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Stock Market Term 5 -
Market Order – A market order is an order to buy or sell a stock that will be executed on a stock exchange. When you place an order with your broker that includes no other conditions, that's an example of a market order. You agree to buy or sell a stock at what ever the market price is when the trade is executed. Due to the time difference between when the trade is requested and when it's executed, there can be substantial difference in the price you buy or sell a stock at compared to where you wanted to buy or sell at.

For example, if you're looking at a stock on your computer screen and it's sitting at $20.00 a share, it may have moved to $21.75 from the time you place the order to the time a trader actually buys the stock for you on the exchange. Remember that stock exchanges are just markets filled with buyers and sellers. The price offered and the price that sellers are willing to sell for changes constantly as the trading day progresses.

Stock Market Term 4 -
Limit Order – As the name suggests a limit order is an order to buy or sell some stock that's limited by price. There are buy limit orders and sell limit orders. When you place a limit order, the transaction can only occur when the stock's price reaches, but doesn't exceed a certain price. This can occur either on the high or low side.

For example, you want to buy some shares of XYZ Corp. (You just love that company) and it's currently trading at $10.00 per share. You can place a limit order that will not be executed if the stock is trading at greater than $12.00 at the time the order is executed. That prevents you from paying more than you wanted to for the stock, which can easily occur with a fast moving stock due to the lag between the time your order is placed and when the trade is actually executed on the stock exchange.

You can also use a limit order when selling. Say you're holding XYZ Corp at $10.00 per share. You can place a limit order to sell your shares but set a limit at some amount, say $8.50, below which you don't want the trade to be executed. If XYZ falls below $8.50 before the trade can be executed, the transaction won't be made.

Stock Market Term 3 -
Stop Order – The stop order is basically the flip side of the limit order. With a stop order, you set what's called a “stop price”. When the stock reaches your selected stop price the trade will be turned into a market order, not before. As with the limit order, there are sell stop orders and buy stop orders. These are great for locking in profits or limiting losses.

For example if an investor is holding XYZ at $10.00 per share, they can set a sell stop order at $9.00/share. That way if the stock drops to $9.00 it will trigger a market order to sell. If the investor (you?) bought the stock at $7.00 they are locking in the $2.00 per share appreciation as profit. Keep in mind that they may not receive the entire $2.00 due to the time difference between when the market order is placed and when the trade is executed.

Stock Market Term 2 -
Stop–Limit Order – If you really aren't comfortable with the market fluctuations that can cause your trade to be executed at a price above or below your stop or limit order, you need to use what's called, appropriately enough, a “stop–limit order”. The stop-limit order is a marriage of both types of orders. As with the stop order you set a stop price. The difference is that the when the stop price is reached the order converts to a limit order, rather than a standard market order.

Why wouldn't you always use a stop-limit order? Well sometimes you can't, because your broker prohibits it with certain classes of stocks, such as over the counter bulletin board (OTC-BB) stocks. When they allow you to place these orders should be clearly spelled out in their service terms. The other reason you may not want to use a stop-limit order is that, as with a standard stop order, if the price of the stock never reaches the limit, your trade will not be executed.

Stock Market Term 1a -
Ask – You'll see the term “ask” on your computer screen when looking at different stocks and their activity. The Ask amount is what the seller of the stock is willing to sell it for.

Stock Market Term 1b -
Bid – Bid is the flip side of Ask. It's what the buyer is offering to pay for a specific stock.

That wraps up the top 10 stock market terms you need to know. There are hundreds more terms that are used by investors, brokers, and traders. Like lawyers, they have a language that is all their own. I'll post the definition of more stock market terms in the near future.

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Stock Market Term 10 -
Sell short – Selling short (also called “shorting” a stock) isn't a term that applies only to investors under 5' tall. Selling short refers to a strategy where the investor bets that a stock is going to fall, and if it does they'll realize a profit. Basically to sell a stock short an investor will borrow from their brokerage house in order to purchase a specific number of shares of a specific stock. They never actually own the shares, they're on loan to the investor.

At some point in the future, they have to repay those shares to the brokerage house. If they were correct, the shares will cost them less than they paid. For example, if they short 100 shares of XYZ corp at $10.00 a share, it costs them $1,000, except that they don't actually have to pay the $1,000 yet. They are obligated to repay the 100 shares of XYZ at some point in the the future, however. In this example if XYZ corp's stock drops to $7.00 a share, the investor can repay the brokerage house the 100 shares and realize a $3.00 per share profit.

One could have made tremendous profits shorting mortgage company stocks in the past year, but the shorting strategy does have a downside. One downside of short selling is that the upside is limited. You can only earn an amount per share that's equal to the share price. Obviously there isn't any more money in there. So, in this example, you could earn a maximum of $10 per share on XYZ. On the other hand in a traditional purchase your upside profit potential is pretty much unlimited. If XYZ went to $100 at some point in the future, you'd have made $90 a share.

Stock Market Term 9 -
Equity – An equity is analogous to a stock. It's an ownership stake in a company. When an investor purchases a share of stock they're purchasing a portion of ownership in the company. This is also called taking an equity position in the company. It's one of the two main ways a company raises money. Selling ownership in the company is called equity financing. The other way is selling bonds or notes, which are financial instruments that a company promises to repay with interest. Selling company bonds or notes is called debt financing.

Stock Market Term 8 -
Margin – Buying stocks on margin is borrowing money from your broker to buy shares of stock. This is strictly regulated by the Federal Reserve. It is a way an investor can use leverage to grow their investment, because they're using borrowed funds. This is just like when you purchase your house with 10% down, you're leveraging the 10% down payment to control a much larger asset. When the house appreciates you get the benefit of the entire appreciation, although you only paid 10%. As you can imagine, an investor can lose big time if the stock goes down, because you are leveraging both gains and losses.

The Fed requires investors to have a 50% equity in their accounts when buying on margin. So if you want to buy 100 shares the ubiquitous XYZ corp's stock at $10 per share you have to have at least $500 in your account to do so. In reality, because of Federal Reserve regulations, you can't get a margin loan from broker unless you have a minimum of $2,000 in your account.

