Investing Basics – Young Money Money: Earn it, Invest it, Spend it Thu, 10 Aug 2017 23:17:14 +0000 en-US hourly 1 Buying a home is better than investing in gold. But how do you get started? Wed, 29 Mar 2017 22:52:59 +0000

Wondering how to begin investing, but uncertain about how the economy is going to go, and therefore, how stocks will do? Gold and real estate are a couple of your investment options if you’re not too excited about stocks.

Gold is a hedge, one investors use as backup against the dollar. If the dollar doesn’t do well vs. other currencies, the logic says gold will be a strong commodity that fetches demand around the world. But, if the dollar does well, gold isn’t going to yield great returns. Essentially, gold and the dollar compete against each other. Real estate, on the other hand, is a long-term investment that many view as safer than gold.

There will always be a demand for real estate, no matter what the dollar does. True, you can lose on real estate. But that’s if you sell when property values are lower than they were when you bought the place. You can always rent your house out, creating steady income, until the right time to sell comes along. Real estate is your smartest investment, for one because it gives you positive cash flow. But if you buy gold when it’s valuable, there’s a chance the dollar won’t tank to the same extent again. But more than that, there’s good chance you would’ve made more money on stocks or real estate.

Need any more convincing? The housing market is healthy–it’s not in a bubble like it was when the Great Recession hit. In 2016, foreclosure rates were the lowest they’ve been since 2000, and June saw property values appreciate at a rate of 5.7%, which means there’s good demand. In general it looks like lenders and buyers have learned from mistakes that led to the housing crisis. Barring some sort of unforeseen housing market disaster, the recovery can (and should) continue. Even if there’s a big collapse, this guide will help you stay away from an investment that will ruin you.

If you’ve still got your heart set on bullion, people have discovered gold in their backyards with a metal detector. In one case, US Army postal inspectors used a military-grade detector to uncover $153,150 worth of gold. So if you buy a house, there’s always the chance you’ll strike two kinds of paydirt, the practical real estate investment kind, and the shiny yellow kind.

Evaluate what you can afford

Essentially, you want to find out which properties you can afford that are going to deliver the best long-term value. There are multiple types of real estate you could invest in, but since this is your first time, I’m going to concentrate on residential real estate. Invest in a home, and you can live in it and rent out the other rooms as well. That way, your tenants make your mortgage payments for you. Once you’re ready, you can move somewhere else and begin to really take advantage of your property’s full earning potential.

The other scenario is you have a family. In that case you’re still making a good investment, because down the line, once you’ve paid off your mortgage and hopefully made some improvements on your home, you can either sell for a profit or become a landlord. Either way, you’ve made a secure investment that will pay off.

Check your credit. If your credit history is bad, do your best to fix your credit score by paying off any outstanding credit debts and debts on other loans. Check to see if there are any errors on the report, and if so, dispute them. If you have any accounts in collections, set up a payment plan to get them out. If you’re in the position to do so, pay off a credit card completely and leave it open. Have a reliable friend add you as an authorized user on their credit card. Next, find a mortgage lender and get a pre-approval letter.

A property in need of renovation can be a solid investment for your money. An FHA Rehab Loan covers both the cost of the mortgage and the cost of renovations. To qualify for one, you must do the following:

  • Find a fixer-upper house in need of rehab
  • Find a qualified lender
  • Meet the lender’s minimum credit score requirement, debt-to-income ratio requirement, and provide proof of income

After the loan is approved, your lender sets up a Repair Escrow Account, and you must begin renovating within 30 days of closing and complete renovations in less than six months.

Particularly if you have great credit and property values are high in the surrounding area, a Rehab Loan could help you flip a house (meaning you fix it then sell it) and make a great short-term return on your investment.

Research the market in your area

Your research into the right home can take multiple forms. A good realtor does all the research for you, and can lead you to properties in your price range in neighborhoods where value is likely to appreciate. Online, you can do all your own research first through sites such as Zillow and Redfin. Look into areas with low crime rates, less inventory than more, and access to desirable resources, such as shopping centers and parks. Once you’ve found an area you like, a realtor will help you get the best deal, and the seller will pay realtor fees. If it’s for sale by owner, ask if they will pay your agent’s commission fee.

Finish the deal

Once you’ve found the home for you, find out what documents your lender needs, provide them, get your loan, and make your offer. Sign a contract with the seller, complete your mortgage application, close the transaction–either through your agent or the seller–and get the keys to your new home.

