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ELI5: Interest Rates & The Stock Market

We saw a bit of red in the markets this week. The S&P 500 was down about 2%. Not a huge drop, but after seeing mostly green for a few months, even moderate losses are jarring. We got used to winning. The drop was largely attributed to a rise in interest rates. Similar to its relationship with bonds, interest rates and stocks tend to move in opposite directions. When rates go up, stocks fall (and vice versa). This is broadly speaking of course. There's no exact way to explain stock movements, especially in the short term. Too many factors at play. Alas, the logic is generally sound. When interest rates rise, money becomes more expensive. For businesses, the greater borrowing cost eats into their earnings. Reduced expected earnings trickles down to reduced stock prices.  For investors, when safe assets start yielding more, they become an attractive alternative. Low rates meant stocks were the only game in town. Investors would rather take a chance with stocks than earn nothing w

ELI5: Why Split Stocks?

Last summer, Apple's stock price went from $500 to $125. On face value, this shocking. A drop of 75% for one of the world's most successful and beloved companies. Are iPhones the next BlackBerries? Was there a scandal with Siri? Nope. The reality is much more boring.  It was a matter of corporate accounting. Apple did what many public companies do from time to time. They increased their number of shares - by splitting them. Stock splits can happen in many fashions. 2-for-1, 3-for-1, you get the picture. In Apple's case, 4-for-1.  This means Apple 4x their shares outstanding. Their overall value remained unchanged. Just more shares, worth less a piece. Seems like a lot of work to get back to same place, no? There's a reason. Stock splits help increase access. As a stock rises, it becomes more and more difficult to buy. Berkshire Hathaway is a prime example. Through decades of compounded success (and never splitting) a single share is now trading well over a whopping $300

Advice From Rich People

If you want to get in shape, turn to the fittest person you know. Do exactly as they do and you're on your way, right? Caution, I know some really fit people where pizza is half their diet. Following their footsteps will gain you nothing but pounds. We're all different (genetics and such). Them being in shape doesn't mean they know how to get you in shape. The same holds true for wealth. The media loves to interview billionaires. Where are we in the cycle? Where are we going? What should we do with our money?  There are definitely smart folks in the bunch we can learn a lot from. Warren Buffet is particularly quotable. But being rich in and of itself doesn't mean you have all the answers. Most folks become successful through a combination of skill and luck. The spectrum goes from hard work and smarts (skill) all the way to being born rich (luck). Skill is often overstated while luck is ignored. Luck can't be taught. This is why lottery winners don't give TED Ta

The Wrong Lesson From GameStop

Newcomers rushed to open a brokerage account last month. Fuelled by the craziness of GameStop, folks jumped into the markets head first. A get-rich-quick scheme paired with a David Vs. Goliath story, this brought investing to the mainstream. Retail investors turned thousands into millions, all while hurting hedge funds in the process. Make money and tackle inequality? How could anyone resist? Driven by emotions and momentum, this was a speculative bubble that was destined to snap back to reality ( oh there goes gravity ). A lot of people are now losing money and are screaming foul at the rich for rigging the game.  A terrible first impression. Why invest when they can change the just rules? This is the wrong lesson. Does the stock market favour the rich? Yes. They have faster computers and better information. But if you put down your broad brush you'll see the stock market is a great way for everyone to build wealth. Pros might have advantages but they don't have complete contr