Harness the power of your investments by starting to invest young. There are simple stock market investment vehicles that will allow the inexperienced investor to achieve solid, long-term, returns without having to be a stock market expert.
Importance of Investing Young. It is essential that you start investing young; if you don't your actually loosing money and missing out on the most important thing young investors have in their favor 'compounding interest'.
Each year that you have money and are not investing you're loosing about 3% of its value due to inflation. So after 10 year of sitting on $100 cash it could be worth less than $75. What's more, by investing young you benefit because the money you made from your investments - make you more money. Making money from money you've already earned from your investments is known as 'compounding interest'. This powerful force can make you a millionaire well before retirement age with saving as little as $70 per month.
Now that you know you need to invest; how do you start? The stock market offers a great place for young investors to get their money working for them; the good news is that you don't need to have a ton of money to start. Plus, with the investment vehicle discussed in this article, you don't need to be a stock market expert to begin.
What's the solution? An ideal investment for young and inexperienced investors is to get on the road to financial independence are low-cost broad market index investments. Warren Buffet states, "A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money." Reduced risk, solid returns and it one of the simplest investments you could make. An added bonus is that it takes only minimal knowledge and about 60 minutes to start getting your money working for you.
What's a broad market index? A broad market index is a group of stocks that you can purchase as one. It allows young investors to buy a collection of top performing stocks that mimic the performance of the entire stock market. Since these index funds allow you to earn returns similar to the overall performance of the market it greatly reduces the risk. This is an advantage to the beginning investor since it is safer than investing in a single stock or some mutual funds; plus there is a history of double digit returns.
Broad based index investments may not sound like something you know; however if you ever watch the news chances are you have heard of this investment. -The Dow Jones Industrial Average index contains 30 top industrial stocks. -The Standard & Poor's 500 contains 500 of a variety of different stocks. -The NASDAQ 100 contains 100 stocks that are mostly in the financial and technology sector.
When you invest in a broad based market index you actually own a small piece of each individual stock. For instance, when you invest in the S&P 500 broad market index, you're buying a piece of all 500 stocks in that index. So for each S&P index share that you own your actually own 1/500th of companies like: American Express, Google, Ford, Nordstrom, Home Depot, Staples and Yahoo to name a few.
For those young investors that don't want to stay glued to their computer all day broad based market indexes are great solution. Since this investment matches the overall return of the market if you believe over the long-term the stock market will continue to rise in value this could be a good investment. If history were an indicator of future performance, it would be clear that over time, you would generate solid returns. The key benefits associated with broad market index investing are:
1) Higher Returns - According to Standard & Poor's, less than 30% of managed funds in 2006 beat broad market index investing. What's more over the last ten years the average person that invested in broad based index funds has beaten the returns of most mutual fund investors.
2) Added Diversification - Diversification lowers risk. If you invest in one individual stock and bad news comes out on the company you could loose a lot of money fast. Now, for instance, if you're invested in an S&P 500 index fund and one stock has bad news you really don't care. That will only affect your investment one five hundredth.
3) Lower fees - Index funds fees are typically lower and are often around .5%. While the average mutual funds fees are around 2%. Over time this will make a big difference in your overall return.
4) Passive investment - When investing in individual stocks or mutual funds it is important to keep your eye on the market and up-to-date with current trends. Investing in broad based market indexes takes less stock market knowledge and requires less time to track.
The earlier you start investing the sooner you can reach financial freedom. invest with broad-based index funds that have similar returns to the overall market, because then we are receiving similar returns while hedging our portfolio - again, investing for young and beginning investors is all about diversifying to improve your chances for financial success.
How do I invest? There are two ways for young investors to begin investing in broad market indexes. Both are similar in their returns; but they are different in how the index is bought and have different fee structures.
* An Index Fund is a mutual fund that purchases the stocks that make up an index in order to match the returns of the overall market. For example, if investing in an S&P index fund, that mutual fund would own all the 500 stocks that make up that particular index. Index mutual funds may require a minimum investment, but some can be waived with a direct deposit investment plan that automatically invests money every month from your account. Typically, fees on index funds are higher and there are minor restrictions on when you can sell.
