The world of investing can be very intimidating. If you are one of the millions of people who have never invested before, it can be a little daunting trying to decide where to start. With the stock market sitting at a point where a comeback is imminent, the time to be investing is now.

A great place to begin investing is with penny stocks. Micro-cap stocks are a good first choice because the relatively low cost of an initial investment can be offset by a fairly substantial return. Most companies out there started as a penny stock at some point. Even the biggest companies on the stock exchanges started out as an idea in somebody’s head that was turned into a success by years of hard work.

Many people believe that penny stocks are always new companies that are up and coming and not well established. This is not always the case. Let’s take for example, Citigroup Inc (NYSE: C), a company that everybody has heard of that right now fits the description of a penny stock, trading in the low 3 dollar range.

A couple of other interesting examples would be; Federal National Mortgage Assoc (Fannie Mae, NYSE: FNM), and Federal Home Loan Mortgage Corporation (Freddie Mac, NYSE: FRE). Here are two government chartered mortgage corporations that are trading for around a dollar a share.

Small-cap stock fortunes can be and are made, but you have to do some homework. You just can’t dump your money into any stock and hope for the best. There is a huge amount of research on stocks out there, but it is up to you, as the investor, to study up and choose the ones that have the best and brightest future.

A lot of the experts believe that Citigroup is one of the best investments on the board right now. The consensus is that the market has over-reacted to their recent troubles and that the positives of the company are still far greater than the small risk you would take by investing in it.

It is amazing to think of a well known corporation like CitiGroup, and two federally backed mortgage companies, that just a few years ago were trading in the $50 range, are now considered to be smart penny stock investments!

Are the financial woes of the banks over? To beat the market by investing in the stock market, you should have a good understanding of the factors that are driving the trends in the financial sector. For example, are we close to the end of the loan write-offs? If you are learning to invest, it is important to have well ground perspective on state of the financial sector before making any long-term commitments. Expect the financial woes of the banks to continue and be careful when the market make volatile moves in either direction.

Bank Failures

On Friday July 11, 2008, after the market closed, the Federal Deposit Insurance Corporation (FDIC) took over IndyMac Bancorp (IMB) in California. This was the second largest bank failure ever in the US. About a year ago, the share price was $29. It closed on Friday at $0.28. According to the FDIC, there have been 12 bank failures so far in 2008. The concern among investors is that there will be many more failures in the months to come as loan write-offs over whelm banks without sufficient capital. Earlier on the same day, there was much consternation about the fate of the quasi-government mortgage banks Freddie Mac and Fannie Mae. An article in the Wall Street Journal and comments from a former Fed Governor indicated that these organizations were insolvent. Management at both companies claimed that this was not true and that they were fully capitalized and accepting mortgages. Quoting “Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae [down 78%] assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said.” (Bloomberg). Also, Senators Schumer and McCain both said Freddie and Fannie would not be allowed to fail, in the same story. Freddie and Fannie are essential to the U.S. mortgage market. According to various reports, they are currently buying up to 80% of the mortgages now created in the US. Without them, the mortgage market would dry up and the price of homes would fall much further as very few could afford to buy a house. If this were to happen, the US would face a housing meltdown of unprecedented form. So where do Freddie and Fannie get additional capital? As mentioned above, the price of their stock has fallen significantly. Not many investors want to place new capital in an organization that still does not know how bad it can get. Free marketers believe they need to fail to help restructure the system and make the market work properly. Others believe the government must step in at taxpayer’s expense. Most likely, we will see the government step contributing a large amount of money receiving preferred shares in return. If this happens, expect the common stock holders to be wiped out. The hope is eventually the Treasury will be able to sell the preferred shares to recoup their investment once the market stabilizes in several years. This makes one think how bad can it get. Testifying before Congress Ben Bernanke said that Freddie and Fannie were adequately capitalized and that the problem was one of confidence. The Securities and Exchange Commission said it would curb short selling in the 19 primary dealers including Fannie Mae and Freddie Mac.

