years of investment experience
Years of options experience
Funds available for options trading
Average transaction size
Number of transactions per year
Types of transactions (Stocks, Options, etc.)
What are your investment objectives? (Note: If you want to trade options, speculation should be one of the boxes you check.)
What type of activity do you plan to conduct in your options account? (Note: Check all boxes, i.e. buy options, write covered options, create spreads, write uncovered options, etc.)

Most brokers will not allow options trading in an IRA (Individual Retirement Account), but there are some brokers that will allow it. Uncovered options strategies are not allowed in an IRA.

Attitude and Risk Tolerance

Successful investors/traders must have a positive attitude and a strong will to succeed. When learning to invest it is easy to get discouraged and quit. Most successful investors/traders have had multiple failures along the way. I don't want that to happen to you! This article was created to give you an edge that most people didn't have when they started investing.

To be successful, you must have:

The right education
The right tools
The right attitude

If you have already been struggling in the stock market, go back and reexamine your prior trades and identify the problem area. One of the biggest mistakes new traders make is risking money they can't afford to lose. They invest car payment money or rent money in the stock market, hoping they will double the money in a matter of hours to days...solving all financial problems. This crosses the line into gambling not investing.

The stock market has a proven track record of being a good place to invest money over the long term. The biggest enemy for most investors is emotion. When stocks are losing value and emotions kick in it's hard to make good decisions. Being indecisive and doing nothing is the worst possible thing to do. Managing risk in a trade helps take the emotion out of investing.

Understanding that getting into a good stock doesn't happen by accident. It takes research and patience to find good company's to invest in.

To determine your risk tolerance, which in turn will determine your trading style ask yourself the following questions:

How much am I willing to lose on any one trade without becoming emotional?
Do I feel more comfortable buying and holding stocks for only short periods of time or do I like to buy and hold stocks for the long-term?
Are the fundamentals of a stock or the chart of a stock more important to me?
Do I like taking risk?
Can I respond to news on my stocks if it impacts the chart or fundamentals?

Matching strategies with your personality and trading style is extremely important. You must identify your strengths and weaknesses in order to develop your trading style around them.

Mutual Funds

Mutual funds are the most commonly known investment vehicle. A mutual fund is made up of a pool of funds for the purpose of investing in securities (stocks, bonds, money market, etc.). Money managers operate the funds and invest the funds capital to produce capital gains and income for investors. The money managers must structure and maintain the portfolio to match the investment objectives outlined in the prospectus.

Mutual funds give small investors access to professionally managed and diversified portfolios. Each shareholder participates proportionally in the gain or loss of the fund.

Disadvantages of mutual funds:

They do not trade like a stock
Brokers charge higher commissions to buy and sell
May have front or back load fees

Front-end load fees are paid to brokers, financial planners, and investment advisors as sales commissions upon initial purchase of a fund. These fees are not included in a funds operating expense.

Back-end load fees are paid to brokers, financial planners, and investment advisors as sales commissions upon selling a fund. The fee is a percentage of the value of the share being sold and the fee decreases yearly until the specified holding period ends, at which time it drops to zero. These fees are also not included in the funds operating expense.

No-load funds do not have front-end and back-end fees. Research shows that funds that charge loads do not necessarily outperform no-load funds.

ETFs

Exchange-traded funds (ETFs) also known as index tracking stocks like mutual funds are a basket of stocks. There is an ETF for almost every sector of the market and for most countries.

Advantages of ETFs:

Trade just like a stock
Diversified like mutual funds
Commissions are the same as on a stock trade
Ability to buy on margin, sell short, and many have options available

Setting Goals

You need to have goals and objectives. Treat investing like a business and set annual goals. Prior to the beginning of each year document your goals and objectives. Write down the percentage return you want to earn for that given year. Depending on the duration of the investment the percentage will vary. Be sure your goals are realistic and you take in consideration that the market average annual returns over the long-term are 10-12% annually.

Goal ideas:

Never lose more than 50% on a option
Never lose more than 10% on a stock
10% annual return this year in my IRA
20% annual return this year in my trading account
Be more patient with my trades
Spend 1 hour a week researching the stocks that I want to invest in
Develop and apply money management rules
Learn how to trade options
Keep 20% of my account in cash for new investment and/or trade ideas

Fundamental Analysis

We will use fundamental analysis to determine if a stock is a quality investment and should be in our portfolio.

Due to article guidelines, we will use company XYZ for our stock and Yahoo finance will be used for our research.

Go to http://finance.yahoo.com/ and enter your favorite stock symbol and click on "Get Quotes" so you can follow along.

Price Pattern

Look at a 1 year chart and a 5 year chart on XYZ. Is the stock in an uptrend, sideways trend or downtrend?

Grade scale: Uptrend (pass), Sideways (neutral), Downtrend (fail)

Answer: Uptrend

Grade: Pass

Analyst Opinion

Yahoo left navigation bar heading - Analyst Opinion

Then look for Recommendation Summary - Mean recommendation (this week).

Note: (Strong buy) 1.0-5.0 (Sell)...The lower the number the better.

Grade scale: 1.0-2.5 (excellent), 2.6-3.0 (good), 3.1-5.0 (bad)

(XYZ) Mean Recommendation (this week): 1.9

Grade: Excellent

Return on Equity

Yahoo left navigation bar heading - Key Statistics

Return on Equity (ROE) is a measure of the return on shareholders equity over the past 12 months...The higher the number the better. For the ROE benchmark, use the S&P 500 average of 14%.

Grade scale: 15% and higher (excellent), 12% to 14.9% (good), 11.9% and lower (bad)

(XYZ) Return on Equity: 22.74%

Grade: Excellent

Current Ratio

Yahoo left navigation bar heading - Key Statistics

The current ratio measures a company's liquidity (its ability to meet its short-term cash flow requirements).

Current ratios below 1.0 can be a warning sign of trouble ahead for the company, since this indicates the company's current liabilities exceed the company's current assets.

Grade scale: 1.5 and higher (excellent), 1.4-1.0 (good), less than 1.0 (bad)

Current Ratio = Current Assets divided by Current Liabilities

(XYZ) Current Ratio: 2.111

Grade: Excellent

Price/Earnings Ratio

Yahoo left navigation bar heading - Key Statistics

Trailing Price/earnings (P/E) ratio is the most commonly used valuation measure. High P/E ratios indicate high expectations for earnings in the future. Growth stocks typically have a higher P/E ratio. Since the P/E will vary by industry group, you should compare the P/E to its peers in the same industry group.

Grade scale: Leads Peers, In-line with Peers, Lags Peers

P/E = current price of the stock divided by earnings per share

(XYZ) Trailing P/E: 29.41

Grade: Leads Peers

Price-To-Earnings Growth

Yahoo left navigation bar heading - Key Statistics

The price-to-earnings growth (PEG) ratio determines how the current stock price compares to projected earnings growth. It's favored by many over P/E because it accounts for growth. A lower number is usually better and may indicate the stock is undervalued, but investors accept higher valuations if the projected growth rate is higher as is the growth rate in most technology companies. Since the PEG ratio will vary by industry group, you should compare the PEG ratio to its peers in the same industry group.

PEG = P/E ratio divided by projected 5-year growth rate

(XYZ) PEG Ratio: 1.67

Grade: Leads Peers

Earnings Per Share

Yahoo left navigation bar heading - Key Statistics

Earnings per share (EPS) is the amount of a company's profit allocated to each outstanding share of common stock. The higher the number the better, though most companies can't sustain these high numbers over the long-term. Compare this value to other companies in the same industry. Values are expressed in dollar terms.

EPS = Net Income minus Dividends on Preferred Stock divided by Average Outstanding Shares

(XYZ) Diluted EPS: 5.72

Grade: Leads Peers

News

Yahoo left navigation bar heading - Headlines

News changes everything. Always browse through the headlines over the last couple of weeks. If there is a negative news story on the stock and the market reacted to it in a negative way, then the grade will be "Fail". Otherwise the stock will receive a "Pass".

Note: Anytime a news story comes out on a company and it is being investigated for accounting issues...

SELL THE STOCK ASAP!

Grade: Pass

Fundamental Analysis Worksheet (XYZ)

Symbol: XYZ

Price Pattern: Pass

Analyst Opinion: Excellent

ROE: Excellent

Current Ratio: Excellent

P/E: Leads Peers

PEG: Leads Peers

EPS: Leads Peers

News: Pass Analysis

Results: Excellent Investment

You now know how to use Yahoo Finance to do a fundamental analysis on your stocks. You can now use the worksheet above to find good quality companies to invest in.

The stocks you invest in don't all have to be "Excellent" and "Leads Peers", but they should have grades of at least "Good" and "In-line with Peers".

Don't invest in stocks that "Fail" the Price Pattern test and/or News test.

Stocks with Analyst Opinion of "Excellent" (1.0-2.5) should outperform over time.

Money Management

Money management is critical in being successful in the market. Many consider it more important than stock picking.

Capital preservation should be your number one priority, profitability second.

Note: Only about 20% of Mutual Fund managers actually beat the S&P 500.

The following are some key points in money management:

Don't buy your entire position in a stock all at the same time. Try to scale in and out of your positions, taking profits alone the way. If you are buying a core holding in your portfolio and your entire position will be 100 shares try buying in blocks of 25 shares. Buy your first 25 shares and then wait for a pullback in the stock of 3.5% to buy your next 25 shares. If the stock never pulls back that far before you reach your profit target...don't worry be happy...take the money and run. You will have to decide what's an acceptable profit target for you. You might consider 10%-15% as a starting point...don't be greedy.

