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ETFs explained in pictures

Here’s the world’s simplest and most straight-foward explanation of ETFs:

Ready to start trading ETFs? Check out my post on the Top 10 best gold and silver ETF funds.

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Top 10 new investing books for 2011

If you’ve been reading my blog for any length of time, you should have a sense that I’m worried about the direction of our economy, as well as the world economy. I’m not a complete pessimist, though. If you’re willing and able to put work into protecting the capital you’ve accumulated, you should be able to whether the coming economic storm.

To do that, though, you’re going to need a lot more than a stock brokerage account. You’re going to need to get educated about what’s going on behind the scenes in the business world and at the Fed. Here are 10 new investment books that should help you do that:

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1) Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown.
The new and updated second edition to Aftershock, the authors have expanded the book with forecasts for 2012 as well as an in-depth break-down of the current economy. They focus heavily on inflation, which they predict will rise to 10 percent in two to three years.

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2) (**Preorder Only**) The Great Crash Ahead: Strategies for a World Turned Upside Down.
Famed financial newsletter writer Harry S. Dent, Jr. argues that we’re due for another major economic meltdown sometime between 2012 and 2014. Dent has a contrarian view arguing that deflation, not inflation, will capsize us next. His reasoning? Aging baby boomers are going to start cashing in their chips. That fact coupled with staggering public and private debt will cause the economy to cave in on itself.

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3) George Lindsay and the Art of Technical Analysis: Trading Systems of a Market Master.
Perhaps one of the most gifted financial prognosticators ever born, George Lindsay’s techniques live on through the newsletters he left behind. Ed Carlson takes Linday’s ideas and translates them into visual charts and easy-to-understand language so you can start using technical analysis on your own before you buy and sell stocks.

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4) The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground.
For the first time in years, the macro-economic picture is going to out-weigh picking individual stocks. It’s not just a question of a where a particular company’s headed, it’s a question of how the global financial system is re-shaping itself. The authors delve into several different scenarios for how the economic mess will play out in the years to come.

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5) Understanding China’s Economic Indicators: Translating the Data into Investment Opportunities.
We all know about CPI, jobless claims, inflation rates and unemployment in the U.S., but increasingly, it’s China’s economy that’s setting the tone for the rest of the world. This book looks at 35 key economic indicators that can give us clues about where the economy in the People’s Republic is heading. And it comes from a reputable source: Tom Orlik, a China correspondent for The Wall Street Journal.

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6) Trading Tools and Tactics.
Fundamental analysis is a great way to destroy your portfolio, according to technical trader Greg Capra. Here, he lays out the insights behind all those mystifying terms you’ve never really understood: candlesticks, shooting the gap, retracements and more. It’s a book designed for daytraders, not the buy-and-hold crowd.

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7) The End of Growth: Adapting to Our New Economic Reality.
You can give up on the idea that our economy is going to recover. According to Richard Heinberg, this period of high unemployment, falling home prices and stagnant or negative growth is the new normal. We could only forestall the energy, economic, environmental and social problems plaguing us for so long. It’s time now for us to start looking at ways to fix them.

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8) Extreme Money: Masters of the Universe and the Cult of Risk.
A cutting look at how the global financial system really works. Satyajit Das draws on 30 years of experience in high finance giving us a look at the housing crisis came about, how hedge funds make money and how a handful of banks and insiders control the bulk of the cash in the largest economy in the world.

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9) (**Kindle Book**) Rupert Murdoch, The Master Mogul of Fleet Street: 20 Tales from the Pages of Vanity Fair.
Let’s just forget that he bought MySpace. It’s hard to argue that Rupert Murdoch isn’t a financial genius (just take a look at this gigantic Wikipeda page that lists all of News Corporation’s holdings). Still, there’s always been the sense that Murdoch’s a wolf in sheep’s clothing (and the current phone hacking scandal just drives the last nail in the coffin). This Kindle book takes a fine-toothed comb over Murdoch’s career through a series of Vanity Fair articles.