* An Exchange Traded Fund (ETF) is similar to an index fund, with the benefit that ETF's can be bought and sold similar to an individual stock. An illustration of an ETF is the "Spiders" (American Stock Exchange: SPY symbol). Each share of a spider contains one-tenth of the S&P 500 index, and so trades at roughly one-tenth of the S&P price. The management fees on ETFs are low. There are less restrictions on the sale of ETF's when compared to broad based index mutual funds.
Young investors will achieve similar returns whether investing in index funds or exchange traded funds, but typically ETFs have lower fees and fewer restrictions.
The earlier you start investing the bigger advantage you will have. Because there is only a minimal amount of money necessary to start and a low level of knowledge needed to invest - broad based market indexes will allow you to start investing young. So quit working for every dollar and get your money working for you.
Saturday, May 3, 2008
Mutual Funds Make For Lousy Investments
Many people think that investing in mutual funds is the way to go and the best method for getting rich. I think mutual funds are horrible investments. Here are 8 reasons why you should not invest in mutual funds.
1. Mutual funds don't beat the market.
72% of actively-managed large-cap mutual funds failed to beat the stock market over the past five years. Trying to beat the market is difficult, and you're better off putting your money in an index fund. An index fund attempts to mirror a particular index (such as the S&P 500 index). It mirrors that index as closely as it can by buying each of that index's stocks in amounts equal to the proportions within the index itself. For example, a fund that tracks the S&P 500 index buys each of the 500 stocks in that index in amounts proportional to the S&P 500 index. Thus, because an index fund matches the stock market (instead of trying to exceed it), it performs better than the average mutual fund that attempts (and often fails) to beat the market.
2. Mutual funds have high expenses.
The stocks in a particular index are not a mystery. They are a known quantity. A company that runs an index fund does not need to pay analysts to pick the stocks to be held in the fund. This process results in a lower expense ratio for index funds. Thus, if a mutual fund and an index fund both post a 10% return for the next year, once you deduct The expense ratio for the average large cap actively-managed mutual fund is 1.3% to 1.4% (and can be as high as 2.5%). By contrast, the expense ratio of an index fund can be as low as 0.15% for large company indexes. Index funds have smaller expenses than mutual funds because it costs less to run an index fund. expenses (1.3% for the mutual fund and 0.15% for the index fund), you are left with an after-expense return of 8.7% for the mutual fund and 9.85% for the index fund. Over a period of time (5 years, 10 years), that difference translates into thousands of dollars in savings for the investor.
3. Mutual funds have high turnover.
Turnover is a fund's selling and buying of stocks. When you sell stocks, you have to pay a tax on capital gains. This constant buying and selling produces a tax bill that someone has to pay. Mutual funds don't write off this cost. Instead, they pass it off to you, the investor. There is no escaping Uncle Sam. Contrast this problem with index funds, which have lower turnover. Because the stocks in a particular index are known, they are easy to identify. An index fund does not need to buy and sell different stocks constantly; rather, it holds its stocks for a longer period of time, which results in lower turnover costs.
4. The longer you invest, the richer they get.
According to a popular study by John Bogle (of The Vanguard Group), over a 15- or 16-year period, an investor gets to keep only 47% of a cumulative return from an average actively-managed mutual fund, but he or she gets to keep 87% of the returns in an index fund. This is due to the higher fees associated with a mutual fund. So, if you invest $10,000 in an index fund, that money would grow to $90,000 over that period of time. In an average mutual fund, however, that figure would only be $49,000. That is a 40% disadvantage by investing in a mutual fund. In dollars, that's $41,000 you lose by putting your money in a mutual fund. Why do you think these financial institutions tell you to invest for the "long term"? It means more money in their pocket, not yours.
