How To Invest
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It's actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it
You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job.
There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which we'll discuss in a later section of this tutorial. The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand.
What Investing Is Not
Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino.
True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Why Bother Investing?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life.
However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.
Whether you live in the U.S., Canada, or pretty much any other country in the industrialized Western world, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. There is much debate over how safe our old-age pension programs will be over the next 20, 30 and 50 years. But why leave it to chance? By planning ahead you can ensure financial stability during your retirement.
Now that you have a general idea of what investing is and why you should do it, it's time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest.
It's good to clarify how securities are different from each other, but it's even more important to understand how their different characteristics can work together to accomplish an objective.
A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own - from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, we will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents.
An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent a type of vehicle to which you have allocated a certain portion of your whole investment. The asset mix you choose according to your aims and strategy will determine the risk and expected return of your portfolio.
Basic Types of Portfolios
In general, aggressive investment strategies - those that shoot for the highest possible return - are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance (can stomach wide fluctuations in value) and a longer time horizon. Aggressive portfolios generally have a higher investment in equities.
The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments.
To demonstrate the types of allocations that are suitable for these strategies, we'll look at samples of both a conservative and a moderately aggressive portfolio.
Note that the terms cash and the money market refer to any short-term, fixed-income investment. Money in a savings account and a certificate of deposit (CD), which pays a bit higher interest, are examples.
The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. The portfolio you see here would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities.
A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund.
The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.
You can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large companies, small companies and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited.
It all centers around diversification. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.
There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it's really just the simple practice of "not putting all your eggs in one basket." If you spread your investments across various types of assets and markets, you'll reduce the risk of catastrophic financial losses.
To start an investment club the first step you need to do is find a few like minded people who are interested in learning to invest. These can be relatives, co-workers, friends. Once you have potential members schedule a meeting and talk about goals, desires and willingness to commit to this venture. Many clubs operate on the 80-20 rule, which is 80% of the work is done by 20% of the members. If all agree to this endeavor the next step is to get a copy of a Partnership Agreement, read it and amend it to you fit the requirements of your Club. Next discuss an Operating Procedures Agreement that will cover duties of members, meeting times, dues, etc. This can be amended without changing the Partnership Agreement. If you have these documents signed and all are on board you need to become legal. Go to the IRS site and request form SS4, complete this and send it in. This will be your tax identification for your club.This will take four to six weeks so in the meantime schedule meetings to get ready to begin the journey. There may be problems along the way but nothing that other clubs have not overcome. Now, about setting up a brokerage account. For some brokerages you will need to submit the signed partnership agreement along with your tax ID. depending on your state or county's requirement you may also need to file a DBA, doing business as form. To read about the different brokerage accounts go to What is a Stock (3.1 in the table of contents) - Online Trading Platforms to read about requirements for each brokerage.
The current tax laws (2008) favor the investor over the trader. If you hold your investment longer than twelve months you will pay a long term capital gains tax at the rate of either 5% or 15% depending on your tax status or rates. If you hold stocks for less than the twelve month period you will pay ordinary income tax rates which may be as high as 36%. Qualified dividends are taxes at the capital gains rates mentioned above. Non qualified dividends which one would receive from a REIT do not get the favorable tax status as REITS do not pay taxes if they meet the IRS requirements for REIT status. They are more like a pass through corporation, meaning profits are passed through to shareowners who pay the tax. Your 1099-DIV should spell out which dividend is taxed at which rate. Depending on whether foreign governments have tax treaties with the US you may or may not pay additional taxes on these investments. Most foreign taxes are witheld before they are distributed so you should not need to concern yourself with any paperwork. See IRS publication 901 to read more in depth.
A stock is a security which shows ownership in a publically traded company. They are sold by the share. Each of these shares denotes a part ownership for a shareowner or shareholder of that company. Stocks are traded on exchanges all over the world with the largest being the New York Stock Exchange, NYSE. Stocks are identified by their ticker symbol. For example General Electric will be identified as GE. Individual Investors can purchase shares for themselves, at a brokerage of their choice, wherever they have an account set up. There are different types of shares, common and preferred. Most shareholders will purchase common stock. The goal is for the price per share to increase over time so the investor can have a profit that beats monies in Treasury bills or beats inflation. Over time stocks have outperformed cash and bonds; this takes into account depressions, world wars, and other world changing events.
The explosion of online trading platforms, or brokerages, has allowed the individual investor to greatly reduce commission costs over the last many years. Investors used to be encouraged to only buy "round lots", or 100 share blocks. Nowadays you can buy as little as one or up to 1000 or more for the same low price. Even banks are getting into the picture to retain or draw customers who want one source financial services.
Bank of America comes to mind as one who charges from as low as $7 for customers on their website who have $100K in assets outside the brokerage account, $10 for accounts with direct deposit and $14 for those who do not hold any accounts other than their brokerage accounts at BofA. They also provide full service brokerage accounts for those who do not wish to actively manage their accounts. Research is available to self directed as well as full service investors. Of the online brokerages TD Ameritrade , formerly Waterhouse, is a favorite among individual investors or investments clubs. TD Ameritrade's website charges a flat $9.99 for trades and provides research like the S&P reports and other resources. Scottrade is another low cost platform as they charge a flat $7 for their trades. They also have research available to investors. More information can be found at the Scottrade website. One online brokerage, Zecco Trading, offers zero-commission stock trades for investors with at least $2500 equity in their account - and includes access to S&P reports. The Zecco community, ZeccoShare, allows people with a Zecco Trading account to share their portfolio, trades, and performance with others.