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10) Endgame: The End of the Debt Supercycle and How It Changes Everything.According to Endgame’s authors, we’re at the end of a six-decade debt binge, and now we’re due to pay the piper. That means debt restructuring and austerity measures are probably on their way in the U.S. and throughout Europe. Our entire economy, tax structure, benefits system and personal habits are due to change – whether we want them to or not.

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Upcoming Release

1) Steve Jobs: A Biography.
OK. This isn’t actually a book on investing, but I’m stoked to read it anyway. No matter how often we complain about Apple products, it’s hard to deny Steve Jobs is a genius. He turned Apple into a household word in the 1990s, left to reinvigorate Pixar, then returned to the crumbled corporate husk that was Apple and repositioned it as a money-minting machine with the iPod, iPhone and iPad. Brilliant.

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What will happen when QE2 ends in June?

A darkening cloud seems to be forming over the financial markets. With QE2 scheduled to end in a mere three months, no one’s entirely sure how the dollar and the stock market will respond, but I’m willing to bet it won’t be good.

QE2 continues to inject an average of $4.4 billion dollars every business day into the U.S. economy, according to Chris Martenson at GoldSeek. That enormous chunk of change has been wending its way into stocks, commodities and bonds.

And now, a series of well-timed media appearances by Fed governors across the country appears to be signaling to the market that the party’s due to end. The Philly Fed’s Charles Plosser is calling for interest rate hikes, James Bullard of St. Louis suggests that strong U.S. economic data could let the Fed wrap up QE2 early and New York’s William C. Dudley sees no reason why the program should continue after it ends in June.

The sheer scale of QE2 should be an indication of how deep our boots have sunk into the muck. Since the start of the Great Recession in 2008, Martenson points out that the monetary base has grown by some 300 percent. And yet, the unemployment rate is still hovering at 9.2 percent – a level we haven’t seen for 28 years.

The Fed has artificially propped up the markets and Martenson argues there’s going to be a whole lot of misery when the music stops in June – particularly since the crisis in Japan leaves few buyers for U.S. treasuries moving forward.

“If the Fed terminates QE on schedule, then I think a tsunami metaphor is apt,” Martenson writes. “First, all of the liquidity will drain out of the bay, leaving countries, governments, and institutions to flop about in the mud. Then the Fed will panic and resume the liquidity flood, feeding the wave that will rush back in to destroy the lives and portfolios of those who positioned their wealth in harm’s way.”

Not everyone agrees, though. James Dailey, chief investment officer of TEAM Financial Managers, tells TheStreet that he’s confident the Fed will raise rates slowly – probably even too slowly, and that should keep upward price pressure on stocks, commodities and precious metals.

“Even if we see tightening, that is no reason to not own commodities,” he added. “Central banks will be behind the curve. You can get corrections based on it being overbought now but the fundamentals are intact. Unless there is a global recession or one or more central banks find religion and develop a Volckeresque appetite for monetary tightening, we see negative real yields.”

An informal survey of experts as CNNMoney found that all but one money manager thought the end of QE2 would have a negative effect on stocks. The economy’s expansion, they argue, should buoy stocks even without the flood of easy money entering the markets.

I’m not so sure. There isn’t a whole lot of data to draw from, but we do know that Japan’s quantitative easing experiments 10 years ago typically led to market sell-offs when they ended. The same thing happened here when QE1 was halted. CNNMoney’s own chart illustrates the market sell-off that eventually led to QE2:

The experts might be telling us to put more faith in the strength of the recovery, but I’m just not convinced the recovery is ready to stand on its own. All we’ve got to go on is past experience. And I’ll take that over the educated guesses of the experts. Expect me to be in cash in June, watching from the sidelines and hoping that QE3 is just around the corner.

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The secret to investing in stocks for beginners

We’ve all heard that markets are driven by fear and greed. Those two emotions are what cause the wild intraday swings in stock prices, and they’re what makes learning to invest so difficult. We all want large and immediate gains. If we could all get them, though, none of us would have jobs. We’d trade stocks for a few years and retire to a cozy island in the Caribbean.

