The Days of Bank Savings Accounts Are Gone. What Now?

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Saving money in the 21st century has become a great deal more challenging than it was in the 20th century. I can remember the days when you opened a savings account, received a decent interest rate and a gift like a toaster or a TV. Those days have long gone and can only be revived through the storytelling of the senior members of this generation. Opening a savings account was almost like a right of passage for young people, where youngsters were introduced to the principles of saving money and introduced into a relationship with a financial institution simultaneously.

Today that right of passage is much more treacherous, full of fees and very low interest rates, and very very confusing choices. What's so confusing about saving money in the 21st century? What choices have to be made that have become so challenging for young people today?

In 2016, the average rate of return on a savings account in the USA was less than 1%, 0.11% APY to be exact, according to Bankrate. What does that mean in layman's terms? $100 yields 11 cents in a year's time, $1,000 will yield $1.10, $10,000 will yield $11, and $100,000 will yield you $111 in a year's time. It is very difficult in this age to save $100 let alone $100,000, and the banks don't seem very willing to reward you for the intense effort that was used to accomplish that feat.

Receiving 0.11% APY is barely better than putting your savings in a hole in the ground. Where does that leave forward thinking young people that are trying to save money for their futures? Where does this low interest rate, for traditional savings methods, leave the older people of this generation? We are all faced with the reality that the traditional method for saving money has left us, and we all must endeavour to find a new way to receive a gain from savings.

This pursuit will require us to become acquainted with a variety of financial instruments. Our quest will also present us with a new language that is used to describe these financial instruments and how they trade. Terms and values that were never necessary to understand when we saved money the traditional way in a savings account.

The terms we need to understand include words like risk, acronyms like EPS ( earnings per share )and P/E Ratio (price to earnings ratio). We need to learn terms that describe stock behavior like the 200 day moving average and resistance levels. These terms must now be understood  by the depositor in order to ascertain the value and trading pattern of a variety of financial securities like stocks, bonds, mutual funds, and ETFs (electronically traded funds). The depositor has evolved into an investor and needs to be able to decipher the info available in order to choose what they perceive as a better option than a savings account.

The first new term that we will discuss is risk. Investing in securities has a degree of risk. There are so many factors that can affect the price of a security. Factors that the new investor has no control over such as the Chief Executive Officer of the company you wish to invest in resigning unexpectedly. Or a newly imposed law that can affect the manufacture or sales of a company's merchandise. A fall in the prices of stocks caused by some news can also contribute to losses in securities investments. I like to interpret the risk in securities investments this way; The price of securities will fluctuate, depending on news and market conditions. This means as an investor you are responsible to monitor the news and market conditions surrounding your investment.

When focusing on stocks, just looking at a stock quote can be so intimidating. That intimidation comes from unfamiliarity of the terms being used to describe the stock. Lets try to eliminate that intimidation by explaining and simplifying what the less obvious terms mean, such as, Beta, Market Cap, EPS, and P/E Ratio.

The Beta is defined by Wikipedia as follows:

In finance, the beta (β or beta coefficient) of an investment indicates whether the investment is more or less volatile than the market. In general, a beta less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market. Volatility is measured as the fluctuation of the price around the mean: the standard deviation.

Beta is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.

Simplified, this means that a stock with a beta value larger than 1 has a tendency to move at a greater rate relative to the normal movements of stocks in general. Indexes give us an idea of how stocks are behaving within a particular sector. The S&P 500 has a beta value of 1, Qualcomm (QCOM) has a beta value of 1.45, when comparing QCOM to stocks that are included in the S&P 500 there is a tendency for QCOM's movements to be greater than the movement of the stock it is being compared to. That's all there is to it! Nvidia Corp. (NVDA) has a beta value of 1.73, when comparing NVDA to QCOM you can expect a tendency for NVDA's movements to be greater than QCOM's in relation to the movements of stocks that comprise the S&P 500. The beta value gives you an indication of a stock's movements compared to the general behavior of stocks in a specific time frame. McDonalds (MCD) has a beta value of 0.73 with our new found knowledge we have an indication as to the expected behavior of MCD's stock price when the market moves. We can expect the movement to be less than those stocks included in the S&P 500 and much much less than the movement of QCOM and NVDA.

Market Cap is a nice acronym for a very basic concept. The determination of what a company is worth in the marketplace, it is the market value of a company's outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding. QCOM's Market Cap value is currently $81.13 billion US dollars, MCD's Market Cap value is $104.25 billion. The Market Cap value helps you understand the size and value of the company as a whole.

Earnings Per Share(EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Let's put that to use immediately to help you see a practical application of this value when looking at a stock quote. QCOM's EPS value is $3.81 MCD's EPS value is $5.32. This is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year to QCOM and MCD shareholders respectively. Just by comparing those two values we can make an educated guess and surmise that MCD earns more than QCOM. MCD's earnings per share value is greater than QCOM, but QCOM's profits the last reported quarter, at the time of my writing, were greater than MCD. Therefore, simply stated, this value represents the stability in the business entity's ability to generate revenue.

Price to earnings ratio (P/E ratio) can be defined this way; The price to earnings ratio indicates how much investors are willing to pay for each dollar of profit they stand to earn per year. For example, if an investor buys a stock with a P/E of 16, he’s willing to pay $16 for each dollar of profit, or 16 times the earnings for one share of stock. This value can sometimes be a little misleading. NVDA's P/E ratio value is 71.21. In a 12 month time frame the stock went from $27 - $108.38 that's a 301% increase that investors in NVDA were able to realize. The P/E ratio of the S&P 500 is approximately 18. Just because a P/E ratio is very high above the normal or very low to the customary values we are taught to look for (around 18), does not mean the growth potential is still not present within a company. The growth potential needs to be weighed as you research your investment strategy. I like this rule of thumb presented by dummies . com  

A stock with no P/E means the company posted losses. You want to invest in profitable companies to ensure the stability of the dividend payment. Stocks with P/Es higher than 20 means investors are willing to pay more for $1 of profits because they expect profits to see significant growth. Stocks with P/Es higher than 40 are expected to see very strong growth, but typically that level of P/E means the stock is just overvalued.

Levels of Resistance

Resistance Levels explained by Investopedia: A resistance level is a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level. Resistance levels are characteristically found at the upper levels of range bound markets. They may be very short lived, or may remain a resistance level over an extended period of time.

That definition is pretty straight forward. What I would like new Investors to be conscious of, are the times when a stock breaks through its resistance levels. Those are the times you can sit on the edge of your seat and wonder what new heights will be recorded. Conversely when support levels are broken you may need to be ready to let go of the position.

The 200 day moving average represents the average trading price over the past 10 months, when trading occurs outside of this range the market needs to be monitored for potential buying or selling opportunities.

To complete this discussion a bid is the price where a stock can be sold immediately. Conversely the ask is the price where a stock can be bought immediately.

If you want to earn more than 0.11% on your hard earned savings, stocks are definitely an option. Understanding the information available that describes the behavior of a stock is critical for you to make a well thought out stock purchase.