How do credit union loans and dividends vs interest work?
"A credit Union makes loans exactly the same ways a bank does. A portion of the money deposited in  checking, savings, money market, Certificate of Deposit, or IRA is then used to make loans for cars, boats, school, mortgages, 2nd mortgages, lines of credit... The government dictates the percentage of each type of deposit that must be held in reserve for non-loan transactions. The Credit Union members are the share holders of the ""company"". There are no investors in the ""company"" because the goal is not to make money. In general the entire package is better because there is no pressure to increase profits.  Fees are generally lower because they are there to discourage bad behavior, not as a way to make a profit off of the bad behavior.  Dividends/interest are treated the same way as bank interest. The IRS forms are the same, and it is reported the same way. Some of bizarre rules they have to follow: maximum number of transactions between accounts, membership rules, are there because banks want to make it harder to be a member of a credit union."
This is great, thank you. Can you think of any cases where expected return is greater than interest payments (like in #2) but the best choice would still be raise money through equity issuing? My intuition tells me this may be possible for an expensive company. For bonds bought at par (the face value of the bond, like buying a CD for $1000) the payment it makes is the same as yield. You pay $1000 and get say, $40 per year or 4%. If you buy it for more or less than that $1000, say $900, there's some math (not for me, I use a finance calculator) to tell you your return taking the growth to maturity into account, i.e. the extra $100 you get when you get the full $1000 back. Obviously, for bonds, you care about whether the comp[any or municipality will pay you back at all, and then you care about how much you'll make when then do. In that order. For stocks, the picture is abit different as some companies give no dividend but reinvest all profits, think Berkshire Hathaway. On the other hand, many people believe that the dividend is important, and choose to buy stocks that start with a nice yield, a $30 stock with a $1/yr dividend is 3.3% yield. Sounds like not much, but over time you expect the company to grow, increase in value and increase its dividend. 10 years hence you may have a $40 stock and the dividend has risen to $1.33. Now it's 4.4% of the original investment, and you sit on that gain as well. "A) Yes, it does accomplish the goal of adding more money, but the money is in lieu of any return you can earn while the loan is outstanding. If you somehow knew exactly which periods where going to run negative, and you took a 401k loan during that time, you'd be in pretty good shape, but if you had that information you'd probably be ruling the world in short order and wouldn't care much about a measly 401k. B) It's a nice idea, but unfortunately you are not allowed to set your own interest rate. (If you could your idea would work perfectly.) The interest rate is bank specific, and is typically 1-2 points over prime. But if your plan was to leave your money sitting in cash or low interest bearing accounts anyway, the loan does actually achieve the goal of ""getting more money in there"". Though it's your money; you aren't ""earning"" it." My understanding of Muslim finance is that you may not lend money at interest, including investing in in things that pay interest. However you may still make investments: it just has to be in places where you get a share of profit, rather than a fixed rate of return. You would be better asking the Muslim community specifically for more details. The benefits of compound interest apply, more or less, to other non-fixed-interest investments. If you invest $1000 in a business and get a 10% rate of return, you have $1100 to invest in your next venture, which means it will be more profitable and so on. That's why the growth happens, not specifically because it is interest. Stocks do not pay interest, and the 'magic' applies to them too. The fact that you might lose as well as win complicates things, but doesn't change the principle. I hear this a lot but how does it work exactly? Is it the more money you have in your share (savings) account the more weight your vote carries? Or does each member get one vote?  I've been a credit union member for 15 years and have never had any say in anything. I also work for a small bank and both institutions are basically the same. My bank has better rates than my credit union on lended money but my CU pays higher rates on my money. My bank is also a publicly traded company and has regular meetings in which any shareholders can come voice their opinion, I've never heard anything about such activity with my credit union. The way I usually make this decision is to answer the following question: Do I think that I can earn a better   return on my savings than the interest   rate I would get on the loan? Yes= Get a loan No= Use the savings If you have your savings in a fixed income investment like a CD or bond, then it is just simple math to answer the question, for more volatile investments like stocks you just have to make an educated guess based on the direction of the markets and past performance. What the comments above say is true, but one more thing is there. FD rates are directly proportional to loan rates. However, banks make money because loan rates will always be higher than FD rates. "In both cases, you have a bunch of assets that pay into a trust, and a set of rules determining how the payments are distributed to bond holders.    Typically, the bonds are split up by ""Seniority"" where any losses from the underlying assets gets recognized by the least senior bond holder first, and the most senior is protected until those below in seniority are wiped out.  In the case of mortgage backed securities, you have a lot of early payoffs (sales and refinances), and those payoffs tend to pay off the senior bonds first (though in practice, quite a bit more complicated than that)  CDOs tend to have bonds as assets that pay into the trust, and CMOs have mortgages.  CDOs used to be more likely to be things like corporate debt, or junk-rated debt.  But during the housing bubble you did have CDOs backed by some form of mortgage backed bonds.  If you build a CDO out of tranches of CMOs, you are going through multiple stages of tranching, and things 'get weird' when you have highly-correlated loss behavior in your underlying assets.  The Equity position or the residual, as it is sometimes called, is whatever money coming from the underlying assets isn't owed to any bond after all of the structuring rules are followed.  This would be interest received in excess to interest owed + money required to make up for lost principal.  Typically goes back to the issuing bank.  There is something called a NIM bond that gets carved out of the residual and pays to the investment bank, I gather.  