Pay Yourself First

Pay Yourself First

by Kathleen Sindell from Investing Online for Dummies

The beginning of personal wealth is the accumulation of capital that you can use for investing. This capital often begins with savings and expands into other types of more profitable investments. Savings are the beginning of your capital accumulation. Families need a regular savings program that's between 5 and 10 percent of take-home pay per month. Some people even manage to put away 15 percent. Getting into a regular rhythm with saving is important.

Additionally, individuals and families need emergency funds. Folks with fluctuating income, few job benefits, and little job security may need a larger emergency fund. Families with two wage earners may need a smaller emergency fund.

A general rule is to have three to six months of take-home pay in a savings account (or a near cash account similar to a market fund with check writing privileges) for emergencies. If you don't have an emergency fund, you need to increase your savings. Payroll deduction plans into a savings account or money market fund are often the most painless way to achieve the best results. On the other hand, if you've been saving a surplus, you may want to consider using these funds for investing.

Where Stocks Trade

Where Stocks Trade

from ClearStation.com

Billions of shares of stocks are traded every day—ever wonder where it all happens?

Stocks are traded on exchanges. An exchange can be classified as either a "securities and commodities exchange" or "over the counter." What that means is that the exchange is subject to the rules and guidelines of its governing body.

The securities and commodities exchanges are organized, national entities where securities, commodities (bulk items like food and metals), futures contracts, and options are traded. Members of these exchanges handle the trades for themselves and their clients. Know those scenes you see in movies where people wearing funny coats are running all over the place frantically trading stocks? Chances are they are representing these exchanges.

Securities and options are regulated by the SEC (Securities and Exchange Commission) while commodities are governed by the Commodity Futures Trading Commission. The New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) are grouped here. Other exchanges include the Chicago Options Exchange (CBOE), the Philadelphia Stock Exchange, and the Pacific Stock Exchange to name a few.

For the over-the-counter market, trades are handled electronically—either via telephone or computer. The over-the-counter (OTC) stocks usually belong to smaller companies that were not able to meet the strict requirements of the NYSE or AMEX. Sometimes companies go with OTC just because they prefer the way things work: there are many dealers who can execute trades whereas on the securities and commodities exchanges trades for a stock would have to go through the specialist that handles that particular stock. Regulated by the National Association of Securities Dealers, NASDAQ provides the automated quotes for this market.

As a final note, OTC Bulletin Board stocks (OTCBB or simply BB) are stocks that trade over-the-counter but do not have a high enough value to trade on NASDAQ. They are also known as penny stocks.

The Stock Market Cycle

The Stock Market Cycle

by John Train from The Craft of Investing

J. P. Morgan was once asked what he thought the market was going to do. He replied in his usual portentous style, "It will fluctuate." Although this seems like a putoff, it is in fact one of the most important possible truths. You need to get deeply into your bones the sense that any market, and certainly the stock market, moves in cycles, so that you will infallibly get wonderful bargains every few years, and have a chance to sell again at ridiculously high prices a few years later. If you grasp just that one principle, you have learned something that will let you prosper if you don't become too paralyzed to act.

The stock market is a voting machine, polling investors on the future, not the present. Differently put, it is a barometer, not a thermometer. It looks ahead. In a ship, the worse the storm and the sicker the passengers, the sooner things will improve and the barometer start rising. Thus, the greatest rise in stock market history, when the Dow Jones Average doubled in less than three months, was in the summer of 1932, in the midst of a financial hurricane. Similarly, once the weather is perfect it can't get better, so the next change in the barometer will probably be down.

The first sense you have to acquire, then, is that the worse you feel, usually because the news is bad, the safer the market is; and the better you feel, usually because the news is good, the closer you are to a top.

Tap the Power of the Internet

Tap the Power of the Internet

by David L. Brown and Kassandra Bentley from Cyber-Investing

The personal computer revolution of the past twenty years has shattered a lot of barriers, including the one between Wall Street and Main Street. A decade ago Wall Street had a lock on the kind of information needed to make a truly informed decision about trading stocks. It took a lot of manpower to research a stock and enormous computing power to manipulate that research into usable data. Few individual investors could afford to do it. Instead, they relied on stockbrokers at major brokerage house who had access to large research staffs and mainframe computers. The PC and the information explosion of the past few years have changed all that.

