What Stock Market Returns to Expect

Investing Articles:
Other Investing Resources:

RSS Feed

Stock market returns rely solely on what types of investments you choose.  The riskier the investments, the more you can gain or lose in any year.  However, if you are investing for a long time horizon, then more risk will almost surely mean higher returns.  Also note that this assumes you invest in a diversified portfolio (i.e. not just one stock).  For example, if you invest in Company A, which is developing a new technology that hasn't yet caught on, you could make 1000%s or you could easily lose it all in just one year.  If you held this stock for 10 years, you could end up losing money all ten years.  On the other hand, if you bought Company A and 20 other companies like it, you could still lose or make quite a bit of money the first year, but you would not make 1000%s or lose it all.  And in the long run, these stocks together should make you money.

There is no hard and fast rule as to exactly what to expect when you invest.  And because the amount of risk you take in your investments can also not be measured accurately, it is even harder to know what type of returns to expect.

Here are some rough guidelines as to what type of returns to expect.  Remember, the opportunity to make more money also means the opportunity to lose more money.

Savings Account, Certificates of DepositBonds, Large Established StocksEmerging Stocks, Speculative Stocks

1 Assumes a diversified portfolio of similar investment types or a mutual fund of that investment type.

2 Assumes an investment period of approximately 1 year. These expected returns are based on historical results and actual results could vary by even more.

3 Assumes an investment period of at least 10 years. Any given year could fluctuate dramatically.

 

View the original article here

Ways to Invest Money

Investing in stocks is not the only way to invest your money.  There are lots of alternative investments that you can add to your portfolio, many of which you may not have thought of.  Here we've listed some of the alternative investment ideas in our list of ways to invest money.

Start Your Own Business.  Instead of investing in stocks and bonds, invest in yourself and start your own business.  Whether buying a franchise, investing in equipment to provide services, or setting up your own restaurant or other establishment, there are lots of ways to start a business.  If you go this route, plan carefully and try to find a partner to help share costs and ideas.

Buy a Small Business.  Another way to invest is to buy an existing business.  Many small businesses are sold when the owner wants to retire or they fall on hard times.  Contact a few local business brokers and search the real estate sites to help you locate an appropriate business.  Often, you may find a business that is barely profitable and then turn it into a profitable business with some fresh ideas and better execution.

Fund a Friends' Business.  Have a friend that has great business ideas but no money.  Help him or her out by loaning them money in return for a share in the business.  Make sure you get legal help to set up the loan and equity agreement.

Lend Money to Someone Online.  There are dozens of sites where you can loan your money to average people that need cash for something.  People list their proposed loans and rates and you can decide who to loan the money to.  The websites provide the legal documents and funding help and you can help someone pay for college, invest in their business, or get the money they need for something else.

Buy Gold and Precious Metals.  Another way to invest is to buy gold or other precious metals and actually take possession of them.  Although you would typically do this through an investment account, you can actually buy metals and store them yourself.

Buy Art.  If you have a love of art and can spot a good art investment, there is money to be made by investing in art.  It usually takes years for art to appreciate in value and you'll need a safe place to store or display it.  You can hire an art broker to help you find potential investments.

Invest in Real Estate.  With a little research and some legal help, you can buy an apartment building, duplex, house or even commercial real estate and then make money on the rental / lease income.  It takes a while to learn the real estate market and find good investment.  Make sure you run lots of spreadsheets to find out what kind of cash flow you can expect.  Also, you'll need to commit to at least 10 years or longer to really start making money this way.

Buy a Vacation Rental.  Live in an area with lots of tourism or near water?  You can buy a house, cabin, condo or other vacation home and then rent it out weekly or monthly for money.  Doing this means that you have to provide a high level of quality service with quick responses to your customers.  You can hire someone to manage your rental but it will cost you 30-40% of your profit.

Flip a House.  Buy a house that is in good shape but that can easily be improved.  Then improve it, doing as much of the work yourself as you can, and sell it for a profit.  Look for homes that you can easily add bedrooms and bathrooms to, that you can easily change the floor plan to dramatically open up the living space, or that just need simple remodels and paint to unlock the value.

Buy a Foreclosure.  Along the real estate line, you can look for houses, vacation rentals or even apartment or commercial buildings in foreclosure.  Depending on your state, you may or may not be able to get a great deal by finding a foreclosure.  Do your research.

Buy Antiques.  Antiques go up in value and therefore can be considered investments.  If you really know what you're doing you may be able to make money doing this.  You can also decorate your house with your investments until you are ready to sell.  Another way to make money on antiques is to find them at estate sales and by "picking", whereby you may be able to get them at a fraction of their worth.

Buy Items to Resell.  Buying items and reselling them is basically what retail stores do.  You can take this concept to a new level and find items to resell for a higher price.  After all, tens of thousands of people make their living from ebay.  Dropshipping is another option along these lines that you may want to look into.  Whether you buy wholesale inventory and resell it online, or buy used items at estate or garage sales and resell them in a consignment shop, there are lots of ways to make this another way to invest.

Join an Investment Club.  Investment clubs often pool their members money and then invest it in assets that are approved by the club.  While many investment clubs buy stocks, there are more advanced clubs that invest in real estate and start up companies, similar to venture capital.

Buy a Website.  There are hundreds of thousands of websites for sale.  Some are just domains with no traffic and some are developed sites or premium domain names.  If you have a good understanding of how to make money with these sites, they can make a good investment.

View the original article here

Stock Investing Basics

The first thing you need to know about stock market investing is that it is easy to do and that anyone can do it.  The second thing to know is that there is no 'perfect' way to invest in the stock market. And there is no 'perfect' stock or investment product for you to choose. 

The best investment choices are the one's that you are comfortable with and the one's that most closely meet your goals. With that said, you can always choose stocks better when you're educated, so once you get started, keep practicing and you should keep getting better over time. As your investments grow, so will your knowledge of how to invest. Start simple and as you learn and save more money, expand and diversify the types of investments you have.

In its simplest form, here are the steps required to invest in the stock market:

Save Money

This sounds pretty simple but is actually the single biggest deterrent to investing.  It is important to know that you don't have to save a lot of money to begin investing.  There are plans were you can start by investing as little as $50 per paycheck. However, most brokerages require a $500 or $1,000 initial deposit to open an account.  If you can't come up with that much money right away, don't worry, start your own savings plan and tuck away as much money as you can in a bank savings account until you can fund your brokerage account.  At $50-$100 per paycheck, you'll be up and running in just a few months.  Having trouble saving money? You may want to visit this site and read hundreds of ways to save money.

Create a Strategy

Now it's time to create your investing strategy.  Are you going to invest for growth, for speculation, for a down payment on a house, for retirement, or for college?  Also, are you going to invest a set amount of money each month or are you going to try to 'time' the market? For a more detailed explanation of strategies, see our section on stock investment strategies.

Open a Stock Account

Now that you've saved money and have an idea of your strategy, it's time to open your stock account.  If you are opening an account for speculation, you'll want to open a margin account with option trading enabled, if you are looking for a retirement account, you'll want to explore the tax benefits of opening an IRA or Roth IRA, and if you are saving for college, you'll want to explore the 529 and Coverdell IRA accounts. For a more detailed analysis on opening account, see our section on how and where to open a stock account.

Fund Your Stock Account

This part is really easy. Once your account is opened you need to send money to your account.  A direct link between your checking / savings account and your brokerage is the fastest and most convenient way to fund your account.  By doing this, you can automatically have funds transferred each paycheck or month, or you can manually move money whenever it is available.

Select and Purchase Stocks or Mutual Funds

This is probably the hardest part of investing because there are tens of thousands of different investments to choose from.  Do you choose stocks, bonds or mutual funds?  And then, which specific stocks or funds do you buy?  The best way to choose stocks is to learn how to do your own research, which you can find in our section on stock investment research.  We also have a section on analyzing mutual funds.

Save More Money

Until you retire, you should never stop saving money.  Continue to save money with the goal of saving more and more each year.  As you watch your prior investments grow, you should become more and more motivated to save even more money.  The fastest way to do this is to increase your income and lower your expenses at the same time.

Invest in More Stocks and Funds

With the new money, invest in different stocks and funds to build a diversified portfolio.  See our section on building your stock portfolio.

Keep Educating Yourself

Keep reading up on the stock market and finding new investments that are right for you.  The more you read, learn and watch, the easier it will be for you to choose investments. See our section on recommended reading for stock investing.

Occasionally Rebalance Your Portfolio

Every year or so, take a look at your total portfolio and make sure that it is diversified, invested in quality investments, and that it is aimed toward your goals.  See our section on building your stock portfolio.

Another good way to learn the stock investing basics is by asking questions.

View the original article here

Stock Market Investing FAQ

Sometimes the best way to learn about stock market investing is to ask questions.  Here are some frequently asked questions that may help:

Why is the Stock Market a Good Long Term Investment?