Take losses quickly and let your profits run. Most investors want to continue to hold on to their losers and sell their winners to make up for it. Everyone has losers and you should accept that. You must set a stop loss, typically this is 8-10%. If a stock goes down 8-10% from your buy price cut your losses short and sell it. This is the only way to ensure that you will not have huge damaging losses in your portfolio. On the other side of the coin it is key to let your winners/profits run. If you have a stock that is doing well take some profits along the way, but let the rest of your shares run.

Maintain appropriate position sizing. Maintaining appropriate position sizing will protect you from allowing one bad trade or investment to have too large of an impact on your account. Position sizing is the number of stock shares or option contracts you buy/sell in any one trade or stock investment. For investments consider not having anymore than 5-10% of your portfolio value in any one stock. For trades consider not risking more than 2-3% of your portfolio value in any one trade. Reduce the percentages significantly in a bear market.

Document your trades and investments. This should include why you're entering/exiting a trade or investment. Keeping records will help you duplicate your successful trades/investments and avoid unsuccessful ones in the future.

I hope that you found the information in this article useful and are able to begin applying the "Fundamental Analysis Worksheet".

Copyright © 2009, InvestSharp Trading, LLC. All rights reserved.

Randy Smotone is the editor and founder of InvestSharp Trading, LLC. InvestSharp strives to provide self-directed investors and traders with all the tools and information needed to be successful in today's market. If you would like to learn more about InvestSharp, please visit our website at http://www.investsharp.com.

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Figuring Out If You Should Take An Unsecured Personal Loan

The two most usual forms of unsecured personal loans are credit cards and payday or cash advance loans. Many do not recognize credit cards as loan instruments, but that is what they are. The card issuer lends you money to pay for goods or services. Credit cards and personal loans are available to many because the underwriting standards are quite flexible.

Consider the advantages and disadvantages of credit cards.

Credit cards can be found with very low interest rates, sometimes even 0%. And by using them you can gain a variety of benefits such as cash back, flying miles, or merchandise rewards. However, missed or late payments, or going over the credit limit can incur rather heavy fees. Of course, to get one you must have an acceptable credit history and gainful employment and meeting a salary benchmark.

Credit cards are easy to use, they can have reasonable rates if you watch yourself, and they do offer rewards for usage. Sometimes interest rates can become quite high and fees can become usurious. Credit cards have become a standard and important financial tool for most every adult. They must be used responsibly and paid off whenever possible. Students, families, the elderly and professionals should probably have one at any rate.

Consider the advantages and disadvantages of cash advance loans.

These loans usually do not require a credit check and no signing over of collateral or valuable property to secure the loan. Since these loans represent a high risk to the lender, the interest rates tend to be rather high. Because of the high interest rates and high fees, sometimes borrowers can trapped in a destructive cycle of refinancing the loans.

These loans can have funds in an individual bank account within a matter of hours. In a perfect world, no one should really avail themselves of such loans. If an unexpected or urgent need for cash arises, they can be life saver if they are paid off within the terms of the contracts. Otherwise they should be avoided.

Consider the advantages and disadvantages of bank loans.

Banks, credit unions and other traditional lenders offer low interest rates and funds are easily transferred to bank accounts. While these lenders do offer unsecured personal loans, it is very difficult to qualify. Only those with exceptional credit histories, decent income, and a history with the bank are usually all who can avail themselves of these loans.

Consider the advantages and disadvantages of private finance loans.

If you are a qualified borrower who needs a larger unsecured personal loan, say $250,000, these firms can make their decisions based more upon the personal situation of the borrower. They do have high qualifying standards, interest rates can be high, and sometimes the repayment terms are not structured in the most comfortable way. These loans are primarily for those with a unique need or circumstance.

Consider the advantages and disadvantages of peer to peer lending.

This is a new trend in the sphere of finance and may offer a prodigious lending alternative. Markets such as Prosper create a place wherein people can post requests for loans and groups of small investors can gather to fund them. These tend to offer fast turnaround. And, you are paying interest to singular folks rather than large corporations or banks. Interest rates can be as high as 34%. And some of the market places charge fees to both borrowers and investors.

Before taking any unsecured loan, it is incumbent on borrowers to thoroughly check the venue and educate themselves to they do not fall prey to scamsters.

Mary Wise is a personal loan consultant who has been associated with Bad Credit Loans and has more than thirty years of experience in finances. She has helped a lot of people to obtain Fast Unsecured Loans, and many other products regardless of their credit situation. If you want to learn more about Personal Loans you can visit her at BadCreditLoanServices.com

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Federal Interest Rate and Your Mortgage Loans

For most people they do not really know how the fed interest rate affects their mortgage loans and other financial holdings and debts. Currently the governments around the world are infusing cash into cash strap and beleaguered financial institutions. Having this in mind, the fed interest rate can affect your perception of you approach your mortgage loans. But in reality the effect in your mortgages is almost non existence. The reason for this is simply because your lenders prime rate hardly the benchmark lenders and banks use to index your mortgages.

Take the case of the recent fed interest rate cut, some lenders and banks did follow and lower their lending rates but all of them did. So if you are trying to figure out how it will affect your home loan, you might find it a little bit difficult. Figuring this out is somewhat complicated. One way it can lower your interest rate is because of the intense competition amongst the banks for depositor's money. Because of the credit crunch at the moment, banks have no other place to get money so they might lower their rates but with stricter or stringent qualifying requirements for a home loan.

When there is federal interest rate cut, prime lending rates follow suit. Most of the times these banks will follow by lowering their rates by the same amount the feds do. This could mean an instant reduction for many borrowers with credit card debts or home equity line of credit tied to a lenders prime rate. The only unfortunate thing about this some credit holders will not be able to realize any advantage or any beneficial effects because of the built in card agreements. In other words not everyone will benefit from any rate cuts by the feds.

For people who have fixed rate mortgages, they will not see any changes or any benefit to them and their mortgage loans. As the term suggest, these types of home loans are fixed to a term based generally on a track ten year treasury note which do not respond to the feds short term rates. So for homeowners who have fixed rate type home loans, they do not worry and neither benefit from any rate cuts by feds.

For the most part a rate cut would give much interest to borrowers. The prime rate is the underlying index for most home equity loans, lines of credit, credit cards, and other types of personal loans.

For adjustable rate mortgage, these are generally fluctuating based on other things or indices and not the prime rate. Most of the indices that these lenders use are the LIBOR and the eleventh district cost of funds (COFI) and other popular indices. For the most part these types of mortgage loans will have very little or no effect especially with the current financial crisis and uncharted waters where the financial industry is in right now.

Fed interest rate will have very little effect on your mortgage loans at the moment. To some it does have some effect but not across the board. With all the factors and built in agreements in every home loans and mortgages, it would be very difficult to figure out who benefits and who does not benefit from a fed rate cut.

Does The Fed Interest Rate Cut Can Affect Your Mortgage Loans and Adjustable Rate Mortgage? Go To JGVFinance.com For More Guide and Info On Mortgage and Fed Interest Rate As Well As Your Financial Issues and Concerns That Matters To You

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What First Time Home Buyers Should Know

Are you gearing up for your first home purchase? You are about to begin on a long journey, which if you are not careful, can put you in a spot that can bother you for a very long time to come. The logic behind this entire exercise is simple- be careful, practical and systematic.

There are a few steps that you need to be very vigilant about when you start your hunt for a new house, for the first time in your life. These involve all aspects of the purchase- real estate trends and markets, financial planning and most importantly systematic and thorough research into the product of purchase.

As you embark on this journey, the first step that you would counter is your budget for the purchase. In case you are planning to go for a mortgage loan, then the procedure is quite lengthy. For this, look at your present income and the bank balance that you possess. For starters, you need to have at least fifteen percent of the allocated budget to pay upfront as well as an additional amount to take care of regulatory fees. This is because most lending institutions finance only up to a maximum of eighty five percent of the price of property, and this excludes the legal and registration charges connected with the purchase. Hence, you need to examine your bank balance. As you analyze your income and expenses, ensure that you have at least forty percent of your income that you can save every month. This is the benchmark that normal banks earmark as monthly mortgage payments. You need to prove that you can match this amount and set this aside for monthly payments.

As you finish your financial analysis, it is time to turn to the market. Shortlist properties that fall into your budget and then research on these properties. The research should include history of builder, performance of his previous constructions in terms of maintenance and quality of construction as well as financial stability of the company. This gives you an insight about the construction company and helps you in your choice of the product. As you close in your choice, the last step that is involved is the lending aspect.

Speak to banks or lending institutions that lend money for home purchases and seek data on interest rates and down payments required. Scan the financial markets on trends related to interest rates. This is vital as it gives you a clear picture about the path taken by banks in connection with lending interest rates. If these are pointing to further reductions, then it will be prudent to choose floating interest rates, as the rates might come down in future and you can take advantage of it. In other cases, if found to be spiraling upwards, this allows you to decide on a fixed rate of interest, something that will insulate from the increases that may occur later.

Scanning the documents related to the acquisition is also important, but in most cases the bank and their legal team help you out in finishing these formalities without any hassles. In case you are planning for an outright purchase, then it would be advisable to hire the services of attorney, well versed with legal documentation related to real estate.

These basic steps shall ensure that your dream home turns out to be as good as your wonderful dream and that you shall cherish it for your lifetime.

Homes that reflect beauty at Waddell AZ Real Estate and West Phoenix Valley Real Estate.

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Advantage Bank Depositors, India to Deregulate Savings Rate

India is set to usher in another set of banking reforms in a few months with the Reserve Bank of India (RBI), the central bank, proposing to deregulate savings rates.