Residuals and NIMs of mortgage bonds are pretty worthless in a high loss environment like this." "In the case of mutual funds, Net Asset Value (NAV) is the price used to buy and sell shares. NAV is just the value of the underlying assets (which are in turn valued by their underlying holdings and future earnings). So if a fund hands out a billion dollars, it stands to reason their NAV*shares (market cap?) is a billion dollars less. Shareholder's net worth is equal in either scenario, but after the dividend is paid they are more liquid. For people who need investment income to live on, dividends are a cheap way to hold stocks and get regular payments, versus having to sell part of your portfolio every month.  But for people who want to hold their investment in the market for a long long time, dividends only increase the rate at which you have to buy. For mutual funds this isn't a problem: you buy the funds and tell them to reinvest for free. So because of that, it's a prohibited practice to ""sell"" dividends to clients." Basically, what you describe exists in many countries - not in the USA though. In Europe, people have checking accounts with allowed overdraft, typically three month net salaries. You can just this money any day as you like, and pay it back - completely or partially - any day as you like. Interest is calculated for each day on the amount used that day; and the collateral is 'future income', predicted / expected from previous income. In the USA, credit cards have taken its place, with stricter different rules and limitations. In addition, many of the extra rules in loans were invented to take advantage of the ignorance or situation of the borrower to make even more money. For example, applying extra payments to future due payments instead of to the principal makes that principal produce more interest while the extra payments just sit around. Stock basically implies your ownership in the company. If you own 1% ownership in a company, the value of your stake becomes equal to 1% of the valuation of the entire company. Dividends are basically disbursal of company's profits to its shareholders. By holding stocks of a company, you become eligible to receiving dividends proportional to your ownership in the company. Dividends though are not guaranteed, as the company may incur losses or the management may decide to use the cash for future growth instead of disbursing it to the shareholders. For example, let's say a company called ABC Inc, is listed on NYSE and has a total of 1 million shares issued. Let's say if you purchase 100 stocks of ABC, your ownership in ABC will become Let's say that the share price at the time of purchase was $10 each. Total Investment = Stock Price * Number of Stocks Purchased = $10 * 100 = $1,000 Now, let's say that the company declares a dividend of $1 per share. Then,  Dividend Yield = Dividend/Stock Price = $1/$10 = 10% If one has to draw analogy with other banking products, one can think of stock and dividend as Fixed Deposits (analogous to stock) and the interest earned on the Fixed Deposit (analogous to dividend). Well for a start funds don't pay interest.  If you pick an income-paying fund (as opposed to one that automatically reinvests any income for you) you will receive periodic income based on the dividends paid by the underlying stocks, but it won't be the steady predictable interest payment you might get from a savings account or fixed-rate security. This income is not guaranteed and will vary based on the performance of the companies making up the fund. It's also quite likely that the income by itself won't cover the interest on your mortgage.  The gains from stock market investment come from a mixture of dividends and capital growth (i.e. the increase in the price of the shares).  So you may have to sell units now and again or cover part of the interest payments from other income. You're basically betting that the after-tax returns from the fund will be greater than the mortgage interest rate you're paying.   3 facts: If you're comfortable with these 3 facts, go for it. If they're going to keep you awake at night, you might not want to take the risk. This is a great question for understanding how futures work, first let's start with your assumptions The most interesting thing here is that neither of these things really matters for the price of the futures.  This may seem odd as a futures contract sounds like you are betting on the future price of the index, but remember that the current price already includes the expectations of future earnings as well! There is actually a fairly simple formula for the price of a futures contract (note the link is for forward contracts which are very similar but slightly more simple to understand).  Note, that if you are given the current price of the underlying the futures price depends essentially only on the interest rate and the dividends paid during the length of the futures contract.  In this case the dividend rate for the S&P500 is higher than the prevailing interest rate so the futures price is lower than the current price.  It is slightly more complicated than this as you can see from the formula, but that is essentially how it works. Note, this is why people use futures contracts to mimic other exposures.  As the price of the future moves (pretty much) in lockstep with the underlying and sometimes using futures to hedge exposures can be cheaper than buying etfs or using swaps. Edit: Example of the effect of dividends on futures prices For simplicity, let's imagine we are looking at a futures position on a stock that has only one dividend (D) in the near term and that this dividend happens to be scheduled for the day before the futures' delivery date.  To make it even more simple lets say the price of the stock is fairly constant around a price P and interest rates are near zero.  After the dividend, we would expect the price of the stock to be P' ~ P - D as if you buy the stock after the dividend you wouldn't get that dividend but you still expect to get the rest of the value from additional future cash flows of the company. However, if we buy the futures contract we will eventually own the stock but only after the dividend happens.  Since we don't get that dividend cash that the owners of the stock will get we certainly wouldn't want to pay as much as we would pay for the stock (P).  We should instead pay about P' the (expected) value of owning the stock after that date.   So, in the end, we expect the stock price in the future (P') to be the futures' price  today (P') and that should make us feel a lot more comfortable about what we our buying.  Neither owning the stock or future is really necessarily favorable in the end you are just buying slightly different future expected cash flows and should expect to pay slightly different prices. I wrote about this a while back: http://blog.investraction.com/2006/10/mutual-funds-dividend-option-or-growth.html In short: Growth options of a mutual fund scheme don't pay out any money, they reinvest the dividend they receive. Dividend options pay out some money, at different intervals, based on the surplus they accumulate. In India, the options have very similar underlying portfolios, so HDFC Equity Fund (Growth) and HDFC Equity Fund (dividend) will have the same percentage allocation to each stock. Update: I also have a video you might want to see on the subject: http://www.youtube.com/watch?v=Bx8QtnccfZk One big difference:  Interest is contracted.  They can change the rate in the future but for any given time period you know what you're going to get. Dividends are based on how the company did, there is no agreed-upon amount.