Potential Loan Losses

About a year ago, the “analysts” estimated that the total write down of bad loans would be about $400 billion. Then by December 2007, the estimate doubled to about $800 billion. Then along comes a report from Bridgewater Associates that expects the number to double again to $1.6 trillion. Bridgewater is a very large hedge fund who is also one of the top analytical firms. Up to now, the banks have been using a ‘mark-to’model’ method of valuing the structured debt. According to Bridgewater, the modes used have grossly underestimated the actual losses. They doubt the financial institutions will be able to generate enough capital to cover the losses. According to the report, “Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn [$12 trillion] worldwide unless banks could raise fresh capital.” Not all of these losses are in the sub prime market. According to the report, more than 90% of the losses from sub prime loans have already been written off. Unfortunately, the losses form the prime and Alt-A loans could be much larger than we have already seen. The size of these loan portfolios are much larger than the sub prime portfolios. Further, Bridgewater expects about $500 billion in corporate losses that must be written off. This leads to the current estimate of more than $1 trillion in losses yet to be written off. That is a scary thought. On Sunday evening July 13, 2008, the government stepped in to start the bail out process of Freddie and Fannie. The following is from MarketWatch:

WASHINGTON (MarketWatch) — The White House and the Federal Reserve moved Sunday to prevent Fannie Mae and Freddie Mac from failing. In a statement, Treasury Secretary Henry Paulson said the global reach of Fannie and Freddie necessitated unprecedented action. The Treasury has asked Congress to increase the existing line of credit to Fannie and Freddie. In addition, Treasury asked Congress for the power to buy the two companies stock. In a separate vote, the Fed board of governors voted to open its discount window lending facility to Fannie and Freddie. In return, Paulson asked Congress to give the Fed a formal role to work with the new GSE regulator on capital standards for Fannie and Freddie.

So the bail out has begun. So far, Freddie and Fannie have not taken advantage of the Fed’s discount window. It looks like just making it available helped to increase the confidence in the financials. Then on Wednesday, July 16, 2008 Wells Fargo increased its dividend by 10 percent, which was a surprise. This news has helped to push up the financial sector more than 10% on the day.

The Bottom Line

So what is an investor to do? The financials benefited from these moves as short covering on Wednesday helped push up the prices of the banks across the board. The transportation and consumer discretionary sectors also did well. One characteristic of bear markets is sudden moves up that can last for several weeks. However, then reality sets in and the market turns back down. We could be on the cusp of this type of move if it can sustain itself through the heart of earnings season. For investors willing to make trades that might last only two to four weeks, there is a good chance we are near an interim bottom. Before committing capital, we need to see if the rally on Wednesday can continue. Stay tuned.

So what in the world is going on with mortgage rates? We have so much volatility its hard to judge the direction. Keep in mind the market is highly emotional right now. From day to day you don’t know what is going to happen.

I try to coach my buyers the best I can but sometimes the window of opportunity is only there for a couple of days and then gone again for a few weeks or even months.

Many people do not realize that mortgage rates are determined by the secondary market for mortgage-backed securities. Let me explain what I mean and it will make more sense.

Lenders make loans to borrowers for mortgages, car loans, etc. Lenders can get their money from a few places. Deposits are the cheapest. This is why banks REALLY stress and focus on what is called core deposit growth.

Banks can also use short term funding like commercial paper or short term notes usually ranging from 90-120 days. They can also borrower from other banks. If the lender is publicly traded they can raise capital through the issuance of common shares or preferred shares. Preferred shares are a hybrid of stock and debt and are paid dividends by either a percentage or dollar amount per share. Example 8% preferred would pay 8% interest on the par value of shares held. If the pare value is $100, they would receive $8 dollars a share. If the stock is a $3 preferred, this would mean that the investor would get $3 per share regardless of the par value (example if the par value was $60). Issuing common shares would dilute common shareholder equity and is usually not seen favorably by investors with big positions within the company. This is a whole other topic.