This comes after a major overhaul of the way banks fix their lending rates. The RBI is going to enforce a new discipline among banks, requiring them to announce their own base rates, which will work like benchmarks for all lending products.

The so-called base rates will replace the existing benchmark prime lending rate. Indian banks have this so-called benchmark in practice but more often than not they lend, especially to big corporates, at rates far below this rate.

The new regulation, which comes into force from July 1 this year, is expected to bring in the much-needed transparency and competition among banks in pricing their products. This is also likely to tie down banks from offering teaser rate loans, a practice that has become rampant in the mortgage loan segment ever since a bubble burst in India's real estate sector and the slowdown in the domestic economy triggered by the global financial turmoil in 2008 and 2009.

Now in the next stage, RBI plans to deregulate savings rate. At present banks can fix rates only on deposits over Rs 2 lakh (approx $5,000).

"Deregulation of interest rates (including savings rates) is an important way forward for reforms. The base rate system that will come into affect from July 1 is also an important reform method," RBI governor D Subbarao said last week.

"There is now a consensus in the government and RBI that all rates should be deregulated, including the savings bank rate. It is certainly on the anvil. It could either be freed completely or there could be a floor price fixed as threshold, beyond which banks cannot go. We need to decide on the mode of migrating to the new system," RBI deputy governor KC Chakrabarty said in an interview.

Currently, Indian banks offer a fixed interest rate of 3.5 per cent on savings deposits. The RBI has mandated that this rate be calculated on a daily basis effective April 1, 2010.

Bankers say deregulating savings rate will help consumer get a better deal. As the banking space gets competitive with the arrival of a large number of private banks and consolidation among public sector players, banks are looking to raise their levels in savings and current accounts, a source of cheaper liquidity.

And when they get to offer savings rates at their own discretion, many are expected to use them to draw new customers. But these rates may also fluctuate wildly depending on the availability of liquidity. Also it remains to be seen if the new base rate and the proposed deregulation of savings rates will tighten margins so much as to hurt profitability and viability of smaller banks.

Indian banking sector has undergone a huge transformation even since the industry was opened up for private participation and foreign players as part of the broadbased economic reforms initiated in 1991. The central bank has since restricted licensing of new foreign players, but the government this year proposed to open licensing of new domestic players.

Last year, the central bank freed use of automated teller machines for bank card holders across banking platforms and ordered banks mandatory accommodate segments of the unbanked population.

The government and the central bank are also in the process of implementing a new mechanism of using banking correspondents, which will use prominent citizens and even grocery shops in villages as dealing points to take banking to far-flung areas.

By Udoy Sankar

Udoy Sankar is a writer with http://www.moneyguruindia.com, a web portal of Indian wealth managers, fund managers, insurance advisors, mutual fund distributors, stock brokers and income tax professionals. http://www.moneyguruindia.com disseminates news, views and analysis of banking, mutual funds, insurance, income tax and areas related to personal finance.

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The Impact of Structured Finance on the Ghanaian Financial Services Industry in the Next 10 Years

A Company can issue bonds to investors secured on the future profits expected to arise from part of its existing life business.

When a pool of financial assets (such as car finance, home or commercial mortgages, corporate loans,royalties, leases, non-performing receivables, and contractually pledged operating revenues) are structured and transferred to a 'special purpose vehicle or entity'(SPV or SPE) it is known as a Securitisation transaction.

Generally, most securitisation transactions involve a two tier transaction in which the originator of the assets to be securitised transfers such assets to a wholly-owned SPV.In turn the SPV transfers or pledges such assets to another entity, which issues rated securities in the capital markets that are collaterised by such assets. This second tier entity can be another SPV or a multi-seller commercial paper conduit and can provide funding by issuing medium term notes or commercial paper.

Types of Securitisation transaction

Usually with securitisation transactions, the transfer of rights to assets can take one of two main forms, true sale or synthetic securitisation.

1. True Sale securitisation

In a true Sale securitisation, the originator (for instance a bank selling mortgages) sells the assets to the Issuer. the assets are serviced by the servicer who happens to be the Originator, with respect to say the mortgages sold to the Issuer(i.e.) and the originator continues to collect the principal and interest from the borrowers on behalf of the issuer on such mortgages and see to all default mortgages as well.

The significance of true sale is that the first-tier sale of the assets from the originator to the SPV is structured as a "true sale" such that the assets are removed from the originator's bankruptcy or insolvency estate and cannot be recaptured by any trustee. Thus, the issuers are usually incorporated as insolvency remote entities; and may not engage into any transactions other than those necessary to effect the securitisation what is known as "limited purpose-concept" by which virtue the SPV will not be allowed to issue any additional debt or enter into mergers or similar transaction.

The transactions can be conducted as conduit, whereby the purchaser purchases and securitises assets from a number of different originators. This is done by through refinancing by issuing commercial paper into the capital market. Banks usually engage in conduits by arranging securitisation for their clients, or standalone where the purchaser only purchases assets and issues as asset-backed securities in the context of a single securitisation transaction. No commercial paper is issued.

It must be said here that, the legal characteristics and economic substance of the transfer will be the primary determining factors as whether the transaction is a true sale not a loan.

2. Synthetic Securitisation

In a synthetic securitisation transaction the originator does not sell any assets to the Issuer and therefore does not obtain any funding or liquidity under the transaction. The originator enters into a credit swap with the issuer in respect of an asset or pool of assets, transferring the originator's risk to the issuers. Under this contract, the issuer pays the originator an amount equal to any credit losses suffered in respect of such assets or pool of assets. The Issuer's (SPV) income streams in a synthetic transactions are the fixed amounts paid by the Originator under the credit default swap and interest amounts received on the collateral. These transactions are typically undertaken to transfer credit risk and to reduce regulatory capital requirements.

3. "Whole-Business" Securitisation

Apart from the main two forms above," whole business" securitisation is sometimes used to finance a stake in private or management buy out of the Originator.

This type of securitisation originated in the United Kingdom. It involves the provision of a secured loan from an SPV to the relevant Originator. The SPV issues bonds into the capital markets and lends the proceeds to the Originator. The Originator services its obligations under the loan through the profits generated by its business. The Originator grants security over most of its assets in favour of the investors. In terms of cash flow, there are three most common types of securitisation transactions:

Collaterised Debt- this is similar to traditional asset-based borrowing. The debt instrument need not match the cash flow configure ration of any of the assets pledged.

Pass-Through-this is the simplest way to securitise assets with a regular cash flow, by selling participation in the pool of assets i.e. an ownership interest in the underlying assets so that principal and interest in the underlying assets collected are given to the security holders;

Pay-Through debt instrument-this is borrowing instrument and not participation. Investors in a pay-through bond are not direct owners of the underlying assets but simply investors.

One significant thing with SPV is that unlike with ordinary operating companies, whose charters typically provide for maximum flexibility, the charters of SPVs provide for the entity to have only those powers that are necessary to accomplish the purpose of the securitisation transaction. Thus the SPV in a securitisation will have the power only to purchase the particular receivables contemplated by the transaction, issue the related capital market securities, and make the payments on them and so on.

The reason for these restrictions is thought to keep the risks of the SPV's own bankruptcy as narrow as possible: the smaller the range of the entity's activities, the smaller the risk of a bankruptcy.

Securitisation is based on the underlying assets being securitised. Rating agencies spend a lot of time to estimate the credit risk for all underlying assets in Securitisation transaction. Other risks considered is the prepayment risk.-the risk that a portion of the assets in the underlying pool may be repaid early. Payments and settlements in Ghana are considered to be good. Prepayments can reduce the weighted average life of the pool and as a result expose investors to considerable uncertainty over future cash flows.This can be mitigated by separating the payment of the principal and interest or the conversion of fixed rate returns to floating rate.

Third Party Risk

Collateral is not the only important factor in structured finance transaction. A servicer risk would be particularly strong in Ghana. This is the case that the collection of payments, distribution to investors and performance tracking will fail. Because in Ghana credit rating is not popular.

In a Securitisation or structured finance transaction, a lot of third parties are involved who must fulfill their various responsibilities to make the transaction go on successfully ."Time is money", it is said. Other third party risks include trustee managing succession of servicing in case of servicer default, notifying investors and rating agencies of breaches and defaults, and holding cash payments to prevent servicer misuse of cash flows; manager responsible to balance the competing interest within a transaction.

Financial Risks (Interest Rate Risks, Foreign Exchange Rate Risks, Devaluation Risk)

Financial risks usually cover interest rates, foreign exchange rate & availability, currency and inflation risks. Inflation really affects the originator in a Securitisation transaction for reasons like raising the cost of the transaction which can delay its completion. Some governments are also sceptical about foreign investment in their country and sometimes prevent the repatriation of funds by foreigners outside. Devaluation and interest rate just like inflation can also affect Securitisation negatively especially when provision has not been made in the transaction deal for that. Russia is a good example. International funds are often cheaper than local ones, but given the fact that the payment to receivables is sold locally, and paid in local currency, using foreign loans creates exposure to the risk of currency depreciation.

Political Risk

Because cross-border transactions are conducted such that assets generate cash flows in the domestic currency while the securities backed by those assets are denominated in foreign currency, there is the risk that regardless of the credit strength of the underlying assets, the issuer might default on the payment. The following relevant known political risks are identified:

Expropriation risk:

The act of taking something from its owner for public use. This involves the act where a government takes over assets or accounts of local parties in the event of financial crisis.

Nationalisation:

Transfer of business from private to state ownership. This is not usually experienced in the West as in South America and Africa. In relation to Ghana's political situation, this is not envisaged.

Convertibility risk:

This is the risk that in a national crisis, the government might impose a moratorium on all foreign currency debts because of a financial crisis in the country.

