Sunday, July 30, 2017

Benefits Of The Rate Hike For Investors

        The FED and the Bank of Canada have recently raised their interest rate by 25 bps each.  What does that mean?  It meant the cost of borrow money will increase and payments on variable rate mortgages and lines of credit will be increased immediately. Consumers and businesses will have their expenses increases due to the cost of borrowing increasing.  Shortly after the Bank of Canada raising their rate by 25bps, the big 5 banks in Canada followed suit within 24 hours.

         A way for banks to make money is too have savings accounts.  The bank then takes the money savers deposit and lend it out at a higher interest than they pay the saver.  The bank "promises" the saver that for the use of the saver's money, they will be paid interest.

         A lot of banks have not raised their rates on the savings accounts along the rates on their lines of credit, loans and mortgages.  So that means the bank will make more money. Therefore the shareholders of the banks will likely be rewarded with increased profits and therefore possible larger dividend increases than the banks have recently done.

Conclusion

     I am a shareholder in 4 of the 5 big banks.  Currently, the only bank stock I do not own is Royal Bank.  So, if North America does no go into recession in the near future then the banks will do well.  I always hear people complain how profitable the banks are each quarter.  My response to them if they are talking directly to me is "With them being so profitable, do you own any shares in any of them?".  I will often get a snarl or " I am too poor to invest!!" response.

     There are ways to invest with very little money.  A person can buy stocks the old way directly through the transfer agent.  How this works, at least in Canada, is that you go to a website like www.dripprimer.ca and try to buy a share of a company.  I will talk about the way I have done through this site.  I posted a message on the share board looking for a share of Enbridge (ENB) and BNS.  Eventually, some will respond and agree to sell you a share.  You then send the person a check with that amount agreed upon. In return, you will get an actual share certificate with your name and I believe your new account number will show up.  The transfer agent sends you the share certificate and not the individual.  The seller as to follow steps outlined by the transfer agent to make their transaction to go smoothly. Once the share certificate is received the buyer can make purchases directly with the transfer agent for that particular stock operating within the guidelines outlined in the company's DRIP program.  Most of the times, investing this way you get to purchase shares at a discount with reinvested dividends.  The downside you do not know the price of shares when you make purchases of additional shares directly with a check or a debit from your bank account.  When buying stocks this way, you directly own the shares in your name.  When you purchase the shares in a brokerage account, you do not own the shares directly but are given all the rights of shareholder ownership  such has voting, dividends, distributions, buyouts, and interest.

    In United States, Capital One (formerly Sharebuilder) allows you purchase fractional shares and the entire dividend gets reinvested. I believe if you put in the order Monday night, to invest X amount of dollars into "ABC", then the shares are purchased the following day.  With Capital One, you can also buy shares like any other brokerage and pay a commission of around $7.00.  Also, with Capital One, you can turn the drip on or off with a click of the mouse.  Most brokerages you have to call or e-mail the brokerage to tell them to turn the drip on or off for each stock in the account.

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