Keep the place up over the years and make improvements. The value will go up, and you’ll have an investment on your hands that leaves you secure and ready for retirement.

U.S. Investment capital shows a preference for North American equity markets in November Mon, 14 Nov 2011 10:00:00 +0000 In November, the assets of U.S. investors have flowed into North American equity markets more than stock markets anywhere else in the world.In November, the assets of U.S. investors have flowed into North American equity markets more than stock markets anywhere else in the world. Inflows into stocks in this region rose slightly less than 0.4 percent during the period when compared to 2010, Forbes reports. Research provided by EPFR Global and Barclays Capital indicates that these individuals divested some of their ownership in Western European and Japanese equities this month.

Emerging Asian markets were the second-largest destination for funds coming from these investors, according to the media outlet. Inflows into this region increased by 0.3 percent from the same time last year. Most of this influx went to China.

Latin American equity markets were the third-largest destination for U.S. investment funds, the media outlet reports. Inflows for this region rose 0.2 percent from the previous year, with most of this funding going to Brazil.

Although many developing markets offer lower labor costs and reduced costs in the form of regulation, one major factor that draws investment to the U.S. in political stability. The U.S. also houses the headquarters for more Fortune 500 firms than any other country in the world.

Spain Sees Debt Downgrade from S&P Mon, 17 Oct 2011 10:00:00 +0000 Policymakers in Madrid are dealing with a downgraded credit rating.The problems in the euro zone continue to mount as Spain’s credit rating was downgraded by Standard & Poor’s on Thursday, October 13, according to The Financial Times.

The country’s debt rating was dropped to AA- from AA on concerns that the country’s high unemployment and excessive debt could dampen any economic growth. The downgrade brings Standard & Poor’s in line with Fitch Ratings, though the Spanish government took issue with the rating, according to Reuters.

“S&P underestimates the scope of the unprecedented structural reforms undertaken, which will obviously take time to bear fruit,” Spain’s Treasury said in a statement to investors on Friday.

The ratings agency did note that the country’s debt-to-GDP ratio is not nearly as dire as the other nations currently suffering major concerns, such as Greece and Italy.

Though the euro has seen sizable gains in recent days, all of Europe is waiting on news from the leaders of the region’s two biggest economies, Germany and France, regarding a potential solution to the Greek debt crisis. Greece is expected to run out of funds sometime this month.

Credit Default Swaps and Why They Aren’t Evil Fri, 24 Jun 2011 17:12:00 +0000 Derivatives are not just about speculation.Before 2008, the majority of Americans were more likely to know derivatives from calculus than from the finance industry. Since then, one of the main types of derivatives contracts, credit default swaps, have earned an unsavory reputation that The Wall Street Journal suggests hardly does them justice.

Tied to the generally negative view many Americans hold of the finance industry, CDS are generally seen as a means of making money, stealing if they are particularly uncharitable. But looking at the structure of these contracts gives a different sense.

A derivative is a contract between two institutions that establishes payments on a particular schedule based on agreed upon criteria. The name “derivative” notes that the contract has no inherent value, but references some other asset, such as sovereign bonds, or figure, such as the interest rate in a country.

For CDS, the asset being referenced is some form of debt from an individual or institution. The now-infamous collapse of American International Group came when a large number of individuals defaulted on mortgages that the company had insured. At present, the largest concern in the derivatives market is the potential for Greece to default on government issued bonds, but these contracts can fall anywhere within the range between those two groups.

Usually the institution buying a CDS pays on a quarterly basis, though some contracts are more frequent. The payout for these contracts comes when the company, country or individual defaults on whatever debt it owes. Sometimes, as in a person declaring bankruptcy, this can be clear-cut, but The New York Times notes that for sovereign debt and corporate bonds, there is usually an extended process to establish the exact size and nature of the damages and thus how much must be paid on CDS contracts.

Many people look at this and see only the potential to profit from someone’s failure, and certainly the potential for speculation exists. However, the initial purpose of these contracts was always as a means of reducing the risk associated with certain investments, spreading it between institutions. Investors could better justify paying for Greek bonds, providing money for the government, if they could also secure some insurance against the country’s failure to pay the bond back.