5. Mutual funds put all the risk on the investor.
If a mutual fund makes money, both you and the mutual fund company make money. But if a mutual fund loses money, you lose money and the mutual fund company still makes money. What?? That's not fair!! Remember: the mutual fund company takes a bite out of your returns with that 1.3% expense ratio. But it takes that bite whether you make money or lose money. Think about that. The mutual fund company puts up 0% of the money to invest and assumes 0% of the risk. You put up 100% of the money and assume 100% of the risk. The mutual fund company makes a guaranteed return (from the fees it charges). You, the investor, not only are not guaranteed a return, but you can lose a lot of money. And you have to pay the mutual fund company for those losses. (Remember also that, even if you do make a return, over time the mutual fund company takes about half of that money from you.)
6. Mutual Funds are unpredictable.
The holdings of a mutual fund do not track the stock market exactly. If the market goes up, you might make a lot of money, or you might not. If the market goes down (the way it is now), you might lose a little bit of money . . . or you might lose A LOT. Because a mutual fund's benchmark isn't a particular market index, its performance can be rather unpredictable. Index funds, on the other hand, are more predictable because they TRACK the market. Thus, if the market goes up or down, you know where your money is going and how much you might make or lose. This transparency gives you more peace of mind instead of holding your breath with a mutual fund.
7. Mutual Funds are sales items.
Why don't all these money and financial magazines tell you about index funds? Why don't the covers of these magazines read "Index Funds: The Most Obvious And Rational Investment!" It's simple. That's a boring heading. Who would want to buy something that isn't exciting or that doesn't tickle one's imagination of immense riches? A magazine with that headline won't sell as many copies as a magazine that boasts "Our 100 Best Mutual Funds For 2008!" Remember: a magazine company is in the business of selling... magazines. It can't put a boring headline about index funds on its front cover, even if that headline is true. They need to put something on the cover that will attract buyers. Not surprisingly, a list of mutual funds that analysts predict will skyrocket will sell loads of magazines.
8. Warren Buffett does not recommend mutual funds.
If the above seven reasons for not investing in mutual funds don't convince you, then why not listen to the wisdom of the richest investor in the world? In several annual letters to the shareholders of Berkshire Hathaway, Warren Buffett has commented on the value of index funds. Here are a few quotes from those letters:
1997 Letter: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."
2004 Letter: "American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous."
Bottom Line: If you want to make money, you need to copy what rich people do. So if Buffett doesn't like mutual funds, why would you? So, if not mutual funds, what should passive investors invest in? The answer by now is clear. Invest in index funds. Index funds have lower fees, and you keep more of your returns in the long term. They are also more predictable, and they give you peace of mind.
1. Mutual funds don't beat the market.
72% of actively-managed large-cap mutual funds failed to beat the stock market over the past five years. Trying to beat the market is difficult, and you're better off putting your money in an index fund. An index fund attempts to mirror a particular index (such as the S&P 500 index). It mirrors that index as closely as it can by buying each of that index's stocks in amounts equal to the proportions within the index itself. For example, a fund that tracks the S&P 500 index buys each of the 500 stocks in that index in amounts proportional to the S&P 500 index. Thus, because an index fund matches the stock market (instead of trying to exceed it), it performs better than the average mutual fund that attempts (and often fails) to beat the market.
2. Mutual funds have high expenses.
The stocks in a particular index are not a mystery. They are a known quantity. A company that runs an index fund does not need to pay analysts to pick the stocks to be held in the fund. This process results in a lower expense ratio for index funds. Thus, if a mutual fund and an index fund both post a 10% return for the next year, once you deduct The expense ratio for the average large cap actively-managed mutual fund is 1.3% to 1.4% (and can be as high as 2.5%). By contrast, the expense ratio of an index fund can be as low as 0.15% for large company indexes. Index funds have smaller expenses than mutual funds because it costs less to run an index fund. expenses (1.3% for the mutual fund and 0.15% for the index fund), you are left with an after-expense return of 8.7% for the mutual fund and 9.85% for the index fund. Over a period of time (5 years, 10 years), that difference translates into thousands of dollars in savings for the investor.