Change of law:

The ruling government can change the laws overnight and this can affect a structured finance. Sometimes for economic and political reasons, tax laws are enacted which might not be to the advantage of the originator in terms of the cost increase to certain elements which could increase the purchase price of the product on completion and can jeopardise the securitisation transaction which must be made cheaper if it is to succeed. For example an increase in the fuel tax can affect the entire transaction because tax neutrality is paramount to securitisation transaction.

Legal & Documentation Risks

Following change of law in political risk discussed above, possible legal risks to a Securitisation transaction include inadequate legal, legislative, and regulatory framework on tax, financial and money market & securities. Sometimes the case and administrative laws in the country concerned are not developed. These issues are of great concern to investors and for that matter the originator will have to deal with this risk.

In asset-backed securities(ABS),however, the legal and documentation risks include uncertainty surrounding the transfer of assets from the seller/originator to the SPV (i.e. 'true sale') the need to ensure that holders of ABS receive full control over the underlying assets; the bankruptcy remoteness of the issuing SPV.

This means reviewing all the covenants in relation to the separation of the SPV from the seller; the legal roles of the trustee and servicer across all relevant jurisdiction including Ghana to curtail operational and execution risks associated with the payment and receipts of transactions.

Because of the changes in deal structures and considering the legal and financial framework of Ghana, legal and documentation risk will be very high.

Regulatory Risk

The risk that originators and other lenders will not be treated fairly. There should be a laid down regulation on profit-sharing, regulations on the rated instruments and most importantly what structure should the SPV that issues the securities be.

Liability Structure Risk

This risk is the issues associated in which with the tranching or slicing of securities brings conflicting interests which if not checked may disrupt the appropriate distribution of receivables to end-investors. The key to structured finance transaction is the payment waterfall which set the covenants for paying the interests and principal and allocation of losses among investors. This can be sorted with over-collateralisaton tests which ensure the existence of sufficient collateral in the underlying pool of assets to cover principal payments; and interest coverage test to ensure that there are sufficient interest proceeds to cover interest payments to note holders.

Levels of Risks

Rating agencies usually would have to assess the totality of the risks envisaged in each transaction before assigning a rating to the security. Thus the potential for any shortfalls in receivables and the adequacy of any credit enhancement to ensure that the end-investors are assigned the right level of default risk. Cross-border transactions for example require specific analysis regarding the potential limit that could apply to the rating of the notes because of the potential default of a government and the possible application of a moratorium by a government in times of crisis.

Benefits of Securitisation

The use of Securitisation is not limited to one specific asset or income flow. The application stretches beyond the existing bank-funding products and equity funding arrangements. The challenge is the approach with which a Securitisation is considered and the ability to measure the impact thereof on the future of the business. This stems from the fact that Securitisation is cash flow driven and not earnings-improvement driven.

Generally, securitisation can offer the following benefits and we would later analyse to see whether or not it would benefit Ghana.

Efficient access to capital markets: when transactions are for example structured with credit ratings by a recognised credit rating agency on most debts, pricing is not tied to the credit rating of the originator. This is very significant if the originator is not credit worthy.

Limitation on issuer-specific's ability to raise capital is reduced: securitisations can minimise an entity's inability to raise capital because capital raised under securitisation becomes a function of the terms, credit quality or rating, prepayment assumptions and prevailing market conditions.

Illiquid assets are converted to cash: Securitisation makes it easier to combine assets which otherwise could not be sold on their own, to create a diversified collateral pool against which debt can be issued.

Raise capital to generate additional assets: capital can quickly be raised such as releasing long-term capital for any allowable purposes like completing capital project and purchasing additional assets.

Match assets and liabilities to minimise risks: a well-structured securitisation transaction could create near perfect matching of term and cash flow locking in an interest rate spread between that earned on the assets and that paid on the debt. This means that Ghanaian business entities can raise enough funds without necessarily providing collateral for security because of the transfer of risk.

Raise capital without prospectus-type disclosure: A conduit securitisation transaction allows one to raise capital without disclosure of sensitive information of any sort; in fact information is kept confidential.

Complete mergers and acquisitions, & divestitures more efficiently: Assets can be combined or divested efficiently under Securitisation transaction. By dividing assets into smaller parts against which debt is issued it can become possible to do away with other business entities which are no longer profitable.

Transfer risk to third parties: Financial risk on loans and other contractual obligations by customers can be partially transferred to investors under securitisations.

More funding beyond bank lending: A structured Securitisation transaction enables the originator to raise funding while maintaining the right to the profit on the receivables. However, these funds will not be linked to its credit rating but rather the credit rating is on the special purpose entity created for the Securitisation transaction. By incorporating an offshore SPE, many businesses in Ghana with poor credit rating might potentially raise funds for any purpose.

The overall effect of securitisation of bank loans and credit aggregates is likely to be a reduction in the level of credit extension by the monetary sector and a reduction of similar magnitude in the M3 money supply. This is to say that the banking sector closes its balance sheet by setting off some loans against some M3 deposits.However,the original borrowers still have obligations but to the SPV not a bank and institutional investors still own assets which are now tradable securities not M3 deposits.

Structure of Ghana's Financial System

The financial system comprises of

1. Bank of Ghana

I. Savings and loans bank

II. Discount houses

III. Finance houses

IV. Leasing companies

V. Forex Bureaux

2. Securities and Exchange Commission

I. Stock Exchange

II. Brokerage firms

III. Investment Management companies

IV. Trustees and Custodians

3. National Insurance Commission

I. insurance Companies

II. insurance Brokers

III. reinsurance Companies

The banking system in Ghana is structured to serve the needs of all citizens as much as possible. At the end of 2005,the banking industry was made up of Merchant banks, Universal banks, Commercial banks, development Banks,ARB Apex banks, and Rural Banks; with a total growth of its assets by 17.62%.

The Non-Banking Financial institutions (NBFI) sector is made up of Savings and Loans Companies, Discount Houses, Finance Companies and Leasing Companies. Total assets for the Non-Banking Financial Institutions also grew by 47.98% which were mainly triggered by loans and advances, investments, other assets and fixed assets. The Discount houses hold 82.61% of the overall total investments of the NBFI sector.

The new Banking Law, Act 673, which became operational in 2005 with its higher Capital Adequacy Ratio requirements, new sanctions regime, as well as higher governance standards ensured that banks remained generally compliant with regulatory and prudential requirements.

The Securities Market in Ghana

African stock exchanges face a number of challenges before they could enter a new phase of rapid growth. The most critical issue is to eliminate existing impediments to institutional developments. These include a wider dissemination of information in these markets, the implementation of robust electronic trading systems and the adoption of central depository systems. Ghana has since established a central depository system in November, 2004.

The Ghana securities market is regulated by the SEC. The Ghana Stock Exchange is underdeveloped with reference to exchanges in US, Europe and even South Africa. South Africa for example has market capitalisation of $180 billion, one of the largest in the world with Ghana's market capitalisation of $11 billion.

Considering that Ghana has had just one Securitisation transaction -structured finance-with no records for research, and the position of Ghana's macro-economic situation, it was found expedient to look at the Securitisation transaction in South Africa. Even though Securitisation transaction is still at an early stage of development in South Africa, it has grown rapidly in recent years and it would be a suitable "benchmark" after which to carve Ghana's Securitisation transaction.

According to the available information, the first Securitisation in South Africa was aimed at mortgage Securitisation; developments were very slow over the 11 years. Then in 1992 Securitisation was applied to corporate equipment rentals and leases up until 1997 through 2000s with Securitisation on trade receivables, properties, future rebate flows, future cross-border flows and CLOs.

South Africa's motive for Securitisation transaction was to benefit from more efficient financing and profit maximisation; improved balance sheet structure and finance ratios; improved risk management; and lower economic and regulatory capital requirements among others.

Although the Securitisation transaction is still in its infancy in south Africa, available records show that issuance involving domestic banks in South Africa (i.e. private banks) has increased from R250 million in 1989 to a whopping R26 billion by the end of October 2005. Based on a recent study conducted on the UK market which suggests that Securitisation provides investors the opportunity to attain a higher after tax return in comparison with after tax returns being generated by equity related property investment , Securitisation in South Africa is being applied as an acquisition tool in acquiring properties and as a portfolio optimisation and value unleashing tool.

Securitisation regulations in South Africa compares to international Regulatory Practices similar to those in the United States of America and regulate the manner with which Securitisation assets and income flows are transferred from the originator to the SPV and operational aspects and efficiencies of the SPV.

Different opinions exist in the South African market regarding conformity to Securitisation regulation. One centres on the use of specific words "Bank or deposit-taking Institution" that only South African banks can originate a securitisation.The other opinion is on non-conformity as appropriate if a company or business other than a bank originates a Securitisation.

The onus of the matter is that Securitisation transaction is also designated within the regulation as an activity which is not limited to the business of a bank under certain conditions; thus allowing companies other than a bank to embark on Securitisation transaction.

The Ghana Securities Exchange Commission's annual report for 2004 does not mince words about the position of the Ghana Securities market. It reported that "despite the modest decline in index performance in percentage terms, the GSE still maintained its position as one of the best performing stock exchanges in the world in 2004 for the second time running." Market capitalisation of listed Companies on the Ghana Stock Exchange increased by 84.90 trillion cedis to 97.61 trillion cedis from just 12.6 trillion cedis.In dollar terms, market capitalisation went up by 654.0% from US$1.43 billion at the beginning of 2004 to US$10.8 billion at the end of 2004.