So once the lender makes the loan they can either hold the loan on the books, a portfolio loan, sell the note to an investor such as Freddie or Fannie — these are government sponsored entities with the sole purpose of providing liquidity in the mortgage market — or they they can sell the note and then sell the servicing rights altogether. Selling the note and servicing provides fee income for the originator of the loan and then frees up the capital to go lend more moving all the risk to someone else.

Freddie Mac and Fannie Mae will then pool these loans together and package them into securities and sell them as bonds to investors worldwide. This is also to provide more liquidity to them so they can continue to buy more and more loans. The cycle just repeats itself.

Freddie and Fannie do have loan limits that are set by the Federal Housing Finance Agency, who on July 30 2008 was created by the Housing Recovery Act, to oversee Freddie, Freddie, and the Federal Home Loan Banks, to make sure the secondary market is functioning properly.

These MBS or Mortgage-Backed Securities are sold in the form of bonds. If you are not sure with how bond pricing works it can be a little confusing. When bond prices move up (which means investors are buying), the yield at which those bonds pay goes DOWN. Yes that’s right price and yield move inversely from each other. When bond prices move down (which means investors are selling), the yield moves up. This can get really complicated because a bond has a stated interest rate or coupon, doesn’t mean the investor will pay that. Market prices change all the time and if an investor wants a higher yield, that means the price has to come down.

So what does all this mean? Well it means that if the yields go up on the bonds, mortgage rates will follow the upward trend. This is because mortgages have a risk of prepayment either through selling the home or refinancing into a new loan. When this happens investors do not get the cash flow from the bond they anticipated so to compensate for that risk these bonds are traded at a spread of government bonds. Spread simply means a numeric figure, expressed in terms of basis points, over the index (the government bonds). Basis points are a fraction of percentages expressed as a unit of 100. Example 1 basis point is 1/100 of a percent. One hundred basis points would be equivalent to 1%.

Right now investors are skeptical of the condition of the economy and even though the government is pumping billions of dollars into the system it boils down to investors wanting higher returns for loaning their money. Bottom line don’t play the guessing game. If you are in the market to purchase a home now is the best time to do so.

Why you ask? Even though we have price volatility, mortgage rates are still at historical lows and on top of that you have home prices that have fallen some 30% in some areas making more homes affordable. Don’t waste time we will start to see home prices going back up soon so don’t get left holding the bag trying to wait it out to the last minute and time the market.

As a warning please make sure you work the numbers of purchasing a home prior to making any offer. Speak with a professional, sit down and work out your budget. Make sure you can afford to make the payments and don’t get caught in the trap many Americans did by splitting hairs just to buy a home

The past month has been a whirlwind of change and uncertainty. The stock market. The mortgage crisis. Severe drops in many personal retirement accounts and investment portfolios. Wall Street and the many international investment firms received a $750 billion rescue. Homeowners in the sub prime market also received financial relief and many banks have been assured liquidity so that they can begin doing what they do best, loan money to make money. At least that is what the overall plan was on October 1, 2008 at 9:27 A.M. when Congress approved the largest financial recovery plan in the history of our nation.

What impact has it had on your professional organization? Have you met with your local banks to learn if that end of the year line of credit is still available? Have you looked at your office costs of doing business and have you seen an increase in the cost of goods and services that your members depend on from your organization?

However, I see the market upheaval as an opportunity to make financial changes that you have been putting off for the past five years. If you currently own your office complex, have you adequately made capital improvements over the past five years? If you have not kept up with remodeling and need to make some improvements, the best time to do it is now. Local contractors have seen a slow-down in their home building and commercial contracts. Contact a contractor and negotiate the best possible deal on the improvements you have been avoiding now, while they are looking for any work they can get. Many economists believe that property is still the best investment anyone can make. Improving your biggest asset now, while the cost is low, follows the principle of buy low and sell high in the stock market. Improvements you make now will pay dividends in the future.