3. Mutual funds have high turnover.
Turnover is a fund's selling and buying of stocks. When you sell stocks, you have to pay a tax on capital gains. This constant buying and selling produces a tax bill that someone has to pay. Mutual funds don't write off this cost. Instead, they pass it off to you, the investor. There is no escaping Uncle Sam. Contrast this problem with index funds, which have lower turnover. Because the stocks in a particular index are known, they are easy to identify. An index fund does not need to buy and sell different stocks constantly; rather, it holds its stocks for a longer period of time, which results in lower turnover costs.
4. The longer you invest, the richer they get.
According to a popular study by John Bogle (of The Vanguard Group), over a 15- or 16-year period, an investor gets to keep only 47% of a cumulative return from an average actively-managed mutual fund, but he or she gets to keep 87% of the returns in an index fund. This is due to the higher fees associated with a mutual fund. So, if you invest $10,000 in an index fund, that money would grow to $90,000 over that period of time. In an average mutual fund, however, that figure would only be $49,000. That is a 40% disadvantage by investing in a mutual fund. In dollars, that's $41,000 you lose by putting your money in a mutual fund. Why do you think these financial institutions tell you to invest for the "long term"? It means more money in their pocket, not yours.
5. Mutual funds put all the risk on the investor.
If a mutual fund makes money, both you and the mutual fund company make money. But if a mutual fund loses money, you lose money and the mutual fund company still makes money. What?? That's not fair!! Remember: the mutual fund company takes a bite out of your returns with that 1.3% expense ratio. But it takes that bite whether you make money or lose money. Think about that. The mutual fund company puts up 0% of the money to invest and assumes 0% of the risk. You put up 100% of the money and assume 100% of the risk. The mutual fund company makes a guaranteed return (from the fees it charges). You, the investor, not only are not guaranteed a return, but you can lose a lot of money. And you have to pay the mutual fund company for those losses. (Remember also that, even if you do make a return, over time the mutual fund company takes about half of that money from you.)
6. Mutual Funds are unpredictable.
The holdings of a mutual fund do not track the stock market exactly. If the market goes up, you might make a lot of money, or you might not. If the market goes down (the way it is now), you might lose a little bit of money . . . or you might lose A LOT. Because a mutual fund's benchmark isn't a particular market index, its performance can be rather unpredictable. Index funds, on the other hand, are more predictable because they TRACK the market. Thus, if the market goes up or down, you know where your money is going and how much you might make or lose. This transparency gives you more peace of mind instead of holding your breath with a mutual fund.
7. Mutual Funds are sales items.
Why don't all these money and financial magazines tell you about index funds? Why don't the covers of these magazines read "Index Funds: The Most Obvious And Rational Investment!" It's simple. That's a boring heading. Who would want to buy something that isn't exciting or that doesn't tickle one's imagination of immense riches? A magazine with that headline won't sell as many copies as a magazine that boasts "Our 100 Best Mutual Funds For 2008!" Remember: a magazine company is in the business of selling... magazines. It can't put a boring headline about index funds on its front cover, even if that headline is true. They need to put something on the cover that will attract buyers. Not surprisingly, a list of mutual funds that analysts predict will skyrocket will sell loads of magazines.
8. Warren Buffett does not recommend mutual funds.
If the above seven reasons for not investing in mutual funds don't convince you, then why not listen to the wisdom of the richest investor in the world? In several annual letters to the shareholders of Berkshire Hathaway, Warren Buffett has commented on the value of index funds. Here are a few quotes from those letters:
1997 Letter: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."
2004 Letter: "American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous."
Bottom Line: If you want to make money, you need to copy what rich people do. So if Buffett doesn't like mutual funds, why would you? So, if not mutual funds, what should passive investors invest in? The answer by now is clear. Invest in index funds. Index funds have lower fees, and you keep more of your returns in the long term. They are also more predictable, and they give you peace of mind.
Thursday, March 27, 2008
Popular indexes in the US
A stock market index is a statistical measure of changes in the securities markets. An index represents a portfolio of securities traded on the market that is considered to be reasonably representative of the market as a whole. Each index has its own method of calculation. It is generally expressed as a change from its base value. For a better understanding of the stock market, an index should be read not at its absolute numerical value but at the percentage change in its numerical value. One cannot invest in an index directly. However, you can invest in index related mutual funds.