Recently, The Journal notes that India has established rules for CDS in that country to allow greater investment in some smaller domestic firms that otherwise might seem too large a risk. Even the World Bank has encouraged the use of derivatives by developing nations to help stabilize the price of food, according to Reuters, suggesting the poor reputation is largely undeserved.

Commodity Investing for Beginners Mon, 19 Jul 2010 14:00:00 +0000 Commodities can be very lucrative, but confusing.The first thing to understand about investing in commodities is that it’s generally a lot more volatile than investing in stocks. The most conservative way to invest – other than just sticking your money in the bank – is low-yield, low-risk bonds like Treasury bills. Stock indexes and higher-yield bonds are riskier still, while individual stocks can offer great returns but also enormous risks.

With commodities, you’re subject to three main factors. First, there’s demand for the commodity you’re investing in. If more people want oil, the price goes up (everything else remaining equal). Second, there’s supply – this is where big shocks can come into play. Drought in agricultural regions or political unrest in oil-producing areas can spike the prices of those commodities.

Third, there’s the vehicle you’re using to invest. There are many ways to trade commodities, but here are the most important ones: Exchange-traded funds (ETFs) track the commodities’ price and trade on regular stock exchanges. Some mutual funds are weighted towards commodity investments. Shares in companies that produce and sell goods like oil and silver usually track the price of those goods. Finally, futures contracts allow sophisticated investors to make bets on price movements.

For your purposes, futures contracts are probably a bit too risky and esoteric, although some people have made a fortune on them. For many, the simplest and easiest way to invest in commodities is with ETFs. The SPDR Gold Trust ETF (GLD) tracks the price of gold, while the United States Oil Fund (USO) follows the price of light, sweet crude oil. The PowerShares DB Agriculture Fund is tied to 11 different agricultural products.

These funds buy and sell oil futures contracts so that the value of the fund moves up and down the same percentage as the actual price of the underlying commodity. Then, the managers issue shares that can be traded like any other stocks on major exchanges.

The advantage of an ETF is the ability to buy and sell your shares at any time, making them very liquid.

A riskier play is to buy shares in a company in your chosen commodity’s industry. If you think the price of oil will increase 10 percent, you could invest in ExxonMobil (XOM), which might get a 15 or 20 percent boost from that oil price. But imagine if you’d invested in BP – you could have been wiped out, even as oil stayed more or less steady.

Finally, some mutual funds, like Pimco’s Commodity Real Return Strategy Fund, are heavily weighted towards commodities. If these are well managed, they can return even better results than stocks or ETFs.ADNFCR-3389-ID-19893075-ADNFCR

Invest in what you know, and reap the rewards Wed, 30 Jun 2010 23:24:38 +0000 Knowing a company in detail can help you make the right decision.A good writer follows the rule of "write what you know," and a good investor should think the same way. Investing in a sector that you understand, or that you work in every day, can help you pick the right assets for your portfolio.

When you understand the ins and outs of an industry, you know exactly what factors cause a company to perform well or poorly. Some attributes, like revenue, profit or growth, are obvious. Other qualities aren’t, however, and knowing a firm’s products or customers intimately gives you a real advantage.

Take the video-game industry, for example. The typical investor will buy stock in a company like Take Two Interactive (NASDAQ: TTWO) or Activision-Blizzard (NASDAQ: ATVI) based on its earnings and its share value, among other things. But if you work in the industry, or just follow video games closely, you might be able to predict that an upcoming game will be a huge hit – like Take-Two’s famous Grand Theft Auto IV – and guess that the earnings from the game will generate huge profits. By investing in the stock before the rest of the market realizes how much money it will make, you can make a killing.

Again, look at Take-Two: GTA IV was well-publicized long before its April 2008 release, but the stock jumped from $17 in January 2008 to over $27 by June.ADNFCR-3389-ID-19867407-ADNFCR

Charles Schwab Launches Twitter Account to Connect with 20-somethings Wed, 23 Jun 2010 11:29:02 +0000 Young people can get financial advice through a new Twitter accounted opened by a financial company.Having the most up-to-date personal finance information can help younger people set themselves up properly.

Hence, microblogging websites like Twitter are growing in popularity among financial institutions. Count Charles Schwab as one of those, as the company said its site will be posting items on an account at @schwabmoneywise.

Along with posting personal finance advice, the Twitter feed will give people in their 20s the chance to engage in a dialogue and ask questions.

