BEST INVESTMENT PLANS

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RETIREMENT PENSION PLAN
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PENSION PLAN GUIDE
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How to Invest in Bonds

2011-10-23T00:23:00.000-07:00

How to Invest in Bonds

Bonds are the prototypical traditional investments, as opposed to stocks, which are more speculative in nature. When you invest in bonds, you pay the par value of the bond, plus any premium or minus any discount, plus any accrued interest, plus any commissions, and get paid fixed annual interest specified by the coupon rate, typically twice yearly until maturity of the bond, when you get paid the par value of the bond.

Barring defaults in interest or principal, bonds are a great way to save and grow your money steadily, especially during periods of high interest rate when you can get yields comparable to or exceeding that of stock returns. Here are the steps to get you started investing in bonds.

Note: All dollar amounts refer to US dollars, and the bond types referred to relate to the United States of America's bond market.

Steps

1. Understand what a bond is. A bond is a interest-bearing certificate, issued by either government agencies (these are known as treasury bonds, agency bonds, municipal bonds, etc.) or business corporations (these are known as corporate bonds), which pays a fixed amount of interest on specified dates, usually every six months, until maturity or redemption. Treasury bonds have no risk of default (because the government controls the money printing press and can print whatever money it needs to pay the interest or principal on its bonds), while corporate bonds carry the risk of default on interest, principal, or both.

o Interest payment dates (IPDs) are the dates interest is paid on the bond, typically on the 1st or 15th of the month.

o Maturity is the date the bond is redeemed for its par value. A bond may be redeemed prior to maturity in accordance to the bond’s call provision. Typically, bonds can only be called at or above par, with higher premium the sooner the bond is redeemed.

o Coupon rate is the percentage yield of the bond at par. For example, a bond with a par value of $1000 and a coupon rate of 12% pays $120 interest annually.

o Current yield is the percentage yield of the bond at its market price. After issuance, a bond fluctuates in price on the open market according to its demand and supply and the general interest rate. For example, a bond with a par value of $1000, a coupon rate of 12%, and current market price of $800 has a current yield of 15% ($120/$800). The current yield is the most important yield figure in comparing the attractiveness of bonds of similar quality.

o Yield to maturity is a complicated calculation of bond yield taking in account the bond’s eventual maturity. See How to calculate yield to maturity for more details.

2. Understand your financial needs. While bonds should be a part of almost anyone's portfolio, how much you should invest in bonds will depend on your age, risk tolerance, and personal circumstances. If you are in or near retirement, you might need to allocate more of your investments in favor of bonds so you can retire comfortably on a steady income and preserve your capital. If you are the kind of person that can’t sleep when the stock market crashes or you're liable to be tempted to sell in a panic as stocks drop in price, buying treasury and investment-grade bonds and holding them to maturity may help you to reduce risk. If you are saving for an important purchase, such as a home, a car, or a college education, bonds can help you build the cash you need faster than savings account or certificates of deposits can. You should invest in stocks only money that you will not need in 20 years, because over the short term, stocks fluctuate and can be down significantly when you need the money.

o Before investing, consider buying a home first, if you are renting and if you already have the funds for a down payment. Owning a home will help protect you against inflation. During periods of high interest rates, rents tend to go up every year dramatically, and may even force a renter out to live in an undesirable place. If you do not have the money to buy a home, you can use bonds to help you build the cash you need to buy a home.