To invest successfully, you’ve got to banish the idea that you can predict where the markets are going from day to day. One of my favorite quotes from Warren Buffett – the CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) and the so-called Oracle of Omaha – came when he was asked how long he likes to hold onto specific stocks. His one-word answer? “Forever.”

If you’re looking to get rich quickly, you’d be better served by going to the horse track or riverboat; not the NASDAQ or NYSE. But, if you’re emotionally able and willing to let your investment plans play out over months or years, you can and probably will make money in the stock market – even if you’re starting out with a relatively small chunk of change.

Here’s a simple secret beginning investors can use to make money on stocks: you’ve got a profound advantage over giant hedge funds, professional money managers and corporations. The relatively small size of your portfolio gives you access to stocks that the big fish just aren’t able to invest in.

“It’s a huge structural advantage not to have a lot of money,” Buffett said in 1999. “I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”

See, investors with lots of capital at their disposal just can’t meaningfully invest in small-cap, high-growth companies. They have too much capital to put to work. The small caps you have access to today might end up in the portfolios of the big fish investors a decade from now, and that’s where you stand to make mountains of cash.

Jim Fink at InvestingDaily boils Buffet’s ideas down to three requirements to earn 50 percent returns every year:

1) Your portfolio must have less than $1 million. Just about all of us (unfortunately) fall into this camp.

2) You must buy small cap stocks “before they grow up.” Fink defines small cap stocks as companies with market caps of $3 billion or less.

3) Pick companies with high returns and low spending requirements. “The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow,” Buffett wrote in 2009. For Fink, that means finding companies that generate at least $5 in cash flow for every $1 they spend.

Remember, investing isn’t about uncovering the next Apple Inc. (NASDAQ:AAPL) or Microsoft Corporation (NASDAQ:MSFT). It about finding companies that are going to reliably produce ever-larger amounts of money without dramatically increasing their costs. Find those stocks, and you’ll do just fine.

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A Sina Weibo IPO could be in the works as China’s Twitter moves to Weibo.com

China’s popular Twitter-like site Weibo may have taken a step closer to an IPO yesterday by unmooring itself from Sina.com. No longer will users have to click or type their way to t.sina.com.cn. Instead, they can type in Weibo.com to access the microblogging site instantly, according to Penn Olson.

Back in February, I wrote a post titled Will we ever see a SINA Weibo IPO? I speculated then that SINA Corporation (NASDAQ:SINA) would be silly to spin off its fastest-growing business. I may have jumped the gun.

All systems seem to be pointing to a Weibo IPO sooner rather than later. First, there was a thinly-sourced report in March from China’s 21st Century Business Herald that claimed Sina was in talks with several investment banks as it mulled a Weibo IPO.

Now, there’s a move to separate the microblogging site from Sina.com by giving it its own domain. Perhaps it’s just a matter of time before we get our hands on an official S-1 filing.

For now, users will be able to use t.sina.com.cn AND weibo.com. Eventually the two sites will be merged, and traffic going to t.sina.com.cn will get re-directed to Weibo.com. The re-branding should help raise public consciousness for Weibo in China and abroad.

“We have successfully built Sina microblog Weibo into the largest and most influential social media platform in China, with user base increasing by more than 25 times in 2010,” Sina’s CEO Charles Chao said after the company’s Q4 earnings report last month.

The total number of Weibo users doubled to 100 million in the four months leading up to the report, and Sina’s in the process of deploying an advertising and a virtual goods marketplace on Weibo. While the microblogging service is yet to generate any revenue, analysts still believe Weibo could be valued at $3 billion or more.

And judging by the success of several recent tech IPOs out of China (including YOKU, DANG and QIHU), a Weibo IPO has the potential to turn into a public spectacle – especially if the site could beat Twitter, LinkedIn and Facebook onto stock exchanges.

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How does the BATS exchange work?