Popular indexes in the US
The Standard & Poor’s 500 Index – The S & P 500 index
This index is the most popular index in the world. The S & P 500 index consists of 500 stocks chosen on the basis of industry, market capitalization, liquidity and other factors. It is a leading indicator of US stocks. The index does not include speculative stocks.
The Dow Jones Industrial Average (DJIA) – popularly known as the Dow
This index consists of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It includes companies such as Microsoft, Exxon Mobil, Disney, and General Electrical. The index does not include speculative stocks.
The Dow Jones Utility Average (DJUA)
The DJUA is more of a sector based index as it is a price-weighted average of 15 utility stocks traded in the US. It is sensitive to interest rate changes as utility companies tend to borrow a great deal of money.
The Russell 2000 Index
This index consists of 2,000 small company stocks that are included in the Russell 3000 index. It serves as a bench mark for small company stocks in the US.
Wilshire 5000 Total Market Index (TMWX)
This index measures the stock performance of all US headquartered equities for which price data is readily available. It is one of the broadest stock market indices. It includes equities of more than 7,000 companies traded on US Stock Exchanges.
The Nasdaq Composite Index
It tracks companies traded on the Nasdaq Stock Exchanges. The index consists of stocks of more than 5,000 companies traded on Nasdaq. Most of these companies are technology companies. However, you will find companies in the financial, industrial, transportation and insurance sectors. It also consists of many speculative companies.
Popular indexes in the US
The Standard & Poor’s 500 Index – The S & P 500 index
This index is the most popular index in the world. The S & P 500 index consists of 500 stocks chosen on the basis of industry, market capitalization, liquidity and other factors. It is a leading indicator of US stocks. The index does not include speculative stocks.
The Dow Jones Industrial Average (DJIA) – popularly known as the Dow
This index consists of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It includes companies such as Microsoft, Exxon Mobil, Disney, and General Electrical. The index does not include speculative stocks.
The Dow Jones Utility Average (DJUA)
The DJUA is more of a sector based index as it is a price-weighted average of 15 utility stocks traded in the US. It is sensitive to interest rate changes as utility companies tend to borrow a great deal of money.
The Russell 2000 Index
This index consists of 2,000 small company stocks that are included in the Russell 3000 index. It serves as a bench mark for small company stocks in the US.
Wilshire 5000 Total Market Index (TMWX)
This index measures the stock performance of all US headquartered equities for which price data is readily available. It is one of the broadest stock market indices. It includes equities of more than 7,000 companies traded on US Stock Exchanges.
The Nasdaq Composite Index
It tracks companies traded on the Nasdaq Stock Exchanges. The index consists of stocks of more than 5,000 companies traded on Nasdaq. Most of these companies are technology companies. However, you will find companies in the financial, industrial, transportation and insurance sectors. It also consists of many speculative companies.
What are index funds?
Warren Buffett, the greatest investor in the history of the stock market and one of the richest people in America is attributed as saying that “investors should know their limitations.” There is a simple wisdom in that saying that applies to everyday life; know what you are able to do and what you can’t do, then do the things you can. Ask yourself, if you got a chance to fight with a grizzly bear, would you do it? You say that is crazy because the bear is bigger and would kill you? Ok, it’s probably an extreme example but you get the picture; you realize that you don’t have the ability to fight with a bear and you wouldn’t do it. Well, sometimes it is the same in the stock market and yes, there are people on Wall Street that successfully fight bears and bulls everyday with a great equalizer. Index funds give investors the tools they need to exceed their limitations.
What are index funds?
An index fund is a type of mutual fund that keeps a stock portfolio designed to match the performance of a stock market or one of its stock sectors as measured by an index of selected stocks. Index funds are also known as market funds.
Why are index funds better than going alone?