3. Learn more about bonds. Some of the best resources for bonds include:
o Books. Some good examples of worthwhile reads include:
 Security Analysis, by Benjamin Graham and David Dodd.
 The Complete Book of Bonds, by Robert Holt.
 The Bond Book, by Annette Thau.
o Websites. Some reputable websites that are worth checking out include:
 Investing in Bonds, http://www.investinginbonds.com/
 Bond Funds and Income Funds, http://www.sec.gov/answers/bondfunds.htm
 Smart Bond Investing, http://apps.finra.org/investor_Information/smart/bonds/000100.asp
4. Learn about the different types of bonds. There are various bond types and understanding their purpose will help you to decide which ones will benefit you most. The most common bond types include:
o Debentures, or unsecured bonds, are the most common type of taxable bonds. All corporate bonds not otherwise pledged assets or properties are debentures.
o Mortgage bonds are bonds pledged specific corporate property as collateral for the bond issue. In case the bond issuer defaults on either interest or principal payment, the mortgaged property may be sold to pay the bond bearers. Due to the added security, these bonds typically have lower yield than debentures.
o Ginnie Mae bonds and mortgaged-backed securities (MBS) are shares in federally backed home mortgages (USA). As homeowners repay their mortgages, the proceeds are divided up and paid to the bond holders until the mortgage is paid off.
o Senior versus subordinate bonds: senior bonds have priority over subordinate bonds in the payment of interest and eventual redemption. This distinction is generally used only when a company runs into financial hardship which may force it into bankruptcy.
o Convertible bonds are bonds that are convertible to a specified number of common shares of the same corporation. For example, a bond with a $1000 par value and a conversion price of $25 is convertible to 40 shares of the common stock. When the common stock trades above $25, the bond will trade in sync with the stock. When the common stock trades below $25, the bond is valued by its interest yield. Corporations typically issue convertible bonds to pay a lower coupon rate than nonconvertible bonds, especially when the common stock is not otherwise attractive, so the convertible bond will draw more investors into its stock.
o Treasury bonds are bonds issued by the Treasury and backed by the full faith of the federal government. Because of the federal government's ability of print money, treasury bonds have no credit risk. Moreover, they are usually non-callable. Because treasury bonds are the highest quality bonds obtainable, all other bonds must offer a better yield than treasury bond with similar maturity to be worthy of consideration for investment.
o Tax-free bonds, or tax-exempt bonds, or municipal bonds, are issued by cities, counties, states, and other government agency, which are free of federal taxes. These bonds are best for investors in the highest tax brackets to invest in taxable accounts.
o Zero-coupon bonds defer all interest payments until maturity. They are issued at an offering price significantly below par, for example, $150-$250 when the redemption par value is $1000. Even though no interest is received, the holder of a zero-coupon bond must pay taxes on accrued interest every year. Thus, zero-coupon bonds are most suitable for retirement accounts where the bond is held to maturity.
5. Understand the inverse relationship between interest rate and bond price. Specifically, when long-term interest rate rises 10%, long-term bond prices are expected to fall by 10%; when long-term interest rate falls 10%, long-term bond prices are expected to rise by 10%. Why? Here is an example:
o Suppose a long-term bond is issued at par $1000 when the prevailing interest rate is 5%. To be attractive as an investment-grade bond, it would have a coupon rate equal to 5%, paying $50 yearly interest. Now suppose the interest rate rises 10%, to 5.5%. Investors can now buy new issues with a coupon rate of 5.5%. To have a comparable yield, the old bond with 5% coupon rate would have to drop about 10% in price to sell at $909 to have a comparable current yield of 5.5% to be equally attractive ($50/0.055 = $909).
o The lesson here is that bonds are great investments during periods of high interest rate, especially at the peak when it is about to fall, so that the investor benefits from both the higher income available and capital gains when the interest rate falls. Conversely, bonds make poor investments during periods of low interest rates, as the income is low and the bonds will fall in price as interest rate rises, giving the investor a capital loss if he decides to sell before maturity, or if the bond is called.