A tiny tech and trading start-up, BATS Global Markets, piqued the curiosity of investors after announcing that it will soon file as a primary U.S. market. The move, which BATS hopes will allow it to start listing stocks in the fourth quarter, would pit the Kansas City-based stock exchange against the two largest stocks exchanges in the world in the NYSE and NASDAQ.

What does the move mean for investors? Instead of buying shares on the NYSE or NASDAQ, retail-level investors may soon be placing orders on BATS as well – provided their brokers offer access to the exchange.

“The key for this to be successful will be to be able to attract a key company to list,” Josef Schuster, founder of Chicago-based IPO investment firm IPOX Schuster LLC, tells Reuters. Schuster speculates that doing an IPO and listing BATS shares on the BATS exchange itself could be a way of doing that.

Alternatively, attracting a sought-after tech company like a Zynga or a Groupon to list with BATS might do the trick. As it stands, BATS is already the third-largest exchange in the world by volume. That’s largely thanks to the exchanges’ emphasis on speed.

When BATS went live in January of 2006, most trading platforms executed trades in one to 30 milliseconds. BATS executed trades in one to three milliseconds. Today, BATS executes 80 percent of all its trades in 250 microseconds (.25 millliseconds). Contrast that with the NYSE, which executes trades in 650-950 microseconds.

BATS’ emphasis on speed has attracted business from “hedge funds and other trading operations” that engage in high-frequency trading, Newsweek reports. Should the company land a few big fish to list, it could very well grow from there and challenge the supremacy of the NYSE and NASDAQ.

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Are rollover IRA contributions tax deductible?

Yes. A Rollover IRA functions exactly like a traditional IRA. The name “Rollover IRA” simply refers to the fact that your IRA account was established from funds that were originally in a qualified plan such as a 401k, 403b, or lump sum pension. When I left my corporate job in 2007, I no longer had the option of participating in a company-sponsored 401K. Rather, than leave my funds in my pre-existing 401K, I rolled them into a Rollover IRA, so that I could pick and choose the stocks I invested in.

By rolling those funds from a 401K into a IRA, I did not have to pay taxes on the “distribution” from my 401K. In essence I was simply moving cash from one tax-protected account to another. Had I elected instead to take a cash distribution from my 401K and let it sit in my bank account for more than two months, then used that cash to establish an IRA, I would have been subject to tax penalties for withdrawing funds from my 401K early.

It took me a lot of Web surfing to find out that after the initial funds had been moved from my 401K to my Rollover IRA, I was, in effect, using a Traditional IRA (more info at RetirementThink.com). The name’s different, but the tax benefits are the same. I can contribute up to $5,000 a year (or $6,000 a year once I hit 50 years old) to my Rollover IRA and write off those contributions – thereby lowering my taxable income. Lower taxes = great news!

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Is China’s Qihoo IPO a buy? (Ticker:QIHU)

The Chinese anti-virus software-maker Qihoo 360 Technology Co. Ltd. is expected to begin trading on Wednesday under the ticker QIHU on the NYSE. The Web security company makes an assorted suite of anti-virus software, the most popular of which is “360 Safe Guard,” which had 301 million monthly active users as of January, according to the company’s F-1 Filing.

Why buy Qihoo 360 shares? Anti-virus + browsers + online games = Big Business.

Qihoo 360 has its fingers in a lot of pots and that adds up to a steady income stream. In 2010, the company booked net income of $8.5 million on $57.7 million in sales. Qihoo pulls in that cash from a number of sources. Chief among them? Paid anti-virus software. In addition to “360 Safe Guard,” the company offers “360 Anti-Virus,” “360 Mobile Safe,” “360 Online Shopping Bodyguard” and more.

There’s a lot more to Qihoo 360, though. The company also makes China’s second most popular Web browser: 360 Safe Browser, which claims 172 million monthly active users and a user penetration rate of 44.1 percent. Safe Browser’s biggest competition is Microsoft Corporation’s (NASDAQ:MSFT) Internet Explorer.