Unlike the stock market, the bond market in 2004 was relatively low posing "a serious market development challenge to the commission". The turnover value of listed corporate bonds in 2004 declined from US$606,600 in 2003 to US$73,414 a decline of 87% whilst government bonds also declined by 71%.The value of listed corporate bonds in 2004 was US$6.79 million compared to US8.98 million in 2003.

The corporate bond market remained relatively quiet. However, the US dollar denominated corporate bonds traded on the market increased by $41,783 to $115,200.

The government of Ghana is determined to use municipal, corporate, government and agency bonds to improve activity in the primary market. As a result of that, the Bank increased accountability and transparency in line with International Financial reporting Standards (IFRS) best practices in its financial reporting and disclosures in 2005.

Coupled with this, other relevant Government policies were strengthened to reinvigorate revenue collections and consolidate public expenditure aimed at reducing the domestic debt in relation to GDP .As a result of that the government started a programme of reducing domestic debt in relation to GDP to enable the private sector access credit and lead the growth process.

The significance of Bank of Ghana in the financial system is that the bank is the provider of technical support for the legal and regulatory reform of the financial system to minimise risks and ensure legal certainty especially for electronic transactions; and also monitor various financial laws at different stages of development.

There is no doubt that people learn from experiences of others so do nations about the successes and failures of other nations especially with regard to something new and complex like the concept of Securitisation transaction. It is recommended that Securitisation in Ghana is modeled on the experience of South Africa's Securitisation transactions with some changes in the legislations to fit the situation in Ghana.

Ghana's private sector is beset with many constraints for no doubt, however, the other side is that, there are so many opportunities either untapped or unidentified comparative as well as other natural and mineral resources already in large quantities. There is potential for more effective exploitation of these endowments. But continued reliance on a few commodities with low prices and wages subject to fierce international competition in slow global markets have left the country vulnerable to hardship. These products could be structured and securitised.

Training of players of Securitisation transactions like, the originator, servicer, legal advisers, accounting adviser, tax advisers and others must be continuous about the technicalities of Securitisation transaction from now till the take-off. There should not be any mediocrity as is the characteristics of government and government agencies.

Investors and potential originators must also be educated on the benefits of Securitisation as an alternative for traditional capital formation besides equity and debt which is common to the Ghanaian business community. Providing better understanding of, cash flow drivers behind Securitisation transactions, credit rating agencies and also credit enhancement issues. This would trigger a strong desire for this form of capital formation to put Ghanaian businesses in the race to compete favourably on the international scene.

The technicalities of grasping the intrinsic techniques of properly analysing the segregation of assets and income flows from the company that owns them to the SPV which is meant to control the assets for the benefit of investors, must be well understood by the investment community.

A lack of genuine understanding of the drivers behind a Securitisation transaction, the ability to measure the impact on future operations as well as the initial costs involved in Securitisation creates difficulty in clearly defining the true incentives for conducting Securitisation amongst South African companies. Thus a comprehensive understanding of such amongst Ghanaian companies will boost Securitisation transaction.

One issue that needs to be tackled very well is the Tax Laws to make the Securitisation transaction work. Ghana operates a free-zone scheme and this can be extended to encourage Securitisation transaction. Certain areas within the country could be assigned as 'free zone for Securitisation'and 'use as tax haven' to nurture and groom Securitisation in Ghana.

The regulatory environment through which Securitisation is conducted, coupled with capital market infrastructure to support adequate pricing of all risks associated with all forms of Securitisation transaction-conduit, synthetic or "whole-business".

Finally, it is recommended that, research into the legal framework on bankruptcy, tax, and commercial laws relating to structured finance and Securitisation in particular should be encouraged among the Ghanaian academia.

Ghana indeed has an enabling environment suitable for Securitisation transaction. Key issues to drive this on might include as mentioned above extension of existing laws like Tax, Bankruptcy and commercial Laws to include treatment of Securitisation transaction.

Ghanaians are strong-willed, forceful and patient. When the expertise is acquired for Securitisation with the training of the players above, good governance of the other key government policies like MIDR and Strategy for 2004-2008‎, improvement on the Ghana School Financing activity‎ they will serve as catalyst for Securitisation.

Considering the experience of South Africa over the past decade, the experience of the developed economies in Securitisation transaction and the macroeconomic and the investment climate continue to improve as it is now ,in the next 10 years, Ghana will not be too farther away from engaging in Securitisation transaction if not already there.

Reference:

1. 'Securitisation in South Africa-a revolution for local funding', by Bagley et al(2003) Fitch Ratings available online accessed 20/07/2007

2. 'Securitisation: A public tool?' Treasury working paper, by Davis,N ,available online treasury.govt.nz/workingpapers/ accessed on 20/07/2007

3. 'Securitization.'Wikipedia, the free encyclopaedia. Reference.com accessed 25 Feb. 2007.

4. "Consider Securitisation to improve liquidity in the South African property market" by Eugene G van den Berg, accessed on vinodkothari.com accessed on 04/08/07

5. "Note on the impact of securitisation transaction on credit extension by banks" in Quarterly Bulletin December 2005 by N. Gumata and J .Mokoena

6. "The awakening of securitisation in south Africa", by Van Vuuren online available vinodkothari.com/secafric.htm

7. Africa -Ghana organising in the informal sector(on line) Available from oecd.org/dataoecd/html (accessed 29th April 2006)

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Advantages of Going Public

Some major reasons of taking your company public is the fact that raising capital for your company gets easier, an increase in your valuation, and the ability to use stock as currency. Other factors would include liquidity for shareholders, prestige and visibility to customers, incentives using stock options to recruit top level employees, and increased wealth.

In this day in age where lending markets are tight, private companies have looked towards the public markets for help to raise funds. Becoming a public company gives investors more confidence in investing in your company. Having a public stock price gives you a benchmark to raise capital. There are some public companies that offer investors an opportunity to purchase stock directly from the company at a discount to the public trading price in a private placement. Typically investors can not sell these securities for one year. This process will give the investor an incentive to invest. Capital raised can be used for growth and expansion, retiring existing debt, marketing, and most importantly acquisition capital. A public company can go to the public markets for capital with a stock or bond issue and may also convert debt to equity.

Going public gives the company an opportunity to create a market for the stock, giving the company a greater opportunity to sell shares to investors. Stock in a public company has more liquidity than a private enterprise. Most times, institutional investors and venture capital firms will require a company to go public before committing funds. The reason for this is the investors know they have an exit strategy. Liquidity is one of the main reasons why public companies are typically valued so much more than a private enterprise.

Once a company is public and the creation of the market for the stock has been established, the stock could be considered as cash when purchasing other businesses and assets. A public companies increase in valuation can lead to a variety of opportunities including mergers and acquisitions. Because of disclosure requirements from the SEC the public will have more confidence in the annual reports of the company. Market value of a public company is usually substantially higher than a private company with a similar structure in the exact same industry. Taking a private company public usually results in a substantial increase in value to the owners. Public companies can sell 20-25 times their net earnings where the same company that is private will sell for 4-6 times their net earnings.

Another major advantage of going public is the availability to use stock and options as an incentive to attract and retain important employees. There are certain tax advantages as well when considering issuing stock to an employee. Stock compensation can be a way of connecting an employee's financial future to the company's success. Last but not least one of the key benefits of a public offering is the stock will become liquid, offering the founders financial independence. This could be a substantial financial significance. It can also increase the personal net worth of shareholders, even if they do not realize immediate profits. Publicly traded stocks can be used as collateral or as currency to buy other assets.

Although there are many advantages of an IPO and going public, it is not for everyone. One must be prepared to deal with all the red tape the market has in store for you. Going public process can be very confusing at times so try to find an experienced consultant that can guide you throughout the process.

Warren R Fellus

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What Are the Different Kinds of Mortgages?

There are literally thousands of loan programs available in the market. Every lender tries to be as different as they can to create a special niche, which they hope will increase business. It would be impossible to provide a review of every type of loan, so in this article, we'll just stick to the main ones. Most loan programs are variations of the loans we will cover here. First of all we will go over some terminology you should understand and then we will delve into the different mortgage programs available today.

AMORTIZATION

Amortization is the paying back of the money borrowed plus interest. The actual term, or length of the mortgage along with the amortization is what determines what the payments will be and when the loan will be paid off. It is a means of paying out a predetermined sum (the principal) plus interest over a fixed period of time, so that the principal is completely eliminated by the end of the term. This would be easy if interest weren't involved, since one could simply divide the principal amount into a certain number of payments and be done with it. The trick is to find the right payment amount,which includes some principal and some interest. The formula of amortization uses only 12 days a year to compute the interest. The interest payment on a mortgage is calculated by multiplying 1/12th (one-twelfth) of the interest rate times the loan balance of the previous month.

On a 30-year, $150,000 mortgage with a fixed interest rate of 7.5 percent,a homeowner who keeps the loan for the full term will pay $227,575.83 in interest. The lender does not expect that person to pay all that interest in just a couple of years so the interest is spread over the full 30-year term. That keeps the monthly payment at $1,048.82.

The only way to keep the payments stable is to have the majority of each month's payment go toward interest during the early years of the loan. Of the first month's payment, for instance, only $111.32 goes toward principal. The other $937.50 goes toward interest. That ratio gradually improves overtime, and by the second-to-last payment, $1,035.83 of the borrower's payment will apply to principal while just $12.99 will go toward interest.

There are four types of loans when dealing with amortization and term. They are:

1. Fixed: with conventional fixed rate mortgages, the interest rate will stay the same for the life of the loan. Consequently the mortgage payment (Principal and Interest) also stays the same. Changes in the economy or the borrower's personal life do not affect the rate of this loan.

