Researching a company
Q. How should I research a company? — G.L., Casper, Wyoming
A.
Start with the company itself. Click through its website to learn more about what it does. In the site’s area for investors, you may find financial filings, annual reports, conference call transcripts, presentations, fact sheets, sustainability reports and other items of interest.
Also, search for news reports and articles online; focus especially on sources you trust, such as major news outlets. Read up on the company’s competitors and industry, too. Even Wikipedia can be informative (though not always entirely accurate).
Q. What are derivatives? — L.R., Middletown, Connecticut
A.
A derivative is a security created by a contract between two or more parties; its value is “derived” from the value of something else — perhaps stocks, stock indexes, interest rates, commodities or currencies. Some derivatives are relatively straightforward, such as stock options. With a basic “call” option, you buy the right to buy a certain stock at a certain price over a certain period. The option’s value depends on the (fluctuating) value of the stock it’s tied to.
Other kinds of derivatives include forwards, futures, swaps, mortgage-backed securities, collateralized debt obligations and credit default swaps.
Derivatives also often incorporate debt, which can amplify their gains — and their losses. Derivatives can be used for managing risk (such as via hedging), or for pure speculation. Some can be quite risky.
Many derivatives are not regulated and bear the risk of one of the parties defaulting. Warren Buffett has said, “The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)” and “derivatives are financial weapons of mass destruction.”
Is your home sufficiently insured?
Unless you’re so rich that it won’t affect you much if your home burns down or is blown away by a tornado, you’ll need to carry homeowner’s insurance. It’s important to buy enough coverage, so here are some considerations:
Be sure to get replacement-value coverage: If you need it, it will pay for your home to be entirely rebuilt. It’s a mistake to focus your coverage on the home’s market value, as that may be far from what it would cost to rebuild it. Check every couple of years that your coverage is still sufficient, because building material prices may have soared. Also consider getting replacement cost coverage that’s “extended,” which will pay up to a certain percentage above the amount you’re covered for if needed, or “guaranteed,” which will cover the entire cost.
Not only will you want to be able to rebuild your home, but you’ll also want to cover possessions in the home. When you add those up, they’re probably worth a lot. Again, focus on replacement-value coverage because some items may not be worth much if you’ve owned them for a decade, but replacing them could be costly. Taking the time to inventory and photograph your belongings can be important.
If you have a lot of a specific kind of valuable, such as jewelry or collectibles, ask whether you need extra coverage for them, as many regular homeowner’s insurance policies limit the amounts covered.
Liability coverage is also important to protect you if, for example, someone is hurt on your property and sues. A minimum of $500,000 in liability coverage is often recommended; if your net worth is high, increase that — because you have a lot more to lose.
When you shop around for homeowner’s insurance, see what additional coverage might be available, such as covering the cost of a rental while your home is being rebuilt.
Note that even if you rent, you should carry insurance to protect your belongings from fire, storm damage, theft and other kinds of loss.