What about that computer system conversion you have been considering? By contacting a local vendor, you will reap the rewards of the lagging consumer buying and be able to obtain some excellent equipment at bargain prices.

Even as the economy continues to slide, people will still need to obtain services. Is your association offering diverse services to allay your member fears? Now is the perfect time to conduct financial recovery seminars. Ask a local economist from a nearby University to speak on budgeting and establishing a sound and effective five year business plan. Offer programs on financial fraud. You will be surprised at the attendance. If nothing else, it is an opportunity to demonstrate to your members that you understand their concerns and fears and you are doing all you can to ease their worry.

We are all faced with challenges in our daily lives. As association leaders why not demonstrate your heartfelt compassion and reach out to your membership to offer them a discount on their 2009 continuing education seminar. It does not have to be much. Even a few dollars off the price will make your members feel better about your association. Do you really need that cookie and pretzel bar in the mid afternoon anyway? As association leaders you need to set the tone that your association is in it for the long haul and nothing will shake the core of your beloved institution. You may be surprised by your outreach.

In this time of financial crisis, if you make your association a soft place to land, perhaps members will begin telling potential members about the compassion shown by your association and you will even see an increase in membership. Dividends.

10 Worst Stock Market Crashes

10th Worst Stock Market Crash (1932 – 1933):

This crash required the longest recovery time of all the 10 crashes. The combination of the tech bubble bursting and the September 11th terrorist attack served a deadly blow to the stock market, but relative to markets past, this was a minor one.

Date Started: 1/15/2000

Date Ended: 10/9/2002

Total Days: 999

Starting DJIA: 11,792.98

Ending DJIA: 7,286.27

Total Loss: -37.8%

9th Worst Stock Market Crash (1916 – 1917):

This market suffered about a 40% loss.

Date Started: 11/21/1916

Date Ended: 12/19/1917

Total Days: 393

Starting DJIA: 110.15

Ending DJIA: 65.95

Total Loss: -40.1%

8th Worst Stock Market Crash (1939 to 1942):

It was one of the most grueling. It took nearly 3 years to recover from this crash! With the attack on Pearl Harbor, the markets had a very tough time.

Date Started: 9/12/1939

Date Ended: 4/28/1942

Total Days: 959

Starting DJIA: 155.92

Ending DJIA: 92.92

Total Loss: -40.4%

7th Worst Stock Market Crash (1973-1974):

Another long market crash -one that many people still remember (think Vietnam and the Watergate scandal). This crash lasted for 694 days before bottoming out.

Date Started: 1/11/1973

Date Ended: 12/06/1974

Total Days: 694

Starting DJIA: 1051.70

Ending DJIA: 577.60

Total Loss: -45.1%

6th Worst Stock Market Crash (1901 – 1903):

This is the oldest crash to make the list (DJIA records are not available before 1900).

Date Started: 6/17/1901

Date Ended: 11/9/1903

Total Days: 875

Starting DJIA: 57.33

Ending DJIA: 30.88

Total Loss: -46.1%

The 5th worst stock market Crash (1919 – 1921):

This crash followed a post war boom (Stock prices rose 51%). After the crash bottomed out in August of 1921, this decade saw tremendous growth in the stock market and the economy (often called the roaring twenties).

Date Started: 11/3/1919

Date Ended: 8/24/1921

Total Days: 660

Starting DJIA: 119.62

Ending DJIA: 63.9

Total Loss: -46.6%

The 4th worst stock market crash in U.S. History

Although this is the shortest market crash observed, it was a deadly one. Investors saw almost half their money disappear in just two months. This crash started the “Great Depression.”