6. Look for reputable discount bond brokers. Most bond brokers are also stockbrokers, which is okay. Consider what bond choices are available, what bond research is provided, and whether timely Quote and Sizes are available. Pay attention to both the commission and the spread. Commissions for bond purchases typically range from $1 to $4 per bond, with minimum commission about $8-30 per transaction. Spread is the difference between the ask price (the price at which you can buy) and the bid price (the price at which you can sell). For example, if the ask price for a bond is $60, while the bid price is $58, the spread is $2, which goes to the broker. Spread typically narrows with marketability of the bond. Scarce bonds tend to have wider spreads. Other places to buy bonds include:
o Banks: pay attention to the fees charged.
o Federal Reserve: you can buy treasuries direct through the federal reserve banks or online here: http://www.treasurydirect.gov/
7. Locate bond offerings. Brokerages provide lists of available bonds in offering sheets, and you can search for bonds meeting certain criteria. Bond guides, stock guides, the Wall Street Journal, and the Standard & Poor’s (S&P) sheet of bond issuer and prospectus are all great places to locate bonds for potential investment.
8. Check the bond ratings provided by S&P and Moody’s. These ratings are a rough measurement of a bond’s safety in both interest and principal. S&P’s ratings are AAA, AA, A, BBB, BB, B, CCC, CC, C; the corresponding Moody’s ratings are Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. AAA is the highest rating by both services. D is sometimes used for a bond already in default, and is the lowest rating possible. NR, or no rating, is used when the bond issuer did not request a rating, insufficient information is available to make a rating, or rating is applicable to the specific type of bond involved. In general, bonds rated BB or below are junk bonds (which are deemed at risk for default). S&P modifies these ratings by assigning (+) or (-) to further rate a bond’s relative standing within each category. Moody’s adds numeric suffixes to designate these differences, such as Aa1, Aa2, Aa3.[1]
o Do not rely entirely on these ratings. They are meant be used only as a rough guide to investing in bonds, and their ratings are typically slow to get updated, even after adverse corporate events have been reported.
9. Do your own bond research. Determine the type of bond, its interest payment dates and maturity date, at least three year history of the bond issuer’s interest charges versus earnings ratio or interest coverage (the higher this ratio, the more likely the issuer will be able to pay interest on its bonds, and the higher the quality of the bond), call provisions, total long term debt and debt to equity ratio, price trading ranges of the bond, current yield, yield to maturity, and any accrued interest on the bond.
10. Buy TIPS (treasury inflation protected bonds), the only investment guaranteed to beat inflation. TIPS are a special type of treasury bonds created in 1997 to provide investors protection from inflation risk. The face value of a TIP starts at $1000, and it is increased each year by the percentage rise in the CPI (consumer price index), a weighted average of prices paid by urban consumers for a wide basket of consumer goods and services. TIPS are arguably the best investment in bonds, because they essentially eliminate the two biggest risks associated with bond investing: credit risk and inflation risk. The caveat with TIPS is that the CPI may or may not represent the prices you pay for goods and services (which are quite variable among many goods and services, and widely dependent on where you live). Another caveat is that even though you do not get the money added to the bond's principal until maturity of the bond, you nevertheless have to pay taxes at the ordinary income rate on the amount added to the TIP's principal every year. This does not apply to tax sheltered accounts such as 401(k) and IRA, and these the ideal places to buy and hold TIPS until maturity.
11. Buy discount bonds (bonds selling below par $1000). Bonds generally sell at a discount because interest rates have gone up since the bond was issued. Given a choice between an older bond selling at a discount, and a new issue at par, both with the same current yield and quality, choose the older bond selling at a discount. The reason is that the discount serves as a call protection, because the company loses money by calling the bond and paying par value $1000 for it. Instead, if the company wishes to call the bond, it will simply buy the bond in the open market for a price below par. For this reason, never buy a bond at a premium (selling above par), because the company can choose to call the bond and you would realize an immediate capital loss equal to the premium you paid.
12. Buy convertible bonds when the yield of convertible bonds is higher than 2% below the yield of nonconvertible bonds of equal quality. Convertible bonds offer the holder an option to convert the bond to a specific number of common shares of the same corporation at a price above the market price. For example, a company whose stock trades at $10/share may issue a bond with a 5% coupon rate, convertible for 60 shares of common stock. The conversion price of this bond would be $16.67 ($1000/60). When the common stock appreciates above the conversion price, the convertible bond will fluctuate in proportion to the stock. Because of the conversion feature, convertible bonds historically have a yield about 2% below a nonconvertible bond of equal quality. When the yield of nonconvertible bond minus the yield of convertible bond is less than 2%, it is a good time to buy convertible bonds. When the yield of nonconvertible bond minus the yield of convertible bond is higher than 2%, convertible bonds are overvalued and nonconvertible bonds are better value for the money.
13. Choose a low expense ratio bond fund to invest in junk bonds (also known as “high yield bonds”). Bond funds are investment products offered by brokerages and private corporations to make money for the fund managers, either in substantial acquisition fees (“loads”) or yearly management fees (represented by the expense ratio), or both. As a result of these fees, investors will generally obtain a higher yield by investing in individual bonds instead. The main benefit of bond funds, however, is instant diversification. A bond fund typically owns more than 100 different bonds, minimizing the effect of a few poor investments on overall portfolio returns. The benefit of diversification is useless for government bonds (which have no risk of default) and negligible for high quality corporate bonds (which have very low risk of default). The only place where bond funds are preferable to individual bonds is in the investment of junk bonds, where the default risk is high. To obtain true diversification, an investor would need at least 20 different junk bonds, which require substantial capital and commission fees. Therefore, to invest in junk bonds, it is best to choose a junk bond fund, such as SPDR Barclays Capital High Yield Bond (JNK), with the lowest expense ratio possible.
14. Buy tax-free bonds for your taxable accounts, if you are at the highest tax bracket. Tax free bonds will have a lower yield than taxable bonds. To determine whether you would benefit from buying tax-free bonds, multiply taxable bond yield by (1 - your tax bracket), where your tax bracket is the percentage of tax you pay. If the result is greater than tax-free bond yield, you will earn more after taxes by buying taxable bonds. If the result is less than tax-free bond yield, you should buy tax-free bonds for your taxable accounts.
o Here is an example: suppose the highest yield obtainable for investment-grade tax-free bond is 4%, while the highest yield obtainable for investment-grade taxable bond is 6%, and your tax bracket is 35%. Multiply 6% by (1 - 35%), resulting in 3.9%. Since the yield on tax-free bond is greater, you should buy tax-free bonds. Note that the opposite conclusion is true in this example if your tax bracket is less than 33%. (Figure out why!)