It's all about risk and return, and because your money is at more risk in the stock market than if you park it in a savings or CD (by the way, the money you invest in a CD is probably reinvested by the company offering the CD), the potential return is higher. It's true that the gyrations in the stock market can cause both large losses and large gains, but if your investment time horizon is long enough, these short-term fluctuations will result in relatively high returns. It is generally accepted, that the average long term return from investing in stocks is 10-12%. This is much higher than the average CD or savings rate of 4-6%.

Why does the Stock Market Get out of Whack with Reality?

Over the long term, the stock market is driven by underlying economic, financial and global growth. But in the short run, the market is driven by simple greed and fear, which are dictated by human emotions. During periods of prosperity, the stock market often rises faster than underlying earnings. During tough economic times, political uncertainty, and low consumer confidence, the stock market often performs worse than the underlying fundamentals predict.

View the original article here

Stock Investment Research

You hear every day how "analysts" are raising or lowering their stock ratings. Ever wondered how they come up with those stock ratings and just how accurate they are?  Well, I was a stock analyst for close to ten years and can tell you first hand that you can do your own stock investment research and come up with answers that are just as accurate as theirs.  I'll try to break down into simple terms some of the techniques they use. If you are interested in learning more, there are thousands of books devoted entirely to this subject.  However, I would recommend keeping things simple and not getting too technical.

There are two steps to choosing the right stocks to invest in.  First, do your investment research.  This means learning about the fundamentals of the company, including their products, services, business goals, management depth and other intangible assets.  Once you've done this, it's time to apply various stock valuation techniques in order determine if the stock is priced attractively and if you should buy it.

In this section, I'll discuss how to do your own stock research.  To learn about stock valuations, visit the stock valuation section.  You'll need to take the results of both techniques into account before making your investment decision.

Let's get started by looking at the different ways to research stocks.  And by research, what we really mean is that we are going to find out as much information about the company as possible and then use that information to deem whether or not the company merits your investment consideration.  Use the following methods to formulate an overall opinion about the quality of the company you are considering.

Annual and Quarterly Reports

Each company files quarterly and annual reports with the SEC, which are called 10-Qs and 10-Ks.  They include a lot of information about the company and how the company does business, including competition, long term risks, as well as fully explained sales and cost analysis.   Read these statements over to learn about the company you are researching.  The more of these statements you read from different companies, the more you will learn to take away valuable information about the companies.  These forms can be found through any finance website such as yahoo or google.

Press Releases

Press releases are distributed through any finance website or on the company's website.  They can be released at any time and often cause stock prices to rise or fall sharply.  Go back in time and read the press releases to understand what the company deems important and what the current issues are with the company.  Press releases often announce new contracts, mergers and acquisitions, management changes, and of course earnings releases.  Watch for new press releases everyday to keep up with the companies you are researching.

Industry Reports

Every industry has an expert or organization that follows it.  Many of these industries are private and only offer full information for exorbitant prices.  However, most industry analyses offer some of their information for free.  Stock analysts also offer industry reports.  Sometimes you can buy these through a finance site or brokerage.  Also, you can always call or email the organization or analyst and ask them for a copy.

Analyst Days and Other Webcasts

Most companies have analyst or investor days.  You probably won't get an invitation but it is worth contacting the company and asking if you can attend.  They are often broadcast on the web so you can attend them for free.  Also, if a company you are following is presenting at an upcoming conference, ask them if you can attend.  They will likely put your name on the guest list so you can get in for free and learn about them and other companies in their industry.

Conference Calls

Companies host conference calls that are streamed via the web.  Some are scheduled weeks in advance, like for earnings reports.  Some are scheduled just a few minutes in advance, for suprise news.  These calls are available to anyone and you should listen to as many as you can.  You will learn how management thinks and acts and can better form your investment decision.

Competitive Analysis

Do your own competitive analysis.  Compare everything about the company you are researching against other companies that are like it.  Is it's market share growing?  Are its margins as high?  Is it growing faster or slower than others.  If your company is better than others in its industry, it usually trades at a premium in price to the others.  Only buy companies that are on the upswing.

Intangible Assets

Look for intangibles that make your company stand out.  For example, Dell and Apple both make computers but Apples brand name is an intangible that stands above the crowd.  Other intangibles to take into account are patents, ability to make accretive acquistions, and the quality of the company to attract talent.

Management Depth

You can find the history and background of the core management team in their 10-K filing.  You can also do some searches on the Internet that can tell you more about the individual leaders of the company.  More importantly, listen to the conference calls and look at their track records to make sure they are good.  Good management, especially in bad times, can make all the difference.  Look for experience and a history of success.

Company Goals

Find out what the goals of the company are.  Are they to grow existing business rapidly, grow by acquisition, help the environment, protect their assets, etc.  Make sure they meet your investing goals.  Watch for companies that are increasing spending faster than sales.  Although they are likely adding to future sales growth, they can go through periods of slow earnings growth in the near term.

Contact the Company

Have any questions about the company you are researching?  Call them!  That's right, call their corporate headquarters and ask for investor relations.  Or email them.  They can probably answer most of your questions.

View the original article here

Investing Online

Investing Articles:
Other Investing Resources:

RSS Feed

Investing online is easy, even if you are a beginner investor.  To get started, this is all you have to do:

Choose An Online Brokerage.  There are many things to look for in an online broker, but these are the most important.

Reliability.  Most online brokerages have strong reliability ratings, but to make sure, check out the reviews of each brokerage by third parties.  You can find ratings in many money and consumer related magazines, including their online versions.  Do a search for "online brokerage reviews".Execution.  It is very important that when you place a trade order, that it is executed in an extremely timely manner.  To find out how fast different brokerages execute trades, you can also read reviews, or visit their site and see their execution guarantees.Breadth of Investments.  Perhaps one of the most important aspects is the breadth of investing options that your online brokerage provides.  Before you sign up, browse through the broker's site and view all of the different investments that you can purchase.  Look specifically at the choice in mutual funds.  Some brokers only provide limited options and others allow access to almost any mutual fund out there.  Typically, the larger the brokerage, the more investing options they can provide.  Also, the more discounted the broker is, the less options they provide.  Besides mutual funds, look to see what they offer for bond investments, options and money market funds.Diversity of Products.  Similar to breadth of investments, you want to make sure that your online brokerage offers all the products you'll need in the future.  Look to see that they offer investing in stocks, bonds, mutual funds, options, exchange traded funds (ETF) and money market accounts.  On top of that, see if they also offer checks and atm/debit cards related to your account (easy ways to get money out).  Some online brokers even offer separate bank accounts that can be tied to your brokerage account, and some even offer mortgages or home equity lines of credit.  If you use all or several of the products, many brokerages offer discounts.Pricing.  Although pricing is important, unless you're a day trader the actual cost of doing a trade really shouldn't be your final decision maker.  That's because a typical long-term investor only makes a few trades a month or year.  And if you need to spend an extra few dollars for your trades but get better service and more investment options, then I would recommend paying for the better options.Account Minimums.  Check the account minimums for each online broker you're investigating.  Some are as low as $100 and some are $10,000.  Check to see the minimum amount before you are charged a maintenance fee (fee charged if your balance is below a certain dollar value).Rates.  Look at the interest rates offered by the brokerage for their money market accounts.  If you are planning to hold a lot of cash in your account, this rate is very important.  They can vary dramatically, but typically the more money you have invested, the higher the rate paid.  Also, look at the margin interest rates (the rate charged on money you borrow from the brokerage).  These rates can be astronomical for some brokerages.Fees.  Look for any fees that the brokerage may charge.  A good brokerage should not charge any annual fees, maintenance fees or sales loads.  Look closely at the website for any hidden fees and make sure you avoid them.Investment Research.  Look for online investing companies that offer free or reduced price research.  Although you don't need this research, and it is often tainted by the person or firm who wrote it, it is often helpful to see the information from another perspective.

Open Online Investing Account.  Once you've chosen the brokerage you desire, open the account. You can usually do this online by filling out a form and then submitting it electronically.  However, at some point you will have to sign a few forms and either mail or fax them back to the brokerage.  We suggest that when you open an account, that you get all of the account options that you can.  For example, instead of just opening a cash investing account, we suggest that you open a margin account with option trading capability that has checks and an atm/debit card.  That way, as you become a better investor and grow into the account you'll already have all the tools you need at your disposal.

Make Initial Deposit.  Before you can trade you'll need to fund your account.  You can do this by sending in a check, doing a direct transfer from a checking or savings account, or by wiring your money (fast but expensive).  Make sure you deposit more than the initial amount so that if you lose some money, you will not trigger any maintenance fees.

Select Investments.  Now that you've got a funded account, it's time to select your investments.  Take your time!!  Don't rush into finding investments just because you're account is funded.  And don't feel like you have to invest all of the money at once.  Use the other resources on this site to help you find stocks and funds to purchase.