2. Adjustable: (ARM) also called variable rate mortgages. With this loan the interest rates can fluctuate based on the changes in the rate index the loan is tied to. Common indexes are 30 year US Treasury Bills and Libor (London Interbank Offering Rate). Interest rates on ARMs vary depending on how often the rate can change. The rate itself is determined by adding a specific percentage, called margin, to the rate index. This margin allows the lender to recover their cost and make some profit.

3. Balloon: A loan that is due and payable before it is fully amortized. Say for example that a loan of $50,000 is a 30-year loan at 10% with a five-year balloon. The payments would be calculated at 10% over 30 years, but at the end of the five years the remaining balance will be due and payable. Balloon mortgages may have a feature that would allow the balloon to convert to a fixed rate at maturity. This is a conditional offer and should not be confused with an ARM. In some cases, payments of interest only have to be made, and sometimes the entire balance is due and the loan is over. Unpaid balloon payments can lead to foreclosure and such financing is not advisable to home buyers. Balloons are used mainly in commercial financing.

4. Interest only: This type of loan is not amortized. Just like the name implies the payments are of interest only. The principal is not part of the payment and so does not decline. Interest only loans are calculated using simple interest and are available in both adjustable rate loans and fixed rate loans.

Fixed rate: The fixed rate loan is the benchmark loan against which all other loans are compared to. The most common types of fixed rates loans are the 30 year and the 15 year loans. The 30 year loan is amortized over 30 years or 360 payments while the 15 year is amortized over 180 payments. For the borrower, the 15 year loan has higher payments, since the money needs to be repaid in half the time. But because of that same feature the interest paid to the bank is much lower as well.

Even though these two are the most common terms, others are gaining in popularity, such as the 10, 20, 25, and even 40 year term loans Depending on the lender, the shorter the term, the less risk, and thus the lower the rate.

Other types of fixed rate loans:

BI-WEEKLY MORTGAGE

The bi-weekly mortgage shortens the loan term of a 30 year loans to 18 or 19 years by requiring a payment for half the monthly amount every two weeks. The biweekly payments increase the annual amount paid by about 8 percent and in effect pay 13 monthly payments (26 biweekly payments) per year. The shortened loan term decreases the total interest costs substantially.

The interest costs for the biweekly mortgage are decreased even farther, however, by the application of each payment to the principal upon which the interest is calculated every 14 days. By nibbling away at the principal faster, the homeowner saves additional interest. The ability to qualify for this type of loan is based on a 30-year term, and most lenders who offer this mortgage will allow the home buyer to convert to a more traditional 30-year loan without penalty.

GRADUATED PAYMENT MORTGAGE (GPM)

This loan is a good idea for buyers who expect their income to rise in the future. A GPM will start these borrowers off at a much lower than market interest rate. This allows them to qualify for a larger loan than they would otherwise. The risk is that they assume they will have enough income to pay increased payments in the future. This is similar to an ARM but the rate increases at a set rate, not like the ARM where the rate is based on the market. For example, a GPM for 30 years might start out with an interest rate of 5% for the first 6 months, adjust to 7% for the next year, and adjust upwards .5% every 6 months thereafter.

GROWING EQUITY MORTGAGE (GEMS)

For as long as mortgages have been around conventional fixed loans have been the standard against which creative financing has been measured. In the early 1980s the GEM was developed as a new alternative to creative financing. The GEM loan, while amortized like a conventional loan, uses a unique repayment method to save interest expense by 50% or more. Instead of paying a set amount each month, GEM loans have a graduated payment increase that can be calculated by increasing the monthly payment 2, 3, 4, or 5 percent annually during the loan. Or the monthly payments can be set to increase based on the performance of a specific market index.

So far it is sounds like a graduated payment mortgage but there is a difference. As monthly payments rise, all additional money paid by borrowers is used to reduce the principle balance. This results in a loan paid off in less than 15 years.

REVERSE MORTGAGES

While a reverse mortgage is not exactly a fixed rate mortgage (it is more of an annuity), I have included it here because the payments made to the home buyers are fixed. Reverse mortgages are designed especially for elderly people with equity in their homes but limited cash. They allow individuals to retain home ownership while providing needed cash flow. In a traditional mortgage, the homeowners repay the amount borrowed over a specified period of time. With a reverse mortgage the homeowner receives a specified amount every month.

To illustrate, say Mr. and Mrs. Smith are 70 and 65 years old respectively and retired. Their home is free from all encumbrances and worth $135,000. They would like to get the money out of their house to enjoy it, but instead of receiving it in one lump sum by refinancing it, they want to receive a little bit every month. Their lender arranges for a $100,000 reverse mortgage. They will get $500 a month from their equity and the lender will earn 9% interest.

Unlike other mortgages where the same $100,000 represents only the principle amount, with a reverse mortgage $100,000 is equal to the combined total of all principal and interest. On this particular loan, at the end of 10 years and 3 months, the Smiths will owe $100,000. The breakdown being $61,500 principle and $38,500 in interest. At this time the loan will end. So the Smiths will only receive $61,500, and they now owe the bank $100,000.

ADJUSTABLE RATE MORTGAGES

An ARM is a type of loan amortization where the most prevalent feature is that the interest rate adjusts during the course of the loan. Thanks to the adjustable rate feature, banks and lenders are better protected in case interest rates fluctuate wildly like in the 1970s when banks were lending at 8% fixed and then rates went as high as 18%. This left the banks holding loans that were losing money every month since the banks had to pay money to depositors at higher rates then they were making on their investments.

Important Tip: ARM interest rates are usually lower than fixed rates.There are multiple types of ARM loans in the market today. They all This makes it easier for borrowers to qualify for a larger loan amount with an ARM. differ from each other in minor but important ways. There are four main criteria to look at when dealing with an ARM loan: the Index used, the Margin, the Cap, and the Adjustment Frequency.

INDEX

The interest rates of an ARM loan are based on an Index, which is a published rate. The most common used indexes are:

COFI - The Cost of Funds Index. This index is related with the 11th District Federal Home Loan Bank Board in California. This index is also the most stable of all the common indexes.

The Treasury Series - This is a series of maturity lengths for Treasury Bills. These bills are used as investments by millions and are actively traded every day and so the rate varies daily.

LIBOR - The London Inter Bank Offered Rate is the rate the central bank in England uses to lend money to its banks.

Prime - This rate is the rate that banks in the US use to lend money to their best clients. This number is published daily in US newspapers, but it is important to know that each bank can set it's own Prime rate.

CDs - This index is from the rate paid to purchased of 6 month Certificates of Deposits.

MARGIN

Margin is defined as the amount added to the index rate to determine the current rate charged on the ARM. Once you add the margin to the index rate you arrive at what is called the Fully Indexed Rate (FIR). This rate is the true rate which the borrower will pay. The interest rate quoted to a borrower at closing might be lower then the FIR.

LOAN CAPS

The Cap is a very important number because it is the maximum that a rate can change. So even if the index rises 10% in one period, the FIR will not do so if there the rate cap is reached. There are two types of caps to worry about when discussing an ARM. The Rate Adjustment Cap which is the maximum the rate can change from one period to another. And the Life of the Loan Cap which is the maximum rate that can be charged during the loan. To figure out how the rate will change, you have to know the index, the margin, the rate, and the cap. Add the index and the margin to determine the FIR. Then take the rate and add it to the cap. Whichever is the smaller change is what the new interest rate will be.

ADJUSTMENT FREQUENCY

This is how often the rate changes. Initially when the loan is closed the rate will be fixed for a certain amount of time, then it will start changing. How often it changes is the Adjustment Frequency. So you can have a 7/1 Arm which means the rate will be fixed for 7 years, and then adjust every year after. Or you can have a 3/1 ARM. Fixed for 3 years. The more frequent the adjustment and the sooner it starts, the lower the initial interest rate. So a 3/1 ARM will have a lower rate then a 10/5 will. And that is because the 10/5 has more risk for the lender. The 10/5rate will be much closer to a fixed rate loan.

When a borrower considers an ARM, it is usually because the rate is lower then the fixed rate loan. And thus it is easier to qualify for. But the borrower is then betting against the bank. The ARM loan might turn out to be more expensive then the fixed rate loan in the long run, if rate rise during the term of the loan.

You must have an idea of how long you are going to live in the house you are borrowing to buy. If you are going to stay there long-term, a fixed-rate may make more sense. ARM's are better for military and other people who buy and sell within shorter time periods.

CONVENTIONAL MORTGAGE

A conventional mortgage is a non-government loan financed with a value less than or equal to a specific amount established each year by major secondary lenders. As of 2008, financing for less than $417,000 was regarded as conventional financing. A conventional loan is the most popular loan today, as so it has become the benchmark against all the other mortgages. It has 4 special features:

1. Set monthly payments

2. Set interest rates

3. Fixed loan term

4. Self amortization

A conventional loan is one that is secured by government sponsored entities such as Fannie Mae and Freddie Mac. Since they are secured, the lender is assured that they can easily sell the loan on the secondary market.

And because of that assurance, these loans have the lowest rates.

In order to qualify as a conventional loan, the home and borrowers must fall into the guidelines set by the secondary lenders.

HOME EQUITY LOANS

Real estate has traditionally been considered a non-liquid asset. Property can be converted to cash only by either selling or refinancing. Both are very expensive and time-consuming ways to raise money. Today's borrowers can convert their house to cash immediately by using the equity in their home.

These loans take much less time to approve and fund then regular home loans. And the fees are generally less than a normal loan as well. But home equity loans are usually placed in a second lien position after the original mortgage, at a higher interest rate. If the borrower does not pay, the house could be foreclosed upon.

