Login | March 08, 2021

SPACs, explained

THE MOTLEY FOOL
Ask the Fool

Published: February 18, 2021

Q: What's a SPAC? -- H.L., Middleton, Idaho
A: The letters stand for "special purpose acquisition company." While SPACs aren't new, they've become more high-profile in recent years as some major investors and entities have gotten involved in them.
In a nutshell, SPACs -- sometimes referred to as "blank-check companies" -- have no manufacturing or service operations. They are formed in order to hold initial public offerings (IPOs) and collect cash in exchange for their shares; that cash is then used to buy or merge with another company.
Q: When is the right time to sell a stock? -- T.S., Kirkwood, Missouri
A: There are many reasons you might want to sell, such as: You don't know much about the company and can't explain exactly how it makes its money. You're holding shares mainly for sentimental reasons. You'll need the money within three to five years. (You don't want a market crash to happen just before you plan to use the money. Keep shorter-term money in more stable places, such as savings accounts or CDs.) The stock is significantly overpriced. The reason you bought it is no longer valid -- perhaps due to a competitor taking its market share.
If you can't remember why you bought shares, consider selling. (It's not a bad idea to keep written records of why you bought various stocks and when you might sell, and revisiting those reasons periodically.)
Selling can also be a good move if you find a more promising investment. Don't trade too frequently, though, as that can hit you with short-term capital gains tax bills. And do be patient with very promising companies -- just because many others are selling a stock is a bad reason to do so.
Fool's School
Mortgage Terms
When buying a home, the vast majority of people choose a 30-year mortgage instead of a 15-year one, but shorter-term loans are often worth considering.
Many people bypass 15-year fixed-rate mortgages because those loans require significantly higher mortgage payments. As an example, if you're buying a $250,000 home with a 20% down payment ($50,000), you'll be borrowing $200,000. At recent interest rates, you'd pay around $1,400 per month with a 15-year loan or roughly $930 per month with a 30-year loan. That heftier payment may be a drag, but the shorter-term loan will have you paying total interest of only about $52,000, versus a whopping $135,500 for a 30-year loan. That's a big deal, and it will save you a lot of money -- which could be used in better ways, such as putting it away for retirement.
Another key advantage of a 15-year fixed-rate mortgage is that by paying off the principal more rapidly, you'll build equity in your home faster -- making you the sole owner of your home much sooner. This can be particularly attractive if you're aiming to enter retirement without mortgage payments. A 15-year mortgage will also typically feature a lower interest rate than a 30-year loan.
A 30-year mortgage has its own advantages, starting with a smaller monthly payment. That can help you buy more house than a shorter-term loan would (though bigger homes do cost more for taxes, insurance and upkeep). Thus, you can end up with more money in your pocket that you can use toward other financial goals. It will give you bigger tax deductions -- but only because you're paying a lot in interest.
One excellent strategy is to get a 30-year fixed rate mortgage that allows prepayments, and then make lots of extra payments over the years. You'll need discipline to keep paying extra, but it will shorten the life of the loan and save you a lot in interest. With this strategy, you can also skip extra payments when necessary, as they're not required by the bank.
My Smartest Investment
Investing in Yourself
My smartest investment has been my Doctor of Pharmacy degree, because it's a great profession. -- N.M., online
The Fool responds: The best investments you can make are in yourself -- and choosing a great career is one of them. As you decide what career to pursue, consider how much you think you'd enjoy it, and how much money you might make in it; you don't want to end up in a profession you dislike or one that pays pitifully. Ideally, you'll find an occupation that both feels attractive to you and also pays well.
Think, too, about how versatile each degree or career could be: If you become a nurse, for example, there are many different kinds of jobs you could have (such as school nurse, intensive-care nurse, traveling nurse, or clinical administrator in a health care organization). It's also a position with opportunities for advancement, such as becoming a nurse practitioner. Other careers may be narrower and limit your flexibility.
With a job that pays well, you can not only live comfortably, but also save and invest for retirement -- perhaps even achieving an early retirement. If you're not loving your current career, consider swapping it for a new one. Even those in their 40s and 50s might be able to retrain themselves and switch. Search online for fields that pay well and are growing -- and see which ones excite you.
Foolish Trivia
Name That Company
I trace my roots back to the 1810 founding of a fire insurance company. Fifteen years later, I sold my first higher-education insurance policy -- to Yale University. I covered the property of Abraham Lincoln during the Civil War, and I introduced coverage for automobiles in 1913. I've also insured Babe Ruth, the Hoover Dam and the Golden Gate Bridge. Based in Connecticut, I'm known for auto, home and business insurance; group benefits (supporting more than 12 million workers); and mutual funds. I've been named one of the "World's Most Ethical" companies 12 times. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1933, when a Middle Eastern country permitted Standard Oil of California (Socal) to explore for oil. I started producing oil in 1938, and by the 1940s, I was known as the Arabian American Oil Company. By 1980, Texaco, Mobil, Exxon and Socal had sold their entire stakes in me to my local government. In 2019, I went public, selling shares of myself for the first time and becoming the world's most valuable company, with a market value of almost $2 trillion. At that time, it was the largest initial public offering (IPO) ever. Who am I? (Answer: Saudi Aramco)
The Motley Fool Take
Your Visa to Profits
Payment facilitator Visa (NYSE: V) can be purchased and set on cruise control for a long time. Driven by payment-processing fees, Visa keeps generating income as the U.S. and global economies grow. It's a numbers game, and Visa is on the winning side over the long run.
Visa's success is also a reflection of its focus on payment processing and avoidance of lending. While some of its peers have chosen to run both businesses during periods of economic expansion, allowing them to collect interest income as well as processing fees, Visa has declined to join them. It's been a smart move, because inevitable recessions and economic contractions lead to rising credit delinquencies and charge-offs. Since Visa doesn't lend, rising credit delinquencies have little to no impact on its business. This is a major reason that its recent profit margin has often been above 45%.
The financial services company is going through a rough patch right now: The pandemic has depressed spending, while border closures have led to plunging cross-border transaction volumes. But the pandemic is also pushing many countries and businesses to adopt digital payments, thereby benefiting Visa's business of facilitating digital payment transactions.
Visa's dividend yield was recently only 0.6%, but it has hiked its payout by an annual average of 18% over the past five years. (The Motley Fool owns shares of and has recommended Visa.)
COPYRIGHT 2021 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.


[Back]