15. Develop a bond buying strategy. Like stocks, bonds fluctuate in prices, and the best time to buy bonds is when the prices are low. Bond prices are lowest when the interest rate peaks. That is the ideal time to buy because you benefit not only from better yields, but also from capital gains when interest rates start to decline. Interest rate tends to peak when short-term rates equal or exceed long-term rates, creating an inverted yield curve, a rare opportunity to buy bonds at great prices. During periods of high interest rates, investors prefer longer maturity bonds to lock in the high yields, while corporations facing high interest costs prefer to incur necessary loans on a short-term basis. The greater demand for long-term bonds coupled with reduced supply causes lower interest rates among longer maturities.
o Determine how much of your assets to allocate for bonds. A rough rule of thumb is that your age should equal the percentage of your assets in bonds and fixed income, and the rest in stocks. For example, if you are 25, you should have 25% assets in bonds, and 75% in stocks. If you are 55, you should have 55% bonds and 45% stocks. Your bond allocation may vary depending on your financial situation and risk tolerance.
o To mitigate interest rate risk, build a bond ladder consisting of short and intermediate term bonds maturing one year after another. For example, if you have $50,000 to invest in bonds, invest $10,000 each in bonds maturing in 1 year, 2 years, 3 years, 4 years, and 5 years. When the shortest term bond matures after one year, reinvest the proceeds in a new bond maturing in 5 years. Repeat this every year, so your bond portfolio always contains five bonds, maturing one year after another. Bond laddering is a sound investment strategy because short term bonds are less sensitive to interest rate fluctuations, and should interest rate rise, you have the opportunity to reinvest in a higher-yielding bond as your bonds mature.
Video
Tips
• If you have any debt, consider paying off all your debt before investing. Most people would agree that you shouldn't borrow at 3% to invest at 5%, as the increased risk in leveraging yourself is not worth the negligible payout. Investing while you still have debt is essentially the same thing.
• Since treasury bonds have no risk of default, they are inherently superior in quality to all corporate bonds, and therefore offer lower yields. Agency bonds and corporate bonds must offer higher yield to compensate for the increased risk of default. For example, if a 10-year treasury bond offers 4% yield, while a 10-year corporate bond offers 5% yield, there is an implicit market assumption that the corporation has a 1% risk of default each year. If you are risk averse, or the yields on treasury bonds and investment-grade corporate bonds are comparable, or if you have no time or inclination to research corporate bonds, go with treasury bonds to protect your capital.
• Bonds are ideal for an investment horizon of 5 years or less. For example, if you are saving money for a down payment to buy a house in 3 years, invest in bonds that mature in 3 years, and stay away from stocks, which are too volatile short term.
• Use a limit order, instead of market order, when buying bonds, even if you are willing to buy at or above the ask price. The bid and ask prices may change before a market order reaches the exchange floor, so a limit order is always wise to prevent paying more than you expected.
• Compare the yields of bonds with the dividend yields of stocks. During periods of high double digit interest rates, as happened in the late 1970s and early 1980s, it is possible to buy risk-free long term treasury bonds that offer double digit yields exceeding returns that can be reasonably expected from the stock market. As a rule of thumb, when interest rates on long term treasury bonds exceed the S&P 500's dividend yield by more than six percent, sell your stocks and buy bonds.
• When interest rates rise significantly after you bought bonds, consider selling the bonds at a loss and replacing them with higher-yielding ones. The capital loss you realise will give you a tax benefit, and the higher yielding bonds means higher income in the long term. Obviously, this should only be done in a taxable account in order to reap the tax benefit of a capital loss, and the tax benefit must offset any trading costs involved. All securities in a tax sheltered account should be held till maturity.
Warnings
• All bonds, including treasury bonds, carry inflation risk, i.e. the principal and fixed interest of the bond will tend to get eroded by inflation and will be worth less and less with time. The inflation risk is greater for longer term bonds.
• If you have discretionary money you will not need for at least 20 years, you should invest the money in stocks instead of bonds. Stocks are much better long-term investment than bonds.
• Do not buy tax free bonds for tax-sheltered retirement accounts, such as IRA and 401(k). Buy only taxable bonds for these accounts, and look for the highest yield. Tax free bonds, such as municipal bonds, are useless for retirement accounts, because the accounts are already exempt from taxes.
• Avoid bond funds in government bonds or high grade corporate bonds. The main advantage of bond funds is diversification, which is unnecessary for government bonds or high grade corporate bonds with no or little risk of default. Bond funds also have no defined maturity date, and they fluctuate in price inversely with the prevailing interest rate. A buyer of an individual bond is assured of getting back the par value $1000 of the bond at maturity, no matter what the interest rate is at that time. The buyer of a bond fund, however, can only get paid the market price of the bond fund, which could easily have declined 50% when he needs the money, if, for example, he bought when interest rate was 3%, and when he needs to sell, the interest rate has gone up to 6%. The investor is better served buying individual government bond or high grade corporate bonds to get a higher yield without paying yearly management fees. The only bond fund worthy of consideration is junk bonds fund, where diversification is necessary to offset credit risk, but you should invest only money you can afford to lose in junk bonds.
• Avoid zero coupon bonds. Bonds are supposed to pay interest, and zeroes don't, so technically zeroes should not be considered bonds. Interests on zero coupon bonds are deferred until maturity, but you still have to pay taxes on the accrued interest every year even though you received nothing. Zeroes are more volatile than conventional bonds because they lock in a given interest rate, while interest payments on conventional bonds can be reinvested at prevailing interest rates. It is not uncommon for zeroes to plunge 20% in value in just a few weeks. The only rational place for zeroes is in tax-advantaged retirement accounts where you don't have to pay taxes on interest you do not receive, and only buy zeroes you can hold until maturity, buying them when the prevailing interest rate is high, preferably in the double digits.
• Limit bond purchases during periods of low interest rate. Interest rates have averaged about 5% historically. If you buy bonds when the prevailing interest rate is low, you get a lower yield, and incur capital losses as interest rate increases, if you sell the bond prior to maturity, or if you paid a premium for the bond.
Related wikiHows
• How to Buy Premium Bonds
• How to Issue Corporate Bonds
• How to Account for Bonds
• How to Price a Bond
• How to Calculate Yield to Maturity
• How to Buy Treasury Bonds
• How to Build a Diversified Portfolio
• How to Start Building Wealth at a Young Age
• How to Manage Your Portfolio in Response to Market Action
• How to Retire With Security
Sources and Citations
1. ↑ See Understanding Standard & Poor's Rating Definitions at: http://www.standardandpoors.com/spf/delivery/assets/files/Understanding_Rating_Definitions.pdf and Moody’s Investor Service Rating Symbols and Definitions at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 for more information.
Article provided by wikiHow, a wiki how-to manual. Please edit this article and find author credits at the original wikiHow article on How to Invest in Bonds. All content on wikiHow can be shared under a Creative Commons license.