Today, from Sioux City, Iowa to San Antonio, Texas, from Portland, Oregon to Portland, Maine, the information superhighway leads directly to Wall Street. With cyber-investing you can retrieve in seconds price and volume information for virtually any listed stock. You can plot intraday stock graphs or historical graphs for one week or one month, one year or twenty. You can see a company's earnings the minute they're released. You can obtain earnings estimates made by independent analysts for the next quarter, the next year, the next five years. You can read research reports written by professional analysts and inspect corporate financial statements filed with the Securities and Exchange Commission (SEC). You can consult forecasts by experts on where they think a stock is headed. You can even learn which corporate insiders are buying or selling their company's stock, how many shares they bought or sold, the price they paid, and the size of their current holdings!

This is cyber-investing. Cyber-investing levels the playing field and makes it possible for an individual investor with a PC to do as well in the stock market as the experts on Wall Street. If you doubt this, listen to what Peter Lynch, the former manager of Fidelity Magellan Mutual Fund, has to say in his best-selling book, One Up On Wall Street:

The amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.

Take Your Time

Take Your Time

by John Train from The Craft of Investing

The first rule is to wait until you're sure. Be fussy. In fact, good investing is an exercise in controlled fussiness.

Investment is a "loser's game," like club tennis. Most points are lost on errors, rather than won by forcing shots. Since the investor never has to act, he should focus on not make avoidable mistakes. An enthusiastic retail investor often pays up for an exciting conception. Then there is an earnings disappointment, the market becomes disillusioned, and the price drops severely: a double play in reverse, as it were. Misery! So remember that the safest strategy is being very hard to please. Insist on waiting for a stock to satisfy you completely before you risk your capital. All the information you need should be available, and what you learn should satisfy you; that it's a company you want to be part of. What's the hurry? There are plenty of other possibilities, thousands, in fact. So, take your time.



Separate Information from "Noise"

Separate Information from "Noise"

from Investorama.com

Investment headlines sell newspapers and create investment noise. The media is motivated by headlines, and this noise is the lifeblood of today's media—whoever shouts the loudest creates the biggest story. The simple fact is that investment noise makes good headlines.

Noise investors believe that by regularly reading a financial publication, they become "insiders" to information that gives them some advantage. What noise investors don't realize is that chasing a hot stock or attempting to time the swings in the market are strategies that are costly to implement, have an extremely low probability of success, and are ineffective in adding value to your portfolio.

Information investors are the opposite of noise investors. Information investors understand how financial markets actually work, and they know how to use their financial market knowledge to consistently make money. Information investors focus on the overall investment strategy and portfolio, rather than viewing a specific investment in isolation. They have learned to figure out what information is useful, and what information is next to worthless.

When you hear bad news about a company, you need to figure out its impact on your investment. Here are some questions you should ask about any information, good or bad, that you come across that is related to a stock that you own:

How is this news likely to affect the profitability of the stock in the future, both in the short-term and the long-term? Even great companies occasionally stumble, but many often recover quickly.

Is this a problem that's specific to this company, or does it affect the entire industry? A company could be the subject of "bad news," but still be a standout among its competitors.

How is this news likely to affect the performance of this investment in your time frame? Or is the worst already over? In many cases, "bad" news is temporary, and may have little impact on a long-term investment.

Are there sudden changes in management that the company hasn't properly prepared for?

Before you decide to take action based on the fact that an analyst has "downgraded" or "upgraded" a stock, consider this: do you know the time frame that the analyst used in making the recommendation? Many analysts are only interested in stocks that will increase in price in a relatively short period. If you have a long-term horizon, this action may be a tiny blip in the stock's performance.

Remember, there are institutional traders and other professionals who have real-time news feeds and can act much more quickly than you ever could. Don't try to beat them at their game. Take your time, and make a careful analysis of the situation before you take action.

The Time Value of Money

The Time Value of Money

by Laura Maery Gold and Dan Post from Boot Your Broker!

Money lives in a funny place on the time-space continuum. It's a thing that looks quantifiable, but is, in reality, very amorphous. A hundred dollars kept under your mattress is, in a year, no longer the same hundred dollars. Given inflation, and lost opportunity costs, and the cost of the new door locks you buy to protect the money, it's probably only twenty dollars. (Or maybe the entire social-economic system collapses during the year, and your rare hundred dollar bill gets you 500 loaves of bread. But that's not very likely.)

As an investor, you must always be aware that any investment is a trade-off between what you're doing with the money, and what you could be doing with the money. Even if you do nothing, you're still doing something. Putting your money in a 2-percent passbook savings account is a conscious decision to forego other opportunities.