The Equity Loan is an open ended mortgage similar to a credit card. Borrowers can take the money out, use it, and pay back the money when they choose. Recently, home equity loans have brought about new government regulations in some states since people were getting these loans without really understanding the consequences and thus being taken advantage of by less than honest lenders.

SECOND MORTGAGES

A second mortgage is a loan against a property in second or "junior" position. In case of foreclosure, the creditor in first position gets first dibs on any monies. In many cases, there is not enough equity in a house to pay off both the first and second mortgage. So the second mortgage holder can get nothing. Therefore, being in second position can be a very risky place to be.

That is why second mortgages come with higher rates then first mortgages. Second mortgages come in two main forms - a fixed mortgage and a home equity mortgage. The fixed mortgage follows the same format as a regular fixed loan. The equity mortgage is based on equity in the home.

Second mortgages are used by loan officers to either help the borrower avoid paying PMI, or to avoid a jumbo loan. A jumbo loan would be a non-conforming loan and thus would have a higher rate for the entire loan. If a borrower wanted to avoid this, he could get a first mortgage at the max conventional loans allow, and a second for the balance. The rate on the second would be high, but blended together, the rate would be less than on the jumbo.

GOVERNMENT LOANS

There are two governmental agencies that guarantee loans: The Department of Veterans Affairs (VA), and the Federal Housing Administration (FHA).

VA LOANS

VA loans are one of two types of government loans and are guaranteed by The Department of Veterans Affairs under the Serviceman's Readjustment Act. Lenders rely on this guarantee to reduce their risk. The best thing about VA loans is that for veterans is allows them to get into a house with zero or very little down. The amount of down payment required depends on the entitlement and the amount of the loan. Military service requirements vary. These loans are available to active-duty as well as separated military veterans and their spouses.

These loans are self-amortizing if held for the complete term of the loan, yet it may be paid off without penalty. These loans are only available through approved lenders. The amount of entitlement a veteran has is reported in a Certificate of Eligibility which must be obtained from the VA office in your area.

Veterans who had a VA loan before may still have "remaining entitlement" to use for another VA loan. The current amount of entitlement was much lower previously and has been increased by changes in the law. For example, a veteran who obtained a $25,000 loan in 1974 would have used$12,500 guaranty entitlement, the maximum then available. Even if that loan is not paid off, the veteran could use the difference between the $12,500 entitlement originally used and the current maximum to buy another home with VA financing.

Most lenders require that a combination of the guaranty entitlement and any cash down payment must equal at least 25 percent of the reasonable value or sales price of the property- whichever is less. Thus, in the example, the veteran's $23,500 remaining entitlement would meet a lender's minimum guaranty requirement for a no down payment loan to buy a property valued at and selling for $94,000. The veteran could also combine a down payment with the remaining entitlement for a larger loan amount.

FHA LOANS

The Federal Housing Administration is one of the oldest and largest sources of mortgage assistance available to the general public. The Department of Housing and Urban Development (HUD) run this program.

FHA backed mortgages are the other type of government loans and are an outgrowth of policy in the interest of the public, with the view that the government should stimulate the economy in general and the housing industry in particular. FHA loans like VA loans can only be obtained through approved lenders.

Why are FHA loans so popular? Because they have liberal qualifying standards, low or even no down payments and even closing costs can be financed and added to the loan. There is no prepayment penalty. FHA loans made prior to February 4, 1988 are freely assumable by a new buyer when the house is sold. Loans made after December 15, 1989 may only be assumed by qualified owner-occupants and cannot be assumed by investors.

FHA loans have limits too. Recent housing appreciation has pushed up the limits on this year's loan program by nearly 16 percent in the continental U.S.

If you want to find out what the loan limit is where you live you can call the consumer hotline for the Housing and Urban Development Department . Their toll-free number is available on their site. The FHA is a division of HUD.

As always, consult a mortgage professional. A Certified Mortgage Planner will work with your own financial planner, Realtor, CPA and other advisers to find a mortgage loan product that is right for you.

Please visit James at [http://swifthussherrealestate.com] for mortgage needs. Apply online, check current offered rates and loan programs and more!

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Making A Profit On Investment From Social Lending Sites

The worldwide lending industry is a multi-billion dollar industry where people borrow from banks, financial institutions and other private lenders. In the last couple of years, the lending industry has gone through an evolution and has given way to social lending as the new and promising mode of lending. Also known as peer- to- peer lending or person to person (P2P) lending, one of the first companies to set the base for social lending are Zopa, Prosper and more recently LendingClub.

Zopa is considered the first social lending marketplace in the world and its roots are in the United Kingdom. With the launch and immediate success of Zopa, other similar peer to peer lenders have sprung up like Prosper in the US, Boober in Netherlands and Smava in Germany.

If you are wondering whether the P2P loans offered at the social lending sites are worth it or not then the answer is most likely yes. There is not much of a difference as far as the P2P loans from these lending hubs and from a bank is concerned. The difference lies in the fact that there are no banks, no long procedures, and no middleman and above all the entire process is transparent for both the lenders and borrowers (no more hidden hard to find loan agreements!).

The main objective of the social lending hubs is to offer an online loan with the best interest rates and to make customers feel like they are borrowing from a friend or community. This peer to peer borrowing is increasingly being seen in a new light and is being considered as a part of community borrowing (which was more traditionally offered by small local community banks).

Other benefits:

Creation of a new asset class: Lenders on any of the peer to peer lending hubs can now take advantage of a new asset class, which they can add to their portfolio because it doesn't fall under an investment or even a savings account.

Choosing interest rates and loan repayment: There are several benefits for lenders as well as borrowers. In social lending hubs like Zopa or Prosper, lenders have the freedom and the flexibility to choose a loan repayment time period as well as the interest rate on the p2p loan.

Active community participation: one of the salient points is that this kind of a lending hub make borrowers feel as if they are following from an actual person and not an organization or a faceless institution. Hence it helps in developing a strong community feeling.

Lenders at any of the social lending websites have the power to set a minimum interest rate that they want to earn and can bid in an increment of $50 till $25,000 through loan listings. Borrowers can create a loan listing for a period of 3-years, and borrow an amortized and unsecured loan of up to $25,000 and also provide the maximum interest rate that they will be able to pay a lender.

The success of Zopa lies in its facts and figures. They are the largest lender today and have loaned out in excess of $930,000. The return on investment for lenders has been around 5.01%, which is healthy especially in the wake of the fact that social lending is still in its nascent stages. One of the top lenders even got an ROI of 19.8% on social lending websites.

The Lenders

By now you are probably thinking who these lenders really are? Are they banks in disguise or are they really other people? The truth is that they are really people. Let's take Zopa and Prosper for example. Both the social lending hubs are backed by Benchmark Capital who also funded eBay. Zopa or Prosper are the best alternatives that anyone can have to banks or other financial lending institutions, however they are restricted to the UK and US markets.

The current business model of Zopa is based on a 1% exchange fee that borrowers are paying them upfront. In return, Zopa is offering borrowers a better interest rate by cutting out the bank middleman. More than that, a borrower will have more control of the entire lending process and has the flexibility to establish an interest rate.

Zopa is the acronym for Zone of Possible Agreement, and its lenders include only U.K. residents who are over 18 years of age. To qualify as a lender, a person needs to have a valid bank account and a high personal Equifax credit rating. There are two restrictions for becoming a lender and they are:

oLenders have to be individuals and not businesses.

oLenders will not be allowed to have anything in excess of £25,000 ($47,000) in outstanding loans at a given point in time.

The American counterpart of Zopa is Prosper and they also handle maximum loan of $25,000 at a time. At this point the future of social lending looks bright as it has now hit New Zealand and Australia with the first peer to peer lending hub in Australia to launch shortly being Lending Hub (you can see their site at lendinghub.com.au and their active blog at blog.lendinghub.com.au) which will offer P2P loans with a strong community focus to ensure a truly social experience for both borrowers and lenders rather than just being a transactional online loan tool.

Ivan Mantelli is an accomplished writer as well as the owner of an Australian Lending Hub http://lendinghub.com.au

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The ETF Parade Keeps Marching On

Riding the wave of investor appetite for commodities, currencies and precious metals, the makers of exchange-traded funds (ETFs) continue to find new ways to slice and dice the market.

The instruments continue to proliferate and pull in money. In the last decade, assets under management at ETFs have soared 59% to $627.4 billion, according to research firm Morningstar Inc. Asset growth has slowed a bit recently, to just under 40% over the last three years, as the industry has gained a more substantial base.

But the massive asset gains have begun to slow slightly. Meanwhile, the number of new funds has grown. The last decade saw the number of new ETFs rise by 39.1%; over the past three years, that ramped up by 52.5%. Much of those gains were in 2006 and 2007, with that pace finally slackening this year as the markets became more unpredictable. (There were 787 ETFs based in the United States as of May 31, according to Morningstar.)

Issuers of the products "are less willing to do new issues," says Kevin Farragher, managing director of Rydex's ETF business line. He notes that fewer offerings have launched so far in 2008 than over the same period last year partly due to market saturation, as the most obvious market indices already have several products tracking them, and even the most mundane have at least one.

But Farragher also blames the fact that "there's less seed capital to be had." Traditionally, an issuer launched an ETF by getting money to start the fund from Wall Street firms known as authorized participants. The ETF issuer would give the firms shares in the ETF. And the institutions would act like a syndicate in an equity offering, selling the ETF shares from their inventories into the market.

Partly in reaction to their own financial circumstances, they are less willing to do new issues. "They want to do things that will be successful," Farragher says. "There's pressure on the issuers to be more judicious in choosing a benchmark around which to build."