How to Invest

2011-10-22T11:22:00.001-07:00

How to Invest

Whether you have $20 or $200,000 to invest, the objective is the same: to make your money grow. The means, however, vary dramatically based on the amount of money being invested, the state of the market, and your own investing style.
Steps
1.             Pay off high interest debt. If you have a loan or credit card debt with a high interest rate (over 10%) there's no point in investing your hard-earned cash. Whatever interest you earn through investing (usually less than 10%) won't make much of a difference because you'll be spending a greater amount paying interest on your debt.[1] For example, let's say Sam makes has saved $4,000 for investing, but he also has $4,000 in credit card debt at a 14% interest rate. He could invest the $4,000 and if he gets a 12% ROI (return on investment--and this is being veryoptimistic) in a year he'll have made $480 in interest. But the credit card company will have charged him $560 in interest. He's $80 in the hole, and he still has that $4,000 principal to pay off. Why bother? Pay off the high interest debt first so that you can actually keep any money you make by investing. Otherwise, the only investors making money are the ones who loaned it to you at a high interest rate.
2.             Build your emergency fund. If you don't have one already, it's a good idea to focus your efforts on setting aside 3-6 months of living expenses just in case. This is not money that should be invested; it should be kept readily accessible and safe from swings in the market. You can split your extra money every month, sending part of it to your emergency fund and part of it to your investing fund. Whatever you do, don't tie up all of your extra money in investments unless you have a financial safety net in place; anything can go wrong (a job loss, an injury, an illness) and failing to prepare for that possibility is irresponsible.
3.             Write down your investment goals. While you're paying down high interest debt and building your emergency fund, you should think about why you're investing. How much money do you want to have, and in what period of time? Different investors have different goals, such as:

·                     Holding onto money so that it's just above inflation
·                     Having a specific amount of money for a down payment in 10 years
·                     Building a nest egg for retirement in 20 years
·                     Building a college fund for a child or grandchild in 5 years
4.             Choose your investments. The bigger the chunk of money you have available for investing, the more choices you have. Most people diversify by investing in more than one place, but the way they split their investments depends on their goals and the amount of risk they're willing to accept.

• Savings accounts - low minimum balance, liquid but with limitations on how often the account is accessed, low interest rate (usually much lower than inflation), predictable

• Money market accounts (MMAs) - higher minimum balance than savings, liquid but with limitations on how often the account is accessed, earns about twice the interest rates of savings accounts,[2] high-yield MMAs offer higher interest rates but higher risks

• Certificates of deposit (CDs) - similar to savings account but with higher interest rates and restrictions on early withdrawal, offered by banks, brokerage firms and independent salespeople, low-risk but reduced liquidity, may require high minimum balance for desired interest rates

• Bonds - a loan taken out by a government or company to be paid back with interested; considered "fixed income" securities because the same income will be generated regardless of market conditions,[3] you'll need to know the par value (amount loaned), coupon rate (interest rate), and maturity rate (when the principal and interest must be paid back)

• Stocks - usually purchased through brokers; you buy pieces (shares) of a corporation which entitles you to decision-making power (usually by voting to elect a board of directors). You may also receive a fraction of the profits (dividends). Dividend reinvestment plans (DRPs) and direct stock purchase plans (DSPs) - bypass brokers (and their commissions) by buying directly from companies or their agents, offered by more than 1,000 major corporations,[4] can invest as little as $20-30 per month and can buy fractional shares of stocks, but can also be high-risk (you cannot decide the price at which to buy when you invest via such plans).