"We can no longer simply talk at this generation," said Charles Schwab Foundation president Carrie Schwab-Pomerantz. "Social media isn’t just a place where young adults spend their time, but it’s also a place that allows for a two-way conversation."

Launching the Twitter account is part of a larger financial campaign from the company. Other features include the Money Mondays effort, which will call on younger people to set aside some time on that day of the week to think about their personal finance status.

Other groups have also hopped on the Twitter bandwagon, including the California Department of Insurance, which plans on posting alerts and educational posts through its account.ADNFCR-3389-ID-19852019-ADNFCR

Commonly Asked Questions about 401k Plans Fri, 21 May 2010 09:00:09 +0000 I am often asked many questions regarding retirement accounts. With many available options these days it can sometimes be confusing to fully understand your rights as an employee.

Because your retirement planning is so important to your future well-being, you should ask questions about the retirement plans available to you and how they work, as well as how best to use your retirement dollars. Below are answers to several commonly asked questions about 401(k) Plans.

Q. How do my 401(k) contributions lower my income taxes?

A. Your 401(k) contributions are made on a pre-tax basis. This means that they aren’t reported to the Internal Revenue Service as current income on your W-2 form to the Internal Revenue Service. For example, if you earn $25,000 a year and decide to contribute 10 percent of your salary ($2,500) to your 401(k) account, only $22,500 will be reported as current income for income tax purposes.

Why does the government give you this excellent tax break? Because it wants to encourage individuals to save as much as possible with their own dollars today so that they are better prepared for their retirement in the future.

Q. What is a Roth 401(k)?

A. Roth 401(k) is not a type of plan, but rather a type of plan contribution. If a 401(k) plan offers this feature, employees can designate some or all of their elective contributions as designated Roth contributions, (which are included in gross income) rather than traditional, pre-tax elective contributions. Meaning that Roth contributions are taxed in the year they are contributed to the plan. Upon distribution, Roth 401(k) contributions are received tax free. Earnings on Roth 401(k) contributions will not be taxed upon distribution if the Roth account has been open for at least 5 years and distribution occurs after 59½ , death or disability. Traditional 401(k) contributions and Roth 401(k) contributions are subject to a combined limit of $16,500 for 2010 ($22,000 if age 50 or older).

Q. Am I able to contribute to both a 401(k) and an IRA?

A. Yes. Many individuals contribute to their 401(k) Plan and to an Individual Retirement Account (IRA) or Roth IRA. It may be best to maximize your traditional 401(k) contributions first, since they are made with pre-tax dollars. (Your IRA contributions may or may not be tax deductible, depending on your annual salary and other qualifications.) If your employer offers matching contributions and you qualify for a Roth IRA or deductible IRA, it may make sense to contribute enough to your 401(k) to attract the maximum employer match, and then contribute to an IRA or Roth IRA. If you have not exhausted the maximum allowable contribution and can afford to do so, contribute again to your 401(k) Plan.

Q. If I change jobs, may I take my 401(k) money with me?

A. Yes. All contributions you have made to your 401(k) account are 100 percent yours. Contributions made by your employer (if any) may be yours depending on a vesting schedule. You will need to check your plan for specific vesting schedules.

In addition, if you do change jobs, it may be a good idea to consider either rolling your 401(k) money over into an IRA or another qualified plan (such as a profit-sharing or 401(k) plan) at your new employer. Otherwise, you may incur taxes and early withdrawal penalties. Be sure to check with your tax adviser before taking any distributions from your 401(k) Plan.

For More Information
Matthew A. Klatsky, is a financial advisor in Morgan Stanley Smith Barney’s Hunt Valley, MD office. Matthew can be reached at (410) 229 8219 or

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney’s Financial Advisors do not provide tax or legal advice, are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein, except as otherwise agreed to in writing by Morgan Stanley Smith Barney. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisors before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan.

This article is published for general informational purposes and is not an offer or solicitation to sell or buy securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.

Investments and services are offered through Morgan Stanley Smith Barney LLC, member SIPC.

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What is Morningstar? Thu, 19 Nov 2009 05:00:11 +0000 Question: What is Morningstar? Why are they good?

Answer: Morningstar is an investment research company that provides information on a wide range of financial products to individual investors, financial advisors, and large institutional clients. 