The Importance of Diversification

The Importance of Diversification

from Investorama.com

Diversification means building a portfolio that includes securities from different asset classes. Since bonds tend to do well when stocks don't, you could construct a portfolio that includes a certain percentage of stocks and bonds. When bonds are doing well, that part of your portfolio would do well. When stocks do well, the other part of your holdings would do well.

Another way to diversify is to buy securities in the same asset class that are not affected by the same variables. For instance, entertainment companies, utilities, grocery stores, and airlines are completely different businesses. Depending on the country's economy, one or more of these industries might tend to perform better than the others. If you built a portfolio that included securities from a number of sectors, chances are that one or more would always be doing better than average.

When you diversify, you try to ensure that at any given time, the value of some of your holdings might be down, and some might be up, but overall your portfolio is doing fine. The trick is to find securities that don't have tendencies to increase or decrease in price at the same time.

The trade-off for the balancing of risk and return in a diversified portfolio is that your overall return might be somewhat lower than you could get in an undiversified portfolio. However, along the way, a diversified portfolio will have less volatility, and steadier returns.

Diversification does not eliminate risk, however! It is merely a tool that can reduce the risk you face with your investments.



? How Much Risk Can You Tolerate

How Much Risk Can You Tolerate?

from Investorama.com

Risk is an unavoidable component of investing. It is necessary to accept a certain amount of risk in order to generate a reasonable return on your investment. The more risk you are willing to assume, the greater the potential return your investments can provide. The amount of risk you should assume is dependent on two primary factors: your personal tolerance and your investing time frame.

It's very important to understand how much risk you can accept in your own investing. It's not a good sign if you are constantly worried about your investment portfolio and fearful of what will happen if share prices fall. You should be comfortable with the risk level of the assets you own, whether you are investing on your own or following the advice of a financial planner or full-service broker.

A good rule of thumb is if you can pass the "sleep" test. If you stare at the ceiling from your bed each night, thinking of how you'll cope if the market crashes, taking your portfolio along with it, then you're probably invested in assets that are too risky for your personal comfort. You should reduce your risk exposure until you own a portfolio that allows you to sleep at night.



What Are Your Investment Goals

؟ What Are Your Investment Goals

by Laura Maery Gold and Dan Post from Boot Your Broker!

The first step in creating a portfolio strategy is deciding what it is you're investing for. Unless you've got the Midas urge to simply own money, there's certainly something you're hoping to do with those assets.

Your investment goals can be short term—a down payment for a house, for example, or next year's college tuition, or an overseas vacation two years down the road.

Perhaps your goals are intermediate term. College tuition might be eight or nine years away. Retirement might be 10 years into the future. You could hope to turn your hobby into a full-time business.

Or it may be that your goals are very long term. You're 20 years from retirement. You want to leave an inheritance for your grandchildren. You want to be free to travel in your golden years.

Your first task as an investor is to decide what exactly you hope to achieve in your investment program.

The goal-setting process is simple:

List your top three or four investment goals. Think short, intermediate, and long term. Make time to discuss this critical issue with your spouse.

 Create a timeline for achieving your goals. It needn't be tremendously precise, but it should reflect your basic expectations about the direction and tone of your life. No investor, no matter how savvy, can predict with accuracy interest, inflation, taxes, or most of the other factors that influence the future value of your investments—so recognize the need for some flexibility in your timeline.

 Calculate the return you'll require to meet those goal

Once you've decided what you want to accomplish, you're ready to decide what you're willing to do to get there.



Before You Begin

Before You Begin

Investing is really a very easy process—if you've learned a few fundamentals first. In this practical series, a variety of experts offer you everything from a simple, four-step investing process to the time value of money. This is one you won't want to miss!

A R T I C L E S  I N  T H I S  S E R I E S

What Are Your Investment Goals?—They're important, unless, like Midas, you simply want to own money.

How Much Risk Can You Tolerate?—It depends on your time frame.

The Importance of Diversification—The trick: finding securities that don't increase---or decrease---at the same time.

The Time Value of Money—A hundred dollars kept under the mattress, in a year, is no longer the same hundred dollars.

Separate Information from "Noise"—It may make good headlines, but what does it mean to you?

Take Your Time—The case for procrastination: wait until you're sure.

Tap the Power of the Internet—Shattering the barrier between Wall Street and Main Street.

The Stock Market Cycle—Learn what will help you prosper.

Where Stocks Trade—Billions of shares are are bought and sold each day, some by people in funny coats.

Pay Yourself First—The beginning of your personal wealth? The accumulation of investment capital.