• Real estate property - ties up money (not easy to liquidate investment), capital intensive (usually leveraged through mortgage loans)

• Mutual funds - not insured by any government agency, built-in diversification, some funds have low initial purchase amounts, and you'll have to pay annual management fees

• Real Estate Investment Trusts (REITs) - similar to mutual funds, but instead of investing in stocks, they invest in real estate

• Gold and silver - these are great ways to store your money and keep up with inflation. They are not subject to tax, and they are easy to store and very liquid (can buy and sell easily).

5. Save money to invest. If you don't already have money set aside for investing, you'll need to build up your investment fund. By now, you should know how much money you'll need to reach your goals, given the risks you've chosen to undertake.

6. Buy low. Whatever you choose to invest in, try to buy it when it's "on sale" -- that is, buy when no one else is buying. For example, in real estate, you'll want to purchase property when it's a buyer's market, which is when there's a high proportion of properties for sale versus potential buyers. When people are desperate to sell, you have greater room for negotiation, especially if you can see how the investment will pay off when others don't (or perhaps they do, but can't afford to act on it at the time).

• An alternative to buying low (since you never know for sure when it is low enough) is to buy at a reasonable price and sell higher. When a stock is "cheap", such as 80% or more below its 52 week high, there is a reason. Stocks don't drop in price like houses. Stocks typically drop in price because there is a problem with the company, whereas houses drop in price not because there is a problem with the house, but because there is a lack of overall demand for houses. When the entire market drops, however, it is possible to find certain stocks that fell simply because of an overall "sell-off." To find these good deals, one must do extensive valuations. Try to buy at a discount price when the valuation of the company shows its stock price should cost more.

7. Hold on tight. With more volatile investment vehicles, you may be tempted to bail. It's easy to get spooked when you see the value of your investments plummet. If you did your research, however, you probably knew what you were getting into, and you decided early on how you were going to approach the swings in the market place. When the stocks you hold plummet in price, update your research to find out what is happening to the fundamentals. If you have confidence in the stock, hold, or, better yet, buy more at the better price. But if you no longer have the confidence in the stock and the fundamentals have changed permanently, sell. Keep in mind, however, that when you're selling your investments out of fear, so is everyone else, and your exit is someone else's opportunity to buy low.

8. Sell high. If and when the market bounces back, sell your investments, especially the cyclical stocks. Roll the profits over into another investment with better valuations (buying low, of course) and try to do so under a tax shelter that allows you to re-invest the full amount of your profits (rather than having it taxed first). In the U.S., examples would be 1031 exchanges (in real estate) and Roth IRAs.

Tips

• Learn fundamental and technical analysis. Fundamental analysis can help tell you whether a stock is worth buying. Technical analysis may help tell you precisely when to buy the stock.

Warnings

• Avoid watching news about stocks. By the time news reports come in, it is usually already too late to take action. Stock news in general tend to get over-excited when the stock market rises, and panicky when the market falls, prompting you to buy high and sell low, which is exactly the opposite of what you should do. One can however learn to get a feeling for how the market interprets news and buy/sell based on so called sentiment.

How to Make Money

2011-10-22T11:13:00.000-07:00

How to Make Money

from wikiHow - The How to Manual That You Can Edit

Sally Struthers once posed the timeless question in a TV commercial, "Do you want to make more money?" Without hesitation, she answered, "Of course, we all do." How did she know?Actually, this remarkable revelation isn't so startling when you consider that money not only makes the world go 'round, but also, apparently, talks. If your world has stopped spinning, or if you're having trouble talking, you've come to the right place. There are several different ways to make some quick cash today, but here's how to make money in the long run.