Some 98 million of those 172 million monthly active users of Safe Browser access Qihoo 360′s “Personal Start-up Page,” which acts as a content portal and gives Qihoo a platform to promote its other services, including an open gaming and e-commerce platform that’s set up to let developers build and distribute online games and shopping services. Game developers are among Qihoo’s heaviest advertisers, often paying the company to promote new games or inking rev-share agreements with the company.

All this adds up to Qihoo claiming to be China’s third-largest Internet company with more than 300 million monthly active users. That’s a great base to promote products and it lead to year-over-year revenue growth of 79 percent in 2010, according to the Wall Street Journal.

Bigger and better things. Qihoo 360 plans to use funds from its IPO to research and develop new products. The company will also consider strategic acquisitions that could boost its marketshare in China. One of the most appealing aspects of Qihoo 360, though, is its aggressive expansion into the mobile realm. If mobile anti-virus software becomes a standard paid download for Web users in China, Qihoo could accumulate piles of yuan as the mobile market in China is set to explode.

“Users are also increasingly conducting Internet activities through mobile devices, including mobile-banking, mobile-commerce, mobile-gaming and mobile social networking, among others,” Qihoo 360 writes in the company’s F-1 Filing. “According to iResearch, the number of mobile Internet users in China increased from 17 million in 2006 to 303 million in 2010, representing a CAGR of 105.3%, and is expected to grow further to reach 658 million by the end of 2013.”

658 million mobile users. Think about that number. It’s more than twice the population of the United States.

Bumps in the road: Still, for all the positives, there’s a big unknown in Qihoo 360′s future as the company’s embroiled in a legal dispute with Tencent Holdings Ltd. (HKG:0700). Tencent, which develops China’s leading instant messaging software QQ, started bundling its own anti-virus software, QQ Doctor, with downloads of its instant messaging platform. To run QQ Doctor, users have to uninstall Qihoo 360 software. Both companies have since launched smear campaigns targeting one another as they struggle to maintain market share, according to a Wikipedia page (360 v. Tencent) that details the dispute.

No matter what the ultimate outcome of the case, Qihoo 360 is forging ahead with its IPO. The company plans to sell 12.1 million American depositary shares at $10.50-$12.50 a pop. Every two ADSs will represent three Class A ordinary shares. It’ll be interesting to see how investors respond. I, for one, wouldn’t want to take on Tencent head-to-head, but in China’s cut-throat online market, competition is the name of the game. To the victor go the advertising dollars.

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3 reasons to buy Baidu stock (BIDU) even at record levels

Late last week, Chinese search engine company Baidu.com Inc. (NASDAQ:BIDU) overtook Web conglomerate Tencent Holdings Ltd. (HKG:0700) as China’s largest Internet company. Baidu’s market value surged to $46.06 billion compared to Tencent’s $44.6 billion, according to Business China. A lot of investors may be questioning just how big Baidu can get, but there are still compelling reasons to consider adding the stock to your portfolio. Here are three of them:

1) A monopoly on search. After Google Inc. (NASDAQ:GOOG) pulled out of China last March, Baidu’s share of the Chinese search market has steadily risen to 83.6 percent (per ResonanceChina). That’s led to a big bulge in Baidu’s wallet. During Q4 of 2010, Baidu’s revenue was up 94 percent year-on-year to RMB 2.45 billion with most of that cash coming from online advertising services.

2) A new way to browse. Baidu looks to be aggressively expanding its offerings. Now that it dominates search in China, the company’s announced that it’s hard at work on a Web browser that will compete head-to-head with Google Chrome and Microsoft Corporation’s (NASDAQ:MSFT) Internet Explorer. Baidu should be able to leverage its high-visibility search results pages as a platform to advertise the browser and encourage surfers to download it; much like Google did with its Chrome browser. A browser that’s optimized for the Chinese language and surfing habits could make consumers more comfortable (or even dependent) on Baidu’s services.