Execute Trades.  Once you select your investments, place your order.  You can do this with many different types of orders.  Here are the most basic:

market order.  This is the simplest order and is simply an order to buy or sell a stock or mutual fund at the current price.limit order.  This is an order to buy or sell a stock at a given price or better.  For example, you could put in a $20 limit order to buy a stock that is currently trading at $20.25.  Your order will only execute if the stock hits or falls below the $20 price.  These orders can be used to get a better price for stocks that are volatile, but they sometimes backfire and the price moves up before they execute.  You can also use a limit order to lock in a profit.  For example, if you bought your stock at $20 and put in a limit order to sell at $25, then the next time the stock hits $25 your order will be executed and you will have locked in a gain.stop order.  Although more complicated, this is like a limit order except that it is used to protect your investments.  For example, you may have a stock that you hold at $25 that has already given you a nice return.  To protect the gain, you could put in a stop order at $22.  When the stock hits $22 the order will turn into a market order to sell the stock.  Whereas the limit order at $22 would have executed immediately, the stop order executes only when the trigger price is met.stop limit order.  Similar to a stop order, this trade turns into a limit order once the stop price is met.  For example, if you put in a stop limit order at $22 and your stock hit $22, the order would be triggered but the stock would then only sell at prices greater than or equal to $22.  This type of order is commonly used to lock in gains and to ensure that one does not sell at a loss.  However, this type of order could backfire terribly if the stock price keeps dropping.short sale.  This is an order where you sell a stock that you do not own, by borrowing the stock from the brokerage and then selling it.  Short sales are very risky and are used to make bets that a stock will go down.  They are risky because there is no downside limit to your risk.  For example, you could short a stock that seemed overpriced at $50 and the stock could go up to $200, thereby losing 3 times the stock price.  When you short stock, you are required to keep a percentage of the stock price in your account at all times, and you are charged interest on the amount of stock you shorted.  If the price goes up too much, you will get margin calls and be required to deposit more money or to close your short position at a loss.good till canceled (gtc).  This is one of the two timing options.  It means that your order will stay active until it is filled in whole.  In other words, you could place a GTC order to sell a $20 stock at $30 and it would stay active until the stock hit $30, which could be months or even years.day order.  This order will only be active the day in which it is placed.  It will expire at the end of normal trading.all or none.  This is an option whereby you can decide if you want your order split up or not.  Normally, orders are executed in small lots.  For example, if you buy 1,000 shares, it typically takes several small trades to accumulate that many shares.  However, in an all or none order, the broker will only execute the trade if they can get all 1,000 shares at once.

Monitor Portfolio. Now that you've bought your investments sit back and don't watch them too closely (it's often frustrating).  However, once a year, or even twice a year, look at your investments and decide whether or not they are still meeting your goals.  As your goals change, and as your investments go up and down, change your portfolio to meet your current needs.  For example, you may have one stock that moves from 10% to 25% of your portfolio.  You should reduce your exposure to this stock by selling some of it and buying something else.  This is also known as rebalancing your portfolio.  Also, if any investments are doing poorly because of bad management, change in their competitive position, etc. -- you should sell them immediately.  Use the rest of the tools on this website to monitor and optimize your online investing portfolio.

View the original article here

Find the Best Stocks to Invest In

One investor's top stock pick is another investor's worst nightmare.  Indeed, if all investors agreed that there was only one top stock to invest in, then there would be no stock market at all.  It's a good thing thats not the case.  And lucky for you, because of all the technology and free screening websites, it is relatively easy to do your own stock screening and pick the best stocks that fit your portfolio and strategy.  Here are a few steps that we use when we look for new stocks to invest in.

Define the type of stock you want to invest in.  The first thing you need to is decide what kind of stocks you want based on your portfolio goals.  Are you looking for: growth stocks, value stocks, dividend stocks, large cap, small cap, micro cap, penny stocks, international stocks, stocks in a specific industry?

Turn your definition into screening attributes.  Now it's time to translate the stock type you are looking for into attributes that you can screen.  For example, if you are looking for growth stocks, you'll want to screen 1 and 5 year historical and estimated future sales and EPS growth.  If you are looking for dividend stocks, you'll want to screen for dividend, dividend yield, historical dividend growth rate and payout ratio.  If you are looking for large or small cap stocks, you'll want to screen for market cap, enterprise value and sales volume.  If you are looking for value stocks you'll want to screen for price to earnings ratio, both historical and projected, as well as price to sales and price to book value.  If you want stocks that fit into multiple categories, choose screens that will match your criteria.  For example, GARP (growth at a reasonable price) stocks could be found by screening for high growth and low PEs.  Also, you could look for high growth dividend stocks by screening for dividends and high growth.

Find a stock screening website.  There are thousands of stock screening tools and websites out there.  NONE of them are perfect.  None of them have all of the attributes you'd like to search on, and some of them that do have the attributes often are left blank.  For example, if you are screening for future 5 year growth estimates, it would require that an analyst publish that statistic.  Since many stocks don't have analysts and many analysts don't forecast 5 year growth, it would be a difficult field to screen for.  With that said, we tend to stick with the large, well known screening tools like Yahoo Finance, Google Finance, and even your broker's tools.  Check around, as there are literally thousands of screeners, and find one you are comfortable with.

Run your stock screen and download the results.  Start with a very broad stock screen so you don't miss any potentially good stocks.  And remember, the criteria that you screen on will not always reflect the company's potential.  For example, if you screen on historical earnings growth, a company that had a large write off or charge against earnings would show up as negative or very little growth.  And if you are screening on PE (price to earnings), a company that has just started generating profits could look very expensive because of the low earnings.  In other words, be selective in the criteria you screen.  Run dozens of screens until you feel like you've developed an understanding of the screens' results.  We would even recommend running several screens on different criteria, in case a good company is left off a screen because of a special circumstance or abnormality.  When you've finished your screens, download them into a spreadsheet.  You can easily download screens using CSV files and, if you don't have spreadsheet software, go to OpenOffice.org and you can get it for free.  One important note:  When you download the data, make sure that you download as much company data as you can.  For example, if you are screening for high growth based on historical EPS growth, make sure you download all of the other attributes that can help you narrow your list.  In this example, we'd recommend downloading future 1 and 5 year EPS and Sales growth estimates, company description, last 12 months and next years PE, market cap, sales, average analyst price target and any other growth related attributes that are available.

Sort your stock screen by your most important attributes.  Put all of your screens into one spreadsheet. Now that you've got a huge spreadsheet list of stocks, make a copy of the original and begin your sorting.  Sort the list by each of the attributes you think are important.  Then take the top 10 - 50 stocks and copy them to a new list.  Do this for each attribute so that you don't miss outlier stocks.

Briefly evaluate each stock based on its attributes and shrink your list.  Take this smaller list and look at one stock at a time.  Make an evaluation based on all of its attributes to see if deserves to stay in your stock screen results.  Delete the companies that don't meet most of your criteria.

Further investigate the stocks on your list.  Your list should be down to a reasonable number of companies at this point (maybe between 50 and 250).  Now its time to individually investigate each stock.  Go to your favorite finance website (like yahoo or google finance) and plug in the ticker.  Then take a long look at all of the fundamentals of the stock.  Start by looking at the description to see if its even a company you'd consider.  Then, look at the historical financials, their performance versus prior expectations, their historical price charts, analyst estimates, price targets and future projected growth rates.  Then read some of the press releases to see what others are saying (not that they are right, but they will give you some insight as to the current sentiment surrounding the stock).

Create a watchlist of stocks that you are interested in.  When you find a stock in your list that you feel has potential, put it on your watchlist.  Create your watchlist on your favorite stock website so that you can monitor it from anywhere and update it as things change.

Monitor the stocks you like and wait for a buying opportunity.  Now that you've got a list of your top stocks to invest in, monitor them for a while.  Read the news each day for the stocks you're watching and see how they perform during earnings season.  Watch to see if they outpeform and how they react during market swings.  Get familiar with them and start to feel which stocks have the most long term potential.

While monitoring the stocks, look for new stocks to add to your list.  While you are looking for the best stock to invest in, make sure and add new stocks to your list while you are doing your research.  For example, when reading articles about one of your watchlist stocks, take note of the other stocks mentioned in the articles and investigate them to see if they are worthy of inclusion into your watchlist.  Continually monitor and update your watchlist with new stocks and by removing stocks that no longer meet your criteria.

Invest in the top stocks from your stock screen.  During this process of evaluation, start buying shares in the stocks you like.  You can start by buying small positions at set intervals, or you can wait for pullbacks or other events to start buying.

View the original article here

Building Your Stock Portfolio

How to Select An Investment. Here are some tips on how to narrow down your selection of investments.

CDs.  Choose your time horizon. Then find the CD closest to that time horizon with the highest rate. Shop around at your local banks or through your brokerage account.

Money Market Accounts.  Offered by banks and brokerages. Choose between tax-free and traditional accounts. Then look for the highest rate. Tax-free accounts are more beneficial if you are in a very high tax bracket, but they pay a lower interest rate.