Steps

Use the law of supply and demand to your advantage. Most of us are familiar with the law of supply and demand--the more there is of something, the cheaper it is; conversely, the rarer the product or service, the more expensive it is. However, other than when we get to a toy store before sunrise to get on line for the latest fad toy that kids can't get enough of, we don't really apply the law of supply and demand to our own lives--particularly our careers. For example, if you're aspiring to do something that many, many other people want to do (so much so that they do it for free, as a hobby) then it will be far more challenging for you to make money doing it. On the other hand, if you do something that most people don't want to do, or if you get very good at doing something most people don't do all that well, then you can make a whole lot more money. In other words, choose a career in pharmacy over photography.
- If your career path is going nowhere, resign gracefully and switch careers. Research occupations to find out how much they pay and what their future outlook is (in the U.S., you can find this information in the Bureau of Labor Statistics Occupational Outlook Handbook). Find an occupation that pays well, and invest in the education and/or training to get you that job. Look for employers that offer competitive salaries and ample opportunity for advancement.
- If your goal is to make enough money to retire early, prioritize earning potential over job satisfaction, since you plan on getting out of the rat race early, anyway. Consider the types of jobs that pay extraordinarily well in exchange for hard work, little psychological satisfaction, and a punishing lifestyle, such as investment banking, sales, and engineering. If you can keep your expenses low and do this for about 10 years, you can save a nest egg for a modest but youthful retirement, or to supplement your income while you do something you really love doing but doesn't pay much. But keep in mind that delayed gratification requires clear goal-setting and strong willpower.
Recognize that time is money. This critical piece of advice is attributed to Benjamin Franklin, who was an accomplished American inventor, journalist, printer, diplomat, and statesman--the ultimate multitasker. Your ability to manage your time (and stop procrastinating) is a critical ingredient in your ability to make money. Whether you have a job or are self-employed, keep track of what you're spending your time on. Ask yourself "Which of these activities make the most money, and which of them are a waste of time?" Do more of the former and less of the latter, simple as that. When you're focusing on high-priority tasks, get the job done well, and get the job done fast. By working efficiently, you're giving your employer or clients more time, and they'll appreciate you for it. Remember that time is a limited resource that you're always investing. Will your investments pay off?
Jack up your prices. If you're providing a skill, service or product that is in high demand and low supply, and you're making the most of your time, you should be making good money. Unfortunately, there are many people who are too humble or fearful to demand that they get paid accordingly. It's the pushovers in life who get taken advantage of and exploited, so if you think you might be one of them, learn how to stop being a people pleaser. If you work for someone else, ask for a pay raise or get a promotion, and if none of that pans out, revisit your career options as described previously. If you're self-employed, the first thing to do is to make sure your customers and clients pay up on time--this alone can substantially improve your income. Check your prices and rates against those of your competitors--are you undercutting them? Why? If you're providing a superior product or service, you should be getting at least the average, unless your profitability depends on mass production, in which case you're probably making a lot of money and wouldn't be reading this article anyway!
Be proactive. Remember Murphy's Law: "Whatever can go wrong will go wrong." Make plans, complete with as many calculations as possible, then anticipate everything that can go wrong. Then make contingency or backup plans for each scenario. Don't leave anything to luck. If you're writing a business plan, for example, do your best to estimate when you'll break even, then multiply that time frame by three to get a more realistic date; and after you've identified all the costs, add 20% to that for costs that will come up that you didn't anticipate.[1] Your best defense against Murphy's law is to assume the worst, and brace yourself. An appropriate amount of insurance may be something worth considering. Don't forget the advice of Louis Pasteur, a French chemist who made several incredible breakthroughs in the causes and prevention of disease: "Luck favors the prepared mind."
Redefine wealth. In studies of millionaires, people are surprised to learn that most millionaires aren't doctors, lawyers, and corporate leaders with big houses and fancy cars; they're people who religiously live below their means and invest the surplus into assets, rather than liabilities.[2] As you're taking the above steps to make more money, keep in mind that increased income does not necessarily equal increased wealth. Most people who flaunt their wealth actually have a low net worth because their debt to asset ratio is high--in other words, they owe a whole lot more money than they actually have. All of the previous steps have outlined aggressive strategies for making money, but you'll never get anywhere if you have a hole in your pocket.
- They say that a penny saved is a penny earned. Actually, when you consider that you pay taxes on every penny you earn, you really do make more money by saving than by increasing your income, especially if the extra income will increase your tax rate dramatically. For example, let's say you have a choice between saving $100 or earning an extra $100. If you pay 15% taxes, then when you earn an $100, you only get $85. But when you shave $100 off of your existing budget, you keep it all. To sweeten the deal further, if you take advantage of compound interest as found in most savings accounts, over time you'll start making money on the amount saved plus previous interest paid on that amount saved. It'll be pennies at first, but eventually the amount will multiply exponentially.
- Take advantage of tax laws if you're self-employed. Money saved on taxes is still money saved. You may be able to deduct many of your business expenses (use of your home, use of your car, office supplies, etc.) if you keep good records. You may also qualify for tax breaks, such as deducting your health insurance premiums on your tax return. These laws are in place to encourage commerce and business growth, so don't neglect their benefits.
- If you're not self-employed and work for a company, find out if they have a retirement plan. If you're lucky, employers will sometimes match contributions you make into a retirement fund. Retirement plans also often have the benefit of being tax-deferred. The longer you get to keep your money (and make interest on it) the better.
Know the difference between an asset and a liability. The dividing line is whether it puts money in your pocket, or takes it out.[3] As much as you love your home, for instance, it is a liability rather than an asset because you put more money into it than you get out of it (unless you're flipping it or renting it out). Whatever money you save, invest it in assets such as stocks, mutual funds, patents, copyrighted works--anything that generates interest or royalties. Eventually, you might get to the point where your assets are doing the work for you, and all you have to do is sit there and make money!
- Watch out for inflation chipping away at your assets. We've all heard an elderly person describe the purchasing power of a coin in their day. Inflation continues to make today's money worth less in the future. To win the race against time and inflation, learn to invest your money in the right places. A savings account might help you to keep up with inflation; however, to stay ahead of the game you'll want to invest in bonds, stocks, or some other investment that returns above the average rate of inflation (currently 3%-4%).