Stock Market Term 7 -
Call Option – A call option is a contract that two investors enter into where one sells the other the right to purchase a certain security at a certain time for a certain price. The buyer is not obligated (hence the term “option”) to make the purchase, but the seller is obligated to make the sale for the agreed upon price, should the seller so choose. The buyer realizes their profit because they are buying an option to purchase a stock they are hoping they can sell on the open market for more than they paid. It's similar to (but not the same as) employee inventive stock options.

Say XYZ corp is trading at $10 a share and the buyer purchases options to XYZ for $12 a share. The seller locks in a $2.00 share profit because of the $2.00 premium. The buyer pays the $2.00 per share premium as a nonrefundable deposit. Should the stock rise above the $12.00 share price, the option buyer can then buy the stock for the $12.00 agreed upon price, and sell them for whatever the market value is on the day they sell them. The difference between the option price and the sales price is the investor's profit.

Stock Market Term 6
Put Option – A put option is basically the flip side of a call option. It gives an investor the option to sell a specific stock or commodity at an agreed upon price (known as the the “strike price”) at some point in the future. When an investor purchases a put option they are hoping the asset is going to lose value before they exercise the option.

For example, if they buy a put option for, you guessed it, XYZ corp, at $20 a share and XYZ drops to $15 a snare, they'll realize a $5 per share profit, minus the amount they paid for the option. If they paid $2 per share for the option their net profit would be $3 per share. It works like this:

The owner of the put contract buys XYZ at the market price of $15 a share then sells it as per the terms of the put option for $20 per share. They earn $5 per share, but had to pay $2 per share for the option, so they net $3 per share.

Stay tuned for Part 2 of the Top 10 Stock Market Terms - I'll post them tomorrow.

Posted by debtblog at 01:56 PM | Permalink | Comments (0) | TrackBacks (0)

Some of your general investing choices include real estate, individual equities (stocks), bonds (debt), equity funds, mixed funds (stocks and bonds), and your own business. Within those very broad classifications, there are numerous sub classifications. For example, there are many different types of mutual funds you can invest in, all with different characteristics designed to meet the needs of different investors. You can short sell stocks, buy and hold, or try and time the market (for most investors timing the market isn't too smart).

For real estate investors, you can invest in REITs, buy single family properties and rent them out, rent multi family properties, flip properties, concentrate on foreclosures, develop and improve existing properties, or develop raw land. If you'd rather run your own business, there are literally more different business opportunities you can invest your money in than there is room to list them. You can start your own business from scratch, buy an existing business, buy a part of an existing business, or buy a franchise. The different types of businesses that are available to invest in is mind boggling.

There are several characteristics of investors you can look at to find just the right investment choice. One of the first to consider is the time horizon. How long will it be until you'll need access to the money? If you're investing for retirement and you're only 25 years old, you'll choose a totally different strategy than if you're 56 (the new 36) and rolling over an IRA. If you're 25, you can invest more aggressively than if you are closer to the time when you'll need the money because there is time to recover from volatility effects.

Typically more aggressive investments will deliver a higher rate of return, but they will bring with them commensurately more risk. If you're investing for far down the road, you'll have time to recover from those little ups and downs. Looking back over the last 20 years the tech sector has done very well indeed. However, there have been some serious bumps in the road.

For example, the Fidelity Select Software and Computer fund (FSCSX ) has returned an annualized 16.34% over the life of the fund. That's a highly respectable return, and you could do well if all your assets generate such a ROR. The problem is that the tech sector tends to flirt with volatility on occasion. If, in 1998 you were planning on retiring in 5 years, you may have looked at the stats for life of the fund return and think that plopping your money in FSCSX would have been a great idea. That would have been a fatal mistake with regards to your portfolio, however.

As you were crawling our from under the overpass, squinting in the noonday sun, and wondering what the hell happened to your money, you would have realized that just because an investment has great historical returns, it might not be the best investment for you. In this case virtually all equities in the tech sector were pulverized by the dot.com implosion. FSCSX lost almost 50% of it's value between the end of 1999 and the end of 2002.

More recently investors have experienced similar problems with regards to real estate and mortgage sector investments. The key when evaluating an investment vis-a-vis your time horizon is to look at the volatility. By definition volatility indicates a greater likelihood of wide swings in value, even if the overall rate of return during a specific time period is high. That means that you could be caught with your pants (or portfolio's value) down just when you need to begin withdrawals. By choosing investments with lower volatility when your time horizon is relatively short, you'll lower your risk of this happening.

The next thing to examine when evaluating different ways of investing money is your required rate of return. You can never predict an investment's future rate of return with 100% accuracy because you only have past history, industry trends and an evaluation of the local and world economies on which to base your decision. Lord knows any of these variables can be pretty difficult to predict with any certainty, let alone all of them combined.

You can, however, get within shouting distance of what you can expect to receive as a return on your investment by examining these factors and the past history of the prospective investment. In many cases there will be any number of industry analysts only too happy to offer their opinion. In some cases they'll be spot on, but it's often better to look at a general consensus on what performance can be expected in the future.

You will need to determine your required rate of return by determining how much you'll need to accomplish the goal of the particular investment. If you're investing for retirement, you'll need to determine how much annual income you'll require to keep you in the lifestyle to which you've become accustomed, and how long after retirement you plan on living (ah, but you know what they say about the best laid plans!). You can calculate how much of a retirement nest egg you'll need to supply that annual income figure for the requisite time period. Basically, your lump sum retirement account is calculated to pay out like an annuity. Typically a fixed rate of return is assumed for calculating purposes.

Once you know how large that lump sum must be and how long you have to amass that sum, you'll be able to calculate what rate of return you must generate to reach it, providing you known how much you'll be contributing each year. You can calculate your required rate of return using a formula, but it's generally easier to use an investment calculator.

The next thing you'll want to look at when evaluating a prospective investment is your risk tolerance. Many people have substantial tolerance for risk, others are extremely risk averse. Sometimes their risk tolerance for things financial is different that in other aspects of life. For example, you can love to bungie jump, ski and rock climb, but get pretty skittish when it comes to risking your hard earned cash. You'll want to balance your risk tolerance with the required rate of return to find a suitable investment.

Keep in mind that there is usually a positive relationship between risk and return. Higher risk investments compensate investors for taking greater risks with a higher expected rate of return. It's the expected part that can trip you up here.