The vast majority of investors on Wall Street really do not know anything about investing. They don’t define their goals, they don’t learn stock charting and they refuse to perform fundamental analysis on companies before they buy. These are the same investors that don’t understand what happened when they lose their money. There are very few investors that, over the long haul, out-perform the results of the major indices like the Dow, the S&P 500 or the Vanguard Total Stock Market Index.
Index funds such as these and others give the average investor the ability to exceed his or her limitations. These funds are diversified portfolios and represent investment options in a portfolio with a size only a few investors could match. Because they have such a large portion of the market represented in their portfolios, it is extremely difficult to outperform index funds over the course of a year, let alone 10 or 20 years.
What if I want to do it on my own?
That’s one of the beauties of the stock market; no one can tell you that you shouldn’t be playing the stock market. But if you hope to have success at it, you have to commit yourself fully to the endeavor. Winning the stock market game requires an understanding of the basics of stock market investing, a clear stock trading plan and the best resources available.
The first thing you need to do is start learning about the stock market. Start with Benjamin Graham’s book on defensive investing, then read anything you can about Warren Buffett. Both of these men are giants in the world of investing and because of their stature, their views demand a certain level of respect. Your learning should also include an ever-increasing understanding of the stock market terms and techniques of Wall Street. You need to understand Wall Street news and how Wall Street talks and acts in order to recognize its characteristics.
Second, you need to develop a plan for your investing. Define your goals and identify a course for getting there. Want to trade stocks? Make your plans accordingly. Prefer the idea of futures markets or options trading? Those are good possibilities as well. What are your stop loss strategies? Knowing these things will help you make a plan that increases your chances for success.
Finally, you need a stock trading system that will help you track your investments as well as your potential purchases. The best system for this is Japanese Candlesticks. This is a stock trading system with over three hundred years of use and it is far and away the best for tracking stocks and commodities as well as understanding the trends and patterns that occur in the market.
Conclusion
For the average investor, nothing beats index funds. Index funds are simple, secure ways to invest and prosper in the stock market. Index funds allow the investor to relax, knowing that he or she is using the most consistently performing method in the stock market for investing. For the more daring investors, index funds might be a part of an investment philosophy that gives the investor complete control over his or her financial future. Whether investing on your own or taking advantage of index funds, you need to know your own limitations.
What are index funds?
An index fund is a type of mutual fund that keeps a stock portfolio designed to match the performance of a stock market or one of its stock sectors as measured by an index of selected stocks. Index funds are also known as market funds.
Why are index funds better than going alone?
The vast majority of investors on Wall Street really do not know anything about investing. They don’t define their goals, they don’t learn stock charting and they refuse to perform fundamental analysis on companies before they buy. These are the same investors that don’t understand what happened when they lose their money. There are very few investors that, over the long haul, out-perform the results of the major indices like the Dow, the S&P 500 or the Vanguard Total Stock Market Index.
Index funds such as these and others give the average investor the ability to exceed his or her limitations. These funds are diversified portfolios and represent investment options in a portfolio with a size only a few investors could match. Because they have such a large portion of the market represented in their portfolios, it is extremely difficult to outperform index funds over the course of a year, let alone 10 or 20 years.
What if I want to do it on my own?
That’s one of the beauties of the stock market; no one can tell you that you shouldn’t be playing the stock market. But if you hope to have success at it, you have to commit yourself fully to the endeavor. Winning the stock market game requires an understanding of the basics of stock market investing, a clear stock trading plan and the best resources available.
The first thing you need to do is start learning about the stock market. Start with Benjamin Graham’s book on defensive investing, then read anything you can about Warren Buffett. Both of these men are giants in the world of investing and because of their stature, their views demand a certain level of respect. Your learning should also include an ever-increasing understanding of the stock market terms and techniques of Wall Street. You need to understand Wall Street news and how Wall Street talks and acts in order to recognize its characteristics.
Second, you need to develop a plan for your investing. Define your goals and identify a course for getting there. Want to trade stocks? Make your plans accordingly. Prefer the idea of futures markets or options trading? Those are good possibilities as well. What are your stop loss strategies? Knowing these things will help you make a plan that increases your chances for success.