Stocks.  Picking individual stocks is the riskiest method of investing. If you are just starting to invest, you should probably start with stock mutual funds. However, it doesn't hurt to add a small percentage (never more than 10% of your portfolio per single stock) of individual stocks to your account. Doing so will likely increase your participation level and interest in the stock market. To pick individual stocks, use a variety of tools, many of which are offered through your online brokers. Find companies that you know something about and that have a good reputation. Then, read about the company and learn about their business. Try to get your hands on some research reports to learn what other people think (but remember that research reports are wrong as often as they are right). Look for long-term trends that will benefit the company you like. Always invest for long-term reasons and don't ever buy a stock simply because it is popular or because you think you know something others don't. As a previous research analyst, I can safely tell you that every time I knew something that the rest of the market didn't know, I was wrong as to how the stock would react to the news. Basically, I'm saying that you can't predict the short-term fluctuations of the stock market or of individual stocks. The best way to invest is to find long-term, sustainable business trends that you can invest in, and then to hold your investment until you think those trends are changing. A great way to find stocks to read is to subscribe to a magazine that offers opinions and spells out their business models (try Smart Money or Kiplinger's) . Also, word of mouth works to give you ideas, but don't be too hasty acting upon other people's ideas. Quite often they are just repeating something they heard from their broker, or from a friend of a friend of a friend.

Mutual Funds.  Use the tools from your broker, or other sites like Yahoo Finance or Motley Fool, or even magazines like Money Magazine to learn about and compare different funds. Find a fund in the risk category you are comfortable with (capital preservation, income, growth, aggressive growth) that has demonstrated at least market average returns over the past. It also makes sense to go with funds from companies that you've heard of before (like Strong, Janus, Putnam, Fidelity). These companies will likely be in business longer and often attract better portfolio managers than other funds. Also, remember that previous results are not indicative of future results. High flying funds often falter for years afterwards, and the top performing funds often come from previously under performing managers. To find out if a fund is right for you, read their prospectus, which can be found on the website of your online brokerage, on the website of the fund company, or through request from your broker or brokerage. Look at the quality and experience of the managers of the fund, their investment philosophy, and the list of the top stocks held in their fund (all of these are required to be reported in the prospectus). Also, look at the fee structure of the fund. An average management fee shouldn't exceed a few percent a year. Also, some funds charge you extra fees to purchase or sell their shares. Stay away from these funds. And most importantly, don't fret too much about which fund you are buying, and when you buy it, and try not to be too critical of its performance. Give it some time before you judge its results. If it's not working out a year from now, then consider buying a different fund. For more information, see our section on mutual fund investing.

Bond Funds.  Search for a bond fund the same way you search for a stock mutual fund. I wouldn't recommend buying bond funds unless you are nearing retirement, or unless you have a very large portfolio that you need to diversify. When buying bond funds, look at the duration of each fund. Find out whether it invests in long-term, short-term, or medium-term bonds. Use your online broker's tools (or Yahoo Finance) to look at their historical returns versus other funds. Look for good brand names and read the fund's prospectus to determine if it is right for you.

View the original article here

Analyzing Mutual Funds

Investing Articles:
Other Investing Resources:

Mutual fund investing can be overwhelming.  There are hundreds of mutual fund companies and thousands of funds spread across hundreds of different market sectors.  Our method of analyzing mutual funds is rather simplified but should yield as good of results as many financial advisors can give.  To find the right mutual fund, research using the following methods:

Determine the Mutual Fund Sector(s) to Invest In - Should you invest in large cap, small cap, growth, value, bonds, international, health care, technology or other sector funds?  The answer depends mainly on how much money you have to invest.  If you have several hundred thousand dollars to invest, you should diversify your mutual funds over a dozen funds or more, with as little overlap as possible between the mutual funds.  In this case you could choose many specific sector funds if you prefer.  If you are just starting out and want to invest a few hundred or few thousand dollars, then you should stick to one fund that is general in nature.  In other words, the more money you have, the more variety of mutual funds you should purchase.

Also, you should pick your mutual funds based on your age and your investment goals.  If you are simply speculating, you'll want to stick with pretty specific sector funds.  This increases your risk and chance of higher return.  Also, the younger you are, the more risk you can withstand in your portfolio.  Regarding age, the older you are, the more diversification you should take.  For example, if you are nearing retirement, you'll want a large portion of your portfolio invested in bond mutual funds.  Take this information into account with the information from the previous paragraph and use them together.  For example, if you are young and don't have a lot of money to invest, you should pick one or two general funds that replicate the overall stock market.  If you are older and have lots of money to invest, you should own several funds including both foreign and domestic stock and bond funds.

If you know what sectors of the market you want to invest in, you can determine your fund sector based on personal preference.  For example, you may believe that technology, oil, or healthcare stocks are poised to rise faster than the rest of the market.  If this is the case, and you are okay taking the extra risk, then you could invest in specific sector funds that match your beliefs.  Often, it is a good idea to invest your money by the book (generally accepted investment philosophies, i.e. diversify, diversify, diversify), but it also makes sense to invest most of your money by the book and invest the rest in sectors that you find particularly appealing.

With an idea of what type of funds you want to invest in, it is time to narrow down the list to a group of fund families that you find acceptable.

Find Acceptable Mutual Fund Families - You'll want to pick mutual fund companies that have a wide variety of options, low fees, no loads and most importantly, a great reputation.  I usually choose the large mutual fund companies that have avoided any scandals, but small fund companies can be just as good if not better.  By selecting large companies you can choose between many different mutual funds under one family.  Also, large mutual fund companies often charge lower fees and have better insider trading and fraud protection programs.  Most importantly, a larger mutual fund company doesn't rely on one single portfolio manager for all of its funds.  That means that just in case the manager leaves the firm, there will still be several other capable managers to take over.  Our favorite mutual fund companies (at the time of this article) are Vanguard and T. Rowe Price - they both have no loads, low fees, good reputations and a large variety of funds.  Once you've done your research and have formed a list of several fund families, it's time to pick your specific funds.

Compare Mutual Funds - The best way to judge a mutual fund is to compare it to its peers.  Select the funds in the sectors you desire from the families you've chosen and compare them to each other.  You can get fund information from prospectuses (available online at the fund families sites) or through screening tools like Yahoo Finance or E*Trade.  Look closely at the following aspects of each fund:

Management - Look at the background of the portfolio managers.  Do they have a lot of experience?  Do they have experience in the industry that they are analyzing?  How is their past performance? How is their past performance on other funds and at other companies?  Look for backgrounds that have business experience as well as finance experience, and look for someone with a solid track record and that thinks independently of investment bankers and institutional research analysts.

Investment Strategy - What type of strategy does the fund follow?  This is clearly stated in the prospectus and is easy to find online.  Do you want someone that speculates? Uses leverage?  Holds too much cash?  Tries to time the market?  You'll find that strategies vary dramatically from fund to fund, even in the same sectors.  For example, one growth fund may look for stocks growing 5% or more, while another looks for stocks that grow 15% or more. One growth fund may invest mostly in international, large cap stocks and another similar looking fund may invest in domestic small cap stocks.

Look closely at how the fund describes it's goals.  Make sure that they match the type of fund you are looking for.

Fund Size - Look at the total size of the funds' assets.  If it is small (in the $100s of millions) then the company may be able to get in and out of stock positions quickly.  For larger funds (in the $billions), it is much more difficult to get in and out of stock positions.  In fact, the largest mutual funds often have trouble finding enough stock to make their positions, which often leaves them no option to invest in some of the smaller cap companies.  With that said, this is just one more tool to use when evaluating different funds.

Turnover - Do you want a mutual fund that is constantly buying and selling stocks or do you want an investment that buys and holds its stocks for a long period of time?  Many funds say that they are long term investors but still have high turnover rates.  Check the prospectus or information site you are using to compare turnovers.  High turnover means higher commissions and expenses.

Holdings - This is one of the best ways to see what types of stocks your fund buys.  Each fund is required to report its top 10 holdings each quarter, along with the percent held of each.  Look at the list of top stocks.  Are they too concentrated?  Not concentrated enough?  Are they all in the same sector?  Are they chasing currently popular stocks?  Are they international, domestic, large cap, etc?  Compare the top holdings of each similar fund you are contemplating.  Make sure that the same stocks aren't in each of the funds.  For example, a stock like Microsoft could be found in growth, value, large cap, technology and many index tracking funds.  Overall, the top holdings should give you one of the best answers as to whether or not you want to buy it.

Past Performance - This information can be found in any prospectus, charting service (like BigCharts.com) or mutual fund screening tool (like Yahoo or E*Trade).  Look at the past performance compared to it's benchmark and compared to other funds you are looking at.  If the performance is much better or worse than its peers, figure out why.  And remember, past performance is not an indicator of future performance.  There are many reasons why a fund has performed better or worse than its peers.  For example, many funds that have done well over the past have often been invested heavily in certain sectors that have done well.  Although these funds have performed well, they may have also taken more risk and could be currently exposed to downside risk if that sector goes through a down cycle. 

With that said, past performance shouldn't be used as the main reason to select a mutual fund.  However, by studying the past performance, you should be able to gauge what kind of returns are likely in the future.  For example, two growth funds that appear identical could have vastly different returns over time.  One might vary between -10% and 15% returns per year while another varies between -25% and 30% returns.  Difference like this are probably a good indicator of the type of inherent risk and return that you can expect from those funds.

