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Choosing a Brokerage Account

If you are going to invest in stocks, you will need a brokerage account (but see the following section on dividend reinvestment plans). These accounts offer the ability to buy and sell stocks, bonds, and mutual funds and, in most cases, a linked money market account with check-writing privileges. Other services offered differ depending on the brokerage company and the kind of account. For most accounts, the only cost to you is the commission you pay with each purchase or sale. Some accounts might charge a small yearly fee as well. There are three main types of brokerage accounts: Read the rest of this entry »

Your Investment Timeframe

When evaluating investments, it is important to have some idea of your timeframe. In other words, when will you need the money?

Some investments have a known timeframe. For example, if you are saving for a child’s college education, you know exactly when you will need the money. Other investments might not have a precise target date but you still know whether they are long or short term. An example would be someone in her 30s or 40s saving for retirement—she does not know exactly when she will retire, but she does know it is many years off. Read the rest of this entry »

Risk Versus Return (3)

Beta is a measure of how the fund compares with a benchmark, usually the S&P 500. A beta of 1.00 means that the fund goes up and down in lockstep with the benchmark. A beta of 1.15 means that if the benchmark goes up or down by a certain amount, the fund goes up or down by 15% more. Read the rest of this entry »

Risk Versus Return (2)

Money market accounts pay more return than savings accounts. They are not guaranteed by the government and so, in theory, could decrease in value, but this is very unlikely because it would require a major financial upheaval. To my knowledge it has not happened even once so far.

Bonds offer two risks. One is that the price of the bond will go down. The bond market as a whole fluctuates with interest rates, with higher rates meaning lower bond prices and vice versa. An individual bond will decrease in price if the entity that issued it is in financial trouble. Although it’s rare, a bond can lose 100% of its value if the issuing company goes bankrupt and defaults on its bond obligations. Bonds issued by the Federal Government are the safest, followed by bonds issued by Federal agencies and certain types of mortgage-backed bonds. The bonds of large, established companies are the safest of the nongovernmental bonds.

Stocks present a wide range of risk levels. Any stock can go down, of course, and even the largest, most stable companies have historically seen significant decreases in their stock prices. As a general but not infallible rule, a company that pays dividends will experience less stock price volatility than one that does not.

The risk of a mutual fund is tied directly to the risk of the various stocks and/or bonds that it owns as well as to the investment strategy of the fund. Generally speaking, a broad-based fund will have less risk than a fund that specializes in a certain sector or country. There are several popular measures of mutual fund volatility:

Taken From : Manage Your Money and Investments with Microsoft Excel

Risk Versus Return

With any investment, there are two fundamental questions:

Is my money at risk?

What will my return be?

A basic fact of investing is that there is an inverse relationship between these factors. If you want higher returns, you must take more risk. Conversely, if you want low risk, you are limited to lower returns. Read the rest of this entry »

Certificates of Deposit

A certificate of deposit (CD) is a deposit you make at a bank for a fixed term at a fixed rate. For example, you might see banks advertising a two-year $1,000 CD at 4.5%. You deposit $1,000 and at the end of two years you get your $1,000 back plus the 4.5% interest for the two years. CDs pay higher rates than saving accounts and are guaranteed. You can get your money back early but you’ll pay a substantial interest penalty. CDs can be useful for socking away cash that has to be 100% safe and you know you won’t need for a year or two. Read the rest of this entry »

Treasury Bills

A treasury bill is a bond that is issued by the U.S. government. Treasury bills are considered the “gold standard” in terms of safety because your principal and interest are guaranteed by the government. Because there is essentially no risk involved, the return tends to be lower than other bonds. You can buy treasury bills directly or you can invest in mutual funds that specialize in them. Read the rest of this entry »

Exchange Traded Funds

Exchange traded funds (ETFs) are a fairly new but increasingly popular investment tool. Sometimes they are referred to as closed-end funds. An ETF is like a mutual fund in that it provides an investment in a basket of stocks and hence the benefits of diversification. It is like a stock in that the shares trade on the open market without the high fees and restrictions of a mutual fund. ETFs are not without fees, but these fees are quite low and rival the most efficient mutual funds. You do not pay these fees directly; they are reflected in the price of the ETF. Read the rest of this entry »

Types of Mutual Funds (7)

Front-end loads immediately reduce the amount of your investment. For example, if you invest $1,000 in a fund with a 5% front-end load, your actual investment is only $950. In general, load funds are sold by brokers and the load serves, at least in part, to provide the commissions that reimburse the broker for her services. This is perfectly reasonable, and if you are using the professional services of a broker, you should expect and be willing to pay loads when you buy mutual funds. If you are managing your investments on your own, however, there are plenty of no-load funds to choose from and, other factors being equal, these would certainly be a better choice. Read the rest of this entry »

Types of Mutual Funds (6)

Some funds also tack a few fees on in the Other category to cover things such as accounting and legal costs.

All these costs are combined into an overall annual fund operating expense, which is the figure you should be concerned with. You’ll find this information listed in the prospectus for any fund you are considering. Lower fees are better, of course, and some people are surprised to learn just how much fees can eat into your returns.

Let’s look at an example. Suppose you invest $10,000 in a fund and leave it there for 10 years. The fund’s return (before fees) is 8% per year. What will you have after 10 years?

• If the fund charges 2% annual expenses, $17,640

• If the fund charges 0.5% annual expenses, $20,530

You can see the fees make a big difference—several thousand dollars in this case.

Another kind of fee charged by some mutual funds is a sales commission or load. There are two types of loads:

• A front-end load is paid when you purchase the shares.

• A back-end load is paid when you sell the shares.

Taken From : Manage Your Money and Investments with Microsoft Excel