If the Money markets are a concern to you ask what percent you will get when you are not fully invested. The brokerage accounts do not have fees for accounts. Check the links above, to see what minimums you will need to deposit to open an account and if applicable, to maintain an account without fees.
Closed-end companies (closed-end funds), are pools of assets, that seek the economies of scale in all areas. This little known investing type, will include professional management, diversification, transparency, as well as lower costs. No provision is made for advertising, or educating the public. Closed-end companies are not designed, or priced for dissolution.
Capital is raised from rights offerings. They are not required to buy its own shares back from investors upon request. The net asset value NAV, is not of great concern to investors. Closed-end companies are permitted to invest in unlisted securities, which may not have a liquid market.
Closed-end company's Investment advisors, do not benefit from the continuous buying and selling of the funds assets, like mutual funds. They will not wait to remove securities that do not meet the fund's objectives, like those held in indexes. Essentially all of the fund's realized income and capital gains is paid to shareholders each year. Closed-end company’s charts should have all distributions, reinvested and compounded, to compare results fairly.
Examples of two funds that make maximum use of what the closed-end company type has to offer are Templeton Emerging Markets Fund EMF and Morgan Stanley Emerging Markets Fund MSF. These are diversified global, equity funds. Volatility is reduced from being large enough to be in many uncorrelated markets. Because they do not have to keep cash for redemptions, they can stay fully invested at market bottoms. Funds like these have the freedom to invest in any of the fastest growing, emerging and frontier economies.
Mutual funds are an affordable way for an unfoinrmed investor to diversify their investments to minimize risk. They are good in the respect that it allows you to probably not lose all your money if one or two companies go bad.On the other hand, they often have many charges incurred along with them for upkeep or maintenance and things like that. And often, the funds that have the highest amount of charges because they have the most active management often don't show any better performance than a fund with little charges/activity.In the end though, mutual funds often don't even beat the market performance, and returns can be harder to figure out on a daily basis. If you want to be able to see how you're doing easily and up to the minute, consider an index fund which contains weighted pieces of a number of large stocks (like a NASDAQ or DOW index fund).On the plus side though, you can get money mutual funds from which you can write checks or even make interact payments, so basically operate like a bank account with higher interest.
ETF or Exchange Traded Funds are baskets of stocks that trade as a stock does. Trading costs vary but they are a lower cost alternative to mutual funds and provide diversification for a portfolio. Some are packaged like index funds, for example an ETF might hold solar stocks, or, might hold China based stocks. Another way to describe it is a themed basket of stocks. An example is the Vanguard Energy ETF. It trades with the ticker symbol VDE. It's top two holdings are Chevron, CVX, and Exxon, XOM.
This is the philosophy of investing in a company when its share prices undervalues the company's intrinsic worth (as determined through a variety of measures). Proponents of this philosophy include Warren Buffet, Charlie Munger, BRK and the late Benjamin Graham, as well as John Templeton, and Mark Mobius EMF.
This is the philosophy of investing in companies who's share price has significant growth potential. Note that this philosophy could be either concomitant with or exclusive from value investing.
Everything there is to know about a company is already discounted in the price.
The Parabolic concept draws on the idea that time is an enemy, and unless a security can continue to generate more profits over time, it should be liquidated.  Wilders Parabolic may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend.  He found this when he reached for a straight edge to draw a trendline and grabbed a French curve instead. John Murphy recommends using a filter to complement the Parabolic system. 
The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.
Variations used with Dollar cost averaging by investors are to use variable timing and variable amounts. Simply, invest your assets whenever you get them, and make larger purchases on dips.
With this technique you borrow funds to invest, and pay off the loan with incoming cash flow, then repeat. It can be a secured or unsecured loan. In the case of purchasing securities, you reduce transaction costs by making bigger purchases at one time, and buying more on dips. It will also help getting into investments that need more up front than your short term cash-flow allows. With a little practice your total return will be more than the cost of the loans.  This will help build wealth out of savings, over the long term.  After borrowing the amount intended to be invested during the period, the saver invests the loan-proceeds. By putting the "savings," out of reach, the borrower is forced to pay off the loans out of current earnings, which completes the saving process. 
The 403(b) is a tax deferred retirement plan available for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. If uncertain of your eligibility, consult your employer.
The 403(b) has often been referred to as a Tax Deferred Annuity (TDA) or a Tax Sheltered Annuity (TSA). This is a misnomer and gives the false impression that a participant must invest in annuity products. This is not true. Way back in 1974 Congress granted participants the ability to contribute directly in mutual funds when they added paragraph 7 to the code creating the 403(b)(7) custodial account. Throughout this site the term 403(b) is intended to mean all of the following: 403(b), 403(b)(7), TDA, and TSA. Ultimately, the 403(b) plan is a defined contribution plan (often called a DC plan), where the participant makes contributions and investment decisions, as opposed to a pension or defined benefit plan (often called a DB plan), where the employer makes all, or a majority of contributions and all of the investment decisions.
An IRA is a trust account to hold personal savings, that provides income tax advantages to individuals. 
An Roth IRA is a trust account to hold personal savings, that provides income tax advantages to individuals.