Fees - Once you've narrowed the funds you like down to a short list, start comparing the fees.  Look at the load and the management fees.  We recommend that you never buy any fund with a load (a load is a fee charged to buy the fund that is in addition to an annual management fee), unless you really, really like the fund.  Loads are typically used to pay salespeople and financial advisors and you shouldn't have to pay these if you are buying on your own account.  Regarding management fees, they vary from about 0.5% to upwards of 5%.  We recommend that you find a fund that charges 1.5% or less.  Remember, the management fee comes out of the fund each year, so if the total return on the fund is 8% and the fee is 3%, they've taken away 38% of your profit!!!

Minimum Investment - Finally, look at the minimum investments for a fund.  Some minimum investments are $10,000 or more, so before you decide on a fund, make sure that you can meet the minimum investment criteria.  For IRAs, this amount is often lowered so if you really want a high minimum fund, you could invest in it through an IRA.

View the original article here

Mutual Fund Basics

Investing Articles:
Other Investing Resources:

RSS Feed

Mutual Funds are a part of almost everyone's investment portfolio.  They are offered through banks, stock accounts, employee retirement accounts and can even be bought directly from the mutual fund company.  But do you really know what a mutual fund is and why it makes a good investment?  Here are some of the basics of mutual funds.

Definiton of Mutual Funds.  A mutual fund is a fund that buys and holds shares of multiple securities.  The holdings can consist of any type of security, but are usually stocks or bonds.  The fund buys a large number of shares in different securities and then sells shares of its fund to individual shareholders.  Mutual funds are not listed on an exchange, buth their share prices are calculated and reported at the end of each trading day.  Mutual funds can be bought and sold through most broker accounts, some banks, through retirement plans, and directly from the mutual fund company.  The funds are regulated by the Securities and Exchange Commission (SEC) and there are strict rules as to how their prices, returns and tax implications are measured and reported.

Benefits of Mutual Funds.  The benefits of mutual funds are easy to define.  They offer small and individual investors a way to buy a large number of diversified stocks and bonds with a small amount of money.  For example, if you have $1,000 to invest you could buy a 10 shares of 5 different $20 stocks.  Your trading fee would be for 5 transactions (maybe around $50, or 5%).  Furthermore, you would not own a well diversified portfolio and would be subject to extra risk.  However, you could buy $1,000 worth of a well diversified mutual fund for a small or no transaction fee and then indirectly own 100s or even 1000s of different company stocks, thereby offering you the protection of diversification.  Another benefit is that you do not have to be a stock picker or rely on market timing to buy mutual funds.  You can know nothing about individual stocks and still easily select a mutual fund.  Also, because mutual funds pool people's money, they have a lot of assets and are therefore able to buy IPOs and other offerings directly that individual investors are excluded from.

Important Aspects of Mutual Funds.  A few basic mutual fund attributes that you should be aware of are the goals, asset types, fee structures, load, turnover, top holdings, and tax implications of mutual funds.  All of these attributes are reported by the fund company and can be found on the detail page of the mutual fund on yahoo finance, google finance, or your brokerage account (etrade, ameritrade, etc.).  You can also get copies of the fund's prospectus, which give more detailed information.  You can get this information online or on paper. Goals. Each mutual fund has a specific goal.  It could be to attain high growth, high income, stability or to minimize taxes.  It could be to invest in emerging companies, green technologies, or a specific region or industry.Asset Types.  Each mutual fund spells out what type off assets it buys.  They can vary widely and include small, medium or large cap stocks, treasury, corporate or junk bonds, derivatives or real estate assets, foreign, domestic or emerging market assets, or any other asset type.  This will be disclosed by the fund.Fee Structure.  Most funds charge a flat expense fee that will be clearly displayed.  Some funds charge a fraction of a percent and some charge as much as 5%.  Also, some funds have varying fees based on their performance.  The best fund companies do not charge the higher fees, so be very vigilant.  T Rowe Price and Vanguard offer thousands of low cost funds and have some of the best performing funds.  Every percent you pay in fees is subtracted from your returns, so a few percent a year can really cost you a lot in the long run.  Buy the low fee funds.No Load or Load Mutual Funds.  Some funds charge loads, or fees to buy the fund.  Be wary of any fund charging a load.  Your broker or some third party is getting paid the load to sell you the fund.  In our opinion there is no reason to buy a load fund.  Look for a similar no load fund.Turnover.  Turnover is the percentage of the mutual fund portfolio that is sold each year.  Low turnover means the fund does not trade very often.  This usually means that they don't have to pay as much in capital gains taxes and trading costs.  These savings get passed on to you if you buy a fund with low turnover.  Some funds have turnover over 100%, this means that they are more like traders than investors which is a red flag when looking at mutual fund attributes.Top Holdings.  Each fund must disclose its top holdings.  Look at the list and make sure that the companies represented in this list are in line with the type of investments you want to invest in.  When buying multiple funds, look at the lists and make sure there isn't too much overlap.  For example, if you are buying several high growth funds, there is a good chance that the same stock is in all of them (like Apple or Cisco).  Check the top holdings to get an idea of the kind of stocks the fund holds.Tax Implications.  Turnover factors into the cost of ownership by increasing the annual tax burden on a mutual fund.  Dividend funds also have higher payouts and hence higher taxes.  Municipal or federal bond funds can sometimes be state and local tax free.  Know how your fund handles taxes so you can be prepared.

View the original article here

Investing Calculators

Investing Articles:
Other Investing Resources:

RSS Feed

Here are some of our proprietary free investing calculators. As is always the case with financial caclulators, make sure that you do your research and use valid inputs, as the output of any model depends solely on the quality of the inputs used. Also, you should use scenario analysis when using these calculators. For example, when calculating your retirement goal, it is best to use several different interest rates, inflation rates, and savings rates so that you can see what kind of effect small changes in your assumptions make to the impact of reaching your goals.

This calculator uses as inputs the amount of money you have now, the years to grow, and the rate of return to calculate how much money you will have at the end of the growth period.  It is a great example of how the time value of money and the compounding effect of money come into play in wealth building.

This is a great investment calculator because it tells you how long it will take to reach your retirement goal.  The inputs for this calculator are the amount you invest each year, your financial goal amount, and your expected annual return.  Put in these three assumptions and the model will tell you how many years it will take you to reach your goal.  Make sure and change the assumptions to see the effect that they have on the time to reach your financial goal.

This investing calculator estimates how much your current portfolio will be worth at some point in the future, given different levels of return and different amounts of time invested.  Fill in the assumptions and see how much you could save if you invest wisely.

View the original article here

Investing Money in Retirement

Investing in retirement is no different than investing for retirement.  You determine your appropriate risks and term of investment, then create a portfolio that allows you to meet your goals.  The only difference is that you need to plan on liquidating assets during retirement, so you should always have plenty of money in a short term, stable, liquid asset that you can use to make withdrawals.  Also, there is some account planning that you need to do to ensure that you are tax optimized and in compliance with any retirement plan mandatory withdrawal rules.

The Right Investment Mix. Some people think that when they retire they should sell all their stocks and own only bonds and CDs or money market funds.  This is not true, especially if you are retiring early.  Remember, you are investing your money until the end of you and your spouse's life, not until you retire.  The younger you are the more exposure you should have to stocks.  Finding the right mix for you will be different than for other people because you have different accounts, risk tolerances, spending patterns, etc. 

I'm sure you've heard the age old adage that if you subtract your age from 100, this is how much stock you should own. So if you are 50 you should own (100-50) 50% stocks.  Although this may be okay for some, if you are 50 and have 30-50 years to invest for, why would you only own 50% in stocks?!  Different money managers and financial planners will give you different ratios to own, but in our opinion, if you have more than 25 years to invest, you don't need to own many bonds or cash account yet.

Perhaps the most important thing to look at in your retirement investments is the diversification.  When putting your portfolio together, make sure that you are well diversified.  Invest across different market caps (large, medium and small), across different sectors (technology, materials, real estate, health care, oil, retail), different regions (US, Asia, Europe, South America), different risk markets (developed and emerging markets), and across different growth stocks (dividend, income, growth).

Managing Your Retirement Accounts.  You'll have to be aware of tax implications and mandatory distributions.  For example, if you are 60 and retired, you can withdraw money from your non-retirement accounts without having to pay any income taxes (except for any capital gains).  However, when you withdraw money from your 401k or traditional IRA, you'll have to pay income taxes on the entire amount of withdrawal.  Also, when you hit 70 1/2, you'll have to start making minimum withdrawals from your 401K and IRA.  Make sure that you invest each account accordingly to maximize the tax implications of these withdrawals.

For example, if you are 60 years old and won't need to withdraw from your 401K or IRA until you are 70 1/2, then you should have the 401K and IRA invested in faster growing investments, so that they can grow tax free for the next 10 years.  And you should keep the cash you'll need for the next few years invested in safe money market, savings, or CDs in your non-retirement accounts.  That way you won't need to pay as much tax on the earnings because your higher return investments will be tax deferred and only your low rate of returns will be taxed.