For an individual investor, Morningstar provides some of the best investment research services available, and many of their services are free.  For example, on Morningstar’s website you can sign up for free email alerts so you can receive an email anytime one of your stocks, mutual funds, or ETFs is in the news or releases new financial data.  They also offer a premium membership which includes extra features like analyst reports, stock picks, and advanced screening tools.  The premium membership costs money, but Morningstar allows a 14-day free trial so you can test their services to make sure they’re worth your money. 

As a financial planner, I use Morningstar to aggregate clients’ accounts into one comprehensive portfolio, and to research stocks, mutual funds, and ETFs.  Morningstar also provides unbiased commentary on thousands of investments and offers recommended buy and sell target prices. 

Whether you’re a beginning investor or a large institutional stock trader, Morningstar is a valuable resource that can help you make smarter investment decisions.

Matthew Brandeburg, CFP® has seven years of financial planning experience and runs his own business, Bridgeway Financial Group, LLC, based in Columbus, Ohio.

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Diversifying, Bonds, Options, & Dollar Cost Averaging Fri, 09 Oct 2009 05:00:37 +0000 This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit

Make Your Money Work for You
So now you have maximized your 401(k) and your IRA, you have your debt paid off, your emergency fund is set and you are finally ready to get into some serious investing on your own, the Wall Street way. Where should you begin? The best place to start is with a mutual fund.

Some of you are probably thinking, “Why start with a mutual fund? That’s what I have my IRA invested in.” Remember, the money you are investing now is nothing more than personal savings. This is the money you will use to supplement your retirement or buy a new car or a vacation home. You don’t want to lose the first part of your hard earned savings right away in some oil scheme. I’m not talking about putting all of your money in a mutual fund, just the first part. Once you have a decent balance established, you can begin to move money into other riskier ventures. At this point you may want to look into real estate or individual stocks. Perhaps you would like to diversify into corporate or government bonds, depending on your age and risk tolerance. If you have enough money and you really like to play with fire you could even get into commodities and options trading.

Since there are entire books devoted to these riskier types of trades, I am not going to get into too much detail, but I will give you an idea of what they are.

Diversify: All Your Eggs in One Basket
We have all heard the expression, “Don’t put all your eggs in one basket.” This statement definitely applies to the world of investing. You always hear about people making millions of dollars by investing in individual stocks. Some people have made a fortune by sticking with one company throughout their lives (Microsoft, Wal-Mart, Google). So what is wrong with doing the same thing? Sure it’s riskier, but people do it.  Well, let’s not forget about the people who invested all their money in Enron, FannieMae, or Kmart. If you like to gamble in Vegas with large amounts of money, perhaps putting all of your money into one stock is the way to go. Otherwise you want to diversify.

Why should you diversify? I’m not going to bore you with complicated graphs and statistics, but let’s just say your risk of losing all of your money when you own stock from at least 13 different companies is way less than if you own the stock of just one. This is how it works. If you own, for the sake of simplicity, 20 stocks, with the same amount of money invested in each company, and two of the companies go completely out of business, you have only lost 10% of your money. If you would have all of your money in any one of these two companies, you would have lost 100% of your money. Now, assume that three more of the stocks stayed the same, five went up by 10%, five went up by 15% and the remaining five went up by 25%, your total “portfolio” would have still increased by 2.5%, despite the two companies that went under completely. The key to protecting yourself is to diversify.

So how do you diversify? If you try to buy the stocks from 20 different companies, it would cost you a fortune in transaction fees, besides the fact that you could only afford a few shares of each company. There is a much better way to diversify. We call them mutual funds. Mutual funds are basically a large “portfolio” of various investments. Since many people own pieces of a mutual fund, all of their invested money is used to buy a larger share of each investment and it allows the mutual fund manager to purchase many different types of investments to create a diverse investment vehicle.

There are many types of mutual funds. Some invest in stocks, some in bonds, others invest in both. There are also real estate mutual funds and many more. Each fund must follow a set of basic rules that only allows them to invest in certain types of assets. For instance, a growth mutual fund manager would be looking to purchase shares of companies that are expected to grow, so the growth fund will probably not have the stock from larger well-established firms such as General Electric or Coca-Cola.

To invest in a mutual fund, you would go through an investment firm, such as Charles Schwab, Vanguard, etc. They would set you up with an account after you invest a minimum amount and perhaps set up a way to automatically contribute every month. The mutual fund manager takes your money, adds it to the money that is coming from other investors, and purchases either more shares of stock the fund already owns or perhaps shares of stock in companies that are new to the fund.