Lastly, there are various intangibles that come into play. You may want to invest in things that interest you or in industries with which you have some familiarity. If you have a strong social commitment, you may want to pursue “socially responsible” investing. Other things will impact your investment choices as well, such as local or global economic factors that can make certain investments more attractive due to temporarily greater expected returns, shortened expected payout times or lowered risk.

An example of this is real estate investing in the current economy, particularly in foreclosed properties. Many regions have particularly large opportunities available here due to conditions in their regional economies. In these areas current economic climates, there are large numbers of foreclosed properties, leading to opportunities for investors who would like to invest their time and money here. You may want to retire unbelievably wealthy in a short amount of time. Well, your choices are understandably limited here, but foreclosure investing does offer you the ability to do so. Although the potential upside is large, you could also get yourself and your retirement nest egg into a spot of trouble this way. After all if it was that easy, everyone would be doing it. A few wrong moves and you could be the one getting foreclosed upon.

Another investment opportunity spawned by changing economic conditions is the growing number of new business that cater to those people wanting to save money on fuel costs, weather on motor vehicle fuel or heating oil. The very rapidly rising costs quickly created a market for products and services that wasn't really viable just a short time ago. The risk here is that your investment could be torpedoed if fuel costs drop in the future. Although analysts predict the costs of petroleum products to remain high for at least the next 18 months, possibly longer, analysts have been wrong before.

In order to evaluate different ways of investing money, you'll want to look at the following factors:

• Your investing time horizon

• Your required rate of return – Is the prospective investment expected to generate sufficient returns?

• An investment's risk as it relates to your personal risk tolerance

• Other personal factors that influence your comfort level with a personal investment.

• Your reason for investing – Is it a hobby, do you want regular income from the investment, or are you investing for retirement?
  

These factors will help determine if the different ways of investing your money will deliveer your desired result.

Posted by debtblog at 01:55 PM | Permalink | Comments (0) | TrackBacks (0)

Investing in oil; is it a good idea as the price of oil is hitting an historical high of $135 per barrel? How about that black staple of American energy production; coal? What about investing in energy sources for the future, such as alternative energy funds? As oil prices continue to rise, investing in alternatives may make sense. Oil could price itself out of a job somewhat if it keeps going up. Maybe some of these new technologies will step in to fill the gap. The problem is that oil provides little of our electrical energy. In addition, oil is still pretty cheap, relatively speaking, and there are few alternatives for many of the non-energy uses for oil. You can't pave a road or build consumer products from the sun, but you sure can with petrochemicals.

Is there a more or less direct relationship between the returns generated by alternative energy funds and the price of crude oil? It seemed like something that would bear checking into, so I did a little digging into the returns generated by some of the top alternative energy funds vs. the price of crude oil over the last few years to see if there were any correlations to be found.

As the price of oil goes higher it will make the price of power generated by conventional, oil fired generating plants commensurately more expensive. Oil is used to generate only about 2% of the power in the United States, so the price of oil should have only a slight relationship to the price of electricity on a national scale. Coal, on the other hand, is used to generate about half of the electricity consumed by your new big screen, so the price of coal may have a larger effect on alternative energy funds. I'll check both to see if this is the case.

The price of coal is exploding at a rate that is about on par with the rise in oil prices. If you're investing in oil, and want more commodity investments in the energy sector, it certainly bears looking into as another energy investment alternative. Appalachian coal sat at about $45 per short ton in September of 2007. Want to venture a guess as to where the price is now? Coal form the same region is now over $100 per short ton. Coal from other regions is also rising fast, but not at quite the same rate. For example Illinois basin sourced coal is now at about $57, where 9 months ago it fetched only $32. Maybe coal futures would have been a great bet last summer. Oh well, 20/20 hindsight.

Here is a look at light crude prices for the last 2 years:
2007 NYMEX Light Crude Oil Prices:

2008 NYMEX Light Crude Oil Prices:

As you can see, except for a dip in the first 45 days of this year, crude oil prices have exhibited a rather steady rise for the last 18 months.

Coal Prices since May of 2005

It's pretty hard to miss the rather dramatic spike in short ton coal prices over the last 9 months, as seen here, although it followed a roughly 30% drop in prices shown in the prior 9 months. Notice that Uinta Basic coal was falling, even as Appalachian coal was rising.

Now here are prices for some of the leading alternative energy funds. It's probably not a large enough sample to be truly representative, but it gives investors an idea. The first thing to note is their volatility. The next thing is that they seem to not be correlated to the relatively steady rise in oil prices exhibited over the last 2 years, except over the last 60-90 days, when the ones I looked have shown impressive gains (on the order of 20%). In fact, alternative energy funds have shown rather mediocre returns with the exception of this period, and could have been bested in a number of sectors.

I would have expected the rise in oil and to a greater extent, coal prices to have spurred investment in alternatives to these rapidly rising energy supply sources, and to have precipitated a rise in their prices. Some of the individual stocks have done fairly well, but as a whole the funds themselves have been underwhelming.

Here are pricing trends for a few alternative energy funds -

Guiness Atkinson Alternative Energy

New Alternatives Fund 

Powershares WilderhillClean Energy (PBW) - ETF 

You'll note that there seems to be a correlation between each other, but that's because they contain some of the same issues.

So, it looks like the price of alternative energy funds is not going to track with the price of crude oil, although both have experienced gains in the last few months. Perhaps this is the start of a trend, but then again, it may be an anomaly. They have shown a closer correlation with coal prices, but again, not a direct link. Thought this look at oil investing vs. investing in companies that make future energy sources would prove interesting.

Posted by debtblog at 02:17 PM | Permalink | Comments (0) | TrackBacks (0)

They've also added a community sentiment graphic to show a bullish or bearish sentiment on a stock. Where they get the information to run this, I'm not entirely sure. It appears they track how many Zecco customers have bought and sold a particular issue for the past 5 days, and present it in a dashboard style interface. It will also graphically show where a particular stock lies on 2 scalers, worst performing - best performing, and least held – most held. They also have added a paperless option so you can opt to receive trade confirmations and statements by email, with no printed documents sent through snail mail.

To learn more, click here.

