Investing School

What is a Balanced Fund?

Investing School — Wed, 08 Sep 2010 16:13:15 +0000

A balanced fund is a mutual fund that invests in common stocks, preferred stocks and bonds. Balanced funds will invest in stocks, particularly, for appreciation and will then invest in bonds for income. This is done in order to give its fund holder a regular income while continuously increasing the principal. This is also done to alleviate some risk while still providing a nice return for the investor.

Balanced funds usually produce more income than stock funds. This is primarily due to the method that is employed. However, you may find that their total return is less than that which a stock fund returns if there happens to be a strong stock market at the time.

If there is a flat or falling stock market at the time, however, you may find more substantial returns from balanced funds and these may offset the disappointing returns from stock funds.

Balanced funds are also referred to as a kind of asset allocation fund. This type of fund allows for the change of money to be spread among asset classes that have one investment.

Depending on what the investor chooses and decides with the fund manager, the manager may be allowed to increase the bond position of the fund if he or she believes that it should be done. There are other types that have a fixed bond/stock composition that will not allow the manager to change it as he or she recommends.

When you have a portion of your fund in bonds you will find that it protects you from overwhelming declines in the net asset value if stock prices fall dramatically. You can add or subtract bond amounts depending on how the market reacts.

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Amortization Schedule

Investing School — Mon, 06 Sep 2010 23:00:12 +0000

An amortization schedule is a chart that provides information for each periodic payment that is required on a loan that is amortizing. An amortizing loan is a loan that has the principal paid down during the life of the loan. These payments are usually allotted in equal amounts. A mortgage is the most common amortized loan.

When you make a payment, a portion of these payments will be applied to the interest that is accruing or has accrued on the loan thus far. Whatever is remaining will be applied to the principal of the loan. The principal is the original amount borrowed before any interest has accrued.

When payments are first made, many of them will first be applied to the interest on the loan. As you continue to make the payments, these allocations will shift and later larger amounts will be dedicated to paying down the principal portion of the loan.

Amortization schedules are set in chronological order. The first payment is supposed to come due one full payment period preceding the loan being taken out. There should be equal payment amounts throughout the life of the loan and then the last and final payment will pay off the remainder of the loan.

When payments are made, you will receive a breakdown of where the interest and principal portions of your payments have been allotted and what you have paid thus far. It will also detail the remaining principal balance as of the latest payment.

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What is Alimony?

Investing School — Fri, 03 Sep 2010 15:22:00 +0000

Alimony is a term that refers to the money or funds that provide maintenance and/or support to a spouse. It is a responsibility that is mandated by the court and follows a divorce ruling. This obligation is found in divorce law or family law and is present in many countries around the world. The legal responsibility is based on the notion that each spouse must be obligated to support the other during the marriage. This law also applies to civil unions or common-law marriages.

The history of alimony dates back to the English church courts. These courts made rulings awarding alimony in cases dealing with divorce or separation. It was known as Alimony Pendente Lite, and dictated that a husband had to support a wife during divorce proceedings. Post-divorce or permanent alimony referred to the idea that the marriage actually continued. Therefore, the husband had a requirement to continue to support the wife as these courts could only decree something akin to a legal separation today.

Alimony is not a right. It is something that can be requested, and, the amount will vary according to the circumstances related to the reason for the divorce. The court will make a decision based on the arguments presented by attorneys from both sides. The alimony decree can be modified at any time if circumstances change for either of the parties. For example, if the supported spouse remarries then alimony may no longer be a requirement. However, the courts do not like to modify these agreements unless there are compelling reasons to do so.

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Investment Terms

What is Aggregate Risk?

Investing School — Wed, 01 Sep 2010 15:14:23 +0000

Aggregate risk refers to an investor’s amount of exposure related to actions of spot contracts. Spot contracts are transactions that are carried out which have an immediate settlement. The settlement in most markets is within two working days. Aggregate risk also refers to an investor’s risk or exposure to actions in conjunction with forward contracts. A forward contract is a contract that is not a standard contact between two parties that arranges to buy or sell an asset at a specified time in the future. The price is agreed upon immediately.

Aggregate risk is also a risk or an exposure that is related to overall aggregate market returns. Aggregate risk is sometimes known as market risk, undiversified risk or even associate risk. If the deadlines of these risks are not met there are consequences to such actions. Because each risk has its own method or process there is an inherent risk involved and many business owners will opt to incorporate their companies. Incorporating their companies will provide them with some limited protection.

If you look at a capital asset pricing model as an example, you will see that the rate of return that is necessary for an asset that is in the market equilibrium will depend on the aggregate risk that is associated with the returns on that asset. Risks that are not associated with this model are referred to specific risk, diversifiable risk or idiosyncratic risk. Aggregate risk is sometimes referred to as systematic risk, market risk or undiversifiable risk.

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What is Considered Active Investing?

Investing School — Mon, 30 Aug 2010 15:17:04 +0000

Active investing is an investment term that is also referred to as active management. Active investing happens when a manager decides to make a goal of outperforming a benchmark index from the previous year. This is in direct contrast to the portfolio management strategy of passive management. In passive management, the manager will NOT try to outperform the previous benchmarks. In fact, he or she will try to find an index fund that will come as close as possible to replicating the previous returns.

Active investing is done by the manager seeking and exploiting market inefficiencies and will involve purchasing securities that are below value or it will short sell securities that are overvalued. The manager may choose to use one of these strategies or may decide to employ both at the same time. Active management may also create less risk than the benchmark index depending on what the goals are for the certain investment portfolio. Depending on the manager, the goal of the reduction of risk may be in addition to or in place of the goal of gaining a higher return.