One important issue with mutual funds is how the investment firm makes money. There are several types of fees that can be charged by mutual funds. There are no-load funds, low-load funds and load-funds. A load is another term for a fee. A load can be charged at the beginning of an investment or when you withdraw your money. If you are charged a front-load fee, for every dollar you invest, a few cents comes off the top right away for fees. So your investment has to earn a decent return just so you can break even. Back-loads are fees charged if you withdraw your money within a certain time period, usually seven years. For instance, you may be charged 5% if you withdraw your money within the first year, 4.5% during the second year, 4% during the third year, etc.

I prefer no-load funds, but keep in mind there are still fees involved, even in no-load funds; after all, the investment companies have to stay in business. There are annual fees that may be charged. You definitely want to stay away from funds that charge more than 2% in annual fees. After all, if you earn 8%, but pay 2% in fees, you are only really getting 6%. That is before any tax consequences are considered. The lower the fees the better. Of course, don’t get so caught up in finding the lowest possible annual fees that you forget to see whether the mutual fund is right for you, or even if the fund has been performing well. What good is the lowest fee, if the fund is losing money?

Okay, so let’s talk a little more about mutual funds. There are several types of funds, which can be broken up into different fund styles. The styles really describe the styles of the managers of the fund. The style can be based on an index, investment strategy, a particular sector, company size, on bonds only, or a money market.

I prefer to invest in index mutual funds. An index fund simply holds a portfolio that represents a major index, such as the S&P 500 Stock Index or the Russell 3000. The advantage of the index fund is that the fees are usually lower since the manager does not have to work as hard to actively manage the fund. Since the goal is to imitate the index it is following, most of the guesswork is removed. There is no real statistical evidence that a professionally managed fund earns a better return for the amount of risk involved than an index fund.

Growth funds are managed to purchase stocks of firms that are expected to grow big over the next few years. Growth funds are riskier, because while they may return big, they may also fall big. Expect a lot of volatility with these funds as the value may go way up and way down from one year to the next. Value funds hold shares of companies the managers of the fund feels are undervalued in some way by the current market. They use all types of complex measurements and formulas, but the point is, they feel the market is currently undervaluing the stock at the moment, and they expect the market to eventually see the error of its ways, and bid up the price.

You can also look into sector funds. For instance, if you believe the health sector is on its way up, but are not quite sure which companies will be the winners, you could invest in a health sector fund, which will invest in the stocks of various firms within the healthcare sector. There are funds for almost every sector available.

Company size is usually split between large-cap, mid-cap and small-cap funds. All this tells us is the relative size (or capitalization) of the company relative to the market. Most large-cap funds invest in companies with market capitalization of $8 billion or more, while mid-cap funds stay above $1 billion and small-cap fall below $1 billion. Large-cap funds are the least volatile, but also results in lower returns. The smaller the capitalization, generally the more volatility, but the greater potential for growth and returns.

Bonds come in all shapes and sizes. You can get everything from low-yield treasury bonds that are backed by the full-faith of the federal government to junk bonds, which are high-risk bonds issued by companies with credit problems. Government bonds include those issued by federal, state and local governments, while corporations issue corporate bonds. Bonds are rated according to their credit worthiness, much like we have our own credit score. Moody’s and MorningStar are the two major credit-scoring companies in the bond market. The better a company’s credit rating, the lower the risk they impose to the investor. In return, they will be able to get a lower interest rate.

From your perspective, bonds are like loans in reverse. You give a large chunk of money to a corporation (say $10,000) and they make monthly or quarterly payments to you in the form of interest. At the end of the bond term, say 20 years, you get your principal back.  One of the biggest drawbacks of purchasing bonds is that you lose the benefit of automatic compounding interest. You see, if you receive a payment from a bond every six months, you have to reinvest it at the same rate to enjoy the benefits of compounding. That is one of the reasons to invest in a bond fund instead of individual bonds. The bond fund manager can use the interest payments of the investors and collectively purchase more bonds.