Posted by debtblog at 01:12 PM | Permalink | Comments (0) | TrackBacks (0)

For example, say you hold 1,000 shares of Microsoft (MSFT) corp that you bought at $10.00 a share. You can tell your broker to sell those shares if the stock ever drops below a price that you feel comfortable with, for example $7.50. That way you limit any potential losses on your position.

There is a problem with a traditional stop loss order however, and I’m sure you’ve spotted it already. What happens if Microsoft corp shows impressive gains for a year, say it increases its share price to $18.00? That’s great, but your stop loss order is still set at $7.50, so if MSFT corp’s stock then drops back down you’ve protected yourself against a 25% loss in your original position, but you haven’t protected your gains at all.

A trailing stop limit changes that for you. A trailing stop limit order actually changes the number at which it goes into effect as the stock price changes. That buys you a very important benefit as an investor. It protects you against loss, but also allows you to make a nice profit while doing so. Basically it mitigates a certain measure of risk while maximizing your investment returns. Anything that mitigates investment risk while allowing an investor to generate potentially explosive returns is a great thing.

For example, say you have the same position in MSFT that you got into at the same $10 / share price, but this time you used a trailing stop limit. If you used a 25% trailing stop limit, it would increase so that any time the stock dropped 25%, a sell order would be triggered. That way when the stock went to $18.00, then dropped back down, much of your profit would be preserved. Your loss would be limited to a maximum of 25% of the stock’s highest market price. In this example, your sell order would have been triggered at $13.50 / share.

So, instead of your position being liquidated at $7.50 and you losing all your profit on the stock’s increase, plus part of your original stake, you would lock in some profit, in this case a 35% gain. When setting up a trailing stop limit order you can usually specify either an trailing amount or a percentage. In this example you could have chosen the 25%, or you could have chosen an actual dollar amount, such as $1.50. If you chose to use the dollar amount, your sell order would have been triggered at $16.50.

If your broker offers both options you’ll be free to choose whichever suits your particular position and mental state the day you make the order. If you’re setting the trail using a dollar amount, you’ll typically have a limit price and an optional offset. The limit price moves up and down with the market price and that’s what’s used to trigger the sell order. The offset, if you use one, is an additional amount that’s subtracted from the trailing limit, say .25, to arrive at your actual sell order price.

Using a trailing stop limit can generate explosive gains for your portfolio because you will maximize gains in your stocks, while minimizing losses. Any time you can do that, you’ll be retired on a beach in Maui that much sooner.

Posted by debtblog at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

First of all, as they are minors, children can't actually buy and sell stocks themselves. They can however take advantage of the Uniformed Gift to Minors Act (UGMA) that enables minors to legally own property. It does this by allowing the establishment of a trust for the minor's assets. There is a trustee for the UGMA that is typically the parents. Unlike more complicated trusts, UGMA related trusts are statutorily established in the individual's state of residence. That's nice because you don't have to rack up a mountain of legal fees to establish a UGMA trust, as can be the case with many other trusts.

What the UGMA allows is the gift to a minor child of an amount of money with no tax consequences as per the limits of the gift tax exclusion. The exact amount of the annual gift tax exclusion can vary from year to year, according to IRS regulations, but currently it's $12,000 from one individual to another. There is no actual contribution limit for a UGMA, but there will be tax consequences if the contributions to the account are greater than the current year's exclusion limit. You can establish a UGMA trust for your kid's investment whims at your broker's office or bank by simply filling out a few forms and choosing a custodian.

You can do all the investing you want with the funds in the account, as long as you don't things like gambling as investing. Any realized gains or losses will be reported under the child's SSN. At the age they cease to be minors, either 18 or 21 years of age depending on the state of residence (although some states allow you to move the age from 18 to 21 if you so desire), the funds in the UGMA trust revert to the ownership of the minor. Hear this, you will lose every once of control over these funds at that time.

This bears a bit of thought, because no matter how responsible or irresponsible your kid, you'll have a trust fund baby on your hands if you establish a UGMA. The difference is that you can not prevent the minor from gaining control of the funds through special terms of the trust as you can in other trusts. They are all set up according to the state's statutes, remember? (There are other trusts that you can set up as custom as you would like, but these will usually cost more to establish than a UGMA trust).

Something else to know about a UGMA is that they reduce the child's eligibility to receive student financial aid. Apparently the Feds feel that if your kid is sitting on a half a million dollar trust fund the taxpayer shouldn't foot the bill for their education. The point is that any assets in a UGMA established trust account are considered the child's assets when applying for financial aid, so they will have an impact on eligibility. That's something to consider when setting up a UGMA so your kids can dabble in the markets.

Another thing to consider is that transferring any funds from the UGMA into another vehicle, such as a 529, will cause you to be liable for capital gains taxes on the transfered amount. That's because the assets can't actually be transfered directly. They must be sold, then the proceeds from the sale are used to fund the 529 account. The other issue is that 529 plans are actually adult owned, so the funds must be transferred back to the parents, possibly incurring other tax consequences. 529 plan assets are not used for calculating financial aid eligibility though.

What if you child just wants to invest for an education. Not to fund their education, but to learn how the markets work, and get an actual financial education. That is a great thing, because the vast majority of children today have absolutely no idea about anything financial. If your child is responsible enough to actually want to spend their time investing their assets, rather than spending them at the mall or on smoking dope, you probably have less to worry about than many parents. Most kids would rather spend their money on new games for their PS3 than on shares of the Visa IPO, so if your's doesn't , congratulations.

Posted by debtblog at 01:34 PM | Permalink | Comments (0) | TrackBacks (0)

Lessons About Investing – 1
The first thing to determine when you're beginning investing is why you're investing. What are your goals? Only once you've determined your goals can you develop a plan to achieve them. Are you looking to create a future income stream to fund your retirement, do you want to invest as a business to create income for the present, or are you trying to fund a specific goal, such as college for your children. The other option is that you could be investing for fun, and investing can be an enjoyable hobby (when you do it right).

So, your first lesson is to set your specific investing goals before you begin investing. Be specific when you're doing this. For example, it's not enough to say “I want to fund my retirement”. You have to actually know how much money it will take to do so. One of the most common mistakes beginning investors make is failing to invest in such a way that will meet their goals, because they haven't really set any. So, if you're looking to invest as a retirement funding mechanism, your first task is to decide just how well you'd like to live when you stop working.

