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How Does the Stock Market Work?

Efraim Landa and investment firms like Effi Enterprises are well acquainted with the workings of the stock market. They work with emerging businesses and help them gain value. One of the greatest steps for a company or a business is when they have become profitable enough to go public and make an Initial Public Offering (IPO) of their stocks. Typically a business idea begins with an entrepreneur who gets started and then outgrows their sources. This is when they look for a venture capitalist such as Efraim Landato help get them with funding options with the hope that there will be a day where they can make an IPO. This is when stocks in the company are available to the public through the stock market.

Stock Market

Stock Market

The stock market can be very confusing and those who are unsure about how it works can stand to lose a lot of money when they first start out. However, it is not as complex as it appears to be. Basically, you have the option of purchasing stocks in a company. Companies make these shares available as a way of funding their business. When someone purchases a company’s stock they do not own part of the company but are providing funds by which the company can grow. The more the company is worth, the more value their stocks become. Stocks are frequently traded back and forth on the “stock market.” There can be a few things that affect the price of stocks.

In one way it is as simple as the law of supply and demand. Stocks are available in a limited number and when there are a lot of people who want to buy stocks in a particular company the price will increase on their stocks. But when there is a decline in the number of buyers who want them, or there are a large number of people who want to sell the ones they have then the price on the stocks decreases. Theoretically the demand for stocks for a particular company will depend on how profitable the company is. However, what the company is expected to do in the future will also factor in to the value of the company’s stocks.

When a company goes public with their stock it is generally a way of increasing revenue. This is generally to be used for some form of expansion. Perhaps the business needs to add a new product or offer more services to their clientele. An IPO can be a way of raising those funds. The public can then invest in the company by purchasing the stocks.

The main goal of an investor is to make money on the stocks that are purchased. They will need to buy stock at a lower price and then when the price on the stocks goes up they will sell it off before it takes a downward turn. This will mean that stock holders will need to pay particular attention to the company’s value and the projected value of the company later on. Many times stock prices will go up before an earnings announcement but then decline if these earnings were much higher than what was generally expected.

A lot of novice investors think that when they purchase stocks they are going to receive from the company’s profits but this is not so. Some very large companies may pay a dividend and this is done a per share basis. But most companies hold on to their profits in order to pay for future growth. There are two schools of thought on this, some investors are interested in the company growing so that the stocks are worth more and others are more interested in investing in companies who are profitable enough to pay dividends. The type of stocks purchased will depend largely on a person’s investment goals.

What is LIBOR?

Barclays Bank

Barclays Bank

LIBOR is an acronym for London Interbank Offered Rate. It is basically an interest rate used on the federal level. It’s the interest rate that is charged between banks for loans. As far as interest rates it is the busiest in the world of finance. There are a number of banks which participate in the money market in London and they offer short term deposits to each other. LIBOR is what is used to determine the price of several other financial derivatives. These include items such as futures for interest rates, Eurodollars and swaps. This is very influential throughout the world of finance as it affects more than just the Pound Sterling. It is also important to other currencies like the US Dollar, Canadian Dollar, Japanese Yen and the Swiss Franc.

Every morning in London at 11:00 am LIBOR is set. The exact rate is found by averaging the various interest rates which are being offered by the banks in membership with the British Bankers Association. It is calculated for different time frames from as short as a day to a full year. The banks may offer varying rates throughout each day but the rate set is fixed for a 24 hour time frame. Even when the instantaneous rate and LIBOR are different it is a very small increment and for a short time.

Eurodollar futures are the most important of the derivatives which are related to LIBOR. Eurodollars are basically US monies which are deposited in banks which are outside the United States, generally in Europe. These Eurodollars are traded in Chicago at the Chicago Mercantile Exchange. Depositors outside the country are not subjected to the margin requirements enforced by the Federal Reserve which gives the depositor more leverage over the funds. LIBOR determines the interest rate which is paid on these Eurodollars and these futures provide ways to bet or hedge against the changes in the future interest rate.

There are 16 member banks in the British Bankers Association and they control the rates on about $360 trillion worth in the financial markets and products around the world. This includes the adjustable rate mortgages (ARM), which is where it affects the average Joe. When the interest rates are stable it provides several decent options for those wishing to purchase homes. For these mortgages it means no negative amortization and usually there are fair rates in terms of repayment. Usually the ARM is guided by the 6 month LIBOR plus somewhere between 2 and 3 percent.

LIBOR’s influence affects more than just the homeowner it also affects the entrepreneur and loans for small businesses, students and credit cards. It is all good while the economic climate is stable and LIBOR is doing well. But when economic uncertainty looms, particularly in the developed countries then the rates become volatile. This makes it more difficult for the banks to exchange loans among themselves. This in turn makes it more difficult for others to obtain bank loans. The trouble is that when the system is volatile the bank simply raises its interest rates for the borrower, or offers fewer loans.

LIBOR can also affect Federal rate cuts. Usually investors such as Effi Enterprises enjoy it when the Federal government cuts rates. But when LIBOR rates soar it restricts people from obtaining loans. This means that the average person does not benefit from the discounted rate because fewer loans are being offered. For those with a subprime mortgage it is important to keep an eye on LIBOR rates.

Generally the LIBOR rates do not affect the US Dollar or have little effect. It mostly has an impact on the Euro, Japanese Yen and the British Pound. However, for monies from the US which are being held in foreign banks, it is a relevant issue.