Nonetheless, the industry continues to crank out new products. As of May 31, there have been 131 new ETFs this year, or 16.6% of the 787 U.S.-based funds.

He said he expects the pace to slacken over the summer and for new issuance to slow in the coming year. Regarding the new issues this year, he says, "You're not seeing the acceleration in new issues you saw the two or three preceding years. It's holding flat. That's because people are delivering on their 2008 plans as opposed to all of these new opportunities being discovered and acted upon quickly."

The development has come from issuers creating even more specific instruments, from broad indices to specific market caps. Jeff Ptak, ETF analyst at Morningstar, cites this as the continuation of a trend toward more specific exposures to sectors and industries.

For example, there are some products in registration that give investors exposure to real estate in general and the housing market in particular.

Other ETFs track individual countries and geographic regions. Consider the recently launched ETF from Invesco PowerShares, called the MENA Frontier Countries Portfolio (ticker symbol: PMNA).

It's based on the Nasdaq OMX Middle East North Africa Index, which is designed to measure the performance of the largest companies in the Middle Eastern and North African countries of Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and the United Arab Emirates.

The index has 67 companies with market capitalizations between $243 million and $10.4 billion.

Bulls and Bears

The areas that have seen the largest increase in interest are leveraged and inverse ETFs. These funds seek to give the investor bearish and bullish exposure to an index.

According to Morningstar, there are 77 leveraged and inverse ETFs, all based in the United States, holding $17.5 billion as of May 31. That outpaces the growth of the ETF industry overall, something Ptak describes as "no mean feat."

He cites ProShares as one of the more successful managers when it comes to gathering new assets. One of the company's popular strategies-on the positive side-has been the Ultra QQQ (which tracks the Nasdaq). But given the poorly performing markets, there have been many more bear hits lately: UltraShort S&P 500, UltraShort Oil and Gas, UltraShort Financials, and UltraShort Russell2000. In these cases, the ETF holder is betting on getting twice the inverse of the daily index return. So if the S&P 500 index loses 2%, the fund aims to deliver 4% on the day.

Gary Stroik, chief investment officer at WBI Investments in Little Silver, N.J., chairs his firm's investment committee and uses mostly individual securities and ETFs. He likes ETFs for giving advisors access to tools that would otherwise be unavailable to the typical client in his $275 million practice, like commodities. "You could invest in Exxon-but not oil," Stroik says. "You could invest in Newmont Mining-but not in gold. It's a powerful tool, but like other powerful tools, you've got to be careful how you use it. It's a chainsaw," he says, alluding to the leveraged ETFs that give an investor double the exposure to a particular index or sector. He uses the term "double exposure funds" to describe them and says they can be dangerous.

For example, say an investor wants a $10,000 exposure to the S&P 500. He could could buy $5,000 worth of a double-exposure ETF, and safely stash the other half in a Treasury bill or money market fund. "I get a return in the case, get the same portfolio exposure and performance I wanted, and pocket the interest on the cash," Stroik says. "On the other hand, if you put the entire $10,000 into the double exposure fund, you'd get twice the risk exposure and no cash cushion."

Ptak says these ETFs are handy for making a bearish bet because of their ability to spread risk. "When you look at the risk-reward profile on a particular stock, and contrast that with the risk profile of shorting a basket of stocks, the latter choice is better," he says. "You sacrifice some upside, but you spread uncertainty across lots of stocks." Ptak points out that, unlike the old method of shorting-borrowing money from your broker on a margin account, which could lead to unlimited losses-the downside with bearish ETFs is limited to the investment in the ETF. "It's a better mousetrap," he says.

In addition, these products are especially useful when credit markets tighten. "Hedge funds in particular have taken a shine to these leveraged products because these ETFs will be there whether banks are lending or not," Ptak says. A hedge fund manager can get 200% exposure to a particular index quickly and easily by buying a leveraged ETF, without drawing down a line of credit with their bank, or worrying about a margin call. It also saves the hedge fund manager from worrying about a nervous banker calling in all of the fund's lines of credit when the bond markets start clamping down.

This is how it works. The typical ProShares ETF enters into a total return swap contract. The ProShares trust agrees to pay LIBOR (London Interbank Offered Rate) or a Treasury bill return plus some extra amount in exchange for the return of a specified index (or twice the return of a specified index).

Analysts are watching for growth from a new breed of complex derivative-style products that allow investors to buy risk. As yet still in the regulatory pipeline, these esoteric products would allow investors to access strategies previously available only to institutional investors. These risk-exposure products would be similar to credit default swaps (CDS), a sophisticated derivative instrument that gives the buyer a pure exposure to a company's credit risk.

Buying a CDS differs from simply owning a corporate bond, which also exposes the investor to interest-rate risk, curve risk and prepayment risk. Credit default swaps have been popular with institutional investors for the investment precision they offered when constructing a portfolio. However, the CDS market was also hit hard in the painful credit crunch of last summer.

Little-known fund advisor CCM Partners has filed to manage four such ETF-like structures called ETSpreads, which will aim to track indices that are essentially baskets of CDS: a high-yield bond index and its inverse, and an investment-grade bond index and its inverse. These types of risk products would be most useful to the more sophisticated advisors with high-net-worth clients, such as corporate executives with large blocs of stock in their employer. Such clients have portfolios that are both large and complex enough to warrant precise removal of risk from certain stocks.

Similarly, there are other ETFs in registration aiming to zero in on very specific risks. Earlier this year, MacroShares registered a pair of products tied to the housing market: MacroShares Major Metro Housing Up and MacroShares Major Metro Housing Down. "These are large economic exposures that consumers and investors have day in and day out," Ptak says.

Instead of providing an indirect exposure to a specific risk, products like MacroShares attempt to focus on the risk with pinpoint precision. "We're getting much more narrowly focused niche-type products, in which ETFs divvy up risks and exposures into ever-thinner slices," Ptak says.

Indeed, the same company also has a pair of ETFs in registration that give the investor exposure to the risk of medical price inflation. The MacroShares Medical Inflation Up Shares and MacroShares Medical Inflation Down Shares, its bearish sister, will track the medical care component of the Consumer Price Index. This strategy allows investors a great degree of precision, in case they want to take a strong stand on a particular industry. If you thought medical inflation would go up, before these ETFs, the natural bet would be to buy shares in an index holding the big pharmaceutical stocks, or an actively managed sector fund, or an ETF such as the Vanguard Health Care ETF. But often those indices hold extraneous companies. Plus, there are other influences between consumers and inflation, such as the company. With the new structure, the investor does not have to think about what's going on in the company, only medical inflation.

MacroShares already has a pair of funds that do the same for oil prices, but they are being closed down. They were created with a kind of self-destruct mechanism that triggered a termination clause when the price of oil hit $120 a barrel. The company is liquidating the funds by giving a cash redemption to investors, similar to mutual fund liquidations.

Hitting the Right Note

Meanwhile, exchange-traded notes continue to be much discussed because of their advantageous tax status. But the Internal Revenue Service still may remove that beneficial tax treatment at some point in the future. (The agency has already removed the tax breaks from one specific type of ETN; those tracking single currencies.)

For a non-single-currency ETN, the only taxable event for an investor is when the note is redeemed. If the investor sells after a year, there are only 15% capital gains. Compare that with an ETF, which sees 60% of its gains taxed at long-term rates and 40% taxed at short-term rates. Those taxes get passed on to the investor regardless of how long he held the ETF.

Regardless of how the IRS rules, though, ETNs are still a very efficient way to own currently hot asset classes like commodities and currencies that were difficult to own before. Part of the reason for their efficiency is their structure.

They are notes, or debt instruments, which are tied to the performance of a particular benchmark, rather than a trust that holds a basket of securities, as with an ETF. As in a traditional bond, the issuer of an ETN promises to pay the investor that index return. That means all the investor has to worry about is the credit risk of the issuing bank. And because one of the biggest issuers of these new instruments is banking giant Barclays, Ptak regards the credit risk aspect of many ETNs as fairly safe.

What investors do not have to worry about is the transaction costs within the ETN, as compared to an ETF in which managers buy and sell securities. So the ETN structure eliminates two of the main problems with investing in commodities, currencies and precious metals: transaction costs and tracking error.

But, investors should note that ETNs are not as cheap as the cheapest ETFs. The median expense ratio on ETNs is 75 basis points. The cheapest tracked by Morningstar costs 30 basis points, and the priciest runs 1.25%. But as with all ETFs, ETNs carry the same transaction costs for the investor as a stock. So, frequent trading can erode gains.

Still, in spite of the question mark over their tax treatment, ETNs are becoming popular ways to get a piece of the energy and commodity action. Plus, they are relatively cheap for issuers to launch and run, compared with ETFs, according to Ptak. That makes for a lot of new products. As of May 31, there were 78 ETNs holding $6.5 billion-with 52 having been launched so far this year, according to Morningstar.

At the moment the majority of the wealth is concentrated in a handful of names, including the iPath series from Barclays, the biggest issuer at the moment, with 17 ETNs holding 54% of U.S.-listed assets.

One of the biggest winners among ETNs is the iPath Dow JonesAIG Commodity Index, the biggest commodity instrument among ETNs and ETFs. It held $3.5 billion as of May 31. The next largest ETN is the iPath MSCI India, which holds $739 million in assets. The assets in the rest of the pack drop off rapidly, with 42 of the 78 ETNs holding less than $10 million.

"A lot of them just came online, and they haven't had an opportunity to gain traction on the market," Ptak says.

Elizabeth Wine is an author with On Wall Street magazine. For more information about this article, please visit http://www.onwallstreet.com

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