If a Jed, pre-Beverley Hills lifestyle suits you just fine, then you'll have an easier time than if you would like to retire and earn the same as your pre-retirement income. If you can feel comfortable at 75% of your pre-retirement income, that will give you a specific monetary goal. Obviously you'll have to know what your pre-retirement income will be to do this. Unless you spend time down at Zoltar's, you'll have to rely on a bit of educated guessing.

This is a bit more difficult now than your parent's day, because of the mercurial nature of most people's careers in our brave, new century. In any case, look at your career path, and determine how much your income will realistically increase over your working life. If for example, you are pretty sure you can count on roughly a 5% raise every year, use that number in your calculations.

Lessons About Investing – 2
Your second lesson about investing is to invest in vehicles that will meet your investing goals while taking into account other important factors. The two most important of these are probably your personal risk tolerance and time horizon. For example if you're risk averse, you will want to stay away from high risk investments, no matter if they promise high returns.

Looking at your time horizon is extremely important to help ensure that your investments will have the funds you need when you need them. Some investments tend to be fairly volatile, meaning they go up and down in fairly large swings. Volatile investments may generate pretty high returns over time. The problem arises if you are close to the time when you may need to begin withdrawing funds. If the investment has wide swings in value you risk it being in a trough, rather than a peak when you need the money. Not a good situation.

Lessons About Investing – 3
That leads into lesson about investing number 3. It's one that even the best, most experienced investors can have trouble learning. Don't try and time the market. That's it. Trying to guess exactly when to buy and sell in order to maximize your returns is not a trivial task even for the pros, most amateurs will just get killed trying it. Guess right and you'll make out like a bandit, but the more likely scenario is that you'll be wrong much more often that you'll be right and end up taking a bath.

Lessons About Investing – 4
This a lesson that can be very expensive if not learned. You have to diversify your holdings. If you are a fund investor much of the diversification will be handled for you, unless you invest only in sector funds in a limited scope of sectors. You want to avoid putting all your eggs in one basket, lest you end up in the situation Enron employees found themselves in. Actually this often happens to investors that mainly invest in their employer's stock. While that can be a great experience, just ask Google employees over the last few years, or Microsoft employees in the '90's, it can also be a horrifying ride if you're forced to watch you retirement funds evaporate.

Diversification is an investor's best defense against such a catastrophe. If you're well diversified, a calamity in a certain industry or sector will have much less of an effect on your portfolio, because you have holdings in other areas of the market that will, in theory, be unaffected.

Lessons About Investing – 5
An investing lesson you should learn early is to always do your due diligence. You should know all the factors about your investments that could come back to bite you if things go wrong or you need access to the money. You should know about tax and withdrawal consequences, fees, and other things that can affect your investments. In addition you should know as much as possible about the companies you're invested in, their businesses, and the economic factors that could affect them.

These are 5 of the top lessons you should learn before you start investing. The money you make (or save) will be your own.

Posted by debtblog at 02:08 PM | Permalink | Comments (0) | TrackBacks (0)

Is silver investing worthwhile, or are all the gold talkers right? Currently, silver is sitting at $16.96 an ounce, while gold is at $889.70. That doesn't mean, however that gold is a better investment. Actually you could have made impressive gains in through silver investing over the last 3 years. As with many commodities, silver has been in high demand because of various world economic factors, causing prices to skyrocket (investment cliche number 307).

For much of 2005, silver hovered in the mid $7.00 range. In August of '05 it briefly dipped back into the $6's, where it had spent most of 2004, before starting a nice climb, culminating about 22 months ago, when it reached $15/oz in mid may of 2006. Subsequently it gave much of those gains back, falling to $10 by mid June. Since then silver has been pretty generous, see-sawing itself up to it's present level of almost $17.00. Actually Silver reached a peak of just over $21 in mid March, only to lose 25% of it's 3 year run and land at it's current value. So, in 3 years you would have seen roughly 242% gains in a silver stake. How does that compare with the talk show darling, Au?

In April of 2005, Gold was sitting right about $440/ oz. It was flat for the first portion of the summer of 2005, actually declining to about $425 by early June. It then started a rise roughly parallel to that of Silver, growing to $750 by mid May of 2006, before dropping back to $575 by mid June. Since then, like silver, gold has risen nicely. The exception is that gold reached a peak of just over $1,000 an ounce in mid March of this year before giving back about 20% of it's 3 year gains to land at its present value of $889.70. This equates to a gain of roughly 202%, impressive, but less than the over 240% gains posted by it's ugly cousin from Nevada.

What are we likely to see from silver investing in the future? Silver has historically been in high demand, and in the past traded at about 1/10^th the price of gold. In the early 1980's it even rose to almost $50 an ounce (not adjusted for inflation). Like many other commodities, volatility is the order of the day. Investing in precious metals is not for the faint of heart, but is often used to diversify a portfolio and protect against losses in the stock market. This is because many of the things that cause stocks to rise or fall will stimulate the opposite result in precious metals, as investors tun to alternative places to rest their capital.

One thing about investment in precious metals or any other commodity is that while prices can see precipitous drops, they will never decline to absolute zero, as can happen with stocks. If a company goes out of business, it's stock will be worthless, while a commodities stake will never experience a decline all the way to nothing.

One of the most powerful factors stimulating prices is expected future demand. Nothing causes bidders in the commodities pits to ratchet up prices more than either the fear that something will be unavailable, or that demand will grow enough to outpace supply.

One of the largest uses of silver today is in the electrical switch contacts of small appliances and consumer electronics components. Silver is also used in appliance in other interesting ways. Because silver has bug killing properties, it is now being used in washing machines, air conditioners, and toilet seats to kill germs. As developing nations demand more and more such trappings of 21^st century success, we'll have to pull more silver out of the ground to supply raw materials for them. Another popular use of silver is for the rear window defroster conductors in vehicle defrosters. Again, look to China to cause demand to grow here.

One place where the use of silver will be on the decline is in photography, where 24% of the world's silver was used in 2001. Since most of pics today are printed using ink jet and dye sub printers, rather than developed on traditional film, this use of silver will taper off.

