How To Invest

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This is the organizing page for our How To Invest Guide. Each section and subsection below is a link to an article in the guide. Consider revising an article to improve it, creating a new article within a section, or creating an entirely new category.

You can also visit the WikiProject page for the How To Invest Guide. The WikiProject page is where the guide's writers collaborate, organize their effort, and develop new ideas.

Personal Finance

• Credit Cards
• How the Insurance Business Works
• Saving for Retirement
• Taxation

Approaches to Investing

Why do people invest?

Building Your Portfolio

Investment Clubs

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 reequirement 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.

How Investments are Taxed

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.

Investing vs. Trading

Types of Investments

What is a stock?

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.

• How Stocks are Categorized

• How to Trade U.S. Stocks

• How to Trade International Stocks

• Online Trading Platforms

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.

How to Trade Options

Investing in Currency Exchange

Bond Investing

Mutual Funds

The idea behind a mutual fund is simple: Many people pool their money in a fund, which invests in various securities. Each investor shares proportionately in the fund's investment returns -- the income (dividends or interest) paid on the securities and any capital gains or losses caused by sales of securities the fund holds.

Every mutual fund has a manager, also called an investment adviser, who directs the fund's investments according to the fund's objective, such as long-term growth, high current income, or stability of principal. Depending on its objective, a fund may invest in stocks, bonds, cash investments, or a combination of these financial assets.

Advantages of Mutual Funds: • Professional Management - The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.

• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

Disadvantages of Mutual Funds: • Professional Management - Did you notice how we qualified the advantage of professional management with the word "theoretically"? Many investors debate whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut. We'll talk about this in detail in a later section.

• Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject.

• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

• Taxes - When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Investing in Commodities Futures

Exchange Traded Funds

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.

Residential Real Estate

Commercial Real Estate

Investing Methods

Fundamentals Analysis

• NAIC's Stock Selection Guide (SSG)

Value Investing

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, and the late Benjamin Graham.

Growth Investing

This is the philosophy of investing in companies who's share price has significant growth potential. Note that this philosophy could be could be either concomitant with or exclusive from value investing.

Dividend Investing

Technical Analysis

• Strategy 1
• Strategy 2

Mechanical Investing

Investment Risks and Exit Strategies

Dollar-Cost Averaging

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.

Valuation Methods

DCF Modeling

P/E-based Valuation

Fed Model

Saving for Retirement

401k

403(b) Plan

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.

IRA

Roth IRA

While the information here is up to date do not consider it tax advice. Consult a tax professional if you have questions. The Roth is a non deductible retirement account, however earnings are tax free for life and you are not mandated to withdraw monies when you turn 70 1/2. There are also more liberal withdrawal options for some life circumstances. For the year 2007 you can contribute $4000 until April, 15th 2008. If you are over 50 years of age you can contribute an additional $1000. for the tax year 2008 you can contribute $5000 and another $1000 if you are over 50 years of age. (Catch-up provision). You must have earned income from a job, monies from pensions, annuities and dividend or interest income is not eligible.