Finally, you need a stock trading system that will help you track your investments as well as your potential purchases. The best system for this is Japanese Candlesticks. This is a stock trading system with over three hundred years of use and it is far and away the best for tracking stocks and commodities as well as understanding the trends and patterns that occur in the market.
Conclusion
For the average investor, nothing beats index funds. Index funds are simple, secure ways to invest and prosper in the stock market. Index funds allow the investor to relax, knowing that he or she is using the most consistently performing method in the stock market for investing. For the more daring investors, index funds might be a part of an investment philosophy that gives the investor complete control over his or her financial future. Whether investing on your own or taking advantage of index funds, you need to know your own limitations.
Wednesday, March 12, 2008
Bank Savings And Money Market Account
If you are looking for a higher interest rate than a traditional bank savings account offers, a money market account (MMA) may be a good investment for you. Like savings accounts, money market accounts are liquid savings accounts. They usually offer you the ability to write a certain number of checks from the account each month. Most banks and credit unions offer money market accounts that are insured up to $100,000 by the FDIC of the NCUSIF.
Money market accounts usually earn about twice as much interest as a regular savings account. However, many MMAs require a higher starting balance than savings accounts.
High-yield MMAs are money market accounts that offer double or triple the standard bank MMA rates. These high-yield accounts are usually found through online banks. There is a lot of competition for you deposits and online financial institutes usually have lower expenses resulting in better rates for you.
There are several large corporations, including General Electric and Ford, which offer high-yield MMAs to the general public. While the yields are very competitive, there is no FDIC guarantee on the account. You will be taking a little more risk in return for a higher-yield account. If the corporation goes bankrupt, you will lose your money.
Most MMAs offer check writing and money transfers only over a minimum amount. You are limited by federal regulations to only six electronic, telephone or preauthorized transactions every month, with no more than three check, draft or debit transactions. There may be certain fees charged if you make too many withdrawals or if your balance falls below a certain level. Make sure you read and understand all terms before you open any account.
Money market accounts usually earn about twice as much interest as a regular savings account. However, many MMAs require a higher starting balance than savings accounts.
High-yield MMAs are money market accounts that offer double or triple the standard bank MMA rates. These high-yield accounts are usually found through online banks. There is a lot of competition for you deposits and online financial institutes usually have lower expenses resulting in better rates for you.
There are several large corporations, including General Electric and Ford, which offer high-yield MMAs to the general public. While the yields are very competitive, there is no FDIC guarantee on the account. You will be taking a little more risk in return for a higher-yield account. If the corporation goes bankrupt, you will lose your money.
Most MMAs offer check writing and money transfers only over a minimum amount. You are limited by federal regulations to only six electronic, telephone or preauthorized transactions every month, with no more than three check, draft or debit transactions. There may be certain fees charged if you make too many withdrawals or if your balance falls below a certain level. Make sure you read and understand all terms before you open any account.
Traditional Money And Market Techniques
Short selling is a technique that many stock brokerages allow. It allows you to Sell High then Buy Low, which is the opposite order of the traditional Buy Low, Sell High technique.
First, you will need to apply for a margin account with your trading brokerage. Having margin gives you the ability to buy more stock than the cash you have available by borrowing money from your brokerage. This is also called leverage because it allows you to do more with the money you have. All brokerages require a margin account to do short selling.
Second, you need to find a stock that you believe will be dropping in price soon. However, not all stocks are available for shorting due to supply limitations or other restrictions. When you go to short sell this company, your brokerage will let you know if it is available to short on their system. The brokerage needs to have those shares available to lend to you before you can sell them.
This concept may sound strange, but after you read more about it and try it on your own it will start to make sense. It is used successfully every day by thousands of traders. It is somewhat controversial, however. In fact, the SEC considered banning it for a while. But after they made better regulations on it, they decided to continue allowing it because it is a healthy part of the market. When prices are dropping, who is going to buy the shares from people needing to get rid of them? Short sellers, along with traders looking for bargain prices.