Due to the many uses of silver in industry, jewelery and economic conditions such as inflation and uncertainty in the middle east, silver could be a nice addition to one's portfolio for the near term. Pressure on the dollar, recent rises notwithstanding, could help to drive the price of silver even higher. Many of these conditions were the same as were seen 30 years ago, when silver last experienced a huge price run up. Just remember that prices eventually came back down to earth, so if you are going to try your hand at silver investing, keep both hands on the wheel.

Posted by debtblog at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

Mutual funds are available from most of the major investment houses, such as Fidelity, Janus, Vanguard, T. Rowe Price, and many others. Typically, mutual funds are managed by a fund manager, whose responsibility it is to insure that the fund's return to investors is as high as possible. Ostensibly an investment professional with years of experience, backed by a team of researchers, and powerful software would be able to do this with no problems.

However, the dirty little secret of the mutual fund world is that many mutual funds do not outperform the market as whole over the long term, which is how most funds are used. Active investors who trade stocks on a regular basis tend to prefer individual equities. They may still hold mutual fund shares, but most of these will be used as buy and hold type of investments.

There are several broad classifications of mutual funds, which roughly describe the types of companies they invest in. Which funds you choose to invest in, if any, will be determined by your investment objectives. If you're investing for retirement that's a long way off, you'll pick different funds than if you are investing with an eye to receive regular income from your investments.

Sector funds concentrate their investments in a single industry or a group of tightly related ones.

Growth funds invest in companies who are, in the opinion of the fund's management, likely to experience rapid growth.

Index funds track market indices, such as the S&P 500, Dow Jones, Wilshire 5000, or NASDAQ composite index. These tend to not be actively managed, so in theory these funds have lower expenses than other classes of funds.

Balanced funds - A fund composed of a mix of equities (stocks) and debt (bonds). In theory stocks and bonds tend to cycle roughly inversely to each other, so a balanced fund can help diversify risk.

Income funds – Income funds are targeted at maximizing dividend income within the fund's objectives. These types of funds tend to have a lower volatility (smaller price swings) than growth funds.

Emerging Market funds – This type of international mutual fund concentrates on equities of companies in rapidly growing foreign (to U.S. investors) markets. These have the potential for tremendous growth (the 5-year Lipper average for emerging market funds is around a 200% return), but investing in overseas or Latin American markets can be risky.

Other mutual fund terms to know -
Expense ratio – How much of your money is used to pay the fund's management and administrative fees. An average is between 1% - 2%. These expenses can have a dramatic impact on long term investment returns, so choose carefully.

Load - A fee paid to purchase shares in a mutual fund. Not all funds charge loads. 

A mutual fund is simply fund comprised of a group of stocks managed by someone who knows more than you do about the economy, money management, and certain industries. They're easy to buy and a good way to get into investing for the average person. You can include mutual fund shares in most retirement programs. They are, in fact, a favored vehicle for retirement accounts such as 401k plans and IRAs.

Posted by debtblog at 02:13 PM | Permalink | Comments (0) | TrackBacks (0)

 
If you are new to investing you need to ask yourself one main question: “What are my goals?” If you’re investing for retirement, fun, or to build a large position you can cash out to use for other things, you’ll use different investing strategies. If you’re investing for retirement you’ll have to take into account your current age, risk tolerance, the age you’d like to retire and how much you can invest each period. You may want to create a chunk of cash you can use to fund other things, weather that is other investments or fun in the sun. You could also be looking to start investing in the stock market as a hobby to occupy your spare time, and make a bit of money if you do well.

All of those reasons are great reasons to get started investing in stocks, but you’ll want to begin with a different approach for each. One thing should be the same though. You’ll want to learn as much as possible about investing, economics, human behavior, and finance. It’s often been said that knowledge is power, but in this case knowledge is the difference between your portfolio going up or evaporating altogether.

If you’re investing for your retirement and you have a long time to go before you retire, you can invest in stocks that may be a bit more risky than if you’re investing for retirement and have only 10 or 15 years to go before you want to hang it up. You can afford to invest more aggressively because you have time in which to absorb short term losses. In most cases aggressive investing will carry with it a bit more risk and your portfolio will probably have a bit more volatility. Volatility is the propensity of your portfolio to go up and down.

If you are investing for the short term, you want to be a bit more conservative because large swings in your portfolio’s value could cause you to be in the middle of a drop at precisely a time when you need to be withdrawing funds. If you have a longer time horizon, you have time to absorb such short term losses because in time the market should carry your stocks higher again.

If you’re investing purely for fun, you can afford to take as risky or as conservative a position as you’d like, depending upon your mood. If your research unearths a stock that seems to have promise, you can go ahead and take a position (buy some). If it drops, well, you’re only in it for a good time anyway. If it goes way up, you’ll get the investor’s rush as your portfolio rapidly grows.

In the majority of cases I like Warren Buffett’s value approach to investing. Value investing is buying stocks in good companies that are, by most analytical indicators, undervalued compared to stocks of other companies in their industries. In many cases some of the most boring stocks can be some of the strongest performers. I did a post a while back about boring stocks. On the other hand, some of the sexiest, most attractive stocks can such your portfolio dry in a heartbeat.

You can invest in individual stocks or mutual funds. Mutual funds are funds comprised of a large number of stocks or other securities and are managed by those who in theory know better than you about such things. If you want to choose your own stocks, and want to stay in the value investing mold, here are some pointers as I see it. Value stocks can earn you nice returns, but as with many things stock market related, can eat up your funds in a hurry too. So called value companies are in many cases experiencing some sort of trouble, which is why their stock price is so low in the first place. Your job as an investor is to determine what kind of trouble they’re in and if they are likely to recover over the long term.

If you choose a company that is attractively priced now, but has attractive prospects going forward, you’ll do very well. However you can easily pick a company that is in fundamental trouble and has limited prospects for future success. In that case you’ll likely lose most or all of your investment in that stock.

Here are some of the fundamentals you can look at to help determine if the company has good prospects for success in the future. One of the most important is the cash flow. If the company has a history of positive operating cash flow, and has positive operating cash flow in the last year, that is a good sign. There’s an old saying in business “Cash is king” and that’s certainly true when you’re analyzing a company whose stock you’re considering investing in.

Another important thing to look at is weather the company is profitable. To determine that you need to look it’s net income. If the company has a positive net income for the previous year, preferably two, that’s good. Remember as an investor, you’ll be a part owner in the company. You can feel better about it’s prospects to make money for itself in the future, and by extension, make you money, if it’s doing so already.