You should also study social security benefits closely to determine when you should start claiming them.  The longer you wait, the higher the monthly payments will be.  If you are in good health and don't need the money right away, it probably makes sense to forego the payments until the future.  This will also help lower your taxes because social security payments are taxable.

So, in summary, to find the best investments for your retirement, invest your money at a risk level that you are comfortable with, and remember that it is just as important to manage your retirement and non-retirement accounts as it is to manage your retirement money.

View the original article here

How and Where to Open a Stock Brokerage Account

Open an Account. Once you know which types of accounts you want to start investing in, the next step is to open up an account. Here are the basics of opening up each account:

Certificates of Deposit – You can do this through your local bank. Enter your bank and ask the teller about opening a CD account. They will put you in touch with the right person.

Discount Brokerage – The fastest, easiest and cheapest way to open a brokerage account is to open it through a discount brokerage. Even better, open it at an online discount brokerage. My favorites (in order), are E*Trade, Schwab.com and Ameritrade. Ameritrade is the cheapest but has the least options, E*Trade is nearly as inexpensive but offers more options and a better interface than the rest (you can get bank accounts, research reports and other services), and Schwab.com is the most expensive but offers you to pay for additional services like advice, research reports and other full-service options.

Full Service Brokerage – These include companies like Morgan Stanley, American Express, Edward Jones, Merrill Lynch, Prudential Financial. These brokerages provide you guidance, advice and research reports, but they are much more expensive but their brokers can often push you toward investments you may not be comfortable with. Instead of charging a flat fee for trades, they usually charge a commission-based fee structure that can be much more expensive. Also, they charge annual maintenance fees on your account of sometimes hundreds of dollars. Be leary of these accounts unless you really need the extra guidance.

401K, 403B – These plans are ONLY offered through your employer. Find out if your employer offers one of these plans (or any other tax-deferred, stock investment or other plan) by contacting your Human Resources department. They will give you the forms needed to sign up.

Traditional IRA – You can open one of these with almost any brokerage or discount brokerage. I recommend doing it yourself with a discount broker like E*trade or Ameritrade. E*trade doesn’t charge a monthly fee and offers decent tools to help you choose your investments. If you want a little more guidance, you can open a discount brokerage account with Charles Schwab, who will give you personal guidance for additional fees.

Roth IRA – This type of account can be opened the same was as a Traditional IRA.

Coverdell IRA (Educational IRA) – You can open at many brokerages, including E*Trade or Schwab.com.

529 plan – Check with your state to see which plans are offered. Check out www.collegesavings.org to find more information about the plans in your state. Some of these accounts are also offered by online brokers including E*Trade and Schwab.com.

Other plans – Many other specialized, small-business or self-employed plans also exist. Such plans include SEP IRAs, Rollover IRAs, Custodial IRAs, QRP / Keogh, Simple 401k, profit-sharing, money purchase and other plans.

View the original article here

Which Stock Asset Types Are Right For You

Choose your stock asset classes to invest in. Stocks come in all shapes and sizes.  They vary from the amount of risk they offer, the growth rates, the products they sell, the markets they cover, and on nearly every other aspect that you can think of.  There are many different asset classes to consider when figuring out which types of stock to buy.  Here, we'll cover some of the most common ones.

Least Risky Stocks to Buy.  The least risky stocks to buy are the well diversified mutual funds that are in stable sectors.  Stable sectors include companies with large market capitalizations, mature companies, dividend paying companies, and especially companies such as utilities or other non-cyclical and stable businesses.  These types of stocks are also known as low beta stocks.  Low beta means that the stocks do not move as much as the market.  For example, if the market fell 10% in a week, stocks with a beta of 0.5 would fall only one half of the 10%, or 5%.  Because they are less volatile than the market, these stocks are considered less risky.

Medium Risk Stocks.  Stocks that have more exposure to companies that are more volatile or faster growing are considered medium risk investments.  Stocks that fit the categories of growth stocks and value stocks typically fall into this category.  Medium risk stocks are usually well known companies and medium to large cap stocks that are fairly stable but that can have large swings when the market itself swings.  Medium risk stocks carry betas close to 1.0, which means that they typically move up and down about the same amount as the overall market.  There are many mutual funds and exchange traded funds (ETFs) that cover these market sectors, so if you are looking for medium risk stocks it is very easy to find them.

High Risk Stocks.  If you are interested in maximizing your returns, you may be drawn to the high risk stocks.  These stocks often move much more than the overall market, whether it be on the upside or the downside.  That means they have high betas, usually exceeding 1.5 or more.  High risk stocks are often high growth stocks or stocks in emerging markets.  In the 1990s, technology stocks were high risk.  In the early 2000s, Internet and biotech stocks were high risk.  In the 2010s, social networking  and cloud computing stocks are high risk.  As new technologies and business models emerge, they are almost always high risk until they establish growth and profitability.  That's because investors are always looking for the next big name to make them rich.  This exuberance makes high risk stocks very volatile.

Ultra High Risk Stocks.  Beyond high risk is a category of stocks that should be avoided by all investors.  That's because these stocks are really just speculative.  These stocks are called penny stocks.  Penny stocks are ultra volatile, are easily manipulated, and the trading of penny stocks is filled with fraud and deceit.  While less than 1% of all penny stocks actually become legitimate stocks, the other 99% eventually get delisted.

View the original article here

The Compounding Effect of Stock Investing

Investing Articles:
Other Investing Resources:

RSS Feed

The compounding effect of investing your money is perhaps one of the most important aspects to achieving long-term wealth.  For it to work, you must be a long-term investor with a lot of patience.  Here is a summary of how it works.

Say that you invest $1,000 and that you achieve a return of 10% per year.  That means that in the first year you would have $100 in gains ($1,000 x 10%) and a total of $1,100.  In the second year, you'll start with $1,100 but this year you'll earn $110 ($1,100 x 10%) for a total of $1,210.  The third year you will earn $121 ($1,210 x 10%) and have a total of $1,331.  You'll notice that each year you earn significantly more than the year before because each year you earn money on the previous years' gains.  This is called the compounding effect of money and it is one of the most important aspects to investing and saving money.

It is important to understand that the longer you keep your investment, the more money you will make.  However, the amount of money you make does not rise in a linear fashion.  Instead, for each year you keep the money invested, you will earn significantly more money.  This can be illustrated in the following manner:

If you earn 10% per year, at first glance, it seems like it will take you 10 years to double your money (10 x 10%)), and 20 years to triple your money (20 x 10%).  However, this couldn't be further from the truth.  If you keep compounding your gains and earning 10%, you will actually double your money in under 8 years, and triple your money in under 12 years.  Your money will quadruple in 15 years and you will have over 6 times your investment by year 19!

To illustrate this effect, we've added a graph and table below that shows the effect of compounding your investments:

Total Dollars by Year, Assuming a 10% Annual Return

Total Dollars Invested and Profit Per Year, Assuming $1,000 Initial Investment and a 10% Annual Return

View the original article here

How the Stock Market Works

The stock market is driven solely by supply and demand. The number of shares of stock available for sale dictates the supply and the number of shares that investors want to buy dictates the demand. It's important to understand that for every share that is purchased, there is someone on the other end selling that share (or vice versa).  When people's views of the stock market or individual stocks change (which can be driven by economic fundamentals, consumer confidence, fear of terrorism, or company earnings), the demand for stock changes.  This also causes the prices to change.  For example, if people in general believe that the economy is growing, they become more optimistic and want to own more stock.  This increases the demand for stock.  At the same time, since people are selling less stock, it also decreases the supply of stock for sale.  Both of these factors cause the average stock price to rise.

In essence, the stock market is really just a big, automated superstore where everyone goes to buy and sell their stock. The main players in the stock market are the exchanges. Exchanges are where the sellers are matched with buyers to both facilitate trading and to help set the price of the shares. The primary exchanges are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and a few other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange. Years ago, all of the trading was done through the traditional exchanges (like the NYSE, American and Pacific Exchanges) but now almost all of the trading is done through the NASDAQ, which uses ECNs and thousands of other firms with access to the NASDAQ to facilitate trading.

To give you a better idea of what happens behind the scenes, here's an example of one of the many ways that the stock market works:

You open an account with E*Trade. You send E*Trade a check for $1,000. E*Trade deposits the check into a trading account that is listed under your name. You log onto E*Trade and place an order to buy 100 shares of a stock in Company A, which is currently trading at $5. E*Trade uses it's network to tell the NASDAQ and all of it's related networks that there is demand for 100 shares of Company A's stock. The NASDAQ finds someone who is willing to sell 100 shares of Company A and, instantaneously, they execute the trading of stock between you and the person selling the shares. The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you. Basically, the clearinghouse will designate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares as yours. The actual stock certificates are typically held "in street name" at the brokerage and never really need to exchange hands (although you could request that the stock certificates be transferred to your name and held by you).