3) Mobile OS. Rumors surfaced last week that Baidu’s also working on its own “light operating system” for mobile devices to be launched in three to five years. It’ll be interesting to see if Baidu opts for an open-source OS that would compete directly with Google’s Android OS, or if they elect for a closed OS along the lines of Apple’s (NASDAQ:AAPL) iOS, which runs the iPhone and iPod Touch. Either approach could open up valuable revenue streams for Baidu in the mobile app realm.

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Netflix stock performance predictions for 2011 (NFLX)

Twelve months ago, you could have bought a share of Netflix, Inc. (NASDAQ:NFLX) for $72. Let’s call those the good old days. Since then, Netflix has screamed up more than 200 percent with 26 percent of those gains coming since the start of 2011. A single share will now set you back $221.

My finance and I have an ongoing argument about shares in Netflix. She feels like the company has started exiting the growth phase with a one-way ticket to Value Stock Valley. Yes, she’s got some valid arguments: the company DOES face more realistic competition (ala Facebook, Amazon, Hulu, etc.) than it did a year ago, and I’ll readily admit they could use a better selection and more new releases (which will only come at the expense of margins). Still, I’m optimistic about Netflix’s stock performance in 2011. Here are three reasons why:

1) Global domination. A Credit Suisse note out yesterday titled “Don’t Stop Believing,” gave Netflix two very enthusiastic thumbs up with an analyst there upgrading the stock from Neutral to Outperform. The reason? International growth. Credit Suisse predicts Netflix’s subscriber base will triple to 69 million subscribers by 2016 on the strength of growth abroad.

Apparently, The Canada Experiment has been a good one so far. When Netflix opened its doors to subscribers in the north late last year, Credit Suisse predicted they’d reel in 300,000 subscribers by the end of 2011. That was a pitifully low estimate. After just six months, Netflix has 900,000 subscribers in Canada. Online streaming is the future, and there’s no one better positioned to capitalize on that future than Netflix – no matter what country you’re in. (FYI: Credit Suisse raised its price target on Netflix’s stock from $180 to $280).

2) One ring does not rule them all. Fears over Netflix’s competition feel overblown to me. It’s as if we believe people only want to stream video from a single source. Riiiiggght. I’ve got a Netflix account, but I still occasionally rent movies via Amazon’s online rental service. I still check videos out from the Blockbuster kiosk at my local Speedway, and very occasionally I log onto Hulu (even though the site’s ads make me want to vomit). Just because I can watch The Dark Knight on Facebook for a one-time fee, I’m not going to run out and cancel my Netflix account. We’re used to seeking out entertainment from multiple services. That’s not going to change because Facebook starts offering a small, boutique-y selection of movies.

3) Shoot the networks. In a move that could shift power away from networks and studios like HBO and Showtime, news broke last week that Netflix is wading into the content production pool. The company struck a deal with the film studio Media Rights Capital to produce an original series that will stream exclusively on Netflix servers starting late next year. Kevin Spacey will star in a political drama dubbed “House of Cards.” The series, which is being billed as “a satirical tale of power, corruption and lies,” will be directed by the rather brilliant David Fincher (whose portfolio includes The Social Network, Seven, Fight Club and The Curious Case of Benjamin Button). It’s a big roll of the dice for Netflix – and it’s one that I fully expect to pay off.

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Five cheap franchises to start with less than $10,000

Franchises are so ubiquitous we often don’t realize we’re shopping at one. From McDonald’s to Hampton Inns and doggie day cares to campgrounds, they’re literally everywhere. All told, franchises account for 10.5 percent of all businesses in the U.S, and they... Read on.

Why invest in silver?

Ask 10 people why you should invest in gold and silver, and you’ll probably get 10 different answers – many of which will be accompanied by a shrug. Most investors don’t understand the motivation for holding gold or silver bullion. Nonetheless, it’s been difficult to ignore... Read on.

How to Invest in Copper

Copper isn’t as glitzy or glamorous as gold or silver, but in many ways it feels safer. Since copper is regularly used in electronics, it’s consumption per person (particularly in the developed world) has been on the rise for decades. So how does one invest in copper? Read on.