Caution: Before you try it this technique, keep in mind that you will be "swimming against the current," so to speak. The market in general has a tendency to go up about ten percent every year. You will be betting that the company is going down in value, which is the opposite intent of most companies! The owners and managers will be trying to turn the company around every day, so do not hold your shorted position for long! You should also practice this technique with an online stock market game to get the hang of it.
First, you will need to apply for a margin account with your trading brokerage. Having margin gives you the ability to buy more stock than the cash you have available by borrowing money from your brokerage. This is also called leverage because it allows you to do more with the money you have. All brokerages require a margin account to do short selling.
Second, you need to find a stock that you believe will be dropping in price soon. However, not all stocks are available for shorting due to supply limitations or other restrictions. When you go to short sell this company, your brokerage will let you know if it is available to short on their system. The brokerage needs to have those shares available to lend to you before you can sell them.
This concept may sound strange, but after you read more about it and try it on your own it will start to make sense. It is used successfully every day by thousands of traders. It is somewhat controversial, however. In fact, the SEC considered banning it for a while. But after they made better regulations on it, they decided to continue allowing it because it is a healthy part of the market. When prices are dropping, who is going to buy the shares from people needing to get rid of them? Short sellers, along with traders looking for bargain prices.
Caution: Before you try it this technique, keep in mind that you will be "swimming against the current," so to speak. The market in general has a tendency to go up about ten percent every year. You will be betting that the company is going down in value, which is the opposite intent of most companies! The owners and managers will be trying to turn the company around every day, so do not hold your shorted position for long! You should also practice this technique with an online stock market game to get the hang of it.
Friday, February 22, 2008
Make Money The Best Way In Markets
Simple is good and easy is good too. If there is a way to make money in the stock market that is easy and a way that is hard, which is better? The easy way. Right? So what is the easiest way to make money in the stock market?
Well, I have my personal opinion, and I'd be happy to share that with you.
The easiest way to make money is to sell calls against solid stable companies. Covered calls are the easiest way to make money in the stock market. Now that said, there is a lot of misinformation about covered calls trading out there. I've heard people like Wade Cook saying that you can make 20% per month trading covered calls. Well, good luck at that. It's really hard to do that. You have to only trade really dangerous stocks to do that.
Also there is misinformation that that they only work in a bull market. Again not true. At least not if you do covered calls right.
So, let me tell you about the right way to trade covered calls. Here's how. First ignore the stocks that give you the high premium. The premium is high for a reason. The stock is very volatile. You don't want that. You want the stock to be quiet.
So stick with companies that are large and are profitable themselves.
That's the key to make money. Sure with those kinds of companies, the option premium will be much smaller. You won't be able to make 20% per month. You might only make 3%, but annualized that's still 36%. That's good.
Do you want to learn more about how I do it? I have just recorded a 25 minute CD called "How To Pick Winning Stocks - The Secret Formula"
Risks In The Financial Market
The money market is one of the safest financial markets available. It is commonly used by large corporations, financial institutions and governments to secure their money resources for a short period of time. They are often compared to the bond. They are secure investments that are specialized. The main difference, though, in a bond and a money market is that the money market is usually for a very short period of time, usually under a year. You may hear them referred to as cash investments because of this short turn around.
In the most basic of form, the money market is a borrowing of money by a government institution or other large corporation. They are very liquid and are very safe. In fact, when your next bull market falls off, this may be where you plan to put your money. But, with this safety also comes a lower return, as it rightly should.
You can also compare the money market to the stock market. Because the process if virtually the same, you can see how these two elements can be compared. But, the largest difference in them is that the money market is dealing with much larger funds. While in the stock market the individual investor is able to get into the game rather easily, the money market is dealing with such a large amount of money that it is much too high for most. Also, it is a dealer marketing in which companies and governments buy and sell within their own accounts and at their own risk.
If this all sounds too good to not get into, the best way for the individual to get into the money market is to look into money market mutual funds. These funds pool together money from several sources so that they can compete for the money market shares. You can also look into treasury bills as a way of getting into it. The money market is a complex place and you can learn quite a bit more about it, how it works and why it works and see how well you can get into it!
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