Active investment managers will use several different factors and strategies to comprise their portfolios. These can include P/E ratios and PEG ratios, sector investments and purchasing stocks from companies that are currently not-in-favor or are seen as selling below their perceived value. Some other strategies include merger arbitrage, option writing, asset allocation and short positions.

While there is more risk with active investing, the return can be far greater.

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What is Accrual of Discount

Investing School — Fri, 27 Aug 2010 14:02:48 +0000

The term “accrual of discount” refers to the yearly gain or annual addition to the value of a bond. Note that this gain, also known as “book value”, comes about specifically due to the bond having been initially purchased for an amount that calculates out to less than its nominal value.

This is also referred to as a purchase “below par,” where the par value is referring to the face value of the bond, the current rate of interest, the date of maturity, and the amount of interest that is to be paid on a semi-annual basis.
You see, whenever an investor purchases a bond at a discount, he or she receives a return from two specific sources. The first source is the interest income that is received every six months. The second source is the financial gain that is received at the time when that bond reaches maturity.

The nice thing about this accrual of discount is that it is added to the interest income that you already receive semi-annually. The discount is accrued, also described as “accreted”, over the entire life of the bond, and must be calculated both for tax and for portfolio purposes.

There are two methods for calculating the accrual of discount. One is the straight-line method, which accrues in equal installments over the life of the bond. The other is the scientific or yield basis method, which is required for most income tax reporting.

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52 Week High and 52 Week Low

Investing School — Wed, 25 Aug 2010 22:37:03 +0000

Investing in the stock market may sound scary to some but for many, it has made them very, very rich. There are inherent risks involved, but without risk you can’t have a large reward. In order to create wealth, you must educate yourself and follow guidelines and indicators that will provide you vital information about the health of a company.

If you are an investor, you will consider a variety of indicators in order to make your purchase decisions. Among these indicators are the 52 week high and the 52 week low factor of a given stock.

The 52 week high and the 52 week low factor of a stock refers to the highest and lowest points at which the stock was traded within the last 12 months or 52 weeks. Investors find this indicator important because it helps to determine the stock’s current value and helps them to predict a trend in the way the stock may perform moving forward.

A lot of stock traders are using a popular strategy of purchasing companies that are hitting new highs in their stock price. Value investors may choose to purchase a stock trading at a 52-week low as a stock that has been traded and is sitting at a price that is lower than its inherent value. However, a skilled value investor would conduct a more thorough analysis before making a large stock purchase.

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What is the 10-K?

Investing School — Mon, 23 Aug 2010 15:00:57 +0000

If you have a public company, the SEC (or Security’s Exchange Commission) will require that you file a form each year called the “10-K.” This form provides an extensive overview of the company’s performance from the past year. This report is different from the “Annual Report to Shareholders,” which companies will provide its shareholders each year detailing much of the same information. Distinct from the 10-K, the shareholders’ report is a slick and glossy report that is given to its shareholders at the annual meeting.

If you have a company that has $10 million in assets, and those securities are owned by 500 owners or more, then you are also required to file a 10-K report regardless of whether your company is publicly held or not. If a shareholder would like a copy of the 10-K report, the company is required by law to provide one to the shareholder. You can also find larger companies posting their 10-K reports on their websites as they are required by law to make the information free and available. There is a website that the SEC provides with an enormous database storing 10-K reports and other SEC filings, which is available for people to search. It is called the EDGAR database.

Every company that meets the guidelines specified must file their Form 10-K to the SEC within 90 days from the end of the company’s fiscal year. The form 10-K is named for the form in sections 13 and 15(d) of the Securities Exchange Act of 1934, as it was amended.

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Consumer Price Index (CPI)

Investing School — Sat, 21 Aug 2010 03:34:31 +0000

A Consumer Price Index (also known as “CPI”) is utilized to calculate the estimated amount of money spent on consumer goods and/or services per household. The CPI will measure the difference in costs for a specific number and type of goods and/or services from one time period to another in a certain geographic zone, such as a particular city, state, region, or country. With this information, the CPI can calculate the amount of fluctuation in costs of living due to economic inflation. This makes the CPI one of the most attentively monitored national economic statistics available.

The CPI is calculated using specific sets of numbers. These are the “price data” (or the costs of samples of the goods and services from different outlets) and the “weighting data” (or a number based upon expenditures monitored over decades from a sampling of households in the area). These statistics are becoming more and more accurate over time, as computerized bar codes and scanners in stores make it easier to track actual purchasing and pricing information.

There are also similar indicators used in other countries outside of the United States, such as the United Kingdom, Iceland, and other countries, each of which will calculate their own economic statistics under alternative names.

The CPI can provide an interesting snapshot of the inflationary growth in a country. For example, in the years between 1971 through 1977, the CPI of the United States increased by a hefty 47%! On the other hand, in the year 2009, the CPI dropped for the first time in over four decades, since 1955.

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Leading Economic Indicators

Investing School — Wed, 18 Aug 2010 19:37:23 +0000

The list of Leading Economic Indicators is a monthly index of ten selected societal signs that are intended to provide an accurate prediction of economic activity over a future period of roughly six to nine months. Formerly, the indicators were compiled by the United States Department of Commerce, but they are now released privately.

These indicators cover a broad scope of the financial picture, ranging from unemployment to industry, and from construction to the stock exchange. For example, the Leading Economic Indicators list tracks the number of initial jobless claims in the United States. It also measures the amount of new manufacturing orders for capital goods, counting them as long as they are not related to the Department of Defense. The list also includes the number of building permits authorized, and the current level of the S&P 500 market index.

From these indicators, and others like them, the economic climate and growth for the coming half year is estimated.

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