In many ways bonds can work like stocks. Once you buy a bond, you are not necessarily stuck with it until maturity. You can sell the bond in a secondary market, similar to the stock market. In fact, you may have purchased it in this same market. Some people invest in bonds for a period of time, and then sell the bond to get money out for various things such as a vacation, education, etc. The question is how much can you get out of a bond when you sell it? That depends on the rating of the bond, the interest rates at the time and the coupon rate. As interest rates rise, the value of existing bonds falls. Why is that? If you have a bond that pays 5% interest, and new bonds are issued paying 10% interest, why would anyone be willing to buy your bond? They would want the new ones that are paying 10% interest. So how do you sell your bond in this case? You sell it at a discount. If you have a $10,000 bond and you sell it for less than $10,000 then you are selling it at a discount.

Let’s say you have a 10% bond and the interest rates fall to 5%. Now the value of your bond just increased. After all, everyone wants to buy your 10% bond, since all the new ones are only paying 5%. In this case you will sell your bond at a premium. Your $10,000 bond will sell for more than $10,000.

Buying and selling options is perhaps the closest thing to legalized gambling, next to state lotteries. With options big money can be made and big money can be lost. It is not uncommon for a person to make $20,000 in one day with options trading… and then lose $25,000 the next day. By no means should anyone try options trading based on the information I am giving you. If you want to seriously trade in options, there are appropriate books available that discuss the topic in detail. I am just giving you an overview.

Instead of purchasing a $50 stock, you could purchase an option, for say $5, which gives you the right to buy that same stock for $47. At first this may not make sense, because you paid $5 for something only worth $3 (If you would purchase the stock for $47 and sell it at $50, it’s current value, you would make $3, but the option cost you $5, so you essentially lose $2).

At this point your option is “out of the money,” that is, it is worth less than it’s cost. You are probably wondering how this gives you any advantage… why not just buy the $50 stock? Well, if the stock increases in value by 10%, it is now worth $55. You could turn in your option at this point, pay $47 for the stock and sell it at the current market price of $55. You just made $8 profit, minus the $5 cost of the option, which means you netted a gain of $3. Big deal you say? Look at it this way. The stock price only went up 10%, but you made a 60% return on your money. How? You only invested $5, but earned a $3 return on your money.

To make this example clearer, let’s compare two scenarios dollar for dollar. Matt and Pat each have $50. For simplicity sakes, let’s ignore brokerage fees. Matt buys one share of ABC stock for $50. Pat buys 10 options, each $5, which give her the right to purchase the stock for $47 per share (total cost to each Matt and Pat is $50). If the stock’s price increases by 10% to $55 and Matt sells his share, he made a total of $5, or 10% return on his money. Not bad Matt. Pat, on the other hand, exercises her 10 options and buys the 10 shares for $47 each and sells them for $55 each. Pat just made $30 compared to Matt’s $5. Pat got a 60% return on her money. Sorry Matt.

You might be thinking, “Wow, that’s amazing. Why doesn’t everyone just buy options?” Two reasons. First, not every stock has an option attached to it. Second, the losses can be more significant if the stock decreases in value. Using the same example, if the stock decreases by 10% to just $45, then Matt loses $5 or 10% of his investment. Pat, on the other hand, loses the entire $50 since her options are now worthless (the stock costs less than the price her option allows her to purchase it). Pat lost 100% of her investment. Sorry Pat.

Dollar Cost Averaging
The easiest way to save money is to put away the same amount each month or each pay period. One of your regular monthly expenses should be your savings. When you invest in the stock market, you can expect stock prices will fluctuate. Dollar cost averaging is a way to let you invest without really worrying about what the individual prices of the stocks are at any given moment. Essentially you put the same amount of money in your investment every month (or pay period) no matter if the price is up or down. When the prices are up, the same $100 will buy you fewer shares, but at least your overall account has gown since the price increased. When the price goes down, it is like buying the same shares on sale.

Consider the following example. You invest $100 per month into the ABC mutual fund. The shares cost $20 each when you start investing so you own five shares. Next month you contribute the same amount, $100, but the shares fell to $10 each. Your account balance went down since the shares decreased, but now you are able to buy 10 shares at $10 each, so you own a total of 15 shares. When the price recovers to $20 per share the next month, your account balance is up to $300! You only contributed $200 so far and the price is the same as it was when you started, yet you have earned $100. Also, you will contribute $100 since you do so every month, which buys you five more shares. Next month the price increases to $25 per share, so your account balance is $400! This month your $100 savings will only buy four shares, leaving you with a total of 24 shares and an account balance of $600.

Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at or

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