Tips

Work on eliminating any debt you may have. When you have a high debt load, you're making someone else money; what you pay in interest is their paycheck. The sooner you repay your loans and debts, the sooner you stop giving your money away.
Start analyzing your decisions from the perspective of a firm. In economics, a firm's goal is simply to maximize profit. Well-run firms spend money only if they can expect to make more money from their investment, and they allocate their resources to the most profitable use. You're not a firm, of course, and you have other considerations, but if you make the majority of your time and money decisions by choosing the options that promise the highest return on investment, you'll likely earn more money, and that's good news for your shareholders (you and your family).

Warnings

Beware get-rich-quick schemes. Millions of people still get caught up in them. If it's too good to be true, it's truly no good. People who know how to get rich are busy getting rich. They are not advertising methods to get rich.
Don't lose sight of what's really important to you in your quest for money. Sure, you may be able to make more if you work longer hours, but will you and your family get to enjoy the extra money? Money can do a lot of things for you, but don't work yourself to death - you can't take it with you.

Related wikiHows

Sources and Citations

↑ http://blogs.briantracy.com/public/item/203424
↑ Stanley, TJ and Danko, WD. The millionaire next door. ISBN 0671015206
↑ Kiyosaki, RT and Lechter, SL. Rich dad, poor dad. ISBN 0446677450

Article provided by wikiHow, a wiki how-to manual. Please edit this article and find author credits at the original wikiHow article on How to Make Money. All content on wikiHow can be shared under a Creative Commons license.

How to Grow Your Savings

2011-10-22T11:07:00.000-07:00

How to Grow Your Savings

from wikiHow - The How to Manual That You Can Edit

Most of us forget that this hard earned money should grow not only with the rise in income but also in line with economy and inflation. The savings lying idle in the bank accounts shrinks, as the value of money depreciates. 10 years ago $100 would have bought many things for you, but now it can’t. So what will happen after 10 years? It’s already depreciating at the rate of 2-3% every year in US.

Steps

Savings is an essential part of life; it prepares you to face any contingency. However, we don’t always save money to be ready for emergency; the reason is to fulfill a dream or a desire. The reason for savings differs from individual to individual and their priorities at that stage of life.
Most of us, however, forget that this hard earned money should grow not only with the rise in income but also in line with economy and inflation. The savings lying idle in the bank accounts shrinks, as the value of money depreciates. 10 years ago $100 would have bought many things for you, but now it can’t. So what will happen after 10 years? It’s already depreciating at the rate of 2-3% every year in US.
So now it’s a time to search for options to invest these hard earnings and see them grow at the same rate of your economy and/or inflation.
There are various options available with banks or in capital market.
The options available with the banks, viz., fixed/term deposits, recurring/ savings accounts and so on, are vulnerable to the changes in govt policies, interest rate, repo/reverse repo rates.
On the other hand the options in capital markets, comparatively risky, give better returns. However, all options not necessarily give good returns.
To avert this risk and earn the similar amount of returns is possible, Mutual Funds can do this. Mutual Funds reduce the risk of direct investment in capital market; however, their growth is most of the times at par with the capital market or the indices.
A fund manager invests your earnings in capital market and units are allotted to you accordingly. The value of these units is called as Net Asset Value which changes on daily basis, similar to the price of a scrip on stock exchange. However, they also come with a warning – Mutual Fund investments are subject to market risk. Read all documents carefully before investing. Thus, it is very necessary to do research before investing. The past performance of fund manager and the mutual fund should be checked. “Past performance” does not mean the last year but at least past 2-3 years. In case of a New Fund Offer (NFO) the fund managers and Asset Management Company’s (AMC) performance should be ascertained.
Mutual funds give you two options of investment either lump sum or through most popular and highly recommended option Systematic Investment Plan (SIP). Under SIP option you can invest a fixed amount on monthly basis accordingly units are bought based on NAV as on date. This option is similar to recurring account in banks.
There are various types of funds available in market the classification starts with equity, debt, diversified, gold, particular index and so on. Investment in mutual fund should be based on your risk appetite. The old finance paraphrase “don’t put all eggs in one basket” should be followed; the amount should be accordingly divided and invested in more than one fund. However, investment in more than 5 funds should be avoided though this may reduce the risk but at the same time it reduces the benefits also.
Apart from Mutual Funds, ETFs are also available in capital market are comparatively risky. However, Gold ETF is the most popular and less risky option. Gold ETF eliminates the problems of insurance, storage, moving, and reselling and many others. Gold ETF fund will purchase a large amount of gold, maintaining the physical metal in storage. Share will be issued and price of these shares will increase with the value of gold. If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.

Article provided by wikiHow, a wiki how-to manual. Please edit this article and find author credits at the original wikiHow article on How to Grow Your Savings. All content on wikiHow can be shared under a Creative Commons license.

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2011-05-16T22:12:00.000-07:00

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