Calculating inflation
Q. Can you recommend a good inflation calculator? — C.A., Reno, Nevada
A. Sure. Click over to Westegg.com/inflation, enter two years, and you can see how prices changed between them — for example, something that cost $100 in 1999 would have cost $156 in 2019. To learn the average inflation rate over a period, visit MeasuringWorth.com/inflation. (Between 1999 and 2019, for example, it averaged 2.16% annually in the U.S.) That site also shows inflation rates for specific years. Inflation was close to 0% in 2015, but topped 13% in 1980! Since the beginning of the 20th century, inflation has averaged roughly 3% annually.
Q. Can I give certificates for single shares of stock as holiday gifts? — G.R., Mount Pleasant, South Carolina A. You can, but you may not want to. Giving a young person a stock certificate can be a fun way to introduce them to investing, but in this digital era, many companies have phased out paper certificates. You can still ask the company or your broker for a paper certificate, but it will cost you — possibly a lot.
Some websites will offer to sell you certificates for single shares of stock, but they may charge you twice as much as the share actually costs (or more!), and there’s a good chance you’ll just be getting a replica of a certificate. (You’ll also get paperwork confirming that you do own that share.)
Alternatively, you might just transfer one or more shares of a stock you own from your brokerage account to an account belonging to the recipient. If your recipients are minors, they’ll need custodial accounts, likely with a parent or guardian as custodian. Ideally, focus on companies they admire, like Disney, Nike or Starbucks.
Get to know capital structure
When assessing a company as a potential investment, for best results, you should study its business deeply. Among other things, it’s good to understand its “capital structure.”
A company’s capital structure is how it finances its operations — using cash, debt financing (borrowing from a bank; issuing bonds) and/or equity financing (selling a chunk of the company; issuing shares of stock).
Imagine that Scruffy’s Chicken Shack (ticker: BUKBUK) is financed mainly with debt, paying 5% in interest on its loans. If it’s reliably growing its earnings by about 10% annually, that debt seems manageable. The interest rates companies pay depend on their credit ratings: Healthy companies are offered low rates, and shakier ones are stuck with higher rates.
Alternatively, Scruffy’s might finance itself by issuing stock. This is an especially attractive option during bull markets, when its shares will likely trade at high levels, allowing it to get more money for each share issued. That’s great, but every time the company issues shares, it’s diluting the value of the shares that existed before. (This extreme example will show why: If you owned 15 of a company’s 100 existing shares, you’d own 15% of the company. But if it issued another 50 shares, your 15share stake would shrink to 10% of those 150 shares.) Dilution is only OK if the money raised helps the company increase its market value enough to more than offset the drop in value for existing shareholders. When a company becomes cash-rich, it can buy back shares, reducing that share count and thereby rewarding shareholders.
Finally, Scruffy’s might opt to grow only by using cash generated from its operations. That can be less risky, but it can create slower growth.
Companies often use a combination of debt, stock and cash financing.