In a nutshell, that's how the stock market works. It's really just like any other marketplace - it facilitates the exchange of goods between interested parties and works to reduce distribution costs and set prices.

View the original article here

Penny Stocks

Penny stocks are stocks that trade for less than one dollar.  Is buying a penny stock a good investment?  Let's discuss the pros and cons of buying penny stocks.

First, all penny stocks are different.  Some penny stocks are legitimate companies that have fallen on bad times and their stock prices have declined below a dollar.  While other penny stocks are companies that have been delisted, abandoned, and then purchased from someone else for hundredths of a penny per share.  They may or may not be legitimate, and because they are not listed on a major exchange, they are not audited and held to the same standards as listed securities.  Finding out if a penny stock is legitimate is the most important and hardest thing to do.  Many penny stock companies do not have full disclosure and do not have investor relations departments to contact.  Before investing in a penny stock, do your research and make sure the company is legitimate.  Find out who buys their products or services and call them to ask questions and to make sure they really have a product.

Second, investing in penny stocks is beyond risky!  Because the stocks are not listed on a major exchange, they typically have low trading volume and can sometimes trade for less than a penny.  The fact that they are illiquid and trade for pennies, means they can move a lot in terms of percentage.  For example, a stock that trades for 10 cents and has a bid / ask spread of 1 cent, can change by 10% depending on whether the buying or selling price was reported.  Furthermore, average trading volumes can be so low that an order of a few thousand shares can move the price by more than 10% (sometimes even more).  This may sound attractive, but remember that when you need to sell, you may have to take a 10-20% reduction in price to get rid of your shares.

Also, investing in penny stocks is often about rumors and "pump and dump" schemes.  To get attention to a penny stock, penny stock investors often send out mass emails about the stocks they own to get attention to their stock.  A few purchases and the stock soars.  Then people getting the letter think its a good buy and the stock surges more.  The people behind the email or website that promoted the penny stock sells and then, a few days or weeks later, the stock is forgotten about and back below where you bought it.  It is very rare that a penny stock ever does well enough to regain listing on a major exchange.  For an example of penny stock advertising, just search for "penny stock" and look at the sponsored listings in the search results.

So, with all the manipulation, lack of regulation, low liquidity and difficulty of getting accurate information, do penny stocks make a good investment?  We say NO.  In fact, buying penny stocks are usually not an investment at all, but rather a speculation or gamble that may or may not pay off.  So, unless you are looking to speculate and really know what you are doing, we recommend avoiding penny stocks.

View the original article here

What is Online Day Trading

Everyone knows the term "day trader", but have you ever actually met a day trader?  Taking large positions every day in the stock market, watching money come and go in seconds, making huge percentage gains, working from home and finishing work in just a few minutes a day!  Sounds pretty exciting right?  Well, here is our view on online day trading.

What is day trading?  Day trading is a form of trading whereby securities are bought and sold in short time periods, and all positions are closed before the end of the trading day.  The securities traded can be stocks, options, currencies, futures, ETFs or any other exchange traded asset.  Some day traders hold securities for a few seconds while others hold them for a few hours, however, they all make short term trades.  Some make hundreds of trades per day and others make only one.  Since the online investing boom in mid 1990s, day trading has become very widespread and has moved out of financial institutions so that anyone can attempt it.  Furthermore, the historic rise of the stock markets in the late 1990s where fortunes were made every day (until the bubble burst) added to the glamour of the job and also greatly increased the number of day traders.

What are the strategies employed?  Day traders take on many different strategies.  Some look for stocks in the news or that have momentum in them, and then trade them based on that momentum.  Another strategy is to put in nearly simultaneous buy and sell orders at slightly higher and lower prices than the current bid and ask, whereby a fraction of a cent can be made in just a few seconds.  Although minimal in nominal terms, multi-thousand share trades can be quite profitable.  Some day traders follow technical analysis techniques to try to predict moves and then trade in and out quickly to try to profit.  There are dozens of different techniques that can be used to try to profit through very short term trades.

Can you make a living day trading?  This point is worth arguing.  Because the market is seemingly efficient and unpredictable, day trading seems unlikely to generate long term positive returns, however it is also easy to point out that stocks follow trends and have momentum.  Also, I've heard people talk about knowing and seeing day traders that do very well.  We've known a few day traders, but none of them are still day trading today.  In fact, we don't know of anyone that was able to stick with it for very long.

Is day trading investing?  Day traders might disagree, but day trading is not investing.  Investing is when you purchase something for its financial merits and hold the investment to capitalize on its value.  Day trading is often buying and selling stocks of companies that they know nothing about, hoping to capitalize on a short term movement in the price, not on the companies merit.

Does day trading work?  Despite claims to the contrary, we don't believe that day trading works.  By definition, the stock market cannot be predicted.  If someone could predict it with just 51% accuracy, then that person could become a billionaire with their trading.  It may be possible that some methods of day trading work for a short while, but as soon as the secret is shared with someone else, the benefit is gone.  And because when the markets change momentum, day traders are also caught in their trades.

View the original article here

How Much Stock Risk to Take

Investing Articles:
Other Investing Resources:

RSS Feed

Choose your risk level to invest in. Decide on how much risk you are willing to take, and on how much risk you are comfortable with. The longer your time horizon, the more risk you should take. The more risk you take, the higher your return should be. When you take risk, make sure you try to diversify within your risk level. For example, if you are investing in medium risk, large cap investments (like Fortune 500 companies or S&P 500 companies), either buy several stocks or buy a mutual fund that invests in a broad array of these companies.

Determine Your Goals and Needs. Depending on what your goals are, you will utilize different investment tools. Here are the first questions to answer. If you are saving for one or more of these goals, then prioritize them and allocate your investment money among the various investments.

Are You investing for the short or medium-term? If so, you’ll want to open a traditional brokerage account, or maybe even use your local bank. If you are investing for the short-term (less than a year), then you are probably best off if you purchase a CD at your local bank or park your money in a money market savings account. If you are investing for the medium-term or long-term, you’ll want to open a brokerage account. Opening a brokerage account is as easy as filling out and mailing in an online form, and can be done by almost anyone.

Are You investing money that you will want access to before retirement? If so, do not invest the money in a tax-deferred account, but rather follow the advice from the previous goal.

Are You Saving for retirement? If so, you’ll want to utilize as many tax-deferred investments as possible, including any 401K, 403B, IRA or Roth IRA that you qualify for. 401K and 403B plans are only available through your employer. These are the most beneficial tax-deferred plans available. If you are eligible for these plans you should start investing in them immediately, and contribute as much as you can each paycheck and each year. The difference between an IRA and a Roth IRA is that an IRA is tax deductible the year that you create it. Also, if you already participate in a 401K or 403B plan, you are usually unable to contribute to a traditional IRA. In a traditional IRA your money grows at a tax-deferred rate but when you sell it you’ll have to pay taxes on the full amount. On the other hand, with a Roth IRA you are taxed on your contribution the year you make the deposit, but you will never have to pay taxes on the money when you take money out. (Click here for a good example of the differences between the two)

Are You saving for children’s college? If this is one of your specific goals, then you can invest money in a 529 plan (either a prepaid tuition plan or a savings plan) or a Coverdell IRA (formerly know as Educational IRA). Also, see collegesavings.org to find out what plans your state offers.

View the original article here

Recommend Reading for Stock Investing

Despite all the research and technical analysis you might do, it pays to read up on sources that can give you new ideas. We recommend the following sources to help your investing prowess:

Smart Money Magazine - Printed by the Wall Street Journal, this magazine has lots of investment ideas, as well as other ways to manage your finances.  You can buy this magazine with your frequent flier miles or find an online deal for around $10 a year.

Money Magazine - A great source to get investing ideas, as well as ways to manage finances.  The cost is very minimal for this magazine.

Barrons - This subscription is delivered every Saturday and lists all kinds of statistics on the weekly market and upcoming releases.  It also has several opinion articles that make market calls and predictions.  A subscription to this is very expensive, but you can usually use frequent flier miles to buy it.

Yahoo Finance - A very comprehensive financial site that allows you to build portfolios of watchlists and allows you to access all press releases, SEC filings, articles and blogs, message boards, analyst information and you can even purchase research reports there. By far the best message boards for stocks.

Google Finance - A good portal, not as good as Yahoo for overall information, but it does offer some articles that Yahoo doesn't.  Also, google updates real time stock quotes faster and more accurately than Yahoo.

CNBC - Watch CNBC in your spare time.  You can learn the language and see how "professionals" analyze the market and stocks.  By the way, don't ever trade on what Jim Cramer says.  He is entertaining but changes his mind daily.

View the original article here

Stock Investment Strategies

Recommended ways to invest in the stock market:

Don't try to time the market. As tempting as it is to try, it is not possible to time the stock market. People have written millions of pages of research on this topic and NO ONE has ever found a legitimate way to determine its trends.

Use cost averaging. By buying stocks on a periodic basis (like once a paycheck, once a month or even once a year), you will always be buying at an average price. If you try to time the market, you may be buying at a high or low valuation.