Look deeper at the operating cash flow. How was the money generated? If the operating cash flow is greater than the net income that’s a good sign for you as a potential investor. If the company’s operating cash flow for the past 4 quarters are greater than its net income you can usually give the company strong consideration. Also, make sure that the cash flow didn’t come from sale of assets or stock, but from the company’s actual operations of its core business.

One last thing that I like to check is what is called the “current ratio”. That is the company’s current assets related to its current liabilities. If it is decreasing its liabilities related to its assets ever year that is another good sign.

So, once you’ve figured out why the heck you’re thinking of investing in the stock market and learned what you can about how things work, you can take the plunge. Remember by buying stock in a company you’ll be buying a piece of that company, hoping to participate in its future success. Company’s that are well run, in growth industries, and undervalued compared to their competitors stand a good chance of success. On the other hand, you want to steer clear of companies in declining industries that have poor financial indicators and management with shaky track records.

You may want to trade using a full service broker or use a discount broker. A discount broker will give you little or no guidance, but charge you a very small fee each time you make a trade. On the other hand a full service broker will make recommendations but charge you for doing so. You’ll have to pay them each time you buy or sell anything. Some full service brokers are very good and can give you solid recommendations, while others are only interested in the commissions they earn from your trading. Most are somewhere in between.

As with many professionals you’ll want to carefully investigate their track records and talk to their current customers. If you have friends and associates who have a broker they are happy with, and has demonstrated long term success, you may use them. There are also fee based brokers that don’t charge a commission of reach trade you make, they charge you a flat fee no matter how many trades you make. If you plan to make a lot of trades and want the advice and service of a full service broker, a fee based broker may make sense for you.
 

If you plan to make quite a few trades, but feel comfortable doing your own research and choosing your won stocks, you probably want to go with a discount broker. You’ll pay a much lower fee. If you don’t want or need the advice, there’s no reason to pay for it. I did a post comparing online discount  stock brokers a few months ago.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

So, how does it work? How can you actually profit from a company’s troubles and it’s stock price’s decline. Short selling works like this. First of all, with short selling, you don’t actually buy the stock, it’s on loan from your broker. When you make the transaction, the stock is sold and you receive the proceeds from the sale. They are deposited into your brokerage account. Sweet! You just got money in your account from a stock you didn’t even own.

Not so fast there, Warren (whose standard investment strategy, buy value stocks and hold for long term appreciation, is the opposite of short selling). At some point you have to repay the money the broker loaned you. Actually you have to repay the shares, and that’s where you make your money. In investor parlance, getting out of your position and repaying the broker is called “closing the short”. If, for example you borrowed to short 100 shares of Bear Stearns in mid August of 2007. The stock was trading for around $120 a share then. You are then liable to repay 100 shares at some point in the future. If you wanted to cash out for Christmas, you could have gotten out for $89 a share. You would purchase 100 shares at $89 each to repay your broker. The difference between the price when you borrowed and when you repaid is your profit. In the example you made $31 a share, for a profit of $3,100.

Not bad at all, but as we know now only a small fraction of what you could have made. Holding until today would have gotten you a much tidier profit in the neighborhood of $115 a share, for $11,500 in gains. This little example illustrates the potential of short selling, but it also shows one of the problems. One of the problems associated with short selling is risk. A well run company may not fall, especially in the long term. You have to get out when the stock’s price is lower than when you borrowed.

The other big disadvantage, especially over the long term, is that you are limited in your total profit from short selling. The most money you’ll ever make is the difference between the price when you got in and zero. For a short seller, that’s a best case scenario. Cases like Bear Stearns, where a company goes from selling for well over $100 a share to virtually zero in a few months, are pretty rare. Typically you’ll get returns of far less, and if the stock does turn around, you’ll have to repay the shares at a higher price than what you got them for.

Short selling is usually not for the novice investor, although you could have made a nice profit by short selling financial services stocks over the last 6 months, novice or not. Have a great day, and stay Debt Free.

Posted by debtblog at 01:46 PM | Permalink | Comments (0) | TrackBacks (0)

Just what are the limits you're subject to when contributing, withdrawing or rolling over a 401k plan anyway?

401k Contribution Limits:
For 2008, according to IRS rules you can contribute a maximum of $15,500 to your 401k plan. If you're one of the 95% who failed to contribute the maximum amount to the plan in prior years, the IRS allows you to contribute a “catch up” amount, which for 2008 is $5,000. You must be over 50 to take advantage of the catch up contribution. Any employer matching funds are not included in the IRS contribution limits. So, if you're contributing the maximum of $15,500 and your employer provides 50% matching funds, their $7,750 is over and above the limit, so your effective limit for 2008 is $23,250.

401k Rollover Limits:
You're not limited on the dollar amount for 401k rollovers, as you are with contributions, however you can only roll over once every 12 months. Unless you're a rabid job changer, this shouldn't present too much of a barrier.

401k Withdrawal Limits:
There are several limits placed upon your ability to withdraw the funds in your 401k. You can't just retire, pull out the entire lump sum, and head for the Caribbean. Well, you could, but you would be faced with severe financial penalties for doing so.

Withdrawal Age - There age limits for 401k withdrawals. Currently, you must be 59-1/2 years of age to begin withdrawal of funds, unless you are rolling over into another IRS approved financial vehicle such as an IRA. You are also allowed to withdraw funds before age 59-1/2 to avoid foreclosure if you meet the terms of IRS section 213. I recently did a post covering early withdrawal and other 401k hardship withdrawals. You must also begin withdrawal from your 401k by age 70-1/2 if you have not already begun doing so, unless you are still working for the employer sponsoring the 401k. The post 70-1/2 withdrawals must meet IRS mandated minimums, currently defined by tables and based on life expectancy. Failure to take the post 70-1/2 withdrawals triggers a whopping 50% (of the mandated withdrawal amount) IRS penalty, so take the money out)

Withdrawal Amount - There are currently no limits on how much you can take out, but remember withdrawals are taxable events. The IRS allows you to take the entire amount of the 401k, but it is taxed as ordinary income and reported as such on your form 1040, so the more your take out, the higher tax bracket in which you place yourself. If you were born before 1936, you meet special rules, including the ability to average a lump sum distribution over 10 years. See your tax professional if you were born when Roosevelt (either one) was President.