Date Started: 9/3/1929

Date Ended: 11/13/1929

Total Days: 71

Starting DJIA: 381.17

Ending DJIA: 198.69

Total Loss: -47.9%

3rd Worst Stock Market Crash (1906 – 1907):

This crash was called the “Panic of 1907.” The U.S. Treasury department bought 36 million dollars worth of government bonds to offset the decline

Date Started: 1/19/1906

Date Ended: 11/15/1907

Total Days: 665

Starting DJIA: 75.45

Ending DJIA: 38.83

Total Loss: -48.5%

2nd Worst Stock Market Crash (1937 – 1938):

Just when investors thought the market was finally good again, following a recovery of almost half of the great depression losses, the market plunged again due to war scare and Wall street scandals.

Date Started: 3/10/1937

Date Ended: 3/31/1938

Total Days: 386

Starting DJIA: 194.40

Ending DJIA: 98.95

Total Loss: -49.1%

Worst Stock Market Crash Ever:

1932 Stock Market Crash:

Investors lost 86% of their money over this 813 day beast. This market crash combined with the 1929 crash, made up the great depression. The full recovery didn’t take place until 1954.

Date Started: 4/17/1930

Date Ended: 7/8/1932

Total Days: 813

Starting DJIA: 294.07

Ending DJIA: 41.22

Total Loss: -86.0%

You already are aware of our current economic and financial crisis. Wall Street is in fear and panic. The government is clueless – even though they pretend to have things under control. The stock market is in turmoil and stock prices are dropping like the leaves during fall. Trillions of dollars in wealth have been wiped out. But stop right here: Don’t follow those who sell in panic. If you have a few years until retirement, wait it out. You cannot control the events on Wall Street anyway. If you have junk stocks, sell ‘em, but if you hold funds or high quality stocks – keep ‘em. They’re down due to the market, not because all the companies are going downhill.

Rather work on improving your credit score. Clean up your credit history and reduce the amount of debt that you have. In times like these it is important that your credit score is as high as possible. Too many things affecting your life depend on the credit score – as sad as it is. Let’s take your car insurance. Rates depend on how motorists in your area do in regards to claims and damages + it depends on your own profile (age, gender, driving history, and … credit score). A higher credit score means effectively lower car insurance payments.

So, step away from the computer and do no longer watch your stock portfolio all Day. Turn off the TV News stations, or whatever you are watching that scares the heck out of you. Get to work to protect yourself. Pull your free credit report and receive your free credit score, too. Then review the complimentary credit report analysis provided and clean up your credit report. Close old accounts that still show up or contact the lender and make sure they finally update the credit report with the information that these accounts were closed a long time ago. I had to do that once with Wells Fargo and they were very cooperative and my credit score went up within just a few weeks. Consolidate credit card debt without opening new credit card accounts. Make sure you are current on all your payments.

Having a good or perfect credit score will help you to go through this crisis with confidence. It will provide you with a financial foundation that might come in handy one day.

The mortgage market in the United States is an interesting one because of the presence of semi-government entities in it. Freddie Mac is one such entity and a critical one to keeping the mortgage market moving.

Freddie Mac is actually a nickname for the Federal Home Loan Mortgage Corporation. It was created in the 1970s to bring liquidity to the secondary mortgage market and to create a better borrowing environment for Americans. It does this by purchasing loans from lenders, bundling them and then reselling them as securities on the secondary market. The key element of this process is Freddie Mac guarantees the debt. It, in turn, makes money by charging a fee for doing so.

As long as the real estate market remains generally stable, Freddie Mac is fine. It moves so much money in the mortgage securities market that even a bump in the number of bad loans will not hurt it. As we all know, the current market represents more than a bump. This has resulted in concerns that Freddie Mac and other semi-government entities in the mortgage market might fail. Given the fact these entities essentially underwrite nearly half of all the mortgages in the country, such a result could very well collapse the banking industry. Obviously, the government does not want that to happen.