Take taxes into account. When you buy stocks, try to hold them for more than one year so you get taxed at the long term capital gains rate, which is currently 18%. If you sell your stock before one year, you will be taxed at your ordinary income tax rate, which is almost always higher than 18%, sometimes twice as high.

Invest as much as possible into tax-sheltered 401K, 403B and IRAs. By investing in tax deferred plans, you are able to invest money and not worry about the tax implications. With 401K and 403B plans, you get to invest your earnings before taxes, so the investment will grow on a higher base. For example, if you received a paycheck for $2,000 gross pay and taxes were taken out, you'd be left with only $1,200 or so to invest. The investment return on $1,200 could be substantial, but if you could invest that same $2,000 in a tax deferred account, you would be investing and earning a return on $2,000 instead of $1,200. Also, many employers offer matching investments that could make that $2,000 investment equivalent to a $4,000 investment. Put as much as you can into these tax deferred investments.

Diversify your investments. Don't just invest in stocks. It is better if you diversify your investments into other asset classes including real estate (a house), cash (savings account or CD) and maybe even bonds. That way, if one asset class really underperforms, you will have some exposure to the better performing assets.

Diversify your stocks (mutual funds). When investing in the stock market, don't load up on just one or two stocks. Diversify your investments across many stocks. If your portfolio is not large enough to buy 15 or more different stocks, you should consider purchasing one or more mutual funds to ensure diversification.

View the original article here

General Information on Penny Stocks

There is no approved definition of penny stocks. This term consist of two words: penny and stocks. The word stock means the original capital invested in the business by the founder whereas the word penny means the smallest denomination in a currency system. As both terms suggest, these stocks are generally low-priced securities issued by small companies. So to define penny stocks it is reasonable to say that penny stocks are common shares of small public companies that trade at less than $1.00.

Before investing in Penny Stocks, it is preferred to obtain basic information about them. First and most important: Trading can be risky! So before you invest in such stocks, read about the company. Don't allow yourself to be pressurized by the sales person, instead ask why his or her firm has determined that penny stocks are a suitable investment for you. It is worth remembering that these stocks may trade rarely, which means that it may be difficult to sell stock shares once you buy them. In short make a good judgment keeping in mind the scenario. Furthermore bear the possibility in your mind that you might lose your whole investment. So think carefully before you act. Remember that the salesperson is getting paid to convince you to buy those stocks, therefore, don't rely entirely on him/her. Instead seek outside sources for information.

Before you buy a stock, federal law requires a salesperson to tell you the bid on the stock, and the compensation the salesperson and the company receive for the trade. After the trade the company should also send a confirmation of these prices to you. This information is important to evaluate what profit or loss, if any, you will have when you sell your stock. Also they are extremely easy to manipulate since the prices are low and investors can buy a lot of shares at once and then dump them back again to make a profit. Often in emails, newsletter and website people come across attractive offers proposing definite success. Never believe them. You know nothing about the company and it may be a hoax. It is useless to blindly believe in high returns.

All in all it does sound like an attractive venture to make profits but one must consider the negative aspects related to it as well. It involves high risks and one must be very careful when it comes to this type of trading. However, different people have had different experiences and we can't say for sure if you should or should not go for opportunities like these. The right thing to do would be to thoroughly research on this subject and then come to a decision.

Visit the official website of Jackpot Penny Stocks if you wish to know more about penny stock trading.

View the original article here

Growth Stock Investing

Growth stock investing is a typical way to long term investing. When we hear the phrase "stock market", we might think of shares being traded every day. But trading in stock market is different from growth stock investing. In trading, traders only take advantage of the stock's price fluctuation. Normally, a trader buys a stock at a lower price and sells at a higher one. Profit comes from the price margin or from the resulting balance between the buying and the selling price. In growth stock investing, it is not only the increasing price of stocks that makes an individual investor buy some shares. The increasing size of portfolio and its dividends are in fact the primary considerations.

Buying some growth stocks begins with identifying the future of a small company. Most people think that large companies are a good bet for investment. In reality, these large companies do not have any more room for growth perhaps because of operational cost. The most probable reason to buy such blue chips is the stability of investment and income. Smaller companies can be a better source of growth stocks. However, not all small companies could become growth stocks. There must be a condition to determine so. Some companies are said to be growth stocks when they are fast growing. Ideally, early buyers are the ones who will benefit the most. Thus, every investor wishes not to be late in his entry.

It must be sought and analyzed why some companies grow so fast. It could be that they are competitive in their respective industry or they just happen to get some opportunities that make them competitive. This competitiveness can be identified by their consistent effort to innovate. Assuming, a company introduces a new product which is unique in the market. After a short period of time, the product becomes popular and the best in the market. Not long ago, the company plans to develop another unique product in order to sustain their market dominance and repeat the same miracle. Since they have proven their credibility, investors will surely line up to buy some shares of such a company even upon the release of the news that the company is said to develop another competitive product. This aggressive innovation can make the company a candidate for becoming a growth stock.

It is recommended that investors start with enough capital when investing in growth stocks. There is no exact amount of what is enough for all investors. But everyone knows what is acceptable for himself. Let us suppose that we started with $50,000. We bought a stock worth $1 per share, so we owned 50,000 shares of a growth stock. After a year, our stock was worth $2 and the dividend was $10%. If the dividend were declared to be a stock dividend, our shares would become 55,000 shares. Since the market value of the stock was $2, we had a floating investment worth $110,000. In just one year, we gained more than a hundred percent. If we had put the money in a bank, we would have earned only around 10%. In that case, our money would only be $55,000. This example is not a joke. It happens all the time in the US stock market. The important thing an investor should consider is to select the right stock. Therefore, in this scenario, growth stock investing is value investing. Investors should invest in the anticipation of shares valuation. The larger the capital we invest, the higher the value the investment can have.

When the US economy is growing faster, more and more companies benefit. The strongest factor why many companies grow fast is a better business climate. Growth stock investing is a lot easier in such condition. It is the period of expansion not only for certain companies and industries but for the whole economy itself. To begin a growth stock investing, investors should become familiar with the right economic fundamentals that affect the business environment and the performance of stocks in general. Most economic indicators are released monthly, quarterly, and annually. Not all indicators are influential to growth stock investing. But anything that affects the economy in general can directly affect any stock. There are a few economic indicators that we should look at in growth stock investing such as The Federal Reserve rate decision, the Non-Farm Payroll (NFP), and the Growth Domestic Product (GDP), and global economic news.

The Federal Reserve rate cut encourages risk appetite for investment in equities or stock market. It may also imply that the inflation is not any more a threat to the health of the economy. Sometimes, even without a rate cut, any dovish statement of the Fed chairman favoring a potential rate cut can move the market sentiment. Meanwhile, a hawkish comment favoring a possible rate hike creates risk aversion or a sentiment that the economy is overheating and the inflation is threatening the general health of the economy. A rate hike is a strong warning that the growing economy has reached the limit. Therefore, it is highly risky for growth stock investing.

Another influential fundamental indicator is the Non-Farm Payroll. It shows whether or not new jobs are created within a certain period of time. When NFP result is higher than expected, it implies expansion. It means that jobs are added to the payroll of most companies because of the growing demand of their products and services. Additional jobs can also mean more buying power of the consumers. This is the reason why the Dow Jones and S&P500 react heavily every time the NFP data is released. When the NFP data is better than expected, it is also a better timing for growth stock investing. However, this data can make or break a stock position. If the actual result is much lower than the previous one, the value of stocks will surely decline.

On the other hand, the GDP is one of the most reliable data to measure the growth of the economy. Upon the release, stock prices fluctuate. If the GDP is higher than the previous, investors may take advantage of the overall health of the economy. But sometimes, the GDP is not that influential. In fact, it is a little risky for growth stock investing especially when the GDP is increasing along with the higher inflation. However, the annual GDP result is a lot helpful for a long term growth stock investing. It shows that the economy has already gone far and the fundamentals are strong. So, it is safe for any long term growth stock investing.

Global economic issues can somehow affect the US stock market. Most large companies in the US have widespread international exposure. In the New York Stock Exchange, most stocks, being traded every day, are multinational companies (MNC) with operations around the world. Any good or bad news abroad can move the US stock market. One good example is the Euro-zone debt crisis. There are a lot of American companies operating in Europe. So, when the price of the Euro goes down, so does the S&P500 or vice versa.

It is therefore ideal for growth stock investing when there is no problem around the world. But there are some investors who have different attitude toward growth stock investing. They buy stocks on dip and they sell on rally. These contrarian investors trade during the worst time because they believe that the cheapest stock price is the best start for any growth stock investing. And after quite some time, they sell when everybody is willing to buy.

Whatever method one wishes to follow, the key fundamentals of the US stock market are highly important for growth stock investing. Investors' decision depends on the information they get and each finds different opportunities and perceptions. This condition makes the stock market more efficient for growth stock investing.

Michael F. Anyayahan is a freelance forex trader and writer. To learn more, visit: http://www.forexuniverse.yolasite.com/.

View the original article here