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Starbucks experienced a 1% decline in same store traffic, year over year for Q4, 2007 (ending 9/30/2007). They actually had a 5% increase in average transaction value, but that was driven by a price increase on menu items and expanding their lunch program by more than 1,000 locations.

Starbucks has noted a problem, and in their quarter-ending conference call indicated “we recognize that the flat-to-negative trends needs to be addressed” and  ”The pressure we are seeing on the traffic isn’t entirely unexpected considering the challenging operating environment and similar trends reported across both the retail and restaurant industry. It is apparent that our customers are feeling the impact of the economic slowdown.”

One should take note that this was for the period ending in September of 2007, before the bulk of the problems experienced by the credit industry. For Q1, 2008 Starbucks had a 3% decline in the number of same store transactions in U.S. stores. They also raised prices, which helped them raise the average transaction value by 2%. Investors have responded to the consumer’s propensity to avoid inexpensive luxury goods and Starbuck’s flagging sales by shedding their stock, and sending the share price from $26 at the end of November 2007, to its recent close of $18.26.

If you are looking for investment opportunities, this can be a great tool. Take note that when economic conditions dictate that an economic downturn may be in our future, one of the first classes of consumer goods to suffer are inexpensive luxury goods typically consumed by people who shouldn’t so much money on inexpensive luxury goods. As consumer uncertainty regarding their future increases, the trend is for a pullback from spending in certain areas. Spending on luxuries will drop more quickly and farther than spending on necessities. $4.50 coffee drinks while considered a necessity for some consumers have been reevaluated by an increasing number of others, resulting in the sales figures reported by the green giant of coffee shops.

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The elimination of the NYSE’s fixed commission structure in May of 1975 opened the door for the discount brokerage. Prior to that day, stock brokers charged investors a fixed commission for every trade, and it was expensive. There was no freedom to negotiate either, as minimum trade commission prices were set by the SEC. It was a real old boys club, and most would-be investors were excluded. After the process was deregulated, discount brokers began to appear, one of the earliest and most famous being Charles Schwab.

Today there are many discount stock brokers, much to the benefit of all investors, weather they are hard core traders who make their living from investing, or the casual investor who may only make a few trades a year. With the ability to trade from home, and free from the requirement of having a broker involved in every trade, there are no longer barriers to those who would like to dip their toes into the stock trading waters before they take the plunge all the way. Those who like to trade consistently have things much easier as well.

The evolution of discount brokers effectively removed the last barrier to that group of investors. Now, with the price of trades ranging from as low as free to $20 a trade the cost of trading has been reduced to the point where it’s been effectively eliminated for most people.

The other huge advantage of the Internet and online brokerage for most people is that it’s now very easy to find information (not always true) on various investment choices. Weather an investor is looking for general information a particular market, company or even legislation, it’s all there for the browsing. Most online discount brokerages make available a complete set of tools for their customers. The array of tools available now to the amateur investor would actually be the envy of most professionals only a few years ago. Most even offer real time, streaming quotes. In the not too distant past, that would have been the province of the hard core professional investor or institution.

There a still full service brokers, and most of those have online and even discount style accounts. Many investors today don’t feel they need the level of service (and are unwilling to pay for it) offered by a full service brokerage houses. Who are the big players in the discount brokerage game, and what do they offer you? Well, here is a comparison of some of the most popular online discount brokers and what they offer you:

TD Ameritrade – No commission trades for the first 30 days, but you may want to keep trading for a bit beyond 30 days. After the initial 30 day period, you’ll pay $9.99 per trade with no maintenance fees. They offer 24/7 online and phone support. There is a $2,000 minimum required to open a non-IRA account and a $1,000 minimum for IRA accounts. Many investing tools are free, however real time news from Dow Jones will cost you about $30 a month.

E*Trade – E*Trade was the first online brokerage, dating to 1983, but at that time, they weren’t something anyone could just log on and use. Now they offer stock trades according to a graduated pricing plan. Those who make up to 29 trades a quarter and have less than $50,000 in their E*Trade account will pay $12.99 per trade. If you have a larger nest egg and/or make between 30 – 149 trades a quarter, you’ll pay $9.99 per trade. Options traders can tack on an additional .75 fee per trade. Broker assisted trades cost an additional $45. E*Trade has no required minimum for IRA accounts. Pink sheet stocks will require a $54.99 fee to trade. E*Trade has an annual $160 maintenance fee.

Zecco – Zecco offers free stock trades for those who make fewer than 10 trades a month and have more than $2,500 in their account. That makes them my choice for the occasional or semi-active investor. Those making more than 10 trades a month will pay only $4.50 per trade. If you prefer options, you’ll spend $4.50 + 50 cents per contract. They have recently added a very complete set of online tools and analysis screens. You can even have stocks rated by how many other Zecco clients have bought and sold them recently. That can be very powerful. Something else favoring beginning investors is that there are no minimums required to open a Zecco account. Find out more here.

Scottrade – Scottrade offers low, $7.00 online trades for stocks trading at over $1.00 per share. Pink sheet stocks will require a $27 fee to trade. If you need help from a real, live person to make a trade, broker assisted trades run $27 as well.(the same $27).If you’d like to walk in and talk to someone face to face on occasion, they have over 330 branch offices scattered throughout the country. Scottrade offers free, streaming, real time Dow Jones information.

Charles Schwab – Thanks to a persistent ad campaign in the ‘80’s and ‘90’s, Chuck is who many people think of when they hear the term “discount stock broker”. They’ve been around since way before discount brokers went online. They charge $12.95 to trade for orders of less than 1,000 shares. If you exceed the 1,000 share limit, they’ll tack on a penny and a half per share fee, but no account maintenance fee. Charles Schwab also has real time Dow Jones info for free if you’re an account holder.

Note:
I currently am involved with Fidelity, Zecco, Scottrade, and E*Trade. In addition, I have used TD Ameritrade in the past, back in the days before the TD was added. I should have kept the Cisco I had in that brokerage account back during the Internet boom. I sold it at a loss and closed the account, before I jumped (semi)actively back into the market a few years later. Oh, well

Posted by debtblog at 01:34 AM | Permalink |