Most people view Freddie Mac as a solid company because it is backed by the government. This is actually incorrect. The federal government in no way guarantees the debts of Freddie Mac. The government simply created the entity and gave it a specific focus. The company is run by an independent board and the owners are anyone who wishes to buy shares on the stock market. The stock symbol for the company is FRE.

As the mortgage market has gone bad, the value of shares in Freddie Mac have dropped like the proverbial brick. This has resulted in many stockholders realizing clearly that the company is in fact not a government agency. From trading at a value in the $60 a share range in July 2007, it now trades in the $7 to $9 range only a year later. Simply put, it is a company in trouble.

Although Freddie Mac is not a government agency, there is no doubt it is critical to the liquidity of the banking industry. Its failure would be a huge blow and make the current housing slump look like chump change. The government has realized as much and done something extraordinary. It essentially opened up an unlimited credit line for the company through the Federal Reserve Bank of New York. While there should be no mistaking that this is effectively a bailout by taxpayers, it is the correct move to avoid even further damage to the banking industry.

Rumors of the demise of Freddie Mac are greatly exaggerated. The government simply can’t let it fail. To do so would be to take a jack hammer to the real estate market. By providing the company with an unlimited credit line, that is not going to happen.

In the past It seemed a good idea at the time to take out an endowment policy on your mortgage when buying your home. The attraction was the lower rate of interest you had to pay on your mortgage which helped with money in your pocket and the added bonus of once the mortgage term was ended a large payment of cash would be paid to you from the policy once the mortgage was paid off. In 1986 the endowment policy was the bees knees of mortgages with over 80 per cent of mortgages being of this type.

However as these endowment policies were linked to the stock market, when the stock market took a big tumble so did all the endowment policies as well. The share prices plummeted so badly in April 2000 that they never really recovered. The insurance companies were forced with the decision to tell all of its customers that there could be a shortfall in their payments. The letter were sent out in code.

There were three colors; red were for polices where there was likely to be a serious shortfall. Amber was the color which said there may be a slight shortfall, and green for polices which were still on track to reach the projections made. between the dates of July 2001 and December 2002 over 4-3 million letters were sent out according to the Association of British Insurers. Of these letters, only a third that were sent out were actually green. The other two thirds were actually amber or red.

Many homeowners claimed that they were not told properly of the risks that were involved when they took out the policy. Some say they were not even aware that the policies were even linked to the stock market and they did they would never have taken the policy out in the first place. The term now used is the policy was mis-sold. Many have actually proven their case and received compensation as a result. There are still endowment mortgages available today as well as ISAs and unit linked mortgages. The advantage of the ISAs are you do not have to pay the big set up fees like the other endowment mortgages.

However you still have to remember that all of these types of mortgages are linked to the stock market so the risk is still there if the market does take a nose dive.

Interest rates are based upon the performance of stocks and bonds on the exchange markets that reflect how the economy is doing and how much confidence the American people have in the performance of available stocks. As stocks rise so do interest rates as consumer confidence reflects that people are willing to spend and have money to do so.

The factors of inflation and unemployment also affect interest that are set the federal reserve, who are the same institution that prints money and holds a supply of gold that is equivalent to the value of the money circulating throughout the world.

While people are concerned about their spending and what the stock performance will be very few people have an actual grasp of how the Federal Reserve Bank affects the economy and how an interest rate for a mortgage can be determined by a stock exchange that helps to set the rates people are paying for their homes.

While all of the mathematical equations and explanations are beyond the understanding of most people there is a connection to the amount of money people spend and what the interest rates will be for a home purchase or refinance. When it comes time to buy or refinance a home the interest offered to the borrower are the only thing that matter and it is up to the individual to secure and lock in the best interest rate possible by speaking to a mortgage lender and determining when and where the best time to refinance of buy a home may be. Although it is not an exact science a mortgage broker can help to find the best interest rates with the options of conventional